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, 2005
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
ASTEA
INTERNATIONAL INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
23-2119058
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
incorporation
or organization)
|
Identification
No.)
|
|
240
Gibraltar Road, Horsham, Pennsylvania
|
19044
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (215)
682-2500
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(b) of the Act: Common
Stock, $.01 par value
Indicate
by checkmark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes __
No X
Indicate
by checkmark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes __
No X
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes X
No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. [ X ]
Indicate
by check mark whether the registrant is an accelerated filer, an accelerated
filer or a non-accelerated filer. See definition of “accelerated filer” and
“large accelerated filer” in Rule 12b-2 of the Exchange act.
Large
Accelerated filer __
Accelerated Filer __ Non-accelerated
filer X
Indicate
by checkmark whether the registrant is a shell company (as defined in Rule
12b-2
if the Exchange Act.) Yes__ No
X
The
aggregate market value of the voting stock held by nonaffiliates of the
registrant as of June 30, 2006 (based on the closing price of $9.10 as quoted
by
Nasdaq Capital Market as of such date) was approximately $19,936,744.
As
of
March 15, 2007, 3,591,185 shares of the registrant’s Common Stock were
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
TABLE
OF CONTENTS
PART
I
Item
1. Business.
General
Astea
International Inc. and subsidiaries (collectively “Astea” or the “Company”)
develops, markets and supports service management software solutions, which
are
licensed to companies that sell and service equipment, and/or sell and deliver
professional services. Companies invest in Astea’s software and services to
automate enterprise business processes for purposes of revenue enhancement,
cost
containment, operational efficiency improvement, and expansion of management’s
awareness of operational performance through analytical reporting. Customers’
return on investment from implementing Astea’s solutions is achieved through
more efficient management of information, people and cash flows, thereby
increasing competitive advantages and customer satisfaction as well as top-line
revenue and profitability.
Astea
solutions are used in industries such as information technology, medical devices
and diagnostic systems, industrial controls and instrumentation, retail systems,
office automation, imaging systems, facilities management, telecommunications
and other industries with equipment sales and service requirements. Astea’s
strong focus on enterprise solutions for organizations that sell and deliver
services is a unique industry differentiator that draws upon the Company’s
extensive industry experience and core expertise.
Founded
in 1979, Astea is known throughout the industry, largely from its history as
a
provider of software solutions for field service management and depot repair.
Astea has since expanded its product portfolio to also include integrated
management applications for sales and marketing, multi-channel customer contact
centers, and professional services automation.
In
2002,
Astea began commercial release of its latest Astea Alliance service management
suite version 6 products (“Astea Alliance 6”) that adapt the Company’s domain
expertise and integrated business process functionality to the Microsoft.NET
Web
Services framework. Astea solutions include a variety of Web portal and wireless
remote-access capabilities integrating mobile employees, contractors, business
partners and customers into an enterprise’s consolidated, real-time management
of workforce, assets and business relationships.
Astea’s
software has been licensed to approximately 600 companies worldwide. Customers
range from mid-size organizations to large, multinational corporations with
geographically dispersed locations around the globe. The Company markets and
supports its products through a worldwide network of direct and indirect sales
and services offices with corporate headquarters in the United States and
regional headquarters in the United Kingdom and Australia. Sales partners
include distributors (value-added resellers, system integrators and sales
agents) and OEM partners.
In
addition to its own product development that is conducted at Company facilities
in the United States and Israel, Astea participates in partnerships with
complementary technology companies in order to reduce time-to-market with new
product capabilities and continually increase its value proposition to
customers. The
Company’s product strategies are developed from the collective feedback from
customers, industry consultants, technology partners and sales partners, in
addition to its internal product management and development. Astea also works
with its active user community who closely advises and participates in ongoing
product development efforts.
Astea
provides customers with an array of professional consulting, training and
customer support services to implement its products and integrate them with
other corporate systems such as back-office financial and ERP applications.
Astea also maintains and supports its software over its installed life cycle.
The Company’s experience and domain expertise in service and sales management,
distribution, logistics, finance, mobile
3
technologies,
internet applications and enterprise systems integration are made available
to
customers during their assessments of where and how their business processes
can
be improved.
The
Company’s sales and marketing efforts are primarily focused on new software
licensing and support services for its latest generation of Astea Alliance
and
FieldCentrix products. Marketing and sales of licenses and services related
to
the Company’s legacy system DISPATCH-1® products are limited to existing
DISPATCH-1 customers.
FieldCentrix
Acquisition
On
September 21st,
2005,
Astea acquired most of the assets and certain liabilities of FieldCentrix,
Inc.,
a leading provider of mobile workforce automation. Astea and FieldCentrix
together bring more than 35 years of proven experience and excellence and are
now uniting to better support their customers in their combined mission to
decrease costs, maximize revenues and increase the quality of service to achieve
a competitive advantage. Astea’s vision is to continue to enable the seamless
integration of information and a common user-interface across all areas in
the
Service Management Lifecycle, which will lead to a reduction in process costs
and total costs of ownership.
FieldCentrix
has a very strong mobility solution in the market today. Mobility is one area
in
which Astea looks to further enhance and build out its current mobility offering
based upon customer needs. The acquisition of FieldCentrix gave Astea immediate
mobility domain expertise which further strengthens its Service Lifecycle
Management Solution Suite. Astea and FieldCentrix are combining the expertise
of
the two organizations to break new ground in providing solutions that continue
to deliver exceptional value for organizations. Together, Astea and FieldCentrix
are taking a major step forward in revolutionizing Service Lifecycle Management
- and continuing their mission to make organizations and their customers
successful.
A
major
benefit to Astea’s customers is the ability to now offer stronger mobility
solutions that are tightly integrated into Astea Alliance. FieldCentrix
customers now have access to a larger sales, support, service, and product
development team. Astea has retained the FieldCentrix employees and their
offices in Irvine, CA. As a result, Astea offers an even more comprehensive
product portfolio that translates into immediate benefits for organizations.
They can also bring innovative products to the market in a shorter time period
to further optimize service organizations.
4
Current
Product Offerings
Astea
Alliance
Astea
Alliance is a service management offering consisting of software applications
and services. The software product consists of a series of applications. The
offering has been developed as a global solution from the ground up with
multi-lingual and multi-currency capabilities.
Astea
Alliance has been designed to address the complete service lifecycle,
from
lead
generation and project quotation to service and billing through asset
retirement. It integrates and optimizes critical business processes for
Campaigns, Call Center, Depot Repair, Field Service, Logistics, Projects and
Sales and Order Processing. Astea extends its application suite with mobile,
dynamic scheduling, portals, business intelligence, tools and services
solutions. In order to ensure customer satisfaction and quick return on
investment, Astea also offers infrastructure tools and services.
Astea
Alliance is licensed to companies that sell and/or service capital equipment
or
mission critical assets and human capital. Companies invest in Astea’s software
and services to automate service processes for cost containment, operational
efficiency, and management visibility. Customers’ return on investment is
achieved through improved management of customer information, people and cash
flows, thereby increasing competitive advantage and customer satisfaction,
top-line revenues and profitability. Astea solutions are used in industries
such
as information technology, medical devices and diagnostics systems, industrial
controls and instrumentation, retail systems, office automation, imaging
systems, facilities management, telecommunications and related industries with
equipments sales and service requirements.
In
February 2007, the latest software version, Astea Alliance, 8.0 was released.
This version will deliver extensive enhancements and new features to empower
service-centric organizations to achieve a new level of service excellence.
Built on Microsoft .NET 2.0 platform and offering more than 200 web services
for
ease of integration and accelerated development, Astea Alliance 8.0 is one
of
the most open and non-proprietary solutions available on the market today.
It
builds on the prior version, Astea Alliance 6.8, which was designed and built
with new system architecture for Web-based deployment using the Microsoft.NET
development architecture. Prior to this, products were engineered for Windows
client/server technology and marketed as AllianceEnterprise. AllianceEnterprise
products included re-engineered and enhanced versions of service modules that
were initially introduced as ServiceAlliance® in 1997, and a re-engineered and
enhanced version of the Company’s sales force automation product that was
initially introduced as SalesAlliance in 1999.
5
ServiceAlliance
and SalesAlliance, the earliest versions of Astea Alliance solutions, were
the
Company’s initial new technology offerings following a long and highly
successful history with its DISPATCH-1 legacy system solutions. Astea
Alliance solutions have been licensed to over 244 customers
worldwide. Market acceptance of Astea Alliance by global
and regional companies has continually increased since 2002 and the Company
has
aggressively pursued opportunities for larger system implementations
with
mid-size
to large enterprises on a worldwide basis.
The
current Astea Alliance offering consists of:
| · |
9
Core Applications
|
| · |
Mobile
Applications
|
| · |
Extended
Portals
|
| · |
Reporting
and Business Intelligence
|
| · |
Tools
|
Astea
Alliance Core Applications:
Alliance
Contact Center
Alliance
Depot Repair
Alliance
Field Service
Alliance
Logistics
Alliance
Marketing Campaigns
Alliance
Order Processing
Alliance
Professional Services
Alliance
Sales
Alliance
Dynamic Scheduling Engine
Astea
Alliance Mobile Applications:
Alliance
Laptop for Service
Alliance
Mobile
Alliance
2-way Paging
Astea
Alliance Extended Portals:
Customer
Self-Service
Remote
Technician
Astea
Alliance Reporting and Business Intelligence:
Alliance
Reporting
Alliance
Business Intelligence
Astea
Alliance Tools:
Alliance
BizTalk Connector
Alliance
Knowledge Base
Alliance
Links
Alliance
Studio
Astea
Alliance Core Applications
Alliance
Contact Center
The
Alliance Contact Center application supports call centers, information desks,
service hotlines, inside sales and telemarketing activities. Integrated,
multi-channel, inbound/outbound capabilities enable customer service
representatives to serve prospects and customers in their media of choice,
including phone, fax, e-mail or Internet. The integrated customer self-service
portals with automated email response, automated call
6
escalation,
and interface to Computer Telephony Integration (CTI) systems help streamline
customer interaction processes. Work scheduling and demand balancing optimize
staff utilization. Employee personal portals with access to comprehensive
real-time customer data and decision support tools including intelligent
knowledge management and scripting for problem resolution and inside sales
drive
higher staff productivity. Aside from more efficient customer service and higher
levels of customer satisfaction, the objectives of Astea’s Alliance Contact
Center software are to reduce overhead through improved first-call resolution
rates and shorter service-call handling times. A powerful, third-party knowledge
engine is integrated into this application to further enhance and extend the
diagnostic tools available to contact center agents. This optional module is
also available for Depot Repair and Field Service applications.
Alliance
Depot Repair
Alliance
Depot Repair automates tracking of assets through equipment calibration and
repair chains, including merchandise ownership, location, repair status and
warranty coverage. Objectives are to gain real-time visibility of all repair
chain activities, ensure compliance with warranty and contractual agreements,
respond to customer inquiries with up-to-the-minute repair status, collect
and
analyze repair statistics for product design improvement, and reduce overhead
such as inventory carrying costs. Applications support in-house, subcontractor
and vendor calibration and repair; customer and vendor exchanges and advance
exchanges; equipment on loan; change of ownership; merchandise shipments, cross
shipments and pickups; consolidated repair orders; and, storage and
refurbishment programs. Integration with other Astea
Alliance
modules
allows repair orders and repair status queries to be initiated from customer
contact centers, field service, field sales and warehouses as well as the repair
depot.
Alliance
Field Service
The
Alliance Field Service core application delivers a robust set of automated
capabilities to streamline and improve management of field service activities.
By automating workflow field service representatives can more efficiently
complete and document assignments, manage vehicle assets, capture expenses
and
generate revenue through add-on sales during a customer contact. Applications
alert dispatchers to contractual minimum response times and expedite
coordination of field force skills matching, scheduling, dispatch and repair
parts logistics. The use of the Dynamic Scheduling Engine automates much of
this
process. The Remote
Technician
portal
allows site-based field engineers and other off-site agents secure access to
the
core system. Mobile tools deliver rich functionality on notebook and PDA
platforms that enable field forces to work electronically for receiving,
documenting and reporting assignments, eliminating manual procedures, service
delays and paper reporting. The software supports all field service categories
including equipment installations, break/fix, planned maintenance and meter
reading. Applications can also be integrated with equipment diagnostic systems
for fully automated solutions that initiate and prioritize service requests
and
dispatch assignments to field employees’ PDAs without human
intervention.
Alliance
Logistics
The
Alliance Logistics core application is divided into 3 functional portals. These
are Supply Chain, Inventory Management and Reverse Supply Chain, reflecting
the
diversity of needs in this area. Seamlessly integrated with sales and service
applications, Alliance Logistics enables equipment service organizations to
control inventory costs, manage assets and implement proactive service
management strategies. Automated calculation of stock profiles based on usage
eliminates overstocking and dramatically reduces costs associated with storing,
depreciating, and insuring inventory. The application supports parts and tools
management for effective field service delivery and SLA compliance. Improved
cost management improves cash flow by streamlining and shortening the cycles
from inventory to usage to billing. Lower logistics costs open opportunities
to
recognize higher margins on products and services. Key areas to apply Alliance
Logistics include asset management, field service parts/tools management, demand
fulfilment, and sales fulfilment.
7
Alliance
Marketing Campaigns
This
core
application coordinates the planning, execution and analysis of marketing
campaigns. The software supports budgeting and tracking complete multi-channel
campaigns that integrate advertising, direct mail, email marketing,
telemarketing, etc. Electronic campaigns such as email and telemarketing are
further supported with list management, script development and user interfaces
for campaign execution. Marketing managers can define campaign offerings such
as
products and services to be sold, pricing and discount tolerances; assign
campaign attributes; attach campaign documentation such as descriptive text,
images, slogans and lead conversion literature; and monitor and measure
response. The big
picture view enables managers to assess synergies each channel delivers to
an
overall campaign and adjust channel details such as prospect lists, scripts,
budgets or offering incentives to elicit best results. Integration with other
Astea Alliance modules enables equipment and service organizations to
leverage
abundant customer information for identifying new potential revenue sources
and
marketing to maximize customer loyalty and sales opportunities.
Alliance
Order Processing
The
Alliance Order Processing module provides straightforward functionality for
the
management of quotations and order fulfillment. Quotations can be created for
the sale of products and the provision of field services. Integration with
the
Approvals process and the Logistics and Field Service modules ensure good
management control and sustainable promises for delivery. This application
is
ideally suited to the sale of “consumable products” in association with the
provision of equipment-based services, but can be equally applied to the supply
of finished products resulting from up-sell and cross-sell
opportunities.
Alliance
Professional Services
Alliance
Professional Services supports management of knowledge workers, such as those
deployed by professional services organizations and internal service departments
of large organizations. Functionality focuses on planning, deploying and billing
service engagements that can extend for days, weeks, months and years.
Applications improve resource planning and allocation, workflow management,
consultant time and expense reporting, subcontractor and vendor invoice
processing, customer billing, and visibility of service engagements. Integration
with other Astea Alliance modules delivers an end-to-end solution to market,
sell, manage and bill professional services. Capabilities to share sales,
service, project, and post-project field service data across the enterprise
enable professional services organizations to operate with less overhead,
improved cash flow, higher profitability, and more competitive
bidding.
Alliance
Sales
Alliance
Sales consolidates and streamlines the sales processes of an enterprise, from
quote generation through order processing, at all points of customer contact
including field sales, inside sales, contact center sales and field service
sales. Lead-to-close sales process capabilities include integration with Astea
Alliance marketing, customer support and field service applications, leveraging
all enterprise knowledge pools to increase sales opportunities, margins and
close rates. Consolidated
views of sales and service data also provide a clearer understanding of
enterprise operations to drive strategic business decisions. Sales force
automation application automates business rules and practices such as
enterprise-defined sales methodologies, sales pipeline management, territory
management, contact and opportunity management, forecasting, collaborative
team
selling and literature fulfillment. The same functionality is delivered to
mobile resources via the notebook application - with full two-way data
synchronization with the central database, via wired and wireless networks.
Other applications prompt customer support and service staff to up-sell and
cross-sell during contact with customers.
8
Alliance
Dynamic Scheduling Engine (DSE)
Alliance
DSE is the new generation of field service scheduling solutions for a new era
of
service management. It is a proven and robust, real-time scheduling solution
designed to optimize and balance the complex tradeoffs between service cost
and
level of service. It addresses the specific challenges of the user field service
scheduling, while simultaneously increasing efficiency, accuracy and
profitability to help you sustain a competitive advantage in today’s volatile
environment. Astea has taken a scheduling engine that was developed to handle
mission critical environments such as emergency response, where a response
time
determined life or death, and embedded it into its core product. Astea DSE
provides for maximum flexibility that enables companies to proactively drive,
manage and monitor their technicians through demand forecasting, workforce
profiling, and operational optimization. Powered by the latest Microsoft .NET
technology, Astea’s DSE enhances productivity, improves business processes and
maximizes return on investment.
Astea
Alliance Mobile Applications
Astea
provides a family of mobility applications for use away from the base office.
The applications enable
customers to match mobile access to field sales and service needs. Untethered
wireless applications with synchronized client databases are provided for
notebooks and Pocket PC handheld devices. Direct-connect, real-time wireless
text messaging is provided for two-way pagers and capable mobile smart phones.
The mobile connectivity integrates field sales and service activity with
automated front-office processes and eliminates the time, costs, procedural
delays and errors of paper reporting. Benefits include reduced field
administration costs; electronic data sharing among field and in-house
personnel; improved speed, accuracy, content and compliance of field reporting;
faster sales order processing and customer service invoicing; and other
operational efficiencies.
Astea
Alliance Extended Portals
The
Alliance Customer Portal is a secure, multi-level entry point that supports
unattended e-business transactions for customer self-service and self-sales.
Alliance Customer Portal empowers customers and lessens dependence on sales
and
service staff to conduct transactions that can be performed over the Internet.
It reduces routine voice and fax calls to customer contact centers, freeing
lines for customers whose critical needs do require assistance from a service
representative. The pre-defined Entry-Level, Standard and Enterprise profiles
in
connection with a flexible and powerful security utility ensure tight control
on
access to sensitive data and a range of features that can be enabled. It also
provides another channel to promote and sell more products and services to
an
existing customer base. The customer portal can delay or eliminate needs for
contact center expansion and associated increases in facility, equipment and
staffing costs.
The
Remote Technician
Portal provides secure connectivity to the enterprise system from customer
sites, technician’s homes or other non-corporate locations. The available
functionality covers the needs of a mobile service resource in the areas of
work
and inventory management - equivalent to that available with Alliance Notebook
for Service.
Astea
Alliance Reporting and Business Intelligence (BI)
For
proactive service management, Alliance BI provides highly visual, real-time
analysis of
business performance, focusing on Key Performance Indicators - a tool that
facilitates businesses’ understanding customer behavior. Alliance BI enables the
viewing of information for the entire enterprise, increasing revenues and
identifying new business opportunities. Alliance
BI has been designed to ensure that users of all kinds have immediate access
to
crucial information whenever it's needed. In the boardroom, at agent level,
or
even for customers, this tool effortlessly allows the viewing of performance
data such as performance against service level agreements, contract
profitability, product failure rate, repair turn around times, customer
satisfaction and engineer efficiency. Reports allow businesses to see how many
orders have met their contractual service ETA and how many failed, which helps
organizations better understand customer satisfaction. Workloads show the
available working hours at a specific location in contrast to the demand for
workforce planning and optimization.
9
Astea
Alliance Tools
Alliance
Links
Alliance
Links are a family of enterprise application integration products that interface
Astea Alliance to other enterprise systems, such as back-office financial and
ERP applications, remote equipment monitoring and diagnostic software, and
wireless data transmission services. Alliance Links extend Astea Alliance’s
return on investment for customers by making all Alliance modules accessible
to
external software through web services and open, well defined, synchronous
and
asynchronous application programming interfaces (APIs) that are XML
based.
Alliance
Studio
Alliance
Studio is a toolset for easily adapting system behavior and user interfaces
to
specific business environments without expensive custom programming. A customer
can control how Astea Alliance automates workflows as well as the system’s
intuitiveness and “look and feel” to employees, which thereby maximizes the
system’s usability, effectiveness and benefits. Alliance Studio reduces system
implementation time and cost, and subsequently enables customers to update
system performance as their business needs change—all of which contributes to
the system’s low cost of ownership.
FieldCentrix
Enterprise Suite
The
FieldCentrix Enterprise is a service management solution that runs on a wide
range of mobile devices (handheld computers, laptops and PCs, and Pocket PC
devices), and integrates seamlessly with popular CRM and ERP applications.
Add-on features include a Web-based customer self-service portal, workforce
optimization capabilities, and equipment-centric functionality. FieldCentrix
has
licensed applications to companies in a wide range of sectors including HVACR,
building and real estate services, manufacturing and process instruments and
controls, and medical equipment.
The
current FieldCentrix Enterprise offering consists of:
| · |
FX
Service Center
|
| · |
FX
Mobile
|
| · |
FX
e-Service
|
| · |
FX
Resource Utilization
|
| · |
FX
Interchange
|
| · |
FX
Interchange for JD Edwards
|
| · |
FX
Mobility Express
|
| · |
FX
Express for JD Edwards
|
FX
Service Center
FX
Service Center is an Internet-based service management and dispatch solution
that gives organizations unprecedented command over their field service
operation and helps them effectively manage call taking, entitlement
verification, field personnel scheduling and dispatching, customer service,
work
orders, timesheets, service agreements, inventory and equipment tracking,
pre-invoicing, and reporting. The software is extremely intuitive, giving
organizations graphical picture views of the scheduling board, work order lists,
field service worker and site locations, and more. Real-time drag-and-drop
scheduling and re-scheduling take just a few mouse clicks, and pre-scheduling
preventive maintenance calls are simple as well. FX Service Center makes
completed work order and timesheet information instantly available for export
to
an organization’s accounting, ERP, or CRM system. Or, they can integrate FX
Service Center with an organization’s accounting, ERP or CRM system for seamless
information flow.
10
FX
Mobile
FX
Mobile
is a revolutionary workflow software product that uses innovative wireless
communications technology with handheld computers, laptops, and PDA’s to
automate field service processes and help field service personnel do their
jobs
better and faster. With FieldCentrix’s smart mobile client technology, field
service workers are able to complete their work, uninterrupted, regardless
of
wireless coverage. Along with FX Service Center, FX Mobile eliminates the manual
inefficiencies and paperwork that can overwhelm service technicians and an
organizations business. With FX Mobile, service technicians receive work orders
electronically on their mobile devices. It then guides them, screen by screen,
through the job - prompting them to perform standard tasks, take notes, and
even
record future recommended repairs or activities. With FX Mobile, field service
personnel can now spend their time in the field, better serving customers,
generating new business, and increasing organizations bottom line. FX Mobile
is
an international offering that supports various languages, as well as
currencies, measurement systems and time zones.
FX
e-Service
FX
e-Service is an extension of the FieldCentrix solution that provides a dynamic
customer self-service portal that links directly from a customers Web site.
When
integrated with FX Mobile software, it provides the unique capability to truly
deliver real-time information from the point of service to your customers.
Working seamlessly with FX Service Center call center and dispatching software,
FX e-Service gives an organizations customers the flexibility of submitting
service requests, accessing work order information, and managing their account
over the Internet. Customers can receive an email notification each time the
status of work order changes. This allows them to know instantly when the
request has been received, scheduled, is in progress and when it is complete
-
all without ever calling into the office, waiting on hold or taking up valuable
CSR resource.
FX
Resource Utilization
With
the
FieldCentrix Enterprise solution, organizations have already gained the
competitive advantage of best-of-breed mobile field service automation. By
adding FX Resource Utilization software to the mix, they can now take their
real
time service data to the next level and dramatically increase the productivity
and efficiency of their work force and service operations through load balancing
and optimized resource planning. FX
Resource Utilization is a strategic workforce modelling tool for accurately
planning, tracking, and analysing service resources in real-time. It provides
an
easy and automated way to size, manage, and report on resource capacity and
utilization across the enterprise to determine how to best deploy resources,
cost effectively balance workloads and service engineers, and still make sure
all service level commitments are met and contracts remain
profitable.
FX
Interchange
FX
Interchange software provides data transporting services that allow enterprises
to quickly and easily integrate FieldCentrix Enterprise to existing legacy
and
business systems - to get the most value from field data. FX Interchange
converts data stored in FX Service Center knowledge base to XML (eXtensible
Markup Language) or a Microsoft SQL Server 7.0/2000 database. Once converted,
the data is easily accessible to other systems for basic billing and payroll
extraction, and extensive bi-directional integration purposes to support the
needs of an accounting, call center, or service dispatch integrated
solution.
11
FX
Interchange for JD Edwards
FieldCentrix
field service automation software and JD Edwards®
Enterprise and EnterpriseOne applications are integrated to provide medium
to
large companies with an easy-to-use, cost-effective way to streamline and
automate field service operations. The systems are integrated through FX
Interchange™ for JD Edwards. This interface dynamically transfers key customer,
work order, and accounting related information between the FieldCentrix and
JD
Edwards applications. This means the key functions that organizations need
to
run their business efficiently and cost-effectively are now seamless and
completed electronically — without paper.
With
the
FieldCentrix and JD Edwards solution, service workers in the field access and
enter all work order information using a mobile device at the job site. When
the
work is done, the service worker closes the work order and the completed
information is sent wirelessly back to the office automatically. The electronic
information is instantly accessible for processing by an organization’s billing
system so there's no data entry needed. Because you also no longer have to
wait
for the field service worker to bring in the paperwork before you can close
the
work order, customers can be billed quicker.
FX
Mobility Express
For
customers who want to mobilize their workforce without deploying a full field
service automation solution, FieldCentrix offers a special mobilized application
development toolkit called FX Mobility Express™. The FX Mobility Express toolkit
is bundled with FieldCentrix’s popular mobile middleware and allows
organizations to quickly and easily build custom mobile applications that fully
leverage FieldCentrix’s robust and scalable mobile infrastructure and user-
friendly interface. Mobilizing applications with FX Mobility Express provides
organizations with a cost-effective way to create a powerful solution that
fits
their unique business requirements on top of a tried and tested platform -
a
platform built from years of mobile and wireless technology experience and
proven by thousands of users worldwide.
FX
Express for JD Edwards
FX
Express for JD Edwards is a pre-packaged offering that bundles everything
organizations need to seamlessly combine FieldCentrix’s revolutionary field
service engine and mobile workflow software with their Oracle JD Edwards
EnterpriseOne and World application suites - all for one, low introductory
price. Embedding FieldCentrix into a JD Edwards application environment creates
an automated, end-to-end mobile field service management network that increases
profitability, reduces service costs, enhances customer responsiveness and
satisfaction, and improves productivity and efficiency.
Astea
Client Services
Professional
Services:
Astea’s
typical professional services engagement does not include significant
customizations, but rather includes planning, prototyping and implementation
of
Astea’s products within the client’s organization.
During
the initial planning phase of the engagement, Astea’s professional services
personnel work closely with representatives of the customer to prepare a
detailed project plan that includes a timetable, resource requirements,
milestones, in-house training programs, onsite business process training and
demonstrations of Astea’s product capabilities within the customer’s
organization.
The
next
phase of the Astea professional services engagement is the prototyping phase,
in
which Astea works closely with representatives of the customer to configure
Astea’s software solutions to the customer’s specific business process
requirements.
12
The
next
integral phase in the professional services engagement is the implementation
phase, in which Astea’s professional services personnel work with the client to
develop detailed data mapping, conversions, interfaces and other technical
and
business processes necessary to integrate Astea’s solutions into the customer’s
computing environment. Ultimately, education plans are developed and executed
to
provide the customer with the process and system knowledge necessary to
effectively utilize the software and fully implement the solution. Professional
services are charged on an hourly or per diem basis.
The
last
phase of the engagement utilizes Astea’s professional services personnel to
assist in Go
Live
planning
and the Go Live effort. Astea will assist in the planning for installation,
initialization, data preparation, operational procedures, schedules and required
resources. The initialization and creation of the production database is planned
and prepared for the data history, open orders and all required data for go live
processing. During the cut-over to the solution, Astea business resources are
best utilized to assist new users with functionality/processes while Astea
technical resources support customer IT staff.
Following
the Go Live, Astea professional services engages the customer in the
Assessment
Phase.
During
this effort, the delivered system is assessed to validate benefits, analyze
the
process to measure key performance indicators, document and understand lessons
learned. To perform these assessments, Astea consultants collect and analyze
the
planned benefits, processes used to capture and report on the key performance
indicators, and document the lessons learned from all phases of the
implementation. An action plan is developed from the lessons learned and key
performance indicators for use in future phases and/or releases.
Technical
Services:
Astea’s
technical services teams provide services related to installation, data
verification, functional design, technical design, system infrastructure setup
or changes, customizations, QA activities, testing and go-live support.
Initially, software and database installation resources are available to prepare
the environment for the prototyping phase.
Data
verification and feedback services can be provided for initial data verification
analysis. These efforts are conducted to determine the present state of
information as far as type, conversions, data manipulation, location, frequency,
method of interface (initial load, ongoing load, data export or data import,)
and data integrity. Findings are documented and shared with the project
team.
During
the implementation phase, Astea’s technical services team is often engaged to
assist with the functional and/or technical design as related to customer
desired system personalization, customization and interfaces, often referred
to
as ‘gaps’. Gap solutions are assessed and categorized into system, studio,
customization or interface. Utilizing the services of the customer project
team,
Astea professional services and Astea technical services Business Requirement
Documents (BRDs) are created for all customizations and interfaces. Astea
technical services will provide specifications and a quote for the
customization. The Customer and Astea agree on the outcome of the customization
and all expected outputs prior to the actual development customization.
Following acceptance of the BRDs, code will be written as per design. QA of
the
code with test data sets will complete these efforts.
Astea’s
technical services team will also provide testing and go-live support, as
required.
Customer
Support
Astea’s
customer support organization provides customers with telephone and online
technical support, as well as product enhancements, updates and new software
releases. The company can provide 24X7 “follow-the-sun” support through its
global support network. Local representatives support all regions of Astea’s
worldwide operations. Astea personnel or a distributor’s personnel familiar with
local business customs and practices provide support in real-time and usually
spoken in native languages. Typically, customer support fees are established
as
a fixed percentage of license fees and are invoiced to customers on an annual
basis. Astea’s customer support representatives are located in the United
States, Europe, Israel and Australia. In addition, Astea provides customer
support 24X7 with its self-service portal. The
maintenance offering provides customers with support and help desk services,
as
well as software service packs and release upgrades for the modules they have
purchased.
13
Education
& Training
Application
Training:
Key
business owners responsible for the implementation of the core components will
receive in-depth training
designed to present the features, functionality and terminology of Astea’s
solutions. The objective of this training is to provide the audience with a
working knowledge of these solutions. This exposure to the system will enable
project communication and add insight into specific business processes.
End-user
training plans and documents are created during the implementation phase. These
plans and documentation are utilized to conduct end-user training sessions
prior
to go-live.
Technical
Training:
Software
and database installation/creation training is provided, as required and/or
recommended.
System
Administration training provides the customer IT staff pre-requisite knowledge
to manipulate and manage administrative tasks associated with the Astea
solutions. Included within these tasks are: Security, Batch Applications,
Escalation, Import, etc.
Many
customers are interested in performing their own personalization and
customization to the system. Training sessions are available to enhance customer
understanding of available options for personalization and how to perform
customizations.
Customers
The
Company estimates that it has sold licenses
to approximately 600
customers ranging from small, rapidly growing companies to large, multinational
corporations with geographically dispersed operations and remote offices. More
than 244 licenses (including 2006 sales) have been sold for Astea Alliance
and
the remainder for DISPATCH-1 software and the FieldCentrix software. The broad
applicability of the Company’s products is demonstrated by the wide range of
companies across many markets and industries that use one or more of Astea’s
products, including customers in information technology, medical devices and
diagnostic systems, industrial controls and instrumentation, retail systems,
office automation, imaging systems, facilities management, telecommunications,
and other industries with equipment sales and service requirements. In 2006
no
customer represented more than 10% of total revenues. In 2005, one customer,
EDS, represented 24% of revenues. In 2004, Carrier Corporation accounted for
16%
of the Company’s revenues.
Sales
and Marketing
The
Company markets its products through a worldwide network of direct and indirect
sales and services offices with corporate headquarters in the United States
and
regional headquarters in the United Kingdom (Europe, Middle East and Africa
Operations) and Australia (Asia Pacific Operations). Sales partners include
distributors (value-added resellers, system integrators and sales agents) and
OEM partners. The Company actively seeks to expand its reseller network and
establish an international indirect distribution channel targeted at the
mid-market tier. See “Certain Factors that May Affect Future Results¾ Need
to
Expand Indirect Sales.”
14
Astea’s
direct sales force employs a consultative approach to selling, working closely
with prospective clients to understand and define their needs and determine
how
such needs can be addressed by the Company’s products. These clients typically
represent the mid- to high-end of the market. A prospect development
organization comprised of telemarketing representatives, who are engaged in
outbound telemarketing and inbound inquiry response to a variety of marketing
vehicles, develops and qualifies sales leads prior to referral to the direct
sales staff. Additional prospects are identified and qualified through the
networking of direct sales staff and the Company’s management as part of daily
business activities.
The
modular structure of Astea’s software and its ongoing product development
efforts provide opportunities for incremental sales of product modules and
consulting services to existing accounts. See “Certain Factors that May Affect
Future Results— Continued
Dependence on Large Contracts May Result in Lengthy Sales and Implementation
Cycles and Impact Revenue Recognition and Cash Flow.”
Astea’s
corporate marketing department is responsible for product marketing, lead
generation and marketing communications, including the Company’s corporate
website, dialogue with high tech industry analysts, trade conferences,
advertising, e-marketing, on-line and traditional seminars, direct mail, product
collateral and public relations. Based on feedback from customers, analysts,
business partners and market data, the marketing department provides input
and
direction for the Company’s ongoing product development efforts and
opportunities for professional services. Leads developed from the variety of
marketing communications vehicles are routed through the Company’s Astea
Alliance sales and marketing automation system. The Company also participates
in
an annual conference for users of Astea Alliance and FieldCentrix products.
Conference participants attend training sessions, workshops and presentations,
and interact with other Astea product users, Astea management and staff, and
technology partners, providing important input for future product
direction.
Astea’s
international sales accounted for 27% of the Company’s revenues in 2006, 48% of
the Company’s revenues in 2005 and 37% in 2004. See “Certain Factors that May
Affect Future Results—Risks Associated with International Sales.”
Product
Development
Astea’s
product development strategy is to provide products that perform with
exceptional depth and breadth of functionality and are easy to implement, use
and maintain. Products are designed to be flexible, modular and scalable, so
that they can be implemented incrementally in phases and expanded to satisfy
the
evolving information requirements of Astea’s clients and their customers. Each
product is also designed to utilize n-tier, distributed, thin-client and Web
environments that can be powered by multiple hardware platforms and operating
systems. To accomplish these goals, the Company uses widely accepted
commercially available application development tools from Microsoft Corporation
for Astea Alliance and FieldCentrix. These software tools provide the Company’s
customers with the flexibility to deploy Astea’s products across a variety of
hardware platforms, operating systems and relational database management
systems. The latest Astea Alliance products are currently being engineered
for
existing and emerging Microsoft technologies such as COM+, Microsoft ComPlus
Transactions, Microsoft Message Queuing (MSMQ), Internet Information Server
(IIS) and Microsoft.NET Enterprise Servers including Windows 2000 and 2003
Servers, SQL Server and BizTalk Server.
In
addition to product development that is conducted at Company facilities in
the
United States and Israel, Astea participates in partnerships with complementary
technology companies to reduce time-to-market with new product capabilities
and
continually increase its value proposition to customers.
15
The
Company’s total expense for product development for the years ended December 31,
2006, 2005 and 2004, was $3,842,000, $2,461,000 and $1,431,000 respectively.
These expenses amounted to 19%, 11% and 8%
of
total revenues for 2006, 2005, and 2004, respectively. The Company capitalized
software development costs of $2,821,000, $1,555,000 and $1,380,000 in 2006,
2005 and 2004, respectively. The significant increase in software costs
capitalized in 2006 results from the focus on completing version 8.0 of Astea
Alliance, which continued throughout the year. In addition, there were two
new
projects developed at FieldCentrix, version 4.1 and the integration of FX
Mobility with Astea Alliance. The Company anticipates that it will continue
to
allocate substantial resources to its development effort for the upgrade of
its
suite of products. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and “Certain Factors that May Affect Future
Results—Need for Development of New Products.”
Manufacturing
The
Company’s software products are distributed on CD ROMs and electronically via
FTP (file transfer protocol). Included with the software products are security
keys (a software piracy protection) and documentation available on CD ROM and
hard copy. Historically, the Company has purchased media and duplicating and
printing services for its product packaging from outside vendors.
Competition
The
service management software market is intensely competitive and subject to
rapid
change. To maintain or increase its position in the industry, the Company will
need to continually enhance its current product offerings, introduce new
products and features and maintain its professional services capabilities.
The
Company currently competes on the basis of the depth and breadth of its
integrated product features and functions, including the adaptability and
scalability of its products to specific customer environments; the ability
to
deploy complex systems locally, regionally, nationally and internationally;
product quality; ease-of-use; reliability and performance; breadth of
professional services; integration of Astea’s offerings with other enterprise
applications; price; and the availability of Astea’s products on popular
operating systems, relational databases, Internet and communications
platforms.
Competitors
vary in size, scope and breadth of the products and services offered. The
Company encounters competition generally from a number of sources, including
other software companies, third-party professional services organizations that
develop custom software, and information systems departments of potential
customers developing proprietary, custom software. In the service management
marketplace, the Company competes against publicly held companies and numerous
smaller, privately held companies. The Company’s competitors include Siebel
Systems, Inc. (“Siebel”) and PeopleSoft Inc., (“PeopleSoft”), both acquired by
Oracle, SAP AG (“SAP”), Oracle Corporation (“Oracle”), Great Plains Software
which was acquired by Microsoft (“Microsoft Great Plains”), Clarify which was
acquired by Amdocs Limited (“Amdocs Clarify”), Viryanet Ltd. (“Viryanet”) and a
number of smaller privately held companies. See “Certain Factors that May Affect
Future Results—Competition in the Customer Relationship Management Software
Market is Intense.”
Licenses
and Intellectual Property
Astea
considers its software proprietary and licenses its products to its customers
under written license agreements. The Company also employs an encryption system
that restricts a user’s access to source code to further protect the Company’s
intellectual property. Because the Company’s products allow customers to use the
software’s built in features to customize their applications without altering
the framework source code, the framework source code for the Company’s products
is typically neither licensed nor provided to customers. The Company does,
however, license source code from time to time and maintains certain third-party
source code escrow arrangements. See “Customers” and “Management’s Discussion
and Analysis of Financial Condition and Results of Operations.”
The
Company seeks to protect its products through a combination of copyright,
trademark, trade secret and fair business practice laws. The Company also
requires employees, consultants and third parties to sign nondisclosure
agreements. Despite these precautions, it may be possible for unauthorized
parties to copy certain portions of the Company’s products or reverse engineer
or obtain and use information that the Company regards as proprietary. The
Company presently has no patents or patent applications pending. See “Certain
Factors that May Affect Future Results—Risks of Dependence on Proprietary
Technology.”
16
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, 2006, the Company, including its subsidiaries, had a total of
193
full time employees worldwide, 100 in the United States, 19 in the United
Kingdom, 6 in the Netherlands, 56 in Israel and 12
in
Australia. The Company’s future performance depends, in significant part, upon
the continued service of its key technical and management personnel and its
continuing ability to attract and retain highly qualified and motivated
personnel in all areas of its operations. See “Certain Factors that May Affect
Future Results—Dependence on Key Personnel; Competition for Employees.” None of
the Company’s employees is represented by a labor union. The Company has not
experienced any work stoppages and considers its relations with its employees
to
be good.
Corporate
History
The
Company was incorporated in Pennsylvania in 1979 under the name Applied System
Technologies, Inc. In 1992, the Company changed its name to Astea International
Inc. Until 1986, the Company operated principally as a software-consulting
firm,
providing professional software consulting services on a fee for service and
on
a project basis. In 1986, the Company introduced its DISPATCH-1 product. In
November 1991, the Company’s sole stockholder acquired the outstanding stock of
The DATA Group Corporation (“Data Group”), a provider of field service software
and related professional services for the mainframe-computing environment.
Data
Group was merged into the Company in January 1994. In February 1995, the Company
and its sole stockholder acquired the outstanding stock of Astea Service &
Distribution Systems BV (“Astea BV”), the Company’s distributor of DISPATCH-1
and related services in Europe. In May 1995, the Company reincorporated in
Delaware. In July 1995, the Company completed its initial public offering of
Common Stock. In February 1996, the Company merged with Bendata, Inc. In June
1996, the Company acquired Abalon AB. In September 1998 (effective July 1,
1998), the Company sold Bendata, Inc. In December 1998, the Company sold Abalon
AB. In December 1997, the Company introduced ServiceAlliance and in October
1999, SalesAlliance. Both products were subsequently re-engineered into
components of the AllianceEnterprise suite which was introduced in 2001. Through
2001 and into 2002, the Company rebuilt its product functionality for Web-based
applications and in August 2003 introduced Astea Alliance version 6. The Company
released a new system architecture based on Microsoft.NET during the third
quarter of 2004. On September 21, 2005, the Company acquired substantially
all
the assets and certain liabilities of FieldCentrix, Inc.
Item
1A.
Risk
Factors
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.
17
The
following discussion of the Company’s risk factors should be read in conjunction
with the financial statements and related notes thereto set forth elsewhere
in
this report. The following factors, among others, could cause actual results
to
differ materially from those set forth in forward looking statements contained
or incorporated by reference in this report and presented by management from
time to time. Such factors, among others, may have a material adverse effect
upon the Company’s business, results of operations and financial
conditions:
Recent
History of Net Losses
The
Company has a history of net losses. In 2006, it generated a loss of $5.0
million. The Company generated net income of $1.2 million in 2005 and $1.5
million in fiscal 2004. As of December 31, 2006, stockholders’ equity is
approximately $6.1 million, which is net of an accumulated deficit of
approximately $20.3 million. Moreover, the Company expects to continue to incur
additional operating expenses for research and development. As a result, the
Company will need to generate significant revenues to achieve and maintain
profitability. The Company may not be able to achieve the necessary revenue
growth or profitability in the future. If the Company does not attain or sustain
profitability or raise additional equity or debt in the future, the Company
may
be unable to continue its operations.
Decreased
Revenues from DISPATCH-1
In
each
of 2006, 2005, and 2004, 5%, 6%, and 14% respectively, of the Company’s total
revenues were derived from the licensing of DISPATCH-1 and the providing of
professional services in connection with the implementation, deployment and
maintenance of DISPATCH-1 installations. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.” The Company
originally introduced Astea Alliance in August 1997 in order to target a market
segment in which DISPATCH-1 was not cost-effective or attractive. Subsequent,
rapid changes in technology have now positioned the Astea Alliance suite,
introduced in 2001 and which includes the Astea Alliance functionality, to
supercede DISPATCH-1 as the company’s flagship product. As a result, there are
no license sales planned or anticipated for DISPATCH-1 to new customers. License
revenues from DISPATCH-1 were $31,000 in 2006 and $16,000 in 2005. Total
DISPATCH-1 revenues have been insignificant each of the last three fiscal years
and that trend is expected to continue.
While
the
Company has licensed Astea Alliance to over 244 companies worldwide from 1998
through 2006, revenues from sales of Astea Alliance alone may not be sufficient
to support the expenses of the Company. The Company’s future success will depend
mainly on its ability to increase licenses of the Astea Alliance suite and
FieldCentrix offerings, on developing new products and product enhancements
to
complement its existing product offerings, on its ability to continue support
and maintenance revenues from DISPATCH-1, and on its ability to control its
operating expenses. Any failure of the Company’s products to achieve or sustain
market acceptance, or of the Company to sustain its current position in the
Customer Relationship Management software market, would have a material adverse
effect on the Company’s business and results of operations. There can be no
assurance that the Company will be able to increase demand for Astea Alliance
and FieldCentrix, maintain an acceptable level of support and maintenance
revenues from DISPATCH-1, or to lower its expenses, thereby avoiding future
losses.
18
Need
for Development of New Products
The
Company’s future success will depend upon its ability to enhance its current
products and develop and introduce new products on a timely basis that keep
pace
with technological developments, industry standards and the increasingly
sophisticated needs of its customers,
including developments within the client/server, thin-client and object-oriented
computing environments. Such developments may require, from time to time,
substantial capital investments by the Company in product development and
testing. The Company intends to continue its commitment to research and
development and its efforts to develop new products and product enhancements.
There can be no assurance that the Company will not experience difficulties
that
could delay or prevent the successful development, introduction and marketing
of
new products and product enhancements; that new products and product
enhancements will meet the requirements of the marketplace and achieve market
acceptance; or that the Company’s current or future products will conform to
industry requirements. Furthermore,
reallocation of resources by the Company, such as the diversion of research
and
development personnel to development of a particular feature for a potential
or
existing customer, can delay new products and certain product enhancements.
Some
of our customers adopted our software on an incremental basis. These customers
may not expand usage of our software on an enterprise-wide basis or implement
new software products introduced by the Company. The failure of the software
to
perform to customer expectations or otherwise to be deployed on an
enterprise-wide basis could have a material adverse effect on the Company’s
ability to collect revenues or to increase revenues from new as well as existing
customers. If the Company is unable to develop and market new products or
enhancements of existing products successfully, the Company’s ability to remain
competitive in the industry will be materially adversely effected.
Rapid
Technological Change
In
this
industry there is a continual emergence of new technologies and continual change
in customer requirements. Because of the rapid pace of technological change
in
the application software industry, the Company’s current market position could
be eroded rapidly by product advancements. In order to remain competitive,
the
Company must introduce new products or product enhancements that meet customers’
requirements in a timely manner. If the Company is unable to do this, it may
lose current and prospective customers to competitors.
The
Company’s application environment relies primarily on software development tools
from Microsoft Corporation. If alternative software development tools were
to be
designed and generally accepted by the marketplace, we could be at a competitive
disadvantage relative to companies employing such alternative developmental
tools.
Burdens
of Customization
Certain
of the Company’s clients request significant customization of Astea Alliance
products to address unique characteristics of their businesses or computing
environments. In these situations, the Company would apply contract accounting
to determine the recognition of license revenues. The Company’s commitment to
the customization could place a burden on its client support resources or delay
the delivery or installation of products, which, in turn, could materially
adversely affect its relationship with significant clients or otherwise
adversely affect business and results of operations. In addition, the Company
could incur penalties or reductions in revenues for failures to develop or
timely deliver new products or product enhancements under development agreements
and other arrangements with customers. If customers are not able to customize
or
deploy the Company’s products successfully, the customer may not complete
expected product deployment, which would prevent recognition of revenues and
collection of amounts due, and could result in claims against the
Company.
19
Risk
of Product Defects; Failure to Meet Performance Criteria
The
Company’s software is intended for use in enterprise-wide applications that may
be critical to its customer’s business. As a result, customers and potential
customers typically demand strict requirements for installation and deployment.
The Company’s software products are complex and may contain undetected errors or
failures, particularly when software must be customized for a particular
customer, when first introduced or when new versions are released. Although
the
Company conducts extensive product testing during product development, the
Company has at times delayed commercial release of software until problems
were
corrected and, in some cases, has provided enhancements to correct errors in
released software. The Company could, in the future, lose revenues as a result
of software errors or defects. Despite testing by the Company and by current
and
potential customers, errors in the software, customizations or releases might
not be detected until after initiating commercial shipments, which could result
in additional costs, delays, possible damage to the Company’s reputation and
could cause diminished demand for the Company’s products. This could
lead to customer dissatisfaction and reduce the opportunity to renew maintenance
contracts or sell new licenses.
Continued
Dependence on Large Contracts May Result in Lengthy Sales and Implementation
Cycles and Impact Revenue Recognition and Cash Flow
The
sale
and implementation of the Company’s products generally involve a significant
commitment of resources by prospective customers. As a result, the Company’s
sales process is often subject to delays associated with lengthy approval
processes attendant to significant capital expenditures, definition of special
customer implementation requirements, and extensive contract negotiations with
the customer. Therefore, the sales cycle varies substantially from customer
to
customer and typically lasts between four and twelve months. During this time
the Company may devote significant time and resources to a prospective customer,
including costs associated with multiple site visits, product demonstrations
and
feasibility studies. The Company may experience a number of significant delays
over which the Company has no control. Because the costs associated with the
sale of the product are fixed in current periods, timing differences between
incurring costs and recognizing of revenue associated with a particular project
may result. Moreover, in
the
event of any downturn in any existing or potential customer’s business or the
economy in general, purchases of the Company’s products may be deferred or
canceled. Furthermore,
the implementation of the Company’s products typically takes several months of
integration of the product with the customer’s other existing systems and
customer training. A successful implementation requires a close working
relationship between the customer and members of the Company’s professional
service organization. These issues make it difficult to predict the quarter
in
which expected orders will occur. Delays in implementation of products could
cause some or all of the professional services revenues from those projects
to
be shifted from the expected quarter to a subsequent quarter or quarters.
When
the
Company has provided consulting services to implement certain larger projects,
some customers have in the past delayed payment of a portion of license fees
until implementation was complete and in some cases have disputed the consulting
fees charged for implementation. There can be no assurance the Company will
not
experience additional delays or disputes regarding payment in the future,
particularly if the Company receives orders for large, complex installations.
Additionally, as a result of the application of the revenue recognition rules
applicable to the Company’s licenses under generally accepted accounting
principles, license revenues may be recognized in periods after those in which
the respective licenses were signed. The
Company believes that period-to-period comparisons of its results of operations
should not be relied upon as any indication of future performance.
20
Fluctuations
in Quarterly Operating Results May Be Significant
The
Company’s quarterly operating results have in the past and may in the future
vary significantly depending on factors such as:
· Revenue
from software sales;
· the
timing of new product releases;
· market
acceptance of new and enhanced versions of the Company’s products;
· customer
order deferrals in anticipation of enhancements or new products;
· the
size
and timing of significant orders, the recognition of revenue from such
orders;
· changes
in pricing policies by the Company and its competitors;
· the
introduction of alternative technologies;
· changes
in operating expenses;
· changes
in the Company’s strategy;
· personnel
changes;
· the
effect of potential acquisitions by the Company and its competitors; and general
domestic
and
international economic and political factors.
The
Company has limited or no control over many of these factors. Due to all these
factors, it is possible that in some future quarter the Company’s operating
results will be materially adversely affected.
Fluctuations
in Quarterly Operating Results Due to Seasonal Factors
The
Company expects to experience fluctuations in the sale of licenses for its
products due to seasonal factors. The Company has experienced and anticipates
that it may experience relatively lower sales in the first fiscal quarter due
to
patterns in capital budgeting and purchasing cycles of current and prospective
customers. The Company also expects that sales may decline during the summer
months of its third quarter, particularly in the European markets. Moreover,
the
Company generally records most of its total quarterly license revenues in the
third month of the quarter, with a concentration of these revenues in the last
half of that third month. This concentration of license revenues is influenced
by customer tendencies to make significant capital expenditures at the end
of a
fiscal quarter. The Company expects these revenue patterns to continue for
the
foreseeable future. Thus,
its
results of operations may vary seasonally in accordance with licensing activity,
and will also depend upon recognition of revenue from such licenses from time
to
time. The Company believes that period-to-period comparisons of its results
of
operations are not necessarily meaningful and should not be relied upon as
an
indication of future performance.
General
Economic Conditions May Affect Operations
As
business has grown, the Company has become increasingly subject to the risks
arising from adverse changes in domestic and global economic conditions.
Economic slowdowns in the United States and in other parts of the world can
cause many companies to delay or reduce technology purchases and investments.
Similarly, the Company’s customers may delay payment for Company products
causing accounts receivable to increase. In addition, terrorist attacks could
further contribute to the slowdown in the economies of North America, Europe
and
Asia. The overall impact to the Company of such a slowdown is difficult to
predict, however, revenues could decline, which would have an adverse effect
on
the Company’s results of operations and on its financial condition, as well as
on its ability to sustain profitability.
Competition
in the Customer Relationship Management Software Market is
Intense
The
Company competes in the CRM software market. This market is highly competitive
and the Company expects competition in the market to increase. The Company’s
competitors include large public companies such as Oracle, who owns PeopleSoft
and Siebel, as well as traditional enterprise resource planning (ERP) software
providers such as SAP that are developing CRM capabilities. In addition, a
number of smaller privately held companies generally focus only on discrete
areas of the CRM software marketplace. Because the barriers to entry in the
CRM
software market are relatively low, new competitors may emerge with products
that are superior to the Company’s products or that achieve greater market
acceptance. Moreover, the CRM industry is currently experiencing significant
consolidation, as larger public companies seek to enter the CRM market through
acquisitions or establish other cooperative relationships among themselves,
thereby enhancing their ability to compete in this market with their combined
resources. Some of the Company’s existing and potential competitors have greater
financial, technical, marketing and distribution resources than the Company.
These and other competitors pose business risks to the Company
because:
21
| · |
they
compete for the same customers that the Company tries to attract;
|
| · |
if
the Company loses customers to its competitors, it may be difficult
or
impossible to win them back;
|
| · |
lower
prices and a smaller market share could limit the Company’s revenue
generating ability, reduce its gross margins and restrict its ability
to
become profitable or sustain profitability; and
|
| · |
competitors
may be able to devote greater resources to more quickly respond to
emerging technologies and changes in customer requirements or to
the
development, promotion and sales of their
products.
|
There
can
be no assurance that the Company will be able to compete successfully against
current and future competitors or that competitive pressures faced by the
Company will not adversely affect its business and results of
operations.
Risk
of Dependence on Proprietary Technology
The
Company depends heavily on proprietary technology for its business to succeed.
The Company licenses its products to customers under license agreements
containing, among other terms, provisions protecting against the unauthorized
use, copying and transfer of the licensed program. In addition, the Company
relies on a combination of trade secrets, copyright and trademark laws and
confidentiality procedures to protect the Company’s proprietary rights in its
products and technology. The legal protection is limited, however. Unauthorized
parties may copy aspects of the Company’s products and obtain and use
information that the Company believes is proprietary. Other parties may breach
confidentiality agreements or other contracts they have made with the Company.
Policing unauthorized use of the Company’s software is difficult and, while the
Company is unable to determine the extent to which piracy of its software
products exists, software piracy can be expected to be a persistent problem.
There can be no assurance that any of the measures taken by the Company will
be
adequate to protect its proprietary technology or that its competitors will
not
independently develop technologies that are substantially equivalent or superior
to the Company’s technologies. If the Company fails to successfully enforce its
proprietary technology, its competitive position may be harmed.
Other
software providers could develop similar technology independently, which may
infringe on the Company’s proprietary rights. The Company may not be able to
detect infringement and may lose a competitive position in the market before
it
does so. In addition, competitors may design around the Company’s technology or
develop competing technologies. The laws of some foreign countries do not
protect the Company’s proprietary rights to the same extent as do the laws of
the United States. Litigation may be necessary to enforce the Company’s
proprietary rights. Such litigation is time-consuming, has an uncertain outcome
and could result in substantial costs and diversion of management’s attention
and resources. However, if the Company fails to successfully enforce its
proprietary rights, the Company’s competitive position may be
harmed.
Possible
Infringement of Third Party Intellectual Property Rights
Substantial
litigation and threats of litigation regarding intellectual property rights
are
common in this industry. The Company is not aware that its products and
technologies employ technology that infringes any valid, existing proprietary
rights of third parties. While there currently are no pending lawsuits against
the Company regarding infringement of any existing patents or other intellectual
property rights or any notices that it is infringing the intellectual property
rights of others, third parties may assert such claims in the future. Any
claims, with or without merit, could:
22
· be
time
consuming to defend;
· result
in
costly litigation or damage awards;
· divert
management’s attention and resources;
· cause
product shipment delays; or
| · |
require the Company to seek to enter into royalty or licensing agreements,
which may not be available on terms acceptable to the Company, if
at
all.
|
A
successful claim of intellectual property infringement against the Company
or
the Company’s failure or inability to license the infringed or similar
technology could seriously harm its business because the Company would not
be
able to sell the impacted product without exposing itself to litigation risk
and
damages. Furthermore, redevelopment of the product so as to avoid infringement
could cause the Company to incur significant additional expense and
delay.
Dependence
on Technology from Third Parties
The
Company integrates various third-party software products as components of its
software. The Company’s business would be disrupted if this software, or
functional equivalents of this software, were either no longer available to
the
Company or no longer offered to the Company on commercially reasonable terms.
In
either case, the Company would be required to either redesign its software
to
function with alternate third-party software or develop these components itself,
which would result in increased costs and could result in delays in software
shipments. Furthermore, the Company might be forced to limit the features
available in its current or future software offerings.
Need
to Expand Indirect Sales
The
Company has historically sold its products through its direct sales force and
a
limited number of distributors (value-added resellers, system integrators and
sales agents). The Company’s ability to achieve significant revenue growth in
the future will depend in large part on its success in establishing
relationships with distributors and OEM partners. The Company is currently
investing, and plans to continue to invest, significant resources to expand
its
domestic and international direct sales force and develop distribution
relationships. The Company’s distributors also sell or can potentially sell
products offered by the Company’s competitors. There can be no assurance that
the Company will be able to retain or attract a sufficient number of its
existing or future third party distribution partners or that such partners
will
recommend, or continue to recommend, the Company’s products. The inability to
establish or maintain successful relationships with distributors and OEM
partners or to train its direct sales force could cause its sales to
decline.
Risks
of Future Acquisitions
As
part
of Astea’s growth strategy, it may pursue the acquisition of businesses,
technologies or products that are complementary to its business. Acquisitions
involve a number of special risks that could harm the Company’s business,
including the diversion of management’s attention, the integration of the
operations and personnel of the acquired companies, and the potential loss
of
key employees. In particular, the failure to maintain adequate operating and
financial control systems or unexpected difficulties encountered during
expansion could harm the Company’s business. Acquisitions may result in
potentially dilutive issuances of equity securities, and the incurrence of
debt
and contingent liabilities, any of which could materially adversely affect
the
Company’s business and results of operations.
23
Risks
Associated with International Sales
Astea’s
international sales accounted for 27% of the Company’s revenues in 2006, 48% in
2005, and 37% in 2004.
The
Company expects that international sales will continue to be a significant
component of its business. In the Company’s efforts to expand its international
presence, it will face certain risks, which it may not be successful in
addressing. These risks include:
| · |
difficulties
in establishing and managing international distribution channels
and in
translating products into foreign
languages;
|
| · |
difficulties
finding staff to manage foreign operations and collect accounts
receivable;
|
| · |
difficulties
enforcing intellectual property
rights;
|
| · |
liabilities
and financial exposure under foreign laws and regulatory
requirements;
|
| · |
fluctuations
in the value of foreign currencies and currency exchange rates;
and
|
| · |
potentially
adverse tax consequences.
|
Additionally,
the current economic difficulties in several Asian countries could have an
adverse impact on the Company’s international operations in future periods. Any
of these factors, if not successfully addressed, could harm the Company’s
operating results.
Research
and Development in Israel; Risks of Potential Political, Economic or Military
Instability
Astea’s
principal research and development facilities are located in Israel.
Accordingly, political, economic and military conditions in Israel may directly
affect its business. Continued political and economic instability or armed
conflicts in Israel or in the region could directly harm the Company’s business
and operations.
Since
the
establishment of the State of Israel in 1948, a number of armed conflicts have
taken place between Israel and its Arab neighbors, and a state of hostility
has
existed in varying degrees and intensity. This state of hostility has led to
security and economic problems for Israel. The future of peace efforts between
Israel and its Arab neighbors, particularly in light of the recent violence
and
political unrest in Israel and the rest of the Middle East, remains uncertain
and several countries still restrict business with Israel and Israeli companies.
These restrictive laws and policies may also materially harm the Company’s
operating results and financial condition.
Dependence
on Key Personnel who are Required to Perform Military Service
Many
of
the Company’s employees in Israel are obligated to perform annual military
reserve duty in the Israeli army and are subject to being called to active
duty
at any time, which could adversely affect the Company’s ability to pursue its
planned research and development efforts. The Company cannot assess the full
impact of these requirements on its workforce or business and the Company cannot
predict the effect of any expansion or reduction of these obligations. However,
in light of the recent violence and political unrest in Israel, there is an
increased risk that a number of the Company’s employees could be called to
active military duty without prior notice. The Company’s operations could be
disrupted by the absence for a significant period of time of one or more of
our
key employees or a significant number of other employees due to military
service. Any such disruption in the Company’s operations could harm its
operations.
Risks
Associated with Inflation and Currency Fluctuations
The
Company generates most of its revenues in U.S. dollars but all of its costs
associated with the foreign operations located in Europe, the Pacific Rim and
Israel are denominated in the respective local currency and translated into
U.S.
dollars for consolidation and reporting. As a result, the Company is exposed
to
risks to the extent that the rate of inflation in Europe, the Pacific Rim or
Israel exceeds the rate of devaluation of their related foreign currency in
relation to the U.S. dollar or if the timing of such devaluations lags behind
inflation in Europe, the Pacific Rim or Israel. In that event, the cost of
the
Company’s operations in Europe, the Pacific Rim and Israel measured in terms of
U.S. dollars will increase and the U.S. dollar-measured results of operations
will suffer. Historically, Israel has experienced periods of high inflation.
24
Dependence
on Key Personnel; Competition for Employees
The
continued growth and success largely depends on the managerial and technical
skills of key technical, sales and management personnel. In particular, the
Company’s business and operations are substantially dependent of the performance
of Zack B. Bergreen, the founder and chief executive officer. If Mr. Bergreen
were to leave or become unable to perform services for the Company, the business
would likely be harmed.
The
Company’s success also depends, to a substantial degree, upon its continuing
ability to attract, motivate and retain other talented and highly qualified
personnel. Competition for key personnel is intense, particularly so in recent
years. From
time
to time the Company has experienced difficulty in recruiting and retaining
talented and qualified employees. There
can
be no assurance that the Company can retain its key technical, sales and
managerial employees or that it can attract, assimilate or retain other highly
qualified technical, sales and managerial personnel in the future. If the
Company fails to attract or retain enough skilled personnel, its product
development efforts may be delayed, the quality of its customer service may
decline and sales may decline.
Concentration
of Ownership
Currently,
Zack B. Bergreen, the Company’s chief executive officer, beneficially owns
approximately 38% of the outstanding Common Stock of the Company. As a result,
Mr. Bergreen exercises significant control over the Company through his ability
to influence and control the election of directors and all other matters that
require action by the Company’s stockholders. Under certain circumstances, Mr.
Bergreen could prevent or delay a change of control of the Company which may
be
favored by a significant portion of the Company’s other stockholders, or cause a
change of control not favored by the majority of the Company’s other
stockholders. Mr. Bergreen’s ability under certain circumstances to influence,
cause or delay a change in control of the Company also may have an adverse
effect on the market price of the Company’s Common Stock.
Possible
Volatility of Stock Price
The
market price of the Common Stock has in the past been, and may continue to
be,
subject to significant fluctuations in response to, and may be adversely
affected by, variations in quarterly operating results, changes in earnings
estimates by analysts, developments in the software industry, and adverse
earnings or other financial announcements of the Company’s customers as well as
other factors. In addition, the stock market can experience extreme price and
volume fluctuations from time to time, which may bear no meaningful relationship
to the Company’s performance. Broad market fluctuations, as well as economic
conditions generally and in the software industry specifically, may result
in
material adverse effects on the market price of the Company’s common
stock.
Limitations
of the Company Charter Documents
The
Company’s Certificate of Incorporation and By-Laws contain provisions that could
discourage a proxy contest or make more difficult the acquisition of a
substantial block of the Company’s common stock, including provisions that allow
the Board of Directors to take into account a number of non-economic factors,
such as the social, legal and other effects upon employees, suppliers, customers
and creditors, when evaluating offers for the Company’s acquisition. Such
provisions could limit the price that investors might be willing to pay in
the
future for the Company’s shares of common stock. The Board of Directors is
authorized to issue, without stockholder approval, up to 5,000,000 shares of
preferred stock with voting, conversion and other rights and preferences that
may be superior to the Company’s common stock and that could adversely affect
the voting power or other rights of our holders of common stock. The issuance
of
preferred stock or of rights to purchase preferred stock could be used to
discourage an unsolicited acquisition proposal.
25
NASDAQ
Capital Market Compliance Requirements
The
Company’s common stock trades on The NASDAQ Capital Market, which has certain
compliance requirements for continued listing of common stock, including a
series of financial tests relating to shareholder equity, public float, number
of market makers and shareholders, and maintaining a minimum bid price per
share
for the Company’s common stock. The result of delisting from The NASDAQ SmallCap
Market could be a reduction in the liquidity of any investment in the Company’s
common stock and a material adverse effect on the price of its common stock.
Delisting could reduce the ability of holders of the Company’s common stock to
purchase or sell shares as quickly and as inexpensively as they could have
done
in the past. This lack of liquidity would make it more difficult for the Company
to raise capital in the future. Although the Company is currently in compliance
with all continued listing requirements of the Nasdaq Capital, there can be
no
assurance that the Company will be able to continue to satisfy such
requirements.
Material
Weakness in Internal Control
In
connection with the completion of its audit of and the issuance of an
unqualified report on the Company's consolidated financial statements for the
fiscal year ended December 31, 2006, the Company's independent registered public
accounting firm, BDO Seidman, LLP ("BDO"), communicated to the Company's Audit
Committee that the following matter involving the Company's internal controls
and operations was considered to be a material weakness, as defined under
standards established by the Public Company Accounting Oversight
Board:
The
Company does not maintain sufficiently detailed documentation regarding how
modifications to its standard software license terms (and the related accounting
impact, if any) comply with provisions in US GAAP, namely SOP 97-2 Software
Revenue Recognition and SOP 98-9 Modification of SOP 97-2 Software Revenue
Recognition with Respect to Certain Transactions and related practice aids
issued by the American Institute of Certified Public Accountants (AICPA).
A
material weakness is a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the financial statements will not be prevented or detected
by
the entity’s internal control.
The
Company intends to immediately expand its internal contract documentation
procedures in order to fully comply with all provisions of US GAAP, in order
to
correct the material weakness identified. However,
if the Company is unable to make the necessary improvements to its internal
controls over accounting for software revenue recognition and disclosures,
it is
possible that errors in future financial statements could go
undetected.
Increased
Costs for Sarbanes-Oxley Compliance
The
Company is considered a non-accelerated filer for purposes of complying with
section 404 of the Sarbanes-Oxley Act. However, the Company will have to comply
in 2007, by reporting that it has examined and tested its internal controls
and
that they comply with the standards set for non-accelerated filing companies
as
of December 31, 2007. For the year ended December 31, 2008, the Company’s
auditors will be required to attest to management’s assertion on its internal
accounting controls. As a result of the increased requirements placed on the
Company by section 404 of the Sarbanes-Oxley Act, the Company expects to incur
increased audit costs as well as costs to contract with outside consultants
to
assist in the compliance effort.
26
Item
1B.
Unresolved
SEC Items
None
Item
2. Properties.
The
Company’s headquarters are located in a leased facility of approximately 22,000
square feet in Horsham, Pennsylvania. The Company also leases facilities for
operational activities in Irvine, California; Culemborg, Netherlands; and
Karmiel, Israel, and for sales and customer support activities in Cranfield,
England and St. Leonards, Australia. The Company believes that suitable
additional or alternative office space will be available in the future on
commercially reasonable terms as needed.
Item
3. Legal
Proceedings.
On
and
shortly after April 6, 2006, certain purported shareholder class action and
derivative lawsuits were filed in the United States District Court for the
Eastern District of Pennsylvania against the Company and certain of its
directors and officers. The lawsuits, alleging that the Company and certain
of
its officers and directors violated federal securities laws and state laws,
related to the Company’s March 31, 2006 announcement of the accounting
restatement for overcapitalized software development costs during the first
two
quarters of 2005 and the undercapitalized software development costs during
the
third quarter of 2005. Pursuant to a Stipulation and Order of the Court entered
July 12, 2006, the putative class actions were consolidated, certain persons
were appointed as lead plaintiffs, and a consolidated amended complaint was
filed on September 11, 2006. The defendants filed a motion to dismiss the
consolidated amended complaint on October 26, 2006 and the Court will decide
this motion once briefing has been completed. On September 14, 2006, the Court
consolidated the putative derivative actions, appointed certain persons to
serve
as co-lead plaintiffs, and ordered co-lead plaintiffs to file a consolidated
amended derivative complaint within thirty (30) days after a decision is
rendered on defendants’ motion to dismiss the consolidated class action. The
briefings for the motion were completed January 24, 2007, and the motion is
now
awaiting the decision of the Court. The Company believes these lawsuits are
without merit and intends to defend them vigorously.
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.
27
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:
|
2006
|
High
|
|
Low
|
||||
|
First
quarter
|
$
|
25.71
|
$
|
11.73
|
|||
|
Second
quarter
|
11.80
|
7.87
|
|||||
|
Third
quarter
|
9.67
|
4.26
|
|||||
|
Fourth
quarter
|
8.19
|
4.71
|
|||||
|
2005
|
High
|
|
Low
|
||||
|
First
quarter
|
$
|
8.45
|
$
|
6.41
|
|||
|
Second
quarter
|
9.61
|
5.82
|
|||||
|
Third
quarter
|
8.07
|
5.85
|
|||||
|
Fourth
quarter
|
18.31
|
7.50
|
|||||
As
of
March 15, 2007, there were approximately 35 holders of record of the Company’s
Common Stock. (Because “holders of record” include only stockholders listed with
the Company’s transfer agent and exclude stockholders listed separately with
financial nominees, this number does not accurately reflect the actual number
of
beneficial owners of the Company’s Common Stock, of which the Company estimates
there were more than 2,700 on such date.) On March 15, 2007, the last reported
sale price of the Common Stock on the Nasdaq Capital Market was
$5.34 per
share.
The
Board
of Directors from time to time reviews the Company’s forecasted operations and
financial condition to determine whether and when payment of a dividend or
dividends is appropriate. No dividends have been declared since June
2000.
28
Item
6.
Selected
Financial Data
|
Years
ended December 31,
|
2006
|
2005
Restated
|
2004
Restated
|
2003
|
2002
|
|||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||
|
Statement
of Income Data:
|
||||||||||||||||
|
Revenues:
|
||||||||||||||||
|
Software license fees
|
$
|
4,670
|
$
|
8,240
|
$
|
7,392
|
$
|
1,935
|
$
|
6,504
|
||||||
|
Services and maintenance
|
15,614
|
13,914
|
11,315
|
10,906
|
10,294
|
|||||||||||
|
Total revenues (1)
|
20,284
|
22,154
|
18,707
|
12,841
|
16,798
|
|||||||||||
|
Cost
and Expenses:
|
||||||||||||||||
|
Cost of software license fees
|
1,687
|
1,178
|
1,838
|
898
|
1,262
|
|||||||||||
|
Cost of services and maintenance
|
10,262
|
8,261
|
6,356
|
6,963
|
6,345
|
|||||||||||
|
Product development
|
3,842
|
2,461
|
1,431
|
2,490
|
1,781
|
|||||||||||
|
Sales and marketing
|
5,923
|
6,192
|
5,565
|
5,875
|
6,218
|
|||||||||||
|
General and administrative
|
3,757
|
3,003
|
2,051
|
2,198
|
2,426
|
|||||||||||
|
Total costs and expenses (2)
|
25,471
|
21,095
|
17,241
|
18,424
|
18,032
|
|||||||||||
|
Income(loss)
from operations
before interest and taxes
|
(5,187
|
)
|
1,059
|
1,466
|
(5,583
|
)
|
(1,234
|
)
|
||||||||
|
Interest
income
|
234
|
165
|
58
|
54
|
106
|
|||||||||||
|
Income(loss)
from
operations before income taxes
|
(4,953
|
)
|
1,224
|
1,524
|
(5,529
|
)
|
(1,128
|
)
|
||||||||
|
Income
tax expense
|
29
|
7
|
-
|
-
|
200
|
|||||||||||
|
Net
profit/(loss)
|
$
|
(4,982
|
)
|
$
|
1,217
|
$
|
1,524
|
$
|
(5,529
|
)
|
$
|
(1,328
|
)
|
|||
|
Basic
income (loss) per share
|
$
|
(1.40
|
)
|
$
|
.39
|
$
|
.51
|
$
|
(1.89
|
)
|
$
|
(0.09
|
)
|
|||
|
Diluted
income (loss) per share
|
$
|
(1.40
|
)
|
$
|
.39
|
$
|
.51
|
$
|
(1.89
|
)
|
$
|
(0.09
|
)
|
|||
|
Shares
used in computing basic income (loss)
per
share (3)
|
3,547
|
3,093
|
2,960
|
2,922
|
2,921
|
|||||||||||
|
Shares
used in computing diluted income (loss) per share (3)
|
3,547
|
3,116
|
3,001
|
2,922
|
2,921
|
|||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||
|
Working
capital (deficit)
|
$
|
(1,289
|
)
|
$
|
5,495
|
$
|
3,969
|
$
|
1,820
|
$
|
6,449
|
|||||
|
Total
assets
|
18,059
|
21,612
|
13,754
|
10,096
|
16,443
|
|||||||||||
|
Long-term
debt, less current portion
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Accumulated
deficit
|
(20,343
|
)
|
(15,361
|
)
|
(16,578
|
)
|
(18,100
|
(12,568
|
)
|
|||||||
|
Total
stockholders’ equity
|
6,106
|
10,648
|
5,461
|
3,734
|
8,998
|
|||||||||||
| (1) |
Revenues
for 2004 and 2005 have been restated by $610,000 and $611,000,
respectively, to reflect the restatement of revenue associated with
a 2004
contract in the U.K. See Note 2 of the Notes to the Consolidated
Financial
Statements.
|
| (2) |
Results
for 2006 include expense of $397,000 for stock compensation plans
as
required under SFAS 123(R), effective at January 1, 2006. Prior years
do
not contain cost of stock compensation
plans.
|
| (3) |
Restated
for a 1:5 reverse stock-split occurred in September 2003. See Note
3 of
the Notes to the Consolidated Financial
Statements.
|
29
Item
7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
Overview
This
document contains various forward-looking statements and information that are
based on management’s beliefs as well as assumptions made by and information
currently available to management. Such statements are subject to various risks
and uncertainties, which could cause actual results to vary materially from
those contained in such forward, looking statements. Should one or more of
these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated,
expected or projected. Certain of these as well as other risks and uncertainties
are described in more detail in this Annual Report on Form
10-K.
The
Company develops,
markets and supports service management software solutions, which are licensed
to companies that sell and service equipment, or sell and deliver professional
services. The Company’s principal product offerings Astea Alliance and
FieldCentrix Enterprise suites, integrate and automate sales and service
business processes and thereby increases
competitive advantages, top-line revenue growth and profitability through better
management of information, people, assets and cash flows. Astea Alliance offers
substantially broader and far superior capabilities over the Company’s
predecessor product, DISPATCH-1, which was designed for only field service
and
customer support management applications.
The
Company’s products and services are primarily used in industries such as
information technology, medical devices and diagnostic systems, industrial
controls and instrumentation, retail systems, office automation, imaging
systems, facilities management and telecommunications. An eclectic group of
other industries, all with equipment sales and service requirements, are also
represented in Astea’s customer base. The Company maintains offices in the
United States, United Kingdom, Australia, Israel and The Netherlands.
The
Company generates revenues from two sources: software license fees for its
software products, and services and maintenance revenues from professional
services, which includes consulting, implementation, training and maintenance
related to those products.
Software
license fees accounted for 23% of the Company’s total revenues in 2006, which
was mostly comprised of sales of Astea Alliance. Software license fee revenues
also include some fees from the sublicensing of third-party software, primarily
knowledge management software licenses. Typically, customers pay a license
fee
for the software based on the number of licensed users. Depending on the
contract terms and conditions, software license fees are recognized as revenue
upon delivery of the product if no significant vendor obligations remain and
collection of the resulting receivable is deemed probable. If significant vendor
obligations exist at the time of delivery or if the product is subject to
uncertain customer acceptance, revenue is deferred until no significant
obligations remain or acceptance has occurred.
The
remaining component of the Company’s revenues consists principally of fees
derived from professional services associated with the implementation and
deployment of the Company’s software products and maintenance fees for ongoing
customer support, primarily external customer technical support services and
product enhancements. Professional services (including training) are charged
on
an hourly or daily basis and billed on a regular basis pursuant to customer
work
orders. Training services may also be charged on a per-attendee basis with
a
minimum daily charge. Out-of-pocket expenses incurred by company personnel
performing professional services are typically reimbursed by the customer.
The
Company recognizes revenue from professional services as the services are
performed. Maintenance fees are typically paid to the Company under written
agreements entered into at the time of the initial software license. Maintenance
revenue, which is invoiced annually, is recognized ratably over the term of
the
agreement.
30
FieldCentrix
On
September 21, 2005, the Company, through a wholly owned subsidiary, FC
Acquisition Corp., acquired substantially all of the assets and certain
liabilities of FieldCentrix, Inc, the service industry’s leading mobile field
force automation company. The acquisition immediately strengthened and further
cemented Astea’s standing as the leading company that provides an end-to-end
enterprise solution that addresses every facet of the Service Management
Lifecycle process.
FieldCentrix
develops and markets mobile field service automation (FSA) systems, which
include the wireless dispatch and support of mobile field technicians using
portable, hand-held computing devices. The FieldCentrix offering has evolved
into a leading complementary service management solution that runs on a wide
range of mobile devices (handheld computers, laptops and PC’s, and Pocket PC
devices), and integrates seamlessly with popular CRM and ERP applications.
FieldCentrix has licensed applications to Fortune 500 and mid-size companies
in
a wide range of sectors including HVAC, building and real estate services,
manufacturing, process instruments and controls, and medical
equipment.
FieldCentrix’
expertise in mobility and emerging mobile technologies gives Astea’s global
customer base new ways to update and streamline service organizations, which
increasingly support hundreds of remote locations and mobile technical teams.
Astea’s strong and robust enterprise service lifecycle management solution
complements the FieldCentrix mobility offering to provide the FieldCentrix
customer base with the most robust service lifecycle management system on the
market today. Astea and FieldCentrix will combine the expertise of the two
organizations to break new ground in providing premier solutions that continue
to deliver exceptional value for service-centric companies.
Restatements
In
connection with the preparation of the 2006 Form 10-K, an error in the Company’s
accounting for revenue recognition relating to a particular contract from 2004
was identified. In the fourth quarter of 2004, our U.K. subsidiary entered
into
a contract with a new customer. In 2004, the Company recognized all of the
license revenue. In 2005 and the first three quarters of 2006, the Company
recognized services and maintenance revenue based on work performed for the
customer. However, the contract contained a specified upgrade right, which
was
delivered in the first quarter of 2005. According to accounting requirements,
a
specified upgrade right must be valued using vendor specific objective evidence
(VSOE). The Company uses the residual method for recognizing revenue on its
software licenses. In such instances, the accounting rules state that VSOE
for a
specified upgrade right cannot be determined and therefore, revenue must be
deferred until all elements of the arrangement (which would include the
specified upgrade) are delivered. Although the specified upgrade was delivered
in the first quarter of 2005, changes in the customer’s requirements and
subsequent concessions granted by the Company in October 2005 (which included
an
additional specified upgrade right), further delayed our ability to establish
that delivery and acceptance of the license had occurred. This additional
specified upgrade was delivered in the first quarter of 2007. Accordingly all
revenue, including license, service and maintenance should have been deferred
until the delivery and acceptance of the final element. Therefore, the Company
restated its financial statements to defer all license, service and maintenance
revenue recognized in relation to this contract in 2004, 2005 and the first
three quarters of 2006, which was $610,000, $611,000 and $457,000, respectively.
The Company’s policy is to recognize expenses as incurred when revenues are
deferred in connection with transactions where VSOE cannot be established for
an
undelivered element as the Company follows the accounting requirements of SOP
97-2. Accordingly, all costs associated with the contract were recorded in
the
period when incurred, which differs from the period in which the associated
revenue will be recognized.
All
revenue related to this contract is expected to be recognized in the first
quarter of 2007, with the exception of certain post contract support revenue
totaling $131,000, which will be recognized ratably over 2007 and 2008. All
cash
related to the transaction, $1,678,000 has been received by the Company as
of
December 31, 2006, with the exception of $259,000, most of which was received
in
the first quarter of 2007 and the remainder of which is expected to be received
early in the second quarter of 2007.
31
As
a
result of this determination, we restated our financial statements and quarterly
results of operations (unaudited) included in this annual report and are in
the
process of restating the consolidated interim financial statements for the
2006
periods contained in our 2006 quarterly reports on Form 10-Q. The modifications
contained in the restated financial statements relate to revenue and deferred
revenues. It affected the elements of cash flow, but did not have any impact
to
net cash flow from operations as reported in the statements of cash flows.
These
restated financial statements reflect a decrease in basic net loss per share
of
($.20) for the year ended December 31, 2005 and ($.21) for the year ended
December 31, 2004.
Critical
Accounting Policies and Estimates
The
Company’s significant accounting policies are more fully described in its
Summary of Accounting Policies, Note 2, to the Company’s consolidated financial
statements. The preparation of financial statements in conformity with
accounting principles generally accepted within the United States requires
management to make estimates and assumptions in certain circumstances that
affect amounts reported in the accompanying financial statements and related
notes. In preparing these financial statements, management has made its best
estimates and judgments of certain amounts included in the financial statements,
giving due consideration to materiality. The Company does not believe there
is a
great likelihood that materially different amounts would be reported related
to
the accounting policies described below; however, application of these
accounting policies involves the exercise of judgments and the use of
assumptions as to future uncertainties and, as a result, actual results could
differ from these estimates.
Revenue
Recognition
Astea’s
revenue is principally recognized from two sources: (i) licensing arrangements
and (ii) services and maintenance.
The
Company markets its products primarily through its direct sales force and
resellers. License agreements do not provide for a right of return, and
historically, product returns have not been significant.
Astea
recognizes revenue on its software products in accordance with AICPA Statement
of Position (“SOP”) 97-2, Software
Revenue Recognition,
SOP
98-9, Modification
of SOP 97-2,
Software
Revenue Recognition with Respect to Certain Transactions, Accounting
for Performance of Construction-Type and Certain Production-Type
Contracts;
and SEC
Staff Accounting Bulletin (“SAB”) 104, Revenue
Recognition.
Astea
recognizes revenue from license sales when all of the following criteria are
met: persuasive evidence of an arrangement exists, delivery has occurred, the
license fee is fixed and determinable and the collection of the fee is probable.
We utilize written contracts as a means to establish the terms and conditions
by
which our products, support and services are sold to our customers. Delivery
is
considered to have occurred when title and risk of loss have been transferred
to
the customer, which generally occurs after a license key has been delivered
electronically to the customer. Revenue for arrangements with extended payment
terms in excess of one year is recognized when the payments become due, provided
all other recognition criteria are satisfied. If collectibility is not
considered probable, revenue is recognized when the fee is collected. Our
typical end user license agreements do not contain acceptance clauses. However,
if acceptance criteria is required, revenues are deferred until customer
acceptance has occurred.
Astea
allocates revenue to each element in a multiple-element arrangement based on
the
elements’ respective fair value, determined by the price charged when the
element is sold separately. Specifically, Astea determines the fair value of
the
maintenance portion of the arrangement based on the price, at the date of sale,
if sold separately, which is generally a fixed percentage of the software
license selling price. The professional services portion of the arrangement
is
based on hourly rates which the Company charges for those services when sold
separately from software. If evidence of fair value of all undelivered elements
exists, but evidence does not exist for one or more delivered elements, then
revenue is recognized using the residual method. If an undelivered element
for
which evidence of fair value does not exist, all revenue in an arrangement
is
deferred until the undelivered element is delivered or fair value can be
determined. Under the residual method, the fair value of the undelivered
elements is deferred and the remaining portion of the arrangement fee is
recognized as revenue. The proportion of the revenue recognized upon delivery
can vary from quarter-to-quarter depending upon the determination of
vendor-specific objective evidence (“VSOE”) of fair value of undelivered
elements. The residual value, after allocation of the fee to the undelivered
elements based on VSOE of fair value, is then allocated to the perpetual
software license for the software products being sold.
32
When
appropriate, the Company may allocate a portion of its software revenue to
post-contract support activities or to other services or products provided
to
the customer free of charge or at non-standard rates when provided in
conjunction with the licensing arrangement. Amounts allocated are based upon
standard prices charged for those services or products which, in the Company’s
opinion, approximate fair value. Software license fees for resellers or other
members of the indirect sales channel are based on a fixed percentage of the
Company’s standard prices. The Company recognizes software license revenue for
such contracts based upon the terms and conditions provided by the reseller
to
its customer.
Revenue
from post-contract support is recognized ratably over the term of the contract,
which is generally twelve months on a straight-line basis. Consulting and
training service revenue is generally unbundled and recognized at the time
the
service is performed. Fees from licenses sold together with consulting services
are generally recognized upon shipment, provided that the contract has been
executed, delivery of the software has occurred, fees are fixed and determinable
and collection is probable.
Deferred
Revenue
Deferred
revenue includes amounts billed to or received from customers for which revenue
has not been recognized. This generally results from post-contract support,
software installation, consulting and training services not yet rendered or
license revenue which has been deferred until all revenue requirements have
been
met or as services are performed. Unbilled receivables are established when
revenue is deemed to be recognized based on the Company’s revenue recognition
policy, but due to contractual restraints, the Company does not have the right
to invoice the customer.
Accounts
Receivable
The
Company evaluates the adequacy of its allowance for doubtful accounts at the
end
of each quarter. In performing this evaluation, the Company analyzes the payment
history of its significant past due accounts, subsequent cash collections on
these accounts and comparative accounts receivable aging statistics. Based
on
this information, along with consideration of the general strength of the
economy, the Company develops what it considers to be a reasonable estimate
of
the uncollectible amounts included in accounts receivable. This estimate
involves significant judgment by the management of the Company. Actual
uncollectible amounts may differ from the Company’s estimate.
Capitalized
Software Research and Development Costs
The
Company accounts for its internal software development costs in accordance
with
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for
the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed." The
Company capitalizes software development costs subsequent to the establishment
of technological feasibility through the product’s availability for general
release. Costs incurred prior to the establishment of technological feasibility
are charged to product development expense. Product
development expense includes payroll, employee benefits, and other
headcount-related costs associated with product development.
33
Software
development costs are amortized on a product-by-product basis over the greater
of the ratio of current revenues to total anticipated revenues or on a
straight-line basis over the estimated useful lives of the products (usually
two
years), beginning with the initial release to customers. During the first
quarter of 2004, the Company reduced the estimated life for its capitalized
software products from three years to two years based on current sales trends
and the rate of product release. The Company continually evaluates whether
events or circumstances had occurred that indicate that the remaining useful
life of the capitalized software development costs should be revised or that
the
remaining balance of such assets may not be recoverable. The Company evaluates
the recoverability of capitalized software based on the estimated future
revenues of each product.
Goodwill
Part
of
the purchase price for the FieldCentrix assets, acquired September 21, 2005,
included the acquisition of goodwill. Goodwill is tested for impairment on
an
annual basis as of September 30. It is also tested between annual tests if
indicators of potential impairment exists, using a fair-value-based approach.
No
impairment of goodwill has been identified during any of the periods
presented.
Goodwill
is tested for impairment at the reportable unit level using a two-step approach.
The first step is to compare the fair value of a reporting unit to its carrying
amount, including goodwill. If the fair value of the reporting unit is greater
than its carrying unit, goodwill is not considered impaired and the second
step
is not required. If the fair value of the reporting unit is less than the
carrying amount, the second step of the impairment test measures the amount
of
the impairment loss, if any, by comparing the implied fair value of goodwill
to
its carrying amount. If the assumptions we used to estimate fair value of
goodwill change, there could be an impact on future reported results of
operations.
Acquired
Intangible Assets
Acquired
intangible assets (excluding goodwill) are amortized on a straight-line basis
over their estimated useful lives and reviewed for impairment on an annual
basis, or on an interim basis if an event or circumstance occurs between annual
tests indicating that the assets might be impaired. The impairment test will
consist of comparing the cash flows expected to be generated by the acquired
intangible asset to its carrying amount. If the asset is considered to be
impaired, an impairment loss will be recognized in an amount by which the
carrying amount of the asset exceeds its fair value.
Share-Based
Compensation - Option Plans
Beginning
on January 1, 2006, the Company began accounting for stock options under the
provision of Statement of Financial Accounting Standards No. 123(R), or SFAS
123(R), Share-Based
Payments,
which
requires the recognition of the fair value of share-based compensation. The
fair
value of stock option awards was estimated using a Black-Scholes closed-form
option valuation model. This model requires the input of assumptions in
implementing SFAS 123(R), including expected stock price volatility, expected
term and estimated forfeitures of each award. The parameters used in the model
are reviewed and adjusted on a quarterly basis. We elected the
modified-prospective method for adoption of SFAS 123(R).
Prior
to
the implementation of SFAS 123(R), we accounted for stock option awards under
the provisions of Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees,
and
made pro forma footnote disclosures as required by Statement of Financial
Accounting Standards No. 148, or SFAS 148, Accounting
For Stock-Based Compensation - Transition and Disclosure,
which
amended Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation.
Pro
forma net income and pro forma net income per share disclosed in the footnotes
to the consolidated condensed financial statements were estimated using a
Black-Scholes closed-form option valuation model to determine the estimated
value and by attributing such fair value over the requisite service period
on a
straight-line basis for those awards that actually vested.
34
As
a
result of adopting SFAS 123(R), for the year ended December 31, 2006 loss
before income taxes and net loss was $397,000 higher than if the Company had
continued to account for share-based compensation under APB 25. The basic and
diluted loss per share for the year ended December 31, 2006 was $0.11
greater than if the Company had continued to account for share-based
compensation under APB 25.
As
of
December 31, 2006, the total unrecognized compensation cost related to
non-vested options amounted to $686,000, which is expected to be recognized
over
the options’ average remaining vesting period of 3.86years. No income tax
benefit was realized by the Company in the year ended December 31, 2006 as
the
Company reported an operating loss and maintained a full valuation allowance
on
its net deferred tax asset.
The
Company had a choice of two attribution methods for allocating compensation
costs under SFAS No. 123(R): the “straight-line” method, which allocates expense
on a straight-line basis over the requisite service period of the last
separately vesting portion of an award, or the “graded vesting attribution
method”, an accelerated amortization method, which allocates expense on a
straight-line basis over the requisite service period for each separately
vesting portion of the award as if the award was in-substance, multiple awards.
We chose the graded vesting attribution method and accordingly, amortize the
fair value of each option tranche over the respective tranche’s requisite
service period.
The
adoption of SFAS 123(R) has impacted our Consolidated Statement of Operations
through the recognition of share-based compensation expenses in cost of services
and maintenance, development, sales and marketing, and general and
administrative expenses. Future periods are expected to reflect similar costs.
Prior to the adoption of SFAS 123(R) no stock based compensation cost had been
recorded.
With
the
adoption of SFAS 123(R), in order to determine the fair value of stock options
costs, the Company assumed estimated forfeiture rate of 24.5%. Forfeiture rates
were not reflected in prior year estimates of the fair value of stock
options.
As
of
December 31, 2006, the total unrecognized compensation cost related to
non-vested options granted amounted to $686,000 which is expected to be
recognized over the options’ remaining vesting period of 3.86 years. No income
tax benefit was realized by the Company in year ending December 31, 2006 as
the
Company reported an operating loss and maintained a full valuation allowance
on
its net deferred tax asset.
Recent
Accounting Pronouncements
In
June
2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for
Uncertainty in Income Taxes-an Interpretation of FASB Statement 109”, which
establishes that the financial statement effects of a tax position taken or
expected to be taken in a tax return are to be recognized in the financial
statements when it is more likely than not, based on the technical merits,
that
the position will be sustained upon examination. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The Company is still evaluating the
impact of adopting FIN 48, however, is not expected to have a material impact
on
our results of operations or our financial position.
In
September 2006, the FASB issued FAS No 157, Fair Value Measurement (“FAS 157”).
FAS 157 defines fair value, establishes a framework for measuring fair value
in
accordance with generally accepted accounting principles, and expands disclosure
about fair value measurements. FAS 157 is effective for years beginning after
November 15, 2007. The adoption of this Statement is not expected to have a
material effect on the Company’s consolidated financial statements.
35
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements, “(SAB 108). SAB
108 was issued to provide interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be considered in
quantifying a current year misstatement. The effective date of SAP 108 is for
fiscal years ending on or before November 15, 2006. This pronouncement did
not
have any impact on the Company’s consolidated financial statements.
Results
of Continuing Operations
The
following table sets forth for the periods indicated, selected financial data
and the percentages of the Company’s total revenues represented by each line
item presented for the periods presented:
|
Years
ended December 31,
|
2006
|
2005
(restated)
|
2004
(restated)
|
|||||||
|
Revenues:
|
||||||||||
|
Software license fees
|
23.0
|
%
|
37.2
|
%
|
39.5
|
%
|
||||
|
Services and maintenance
|
77.0
|
62.8
|
60.5
|
|||||||
|
Total revenues
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||
|
Costs
and expenses:
|
||||||||||
|
Cost of software license fees
|
8.3
|
%
|
5.3
|
%
|
9.8
|
%
|
||||
|
Cost of services and maintenance
|
50.6
|
37.3
|
34.0
|
|||||||
|
Product development
|
19.0
|
11.1
|
7.7
|
|||||||
|
Sales and marketing
|
29.2
|
27.9
|
29.7
|
|||||||
|
General and administrative
|
18.5
|
13.6
|
11.0
|
|||||||
|
Total costs and expenses
|
125.6
|
%
|
95.2
|
%
|
92.2
|
%
|
||||
Comparison
of Years Ended December 31, 2006 and 2005
Revenues.
Total
revenues decreased $1,870,000 or 8%, to $20,284,000 for the year ended December
31, 2006 from $22,154,000 for the year ended December 31, 2005. Software license
revenues decreased 43% in 2006, compared to 2005. Services and maintenance
fees
for 2006 amounted to $15,614,000, an 12% increase from 2005.
Software
license fee revenues decreased $3,570,000 or 43% to $4,670,000 in 2006 from
$8,240,000 in 2005. Astea Alliance license revenues decreased to $3,603,000
in
2006 from $7,936,000 in 2005, a decrease of 55%. The decrease results primarily
from one large license sale of $4.5 million in 2005. The Company also sold
$1,037,000 of FieldCentrix licenses compared to $288,000 in 2005 which reflects
a full year of results compared to 2005.
Total
services and maintenance revenues increased $1,700,000 or 12% to $15,614,000
in
2006 from $13,914,000 in 2005. The increase is principally due to a full year
of
earning FieldCentrix maintenance revenue, because the company was acquired
on
September 21, 2005. In addition there was an increase of $275,000 in Astea
Alliance service and maintenance revenue offset by an expected decline of
$399,000 in DISPATCH-1 service and maintenance revenue. Due to the decreasing
demand for DISPATCH-1 professional services and the lack of any related product
development by the Company, the decrease in service and maintenance revenue
is
expected to continue in 2007.
In
2006
no customer accounted for more than 10% of total revenues compared to 2005
when
one customer, EDS, accounted for 24% of the Company’s total revenues and 28% of
Astea Alliance revenue.
36
Costs
of Revenues.
Costs
of
software license fee revenues increased 43% to $1,687,000 in 2006 from
$1,178,000 in 2005. The increase results from increased amortization of
capitalized software development costs, increases in the cost of third party
software licenses embedded in our software and a full year of FieldCentrix
acquired software amortization. Amortization of capitalized software increased
by 22% to $1,240,000 in 2006 from $1,020,000 in 2005. The gross margin
percentage on software license sales decreased to 64% in 2006 from 86% in 2005
due to a reduction in license revenue and an increase in cost of license
fees.
The
costs
of services and maintenance revenues increased 24% to $10,262,000 in 2006 from
$8,261,000 in 2005. The increase in cost of services and maintenance is
primarily attributed to a full year of professional services staff from the
2005
FieldCentrix acquisition and additional headcount in the U.S. which resulted
from the Company’s initiative to improve the quality of the professional
services provided to its customers, as well as the extensive upgrade to customer
systems from older versions of Astea Alliance to the latest released version
Additionally, $45,000 in share based compensation expense for employees was
recorded at December 31, 2006 compared to no expense for year ending December
31, 2005. In addition, the Company invested in additional support staff to
improve the timing and quality of support provided to its’ customers. The
service and maintenance gross margin percentage decreased to 34% in 2006 from
41% in 2005. The decreased margin is primarily attributable to the non-billable
time required for new hires to be properly trained on the Company’s software
before they can effectively generate revenue.
Product
Development.
Product
development expenses increased 56%, or $1,381,000, to $3,842,000 in 2006 from
$2,461,000 in 2005. Development costs increased due to an increase in headcount
in the Company’s development center in Israel by 14%, the addition of
development staff for a complete year from the acquisition of FieldCentrix,
which occurred on September 21, 2005, and an increased focus on improving the
quality of product development. Additionally, $90,000 in share based
compensation expense for employees was recorded at December 31, 2006 compared
to
no expense for year ending December 31, 2005.
Product
development as a percentage of total revenue increased to 19% in 2006 compared
to 11% in 2005. This increase is due to both the overall increase in product
development expenses coupled with a reduction in total revenue. The 2006
percentage is about 2% higher due to the overall decrease in revenues in 2006
compared to 2005. Gross development expense before the capitalization of
software costs and was $6, 663,000 in 2006, 64% greater than $4,058,000 in
2005.
Capitalized software totaled $2,821,000 in 2006 compared to $1,555,000 in 2005.
The increase in software capitalization of 81% over last year reflects the
intense effort put forth by the Company to expand and improve its products.
In
2006, the Company released a new version of its FieldCentrix software and a
mobility product for Astea Alliance users, based on the expertise of
FieldCentrix as well as intensive efforts to complete the latest version of
Astea Alliance, (Astea Alliance 8.0), which was released in February 2007.
Sales
and Marketing.
Sales
and
marketing expenses decreased 4%, or $269,000, to $5,923,000 in 2006 from
$6,192,000 in 2005. The decrease is primarily the result of decreased sales
commissions resulting from reduced software license sales partially offset
by
increased investment in marketing programs in order to increase market awareness
of the Company’s products and domain expertise in Service Life Cycle Management,
Additionally, $123,000 in share based compensation expense for employees was
recorded at December 31, 2006 compared to no expense for year ending December
31, 2005. The Company continues to focus on improving its market presence
through intensified marketing efforts to increase awareness of the Company’s
products. This occurs through the use of Webinars focused in the vertical
industries in which the Company operates, attendance at selected trade shows,
and increased investment in lead generation for its sales force. Sales and
marketing expense as a percentage of total revenues increased to 29% in 2006
from 28% in 2005.
37
General
and Administrative.
General
and administrative expenses consist of salaries, benefits and related costs
for
the Company’s finance, administrative and executive management personnel, legal
costs, accounting costs, bad debt expense and various costs associated with
the
Company’s status as a public company. The Company’s general and administrative
expenses were $3,757,000 in 2006 and $3,003,000 in 2005 representing a 25%
increase. This increase is primarily due to the inclusion of a full year’s rent
for the FieldCentrix office in Irvine, California, an increase of $191,000;
$420,000 of additional legal fees partially resulting from the class action
lawsuit that was filed in April, 2006 and $100,000 in bonuses paid to
management. Additionally, $139,000 in share based compensation expense for
employees was recorded at December 31, 2006 compared to no expense for year
ending December 31, 2005. As a percentage of total revenues, general and
administrative expenses increased to 19% in 2006 compared to 14% in 2005. The
increase in expenses relative to revenues primarily results from the increase
in
expenses described above, as well as the decrease in total revenues generated
during 2006.
Interest
Income.
Net
interest income increased $69,000, to $234,000 in 2006 from $165,000 in 2005.
This increase was primarily attributable to growth in the interest rates earned
on the Company’s invested cash as well as an increase in investable funds in the
early part or 2006.
Income
Tax Expense. The
Company accounts for income taxes in accordance with SFAS No. 109 “Accounting
for Income Taxes” which requires that deferred tax assets and liabilities be
recognized using enacted tax rates for the effect of temporary differences
between the book and tax basis of recorded assets and liabilities. SFAS No.
109
also requires that deferred tax assets be reduced by a valuation allowance
if it
is more likely than not that some portion or all of the deferred tax asset
will
not be realized. Based on the Company’s current year and historical operating
losses, the Company determined maintaining a full valuation was appropriate.
The
Company made a provision of $29,000 and $7,000 for 2006 and 2005 respectively,
for income taxes which resulted from a difference between an indefinite-lived
asset, goodwill, which is amortized for tax, but not amortized for financial
reporting purposes.
International
Operations.
Total
revenues from the Company’s international operations decreased by 5,174,000, or
48% to $5,565,000 in 2006 from $10,739,000 in 2005. The decrease in revenue
from
international operations was primarily attributable to a decrease in license
revenues of $4,133,000, the majority of the decline in Europe. International
revenues from professional services and maintenance decreased 19% to $4,441,000
in 2006 from $5,482,000 in 2005. Overall, international operations resulted
in a
net loss of $876,000 for 2006 compared to net profit of $1,279,000 in 2005.
International operating costs decreased by $1,445,000 due to lower cost of
services and maintenance resulting from a decrease in headcount, lower sales
commissions resulting from a decrease in license revenues in 2006 compared
to
2005 and an increase in bad debt expense. The decrease in international net
income of $2,154,000 is the direct result of the decrease in license revenues.
Comparison
of Years Ended December 31, 2005 and 2004 (restated)
Revenues.
Total
revenues increased $3,447,000 or 18%, to $22,154,000 for the year ended December
31, 2005 from $18,707,000 for the year ended December 31, 2004. Software license
revenues increased 11% in 2005, compared to 2004. Services and maintenance
fees
for 2005 amounted to $13,914,000, a 23% increase from 2004.
Software
license fee revenues increased $848,000 or 11% to $8,240,000 in 2005 from
$7,392,000 in 2004. Astea Alliance license fee revenues increased to $7,936,000
in 2005 from $6,585,000 in 2004, an increase of 20%. This increase reflects
the
growing acceptance by the market place of the Company’s new software versions,
which are completely based on .Net, Microsoft’s operating system platform. The
Company also sold $16,000 of additional DISPATCH-1 licenses to existing
customers, compared to $805,000 in 2004. Two existing customers purchased
additional DISPATCH-1 licenses in 2005 compared to 6 existing customers
purchasing DISPATCH-1 licenses in 2004. Additionally, the Company recognized
license revenue of $288,000 from the sale of FieldCentrix products.
38
Total
services and maintenance revenues increased $2,599,000 or 23% to $13,914,000
in
2005 from $11,315,000 in 2004. The increase in service and maintenance revenues
is attributable to an increase of $1,964,000 in Astea Alliance revenues
partially offset by a decrease in DISPATCH-1 revenues of $512,000. Astea
Alliance service and maintenance revenues increased to $11,329,000 in 2005
from
$9,365,000 in 2004 due to the growing Astea Alliance customer base. The increase
is also attributable to service and maintenance revenue of $1,143,000 from
the
newly acquired FieldCentrix customer base. DISPATCH-1 service and maintenance
revenues decreased 26% to $1,437,000 in 2005 from $1,949,000 in 2004 due to
an
ongoing decrease in the number of customers under service and maintenance
contracts. As a result of the decreasing demand for DISPATCH-1 and the lack
of
any related product development by the Company, the decrease in service and
maintenance revenue is expected to continue in 2006 for DISPATCH-1.
In
2005
there was one major customer, EDS, which accounted for 24% of total revenues
compared to 2004 when one customer, Carrier Corporation, accounted for 16%
of
the Company’s total revenues.
Costs
of Revenues.
Costs
of
software license fee revenues decreased 36%, or $660,000, to $1,178,000 in
2005
from $1,838,000 in 2004. The decrease in cost of sales results from lower costs
of third party software. DISPATCH-1 license sales include a significant cost
for
a third party license for the database. However, in 2005, DISPATCH-1 license
sales were only $16,000 compared to $805,000 in 2004, and accordingly the
related database license costs were insignificant. Capitalized software
amortization decreased to $1,020,000 in 2005 from $1,088,000 in 2004. The gross
margin percentage on software license sales increased to 86% in 2005 from 75%
in
2004 due to a reduction in third party license costs, lower amortization of
capitalized software and increased license revenues.
The
costs
of services and maintenance revenues increased 30% to $8,261,000 in 2005 from
$6,356,000 in 2004. The increase in cost of services and maintenance is
primarily attributed to an increase in headcount from last year as well as
the
addition of professional services staff from the acquisition of FieldCentrix
on
September 21, 2005. The service and maintenance gross margin percentage
decreased slightly to 41% in 2005 from 44% in 2004. The decreased margin is
primarily attributable to the non-billable time required for new hires to be
properly trained on the Company’s software before they can effectively generate
revenue and the deferral of services and maintenance on the contract which
is
underlying the restatement.
Product
Development.
Product
development expenses increased 72%, or $1,030,000, to $2,461,000 in 2005 from
$1,431,000 in 2004. Development costs increased due to an increase in headcount
in the Company’s development center in Israel by 35%, the addition of 11
development staff from the acquisition of FieldCentrix on September 21, 2005,
and an increased focus on product improvement that resulted in a lower than
proportionate increase in newly capitalized software development
costs.
Product
development as a percentage of total revenue increased to 11% in 2005 compared
to 8% in 2004. This increase is due to the increase in headcount of the
Company’s development staff as part of its focus on improving the quality and
functionality of its products. The 2005 percentage is about 4% lower due to
the
overall increase in revenues in 2005 compared to 2004. Gross development expense
before the capitalization of software costs and was $4,058,000 in 2005, 44%
greater than $2,811,000 in 2004. In 2004, the Company wrote off $1,155,000
of
fully amortized software for old versions that had been deemed no longer useful
or functional. Capitalized software totaled $1,555,000 in 2005 compared to
$1,380,000 in 2004. The increase in software capitalization of only 13% was
significantly lower then the overall 44% increase in development spending.
This
is reflective of the Company’s focus on improving the existing products compared
to spending on the development of new products.
Sales
and Marketing.
Sales
and
marketing expenses increased 11%, or $627,000, to $6,192,000 in 2005 from
$5,565,000 in 2004. The increase is primarily the result of an increase in
the
Company’s sales force as well as increased investment in marketing programs in
order to increase market awareness of the Company’s products and domain
expertise in Service Life Cycle Management. The Company continues to focus
on
improving its market presence through intensified marketing efforts to increase
awareness of the Company’s products. This occurs through the use of Webinars
focused in the vertical industries in which the Company operates, attendance
at
selected trade shows, and increased investment in lead generation for its sales
force. Sales and marketing expense as a percentage of total revenues decreased
to 28% in 2005 from 30% in 2004.
39
General
and Administrative.
General
and administrative expenses consist of salaries, benefits and related costs
for
the Company’s finance, administrative and executive management personnel, legal
costs, accounting costs, bad debt write-offs and various costs associated with
the Company’s status as a public company. The Company’s general and
administrative expenses were $3,003,000 in 2005 and $2,051,000 in 2004
representing a 46% increase. This increase is primarily due to an increase
in
bad debt expense of $200,000, recovery of $114,000 legal fees in 2004 in
connection with legal action in Europe, increased payroll costs of approximately
$210,000, increased outside consulting expenses, administrative costs of
$215,000 connected with the operation of FieldCentrix, which was acquired in
September 2005, and increased travel costs if $50,000. As a percentage of total
revenues, general and administrative expenses increased to 14% in 2005 compared
to 11% in 2004. The increase in expenses relative to revenues primarily results
from the increase in expenses described above, partially offset by the increase
in total revenues generated during 2005.
Interest
Income.
Net
interest income increased $107,000, to $165,000 in 2005 from $58,000 in 2004.
This increase was primarily attributable to slight growth in the interest rates
earned on the Company’s invested cash as well as an increase in funds which may
be invested.
International
Operations.
Total
revenue from the Company’s international operations increased by $3,785,000, or
54% to $10,739,000 in 2005 from $6,954,000 in 2004. The increase in revenue
from
international operations was primarily attributable to the increases in license
revenues from the Astea Alliance suite. Most of the increase occurred in Europe,
where the Company has focused attention on expanding awareness of the Company’s
products. International revenues from professional services and maintenance
increased 43% to $5,482,000 in 2005 from $3,847,000 in 2004. Overall,
international operations resulted in net profit of $1,279,000 for 2005 compared
to net profit of $611,000 in 2004. Operating costs increased due to higher
cost
of sales on professional services resulting from an increase in headcount,
higher sales commissions resulting from the increased level of revenues in
2005
compared to 2004 and an increase in bad debt expense. The increase in
international net income, 109%, results from the increase in license revenue
for
which the direct costs are insignificant.
Liquidity
and Capital Resources
Net
cash
used by operating activities was $2,948,000 for the year ended December 31,
2006
compared to $5,254,000 of cash generated by operations for the year ended
December 31, 2005, a change of $8,202,000. The increase in cash used by
operations was primarily attributable to a decrease in income of $6,199,000,
and
an increase in accounts receivable of $2,996,000, which includes an increase
in
unbilled receivables of $1,241,000. Partially offsetting these uses of operating
cash were increases in the non-cash charges of depreciation and amortization
of
$597,000, stock option expenses of $397,000 which are reported in the statement
of operations for the first time in 2006, as required by FAS 123(R). Trade
accounts receivable increased despite an overall decrease in revenues for 2006,
compared to 2005, due to an increase in unbilled receivables associated with
certain contracts with extended payment terms for which revenue has been
deferred and higher fourth quarter revenues in 2006 compared to the fourth
quarter of 2005.
The
Company used $3,265,000 of cash for investing activities in 2006 compared to
using $1,188,000 in 2005. The increase in cash used for investing activities
of
$2,077,000 results from an increase in capitalized software development costs
of
$1,266,000, and goodwill increased by $153,000 due to earnout provisions of
the
FieldCentrix purchase agreement. In 2005, the Company received $616,000 in
cash
from the FieldCentrix acquisition and released $75,000 from a restricted bank
account collateralizing a letter of credit on a leased facility.
40
The
Company generated $19,000 from financing activities for the year ended December
31, 2006 compared to generating $791,000 of cash for the year ended December
31,
2005. The decrease in cash generated by financing activities of $772,000 was
principally attributable to a decline in the exercise of Company stock options
in 2006.
At
December 31, 2006, the Company had a working capital ratio of approximately
.9:1, with total cash of $3,120,000. The major component of current liabilities
that is causing the working capital ratio to be below 1:1, is deferred revenues
of $8 million in 2006, which represents an increase of $2.2 million over 2005.
Contained in deferred revenues is $1.6 million related to the 2004 license
agreement which also includes deferred service and maintenance revenue for
which
the Company has restated revenue previously recognized. The majority of the
revenue is expected to be recognized in the first quarter of 2007.
The
Company has projected revenues for 2007 that will generate enough funds to
sustain its continuing operations. However, if current projections trail
expectations, the Company has plans in place to reduce operating expenditures
appropriately in order to continue to fund all required expenditures. The Board
of Directors from time to time reviews the Company’s forecasted operations and
financial condition to determine whether and when payment of a dividend or
dividends is appropriate. The Company does not plan any significant capital
expenditures in 2007. In addition, it does not anticipate that its operations
or
financial condition will be affected materially by inflation.
On
May
23, 2006 the Company entered into a secured revolving line of credit (Line)
agreement with a bank. Maximum available borrowings under the Line represent
the
lesser of 80% of the Borrowing Base, which is eligible accounts receivables
as
defined, or $4.0 million. Amounts outstanding on the line of credit were zero
on
December 31, 2006.
As
of
March 30, 2007, the amount outstanding on the line of credit was
zero.
Contractual
Obligations and Commercial Commitments
The
following tables summarize our contractual and commercial obligations, as of
December 31, 2007:
|
Payment
Due By Period
|
||||||||||||||||
|
Total
|
2007
|
2008-2009
|
2010-2011
|
2012
and after
|
||||||||||||
|
Contractual
Cash
Obligations:
|
||||||||||||||||
|
Long-term
Debt
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
-
|
|||||||
|
Capital
Leases
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Operating
Leases
|
$
|
2,415,000
|
$
|
1,398,000
|
$
|
945,000
|
$
|
55,000
|
$
|
17,000
|
||||||
|
Amounts
of Commitment Expiration Per Period
|
||||||||||||||||
|
Total
|
2007
|
2008-2009
|
2010
-2011
|
2012
and after
|
||||||||||||
|
Other
Commercial
Commitments:
|
||||||||||||||||
|
Letters
of Credit
|
$
|
225,000
|
$
|
225,000
|
$
|
-
|
$
|
-
|
||||||||
41
Item
7A. Quantitative
and Qualitative Disclosures about Market Risk
Interest
Rate Risk
The
Company’s exposure to market risk for changes in interest rates relates
primarily to the Company’s investment portfolio. The Company does not have any
derivative financial instruments in its portfolio. The Company places its
investments in instruments that meet high credit quality standards. The Company
is adverse to principal loss and ensures the safety and preservation of its
invested funds by limiting default risk, market risk and reinvestment risk.
The
Company is currently in the process of revamping its investment portfolio.
As a
result, as of December 31, 2006, the Company’s investments consisted of
commercial paper. The Company does not expect any material loss with respect
to
its investment portfolio.
Foreign
Currency Risk
The
Company does not use foreign currency forward exchange contracts or purchased
currency options to hedge local currency cash flows or for trading purposes.
All
sales arrangements with international customers are denominated in foreign
currency. The Company does not expect any material loss with respect to foreign
currency risk.
42
Item
8. Financial
Statements and Supplementary Data.
Report
of Independent Registered Public Accounting Firm
Board
of
Directors and Stockholders
Astea
International Inc.
We
have
audited the accompanying consolidated balance sheets of Astea International
Inc.
and subsidiaries (collectively the “Company”) as of December 31, 2006 and 2005,
and the related consolidated statements of operations, stockholders’ equity and
cash flows for each of the three years in the period ended December 31, 2006.
These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures
that
are appropriate in the circumstances, but not for the purpose of expressing
an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Astea International Inc. and
subsidiaries as of December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2006 in conformity with accounting principles generally accepted
in
the United States of America.
As
disclosed in Note 2, the Company has restated its consolidated balance sheet
as
of December 31, 2005 and related consolidated statements of operations,
stockholders’ equity and cash flows for each of the two years in the period
ended December 31, 2005 to correct an error in recognizing revenue. As a result
of this revision, net income for the years ended December 31, 2005 and 2004
was
reduced by $611,000 and $610,000, respectively.
As
disclosed in Note 12 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No.
123(R), “Share-Based Payment”, utilizing the modified prospective transition
method effective January 1, 2006.
BDO
Seidman, LLP
Woodbridge,
NJ
March
30,
2007
43
ASTEA
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
December
31,
|
2006
|
2005
restated
|
|||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash and cash equivalents
|
$
|
3,120,000
|
$
|
9,484,000
|
|||
|
Restricted cash
|
225,000
|
225,000
|
|||||
|
Receivables, net of reserves of $163,000 and $310,000
|
6,860,000
|
5,037,000
|
|||||
|
Prepaid expenses and other
|
423,000
|
485,000
|
|||||
|
Total current assets
|
10,628,000
|
15,231,000
|
|||||
|
Property
and equipment, net
|
648,000
|
1,038,000
|
|||||
|
Intangibles,
net
|
1,719,000
|
1,999,000
|
|||||
|
Capitalized
software development costs, net
|
3,636,000
|
2,055,000
|
|||||
|
Goodwill
|
1,253,000
|
1,100,000
|
|||||
|
Other
long-term assets
|
175,000
|
189,000
|
|||||
|
Total assets
|
$
|
18,059,000
|
$
|
21,612,000
|
|||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts payable and accrued expenses
|
$
|
3,930,000
|
$
|
3,969,000
|
|||
|
Deferred revenues
|
7,987,000
|
5,767,000
|
|||||
|
Total current liabilities
|
11,917,000
|
9,736,000
|
|||||
|
Long-term
liabilities
|
|||||||
|
Deferred revenues
|
-
|
1,221,000
|
|||||
|
Deferred tax liability
|
36,000
|
7,000
|
|||||
|
Total
long-term liabilities
|
36,000
|
1,228,000
|
|||||
|
Commitments
and Contingencies
|
|||||||
|
Stockholders’
equity:
|
|||||||
|
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued
|
-
|
-
|
|||||
|
Common stock, $.01 par value, 25,000,000 shares
authorized, 3,591,000 and 3,585,000 shares issued
respectively
|
36,000
|
36,000
|
|||||
|
Additional paid-in capital
|
27,532,000
|
27,116,000
|
|||||
|
Accumulated comprehensive loss -
translation adjustment
|
(911,000
|
)
|
(935,000
|
)
|
|||
|
Accumulated deficit
|
(20,343,000
|
)
|
(15,361,000
|
)
|
|||
|
Less: Treasury stock at cost, 42,000 shares
|
(208,000
|
)
|
(208,000
|
)
|
|||
|
Total stockholders’ equity
|
6,106,000
|
10,648,000
|
|||||
|
Total liabilities and stockholders' equity
|
$
|
18,059,000
|
$
|
21,612,000
|
|||
See
accompanying notes to the consolidated financial
statements.
44
ASTEA
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
Years
ended December 31,
|
2006
|
2005
(restated)
|
2004
(restated)
|
|||||||
|
Revenues:
|
||||||||||
|
Software license fees
|
$
|
4,670,000
|
$
|
8,240,000
|
$
|
7,392,000
|
||||
|
Services and maintenance
|
15,614,000
|
13,914,000
|
11,315,000
|
|||||||
|
Total revenues
|
20,284,000
|
22,154,000
|
18,707,000
|
|||||||
|
Costs
and expenses:
|
||||||||||
|
Cost of software license fees
|
1,687,000
|
1,178,000
|
1,838,000
|
|||||||
|
Cost of services and maintenance
|
10,262,000
|
8,261,000
|
6,356,000
|
|||||||
|
Product development
|
3,842,000
|
2,461,000
|
1,431,000
|
|||||||
|
Sales and marketing
|
5,923,000
|
6,192,000
|
5,565,000
|
|||||||
|
General and administrative
|
3,757,000
|
3,003,000
|
2,051,000
|
|||||||
|
Total costs and expenses
|
25,471,000
|
21,095,000
|
17,241,000
|
|||||||
|
Income
(loss) from operations
|
(5,187,000
|
)
|
1,059,000
|
1,466,000
|
||||||
|
Interest
income
|
234,000
|
165,000
|
58,000
|
|||||||
|
Income
(loss) before income taxes
|
(4,953,000
|
)
|
1,224,000
|
1,524,000
|
||||||
|
Income
tax expense
|
29,000
|
7,000
|
-
|
|||||||
|
Net
income (loss)
|
$
|
(4,982,000
|
)
|
$
|
1,217,000
|
$
|
1,524,000
|
|||
|
Basic
net income (loss) per share
|
$
|
(1.40
|
)
|
$
|
.39
|
$
|
.51
|
|||
|
Diluted
net income (loss) per share
|
$
|
(1.40
|
)
|
$
|
.39
|
$
|
.51
|
|||
|
Weighted
average shares used in computing basic net income
(loss)
per share
|
3,547,000
|
3,093,000
|
2,960,000
|
|||||||
|
Weighted
average shares used in computing diluted net income
(loss)per share
|
3,547,000
|
3,116,000
|
3,001,000
|
|||||||
See
accompanying notes to the consolidated financial
statements.
45
|
ASTEA
INTERNATIONAL INC. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
Common
Stock
|
Additional
Paid-in
Capital
|
Accumulated
Comprehensive
Loss
|
Accumulated
Deficit
|
Treasury
Stock
|
Total
Stockholders'
Equity
|
Comprehensive
Income(loss)
|
||||||||||||||||
|
Balance,
December 31, 2003
|
30,000
|
22,792,000
|
(776,000
|
)
|
(18,100,000
|
)
|
(212,000
|
)
|
3,734,000
|
|||||||||||||
|
Issuance of common stock under
employee stock purchase plan
|
-
|
-
|
-
|
(1,000
|
)
|
2,000
|
1,000
|
|||||||||||||||
|
Exercise of stock options
|
-
|
131,000
|
-
|
-
|
-
|
131,000
|
||||||||||||||||
|
Options for satisfaction of liability
|
-
|
74,000
|
-
|
-
|
-
|
74,000
|
||||||||||||||||
|
Currency translation adjustments
|
-
|
-
|
(3,000
|
)
|
-
|
-
|
(3,000
|
)
|
$
|
(3,000
|
)
|
|||||||||||
|
Net income - restated
|
-
|
-
|
-
|
1,524,000
|
-
|
1,524,000
|
1,524,000
|
|||||||||||||||
|
Balance,
December 31, 2004 restated
|
30,000
|
22,997,000
|
(779,000
|
)
|
(16,577,000
|
)
|
(210,000
|
)
|
5,461,000
|
1,521,000
|
||||||||||||
|
Issuance of common stock under
employee stock purchase plan
|
(1,000
|
)
|
2,000
|
1,000
|
||||||||||||||||||
|
Exercise of stock options
|
2,000
|
787,000
|
789,000
|
|||||||||||||||||||
|
Stock Issuance - FieldCentrix acquisition
|
4,000
|
3,332,000
|
3,336,000
|
|||||||||||||||||||
|
Currency translation adjustments
|
(156,000
|
)
|
(156,000
|
)
|
(156,000
|
)
|
||||||||||||||||
|
Net income - restated
|
1,217,000
|
1,217,000
|
1,217,000
|
|||||||||||||||||||
|
Balance,
December 31, 2005 restated
|
36,000
|
27,116,000
|
(935,000
|
)
|
(15,361,000
|
)
|
(208,000
|
)
|
$
|
10,648,000
|
1,061,000
|
|||||||||||
|
Exercise of stock options
|
19,000
|
19,000
|
||||||||||||||||||||
|
Stock-based compensation
|
397,000
|
397,000
|
||||||||||||||||||||
|
Currency translation adjustment
|
24,000
|
24,000
|
24,000
|
|||||||||||||||||||
|
Net loss
|
(4,982,000
|
)
|
(4,982,000
|
)
|
(4,982,000
|
)
|
||||||||||||||||
|
Balance,
December 31, 2006
|
$
|
36,000
|
$
|
27,532,000
|
$
|
(911,000
|
)
|
$
|
(20,343,000
|
)
|
$
|
(208,000
|
)
|
$
|
6,106,000
|
$
|
(4,958,000
|
)
|
||||
See
accompanying notes to the consolidated financial
statements.
46
ASTEA
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Years
ended December 31,
|
2006
|
2005
(restated)
|
2004
(restated)
|
|||||||
|
Cash
flows from operating activities:
|
||||||||||
|
Net
income (loss )
|
$
|
(4,982,000
|
)
|
$
|
1,217,000
|
$
|
1,524,000
|
|||
|
Adjustments to reconcile net income(loss) to net cash
provided by (used in) operating activities:
|
||||||||||
|
Depreciation and amortization
|
2,237,000
|
1,640,000
|
1,375,000
|
|||||||
|
Increase in provision for doubtful accounts
|
67,000
|
227,000
|
84,000
|
|||||||
|
Stock-based compensation
|
397,000
|
-
|
-
|
|||||||
|
Deferred tax expense
|
29,000
|
7,000
|
-
|
|||||||
|
Changes in operating assets and liabilities:
|
||||||||||
|
Receivables
|
(1,761,000
|
)
|
1,235,000
|
(2,272,000
|
)
|
|||||
|
Prepaid
expenses and other
|
89,000
|
44,000
|
(61,000
|
)
|
||||||
|
Accounts
payable and accrued expenses
|
(37,000
|
)
|
54,000
|
121,000
|
||||||
|
Deferred
revenues
|
999,000
|
954,000
|
1,907,000
|
|||||||
|
Other
long term assets
|
14,000
|
(124,000
|
)
|
-
|
||||||
|
Net
cash provided by (used in) operating activities
|
(2,948,000
|
)
|
5,254,000
|
2,678,000
|
||||||
|
Cash
flows from investing activities:
|
||||||||||
|
Capitalized
software development costs
|
(2,821,000
|
)
|
(1,555,000
|
)
|
(1,380,000
|
)
|
||||
|
Purchases
of
property and equipment
|
(291,000
|
)
|
(324,000
|
)
|
(389,000
|
)
|
||||
|
Net
cash acquired from FieldCentrix acquisition
|
-
|
616,000
|
-
|
|||||||
|
Payment
of contingent purchase price
|
(153,000
|
)
|
-
|
-
|
||||||
|
Release
of restricted cash
|
-
|
75,000
|
-
|
|||||||
|
Net
cash (used in) investing activities
|
(3,265,000
|
)
|
(1,188,000
|
)
|
(1,769,000
|
)
|
||||
|
Cash
flows from financing activities:
|
||||||||||
|
Proceeds from exercise of stock options and employee
stock purchase plan
|
19,000
|
791,000
|
131,000
|
|||||||
|
Net
cash provided by financing activities
|
19,000
|
791,000
|
131,000
|
|||||||
|
Effect
of exchange rate changes on cash and cash
equivalents
|
(170,000
|
)
|
144,000
|
(37,000
|
)
|
|||||
|
Net
increase (decrease) in cash and cash equivalents
|
(6,364,000
|
)
|
5,001,000
|
1,003,000
|
||||||
|
Cash
and cash equivalents balance, beginning of year
|
9,484,000
|
4,483,000
|
3,480,000
|
|||||||
|
Cash
and cash equivalents balance, end of year
|
$
|
3,120,000
|
$
|
9,484,000
|
$
|
4,483,000
|
||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||
|
Satisfaction
of
liability with stock options
|
-
|
-
|
$
|
74,000
|
||||||
|
Cash
paid for interest expense
|
$
|
-
|
$
|
-
|
$
|
1,000
|
||||
|
See
accompanying notes to the consolidated financial
statements.
|
47
Supplemental
Cash Flow Information - FieldCentrix Acquisition
Non-Cash
Transactions:
|
Years
Ended
December
31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Acquisition
of FieldCentrix Net Assets:
|
||||||||||
|
Purchase
Price
|
|
|
||||||||
|
Common stock issued
|
$
|
-
|
$
|
3,336,000
|
$
|
-
|
||||
|
Assets
acquired:
|
||||||||||
|
Accounts receivable
|
-
|
(384,000
|
)
|
-
|
||||||
|
Prepaid Expenses
|
-
|
(80,000
|
)
|
-
|
||||||
|
Property and equipment
|
-
|
(730,000
|
)
|
-
|
||||||
|
Software
|
(721,000
|
)
|
||||||||
|
Customer relationship list
|
-
|
(1,360,000
|
)
|
-
|
||||||
|
Other assets
|
-
|
(31,000
|
)
|
-
|
||||||
|
Goodwill
|
-
|
(1,100,000
|
)
|
-
|
||||||
|
Total
assets acquired:
|
-
|
(4,406,000
|
)
|
-
|
||||||
|
Liabilities
assumed:
|
||||||||||
|
Accrued expenses
|
-
|
719,000
|
-
|
|||||||
|
Deferred revenue
|
-
|
967,000
|
-
|
|||||||
|
Total
liabilities assumed
|
-
|
1,686,000
|
-
|
|||||||
|
Net
assets acquired
|
-
|
(2,720,000
|
)
|
-
|
||||||
|
Net
Cash received from FieldCentrix
acquisition
|
$
|
-
|
$
|
616,000
|
$
|
-
|
||||
48
ASTEA
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Company
Background
Astea
International Inc. and Subsidiaries (collectively the “Company” or “Astea”) is a
global provider of service management software that addresses the unique needs
of companies who manage capital equipment, mission critical assets and human
capital. Clients include Fortune 500 to mid-size companies, which Astea services
through Company facilities in the United States, United Kingdom, Australia,
The
Netherlands and Israel. The Company’s principal products are Astea Alliance, FX
Service Center and FX Mobile. Astea Alliance supports the complete service
lifecycle, from lead generation and project quotation to service and billing
through asset retirement. FX Service Center Internet-based service management
and dispatch solution that gives organizations command over their field service
operations. FX Mobile offerings include mobile field service automation (FSA)
systems, which include the wireless devices and support of mobile field
technicians using portable, hand-held computing devices. Since its inception
in
1979, Astea has licensed applications to companies in a wide range of sectors
including information technology, telecommunications, instruments and controls,
business systems, and medical devices.
2. Restatements
In
connection with the preparation of 2006 Fom 10-K, an error in the Company’s
accounting for revenue recognition relating to a particular contract from 2004
was identified. In the fourth quarter of 2004, our U.K. subsidiary entered
into
a contract with a new customer. In 2004, the Company recognized all of the
license revenue. In 2005 and the first three quarters of 2006, the Company
recognized services and maintenance revenue based on work performed for the
customer. However, the contract contained a specified upgrade right, which
was
delivered in the first quarter of 2005. According to accounting requirements,
a
specified upgrade right must be valued using vendor specific objective evidence
(VSOE). The Company uses the residual method for recognizing revenue on its
software licenses. In such instances, the accounting rules state that VSOE
for a
specified upgrade right cannot be determined and therefore, revenue must be
deferred until all elements of the arrangement (which would include the
specified upgrade) are delivered. Although the specified upgrade was delivered
in the first quarter of 2005, changes in the customer’s requirements and
subsequent concessions granted by the Company in October 2005 (which included
an
additional specified upgrade right), further delayed our ability to establish
that delivery and acceptance of the license had occurred. This additional
specified upgrade was delivered in the first quarter of 2007. Accordingly all
revenue, including license, service and maintenance should have been deferred
until the delivery and acceptance of the final element. Therefore, the Company
restated its financial statements to defer all license, service and maintenance
revenue recognized in relation to this contract in 2004, 2005 and the first
three quarters of 2006, which was $610,000, $611,000 and $457,000, respectively.
The Company’s policy is to recognize expenses as incurred when revenues are
deferred in connection with transactions where VSOE cannot be established for
an
undelivered element as the Company follows the accounting requirements of SOP
97-2. Accordingly, all cost associated with the contract were recorded in the
periods when incurred, which differs from the period in which the associated
revenue will be recognized.
All
cash
consideration related to the transaction, $1,678,000 has been received by the
Company as of December 31, 2006, with the exception of $259,000 most of which
was received in the first quarter of 2007 and the remainder is expected to
be
received early in the second quarter of 2007.
The
modifications contained in the restated financial statements relate to revenue
and deferred revenues. It affected the elements of cash flow, but did not have
any impact to net cash flow from operations as reported in the statements of
cash flows. The total impact of this restatement on the Company’s statement of
operations was to decrease the net income applicable to common shareholders
for
the year ended December 31, 2005 by $611,000 or $.20 for both basic and diluted
earnings per share, and to decrease net income applicable to common shareholders
for the year ended December 31, 2004 by $610,000 or $.21 and $.20 per share
for
basic and diluted earnings per share, respectively.
49
As
a
result of the correction of the errors described above, the Company restated
its
financial statements included in the Annual Report on Form 10-K/A as
follows:
ASTEA
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
December
31,
|
2005
As
previously
reported
|
2005
As
restated
|
|||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash and cash equivalents
|
$
|
9,484,000
|
$
|
9,484,000
|
|||
|
Restricted Cash
|
225,000
|
225,000
|
|||||
|
Receivables, net of reserves of $310,000
|
5,037,000
|
5,037,000
|
|||||
|
Prepaid expenses and other
|
485,000
|
485,000
|
|||||
|
Total current assets
|
15,231,000
|
15,231,000
|
|||||
|
Property and equipment, net
|
1,038,000
|
1,038,000
|
|||||
|
Intangibles, net
|
1,999,000
|
1,999,000
|
|||||
|
Capitalized software development costs, net
|
2,055,000
|
2,055,000
|
|||||
|
Goodwill
|
1,100,000
|
1,100,000
|
|||||
|
Other long-term assets
|
189,000
|
189,000
|
|||||
|
Total
assets
|
$
|
21,612,000
|
$
|
21,612,000
|
|||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts payable and accrued expenses
|
$
|
3,969,000
|
$
|
3,969,000
|
|||
|
Deferred revenues
|
5,767,000
|
5,767,000
|
|||||
|
Total
current liabilities
|
9,736,000
|
9,736,000
|
|||||
|
Long-term
liabilities
|
|||||||
|
Deferred
revenue
|
-
|
1,221,000
|
|||||
|
Deferred
tax liability
|
7,000
|
7,000
|
|||||
|
Total
long-term liabilities
|
7,000
|
1,228,000
|
|||||
|
Commitments
and contingencies
|
-
|
-
|
|||||
|
Common
stock, $.01 par value, 25,000,000 shares
authorized, 3,585,000 shares issued
|
36,000
|
36,000
|
|||||
|
Additional
paid-in capital
|
27,116,000
|
27,116,000
|
|||||
|
Accumulated
comprehensive loss -
translation
adjustment
|
(935,000
|
)
|
(935,000
|
)
|
|||
|
Accumulated
deficit
|
(14,140,000
|
)
|
(15,361,000
|
)
|
|||
|
Less:
Treasury stock at cost,
|
(208,000
|
)
|
(208,000
|
)
|
|||
|
Total
stockholders’ equity
|
11,869,000
|
10,648,000
|
|||||
|
Total
liabilities and stockholders' equity
|
$
|
21,612,000
|
$
|
21,612,000
|
|||
50
ASTEA
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
Years
ended December 31,
|
2005
|
2004
|
|||||||||||
|
As
previously reported
|
As
restated
|
As
previously reported
|
As
restated
|
||||||||||
|
Revenues:
|
|||||||||||||
|
Software
license fees
|
$
|
8,240,000
|
$
|
8,240,000
|
$
|
7,992,000
|
$
|
7,392,000
|
|||||
|
Services
and
maintenance
|
14,525,000
|
13,914,000
|
11,325,000
|
11,315,000
|
|||||||||
|
Total revenues
|
22,765,000
|
22,154,000
|
19,317,000
|
18,707,000
|
|||||||||
|
Costs
and expenses:
|
|||||||||||||
|
Cost
of
software license fees
|
1,178,000
|
1,178,000
|
1,838,000
|
1,838,000
|
|||||||||
|
Cost
of
services and maintenance
|
8,261,000
|
8,261,000
|
6,356,000
|
6,356,000
|
|||||||||
|
Product
development
|
2,461,000
|
2,461,000
|
1,431,000
|
1,431,000
|
|||||||||
|
Sales
and marketing
|
6,192,000
|
6,192,000
|
5,565,000
|
5,565,000
|
|||||||||
|
General
and administrative
|
3,003,000
|
3,003,000
|
2,051,000
|
2,051,000
|
|||||||||
|
Total costs and expenses
|
21,095,000
|
21,095,000
|
17,241,000
|
17,241,000
|
|||||||||
|
Income
(loss) from operations
|
1,670,000
|
1,059,000
|
2,076,000
|
1,466,000
|
|||||||||
|
Interest
income
|
165,000
|
165,000
|
58,000
|
58,000
|
|||||||||
|
Income
(loss) before income taxes
|
1,835,000
|
1,224,000
|
2,134,000
|
1,524,000
|
|||||||||
|
Income
tax expense
|
7,000
|
7,000
|
-
|
-
|
|||||||||
|
Net
income (loss)
|
$
|
1,828,000
|
$
|
1,217,000
|
$
|
2,134,000
|
$
|
1,524,000
|
|||||
|
Basic
net income (loss) per share
|
$
|
.59
|
$
|
.39
|
$
|
.72
|
$
|
.51
|
|||||
|
Diluted
net income (loss) per share
|
$
|
.59
|
$
|
.39
|
$
|
.71
|
$
|
.51
|
|||||
|
Weighted
average shares used in
computing basic net income (loss) per
share
|
3,093,000
|
3,093,000
|
2,960,000
|
2,960,000
|
|||||||||
|
Weighted
average shares used in
computing diluted net income
(loss)per
share
|
3,116,000
|
3,116,000
|
3,001,000
|
3,001,000
|
|||||||||
51
3.
Summary
of Significant Accounting Policies
Principles
of Consolidation
The
consolidated financial statements include the accounts of Astea International
Inc. and its wholly owned subsidiaries and branches. All significant
intercompany accounts and transactions have been eliminated upon consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant assets and liabilities that are subject to estimates include
allowances for doubtful accounts, goodwill and other acquired intangible assets,
deferred tax assets and certain accrued and contingent liabilities.
Revenue
Recognition
Astea’s
revenue is principally recognized from two sources: (i) licensing arrangements
and (ii) services and maintenance.
The
Company markets its products primarily through its direct sales force and
resellers. License agreements do not provide for a right of return, and
historically, product returns have not been significant.
Astea
recognizes revenue on its software products in accordance with AICPA Statement
of Position (“SOP”) 97-2, Software
Revenue Recognition,
SOP
98-9, Modification
of SOP 97-2,Software Revenue Recognition with Respect to Certain Transactions,
Accounting
for Performance of Construction-Type and Certain Production-Type
Contracts;
and SEC
Staff Accounting Bulletin (“SAB”) 104, Revenue
Recognition.
Astea
recognizes revenue from license sales when all of the following criteria are
met: persuasive evidence of an arrangement exists, delivery has occurred, the
license fee is fixed and determinable and the collection of the fee is probable.
We utilize written contracts as a means to establish the terms and conditions
by
which our product’s, support and services are sold to our customers. Delivery is
considered to have occurred when title and risk of loss have been transferred
to
the customer, which generally occurs after a license key has been delivered
electronically to the customer. Revenue for arrangements with extended payment
terms in excess of one year is recognized when the payments become due, provided
all other recognition criteria are satisfied. If collectibility is not
considered probable, revenue is recognized when the fee is collected. Our
typical end user license agreements do not contain acceptance clauses. However,
if acceptance criteria is required, revenues are deferred until customer
acceptance has occurred.
Astea
allocates revenue to each element in a multiple-element arrangement based on
the
elements’ respective fair value, determined by the price charged when the
element is sold separately. Specifically, Astea determines the fair value of
the
maintenance portion of the arrangement based on the price, at the date of sale,
if sold separately, which is generally a fixed percentage of the software
license selling price. The professional services portion of the arrangement
is
based on hourly rates which the Company charges for those services when sold
separately from software. If evidence of fair value of all undelivered elements
exist, but evidence does not exist for one or more delivered elements, then
revenue is recognized using the residual method. If an undelivered element
for
which evidence of fair value does not exist, all revenue in an arrangement
is
deferred until the undelivered element is delivered or fair value can be
determined. Under the residual method, the fair value of the undelivered
elements is deferred and the remaining portion of the arrangement fee is
recognized as revenue. The proportion of the revenue recognized upon delivery
can vary from quarter-to-quarter depending upon the determination of
vendor-specific objective evidence (“VSOE”) of fair value of undelivered
elements. The residual value, after allocation of the fee to the undelivered
elements based on VSOE of fair value, is then allocated to the perpetual
software license for the software products being sold.
52
When
appropriate, the Company may allocate a portion of its software revenue to
post-contract support activities or to other services or products provided
to
the customer free of charge or at non-standard rates when provided in
conjunction with the licensing arrangement. Amounts allocated are based upon
standard prices charged for those services or products which, in the Company’s
opinion, approximate fair value. Software license fees for resellers or other
members of the indirect sales channel are based on a fixed percentage of the
Company’s standard prices. The Company recognizes software license revenue for
such contracts based upon the terms and conditions provided by the reseller
to
its customer.
Revenue
from post-contract support is recognized ratably over the term of the contract,
which is generally twelve months on a straight-line basis. Consulting and
training service revenue is generally unbundled and recognized at the time
the
service is performed. Fees from licenses sold together with consulting services
are generally recognized upon shipment, provided that the contract has been
executed, delivery of the software has occurred, fees are fixed and determinable
and collection is probable.
Reimbursable
Expenses
The
Company charges customers for out-of-pocket expenses incurred by its employees
during the performance of professional services in the normal course of
business. In accordance with Emerging Issues Task Force 01-14, “Income Statement
Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses
Incurred,” billings for out-of-pocket expenses that are reimbursed by the
customer are to be included in revenues with the corresponding expense included
in cost of services and maintenance. During fiscal years 2006, 2005 and 2004,
the Company billed $329,000, $370,000, and $296,000 respectively, of
reimbursable expenses to customers.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Allowance
for Doubtful Accounts
The
Company records an allowance for doubtful accounts based on specifically
identified amounts that management believes to be uncollectible. The Company
also records an additional allowance based on certain percentages of aged
receivables, which are determined based on historical experience and
management’s assessment of the general financial conditions affecting the
Company’s customer base. Once management determines that an account will not be
collected, the account is written off against the allowance for doubtful
accounts. If actual collections experience changes, revisions to the allowances
may be required. Activity in the allowance for doubtful accounts is as
follows:
|
Year
Ended December 31
|
Balance
at
beginning
of year
|
Expensed
|
Write
offs
|
Balance
at end of year
|
|||||||||
|
2006
|
$
|
310,000
|
|
$
|
67,000
|
|
$
|
214,000
|
|
$
|
163,000
|
|
|
|
2005
|
|
|
411,000
|
|
|
227,000
|
|
|
328,000
|
|
|
310,000
|
|
|
2004
|
|
|
810,000
|
|
|
84,000
|
|
|
483,000
|
|
|
411,000
|
|
53
The
decrease in bad debt expense in 2006 is primarily due to improvement in customer
payment performance.
Senior
management reviews accounts receivable on a monthly basis to determine if any
receivables will potentially be uncollectible. Based on all information
available, the Company believes its allowance for doubtful accounts as of
December 31, 2006 is adequate. However, actual write-offs might exceed the
recorded allowance.
Property
and Equipment
Property
and equipment are recorded at cost. Depreciation and amortization are provided
using the straight-line method over the estimated useful lives of the related
assets or the lease term, whichever is shorter. When property and equipment
are
sold or otherwise disposed of, the fixed asset account and related accumulated
depreciation account are relieved and any gain or loss is included in
operations. Expenditures for repairs and maintenance are charged to expense
as
incurred and significant renewals and betterments are capitalized.
Impairment
of Long Lived Assets
The
Company evaluates its long-lived assets, including certain identifiable
intangible assets, excluding goodwill, for impairment whenever events or changes
in circumstances indicate that the carrying amount of such assets may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of any asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered
to be
impaired, the impairment is measured by the amount by which the carrying amount
of the asset exceeds the fair value of the assets. As of December 31, 2006,
the
Company has determined that no impairment has occurred.
Capitalized
Software Development Costs
The
Company capitalizes software development costs in accordance with SFAS No.
86,
“Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed.” The Company capitalizes software development costs subsequent to the
establishment of technological feasibility through the product’s availability
for general release. Costs incurred prior to the establishment of technological
feasibility are charged to product development expense. Development costs
associated with product enhancements that extend the original product’s life or
significantly improve the original product’s marketability are also capitalized
once technological feasibility has been established. Software development costs
are amortized on a product-by-product basis over the greater of the ratio of
current revenues to total anticipated revenues or on a straight-line basis
over
the estimated useful lives of the products (usually two years), beginning with
the initial release to customers. The Company evaluates the recoverability
of
capitalized software based on the estimated future revenues of each product.
As
of December 31, 2006, management believes that no revisions to the remaining
useful lives or write-downs of capitalized software development costs are
required.
Goodwill
The
Company tests goodwill for impairment annually at September 30 of each fiscal
year at the reporting unit level using a fair value approach, in accordance
with
the provisions of SFAS No. 142, Goodwill
and Other Intangible Assets.
If an
event occurs or circumstances change that would likely reduce the fair value
of
a reporting unit below its carrying value, goodwill is evaluated for impairment
between annual tests.
54
On
September 21, 2005, the Company acquired the assets and certain liabilities
of
FieldCentrix, Inc. through its wholly-owned subsidiary, FC Acquisition Corp.
Included in the allocation of the purchase price was goodwill valued at
$1,100,000.
The
purchase agreement provided for an earnout provision through June 30, 2007
that
pays the sellers a percentage of certain license revenues and certain
professional services. Due to the contingent nature of such payments, the value
of the future payments was not included in the purchase price. However, under
FAS 141, as such sales transactions occur, the related earnout amounts are
added
to the purchase price, specifically goodwill, which for the year ended December
31, 2006 totaled $153,000. At December 31, 2006 goodwill is
$1,253,000.
Major
Customers
In
2006
no customer represented more than 10% of total revenues. In 2005 there was
one
customer EDS, that represented 24% of revenues and in 2004, Carrier Corporation
accounted for 16% of the Company’s revenues. One customer represented 11% of
total accounts receivable at December 31, 2006. No customer accounted for 10%
or
more of total accounts receivable at December 31 2005.
Concentration
of Credit Risk
Financial
instruments, which potentially subject the Company to credit risk, consist
of
cash equivalents and accounts receivable. The Company’s policy is to limit the
amount of credit exposure to any one financial institution. The Company places
investments with financial institutions evaluated as being creditworthy, or
investing in short-term money market which are exposed to minimal interest
rate
and credit risk. Cash balances are maintained with several banks. Certain
operating accounts may exceed the FDIC limits.
Concentration
of credit risk, with respect to accounts receivable, is limited due to the
Company’s credit evaluation process. The Company sells its products to customers
involved in a variety of industries including information technology, medical
devices and diagnostic systems, industrial controls and instrumentation and
retail systems. While the Company does not require collateral from its
customers, it does perform continuing credit evaluations of its customer’s
financial condition.
Fair
Value of Financial Instruments
Due
to
the short term nature of these accounts, the carrying values of cash, cash
equivalents, accounts receivable, accounts payable and accrued expenses
approximate the respective fair values.
Income
Taxes
The
Company recognizes deferred tax assets and liabilities for the expected future
tax consequences of events that have been recognized in the Company’s financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement carrying amounts and the tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are expected
to reverse. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amounts expected to be realized.
Advertising
Advertising
costs are expensed when incurred. Advertising for the years ended December
31,
2006, 2005, and 2004 were $98,000, $101,000 and $86,000
respectively.
55
Currency
Translation
The
accounts of the international subsidiaries and branch operations are translated
in accordance with SFAS No. 52, “Foreign Currency Translation,” which requires
that assets and liabilities of international operations be translated using
the
exchange rate in effect at the balance sheet date. The results of operations
are
translated at average exchange rates during the year. The effects of exchange
rate fluctuations in translating assets and liabilities of international
operations into U.S. dollars are accumulated and reflected as a currency
translation adjustment in the accompanying consolidated statements of
stockholders’ equity. Transaction gains and losses are included in net income
(loss). There are no material transaction gains or losses in the accompanying
consolidated financial statements for the periods presented.
Net
Income (Loss) Per Share
The
Company presents earnings per share in accordance with SFAS No. 128, “Earnings
per Share.”
Pursuant to SFAS No. 128, dual presentation of basic and diluted earnings per
share (“EPS”) is required for companies with complex capital structures on the
face of the statements of operations. Basic EPS is computed by dividing net
income (loss) by the weighted-average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution from the exercise or
conversion of securities into common stock. Under the treasury stock method
it
is assumed that dilutive stock options are exercised. Furthermore, it is assumed
that the proceeds are used to purchase common stock at the average market price
for the period. The difference between the numbers of the shares assumed issued
and the number of shares assumed purchased represents the dilutive
shares.
For
the
year ended December 31, 2006, the Company sustained a loss. All options
outstanding at December 31, 2006 to purchase shares of common stock were
excluded from the diluted loss per common share calculation as the inclusion
of
these options would have been antidilutive. At December 31, 2005 and 2004 there
were 22,743 and 41,178 net additional dilutive shares assumed to be converted
at
an average exercise price of $5.06 and $4.52 per share. Additionally, at
December 31, 2005 and 2004 the Company had 41,975 and 51,950 antidilutive shares
that were excluded from diluted earnings per share calculation due to their
antidilutive nature.
|
|
(in
thousands, except per share data)
|
|||||||||
|
Year
Ended December 31,
|
2006
|
2005
(restated)
|
2004
(restated)
|
|||||||
|
Net
income (loss)
|
$
|
(4,982
|
)
|
$
|
1,217
|
$
|
1,524
|
|||
|
Basic
weighted average number of common shares outstanding
|
3,547
|
3,093
|
2,960
|
|||||||
|
Basic
earnings (loss) per common share
|
$
|
(1.40
|
)
|
$
|
.39
|
$
|
.51
|
|||
|
Effect
of dilutive stock options
|
-
|
23
|
41
|
|||||||
|
Diluted
weighted average number of common shares outstanding
|
3,547
|
3,116
|
3,001
|
|||||||
|
Diluted
earnings (loss) per common share
|
$
|
(1.40
|
)
|
$
|
.39
|
$
|
.51
|
|||
Comprehensive
Income (Loss)
The
Company follows SFAS No. 130 “Reporting Comprehensive Income.” SFAS No. 130
establishes standards for reporting and presentation of comprehensive income
(loss) and its components (revenues, expenses, gains and losses) in a full
set
of general-purpose financial statements. This statement also requires that
all
components of comprehensive income (loss) be displayed with the same prominence
as other financial statements. Comprehensive income (loss) consists of net
income (loss) and foreign currency translation adjustments. The effects of
SFAS
No. 130 are presented in the accompanying Consolidated Statements of
Stockholders’ Equity.
56
Stock
Compensation
On
January 1, 2006, the Company adopted the fair value recognition provisions
of
SFAS 123(R) using the modified prospective transition method. Under this method,
compensation costs recognized during 2006, include (a) compensation costs for
all share-based payments granted to employees and directors prior to, but not
yet vested as of January 1, 2006, based on the grant date value estimated in
accordance with the original provision SFAS 123 and (b) compensation costs
for
all share-based payments granted subsequent to January 1, 2006, based on the
grant date fair value estimated in accordance with the provisions of FAS 123(R).
The
Company had a choice of two attribution methods for allocating compensation
costs under SFAS No. 123(R): the “straight-line” method, which allocates expense
on a straight-line basis over the requisite service period of the last
separately vesting portion of an award, or the “graded vesting attribution
method”, an accelerated amortization method, which allocates expense on a
straight-line basis over the requisite service period for each separately
vesting portion of the award as if the award was in-substance, multiple awards.
We chose the graded vesting attribution method and accordingly, amortize the
fair value of each option tranche over the respective tranche’s requisite
service period.
The
Company estimates the fair value of stock options granted using the
Black-Scholes-Merton option-pricing formula and amortizes, the estimated option
value using an accelerated amortization method where each option grant is split
into tranches based on vesting periods. The Company’s expected term represents
the period that the Company’s share-based awards are expected to be outstanding
and was determined based on historical experience regarding similar awards,
giving consideration to the contractual terms of the share-based awards and
employee termination data and guidance provided by the U.S. Securities and
Exchange Commission’s Staff Accounting Bulletin 107 (“SAB 107”). Executive level
employees who hold a majority of the options outstanding, and non-executive
level employees were each found to have similar historical option exercise
and
termination behavior and thus were grouped for valuation purposes. The Company’s
expected volatility is based on the historical volatility of its traded common
stock in accordance with the guidance provided by SAB 107 to place exclusive
reliance on historical volatilities to estimate our stock volatility over the
expected term of its awards. The Company has historically not paid dividends
and
has no foreseeable plans to issue dividends. The risk-free interest rate is
based on the yield from U.S. Treasury zero-coupon bonds with an equivalent
term.
Results
for prior periods have not been restated.
Under
the
Company’s stock option plans, options awards generally vest over a four year
period of continuous service and have a 10 year contractual term. The fair
value
of each option is amortized on a straight-line basis over the option’s vesting
period. The fair value of each option is estimated on the date of the grant
using the Black-Scholes option valuation model and the following average
assumptions as of December 31, 2006.
|
For
the year ended
|
For
the year ended
|
For
the year ended
|
|
|
December
31, 2006
|
December
31, 2005
|
December
31, 2004
|
|
|
Risk-free
interest rate
|
4.77%
|
4.32%
|
4.18%
|
|
Expected
life (in years)
|
6.15
|
6.25
|
6.25
|
|
Volatility
|
115%
|
117%
|
121%
|
|
Expected
dividends
|
-
|
-
|
-
|
|
Annual
forfeiture rate
|
24.5%
|
-
|
-
|
57
The
weighted-average fair value of options granted during the years ended December
31, 2006, 2005 and 2004 was estimated as $5.90, $6.72 and $5.30
respectively.
Prior
to
the adoption of FAS 123(R), the Company accounted for stock-based awards to
employees and directors using the intrinsic value method in accordance with
APB
25 as allowed under FAS 123. The exercise price of the Company’s stock options
granted to employees and directors equaled the market value of the underlying
stock at the date of grant. Under the intrinsic value method, no stock-based
compensation expense had been recognized in the Company’s consolidated statement
of operations because the average price of the Company’s stock options granted
to employees and directors equaled the market value of the underlying stock
at
the date of the grant.
The
following table illustrates the effect on the net income and earnings per share
if the Company had applied the fair value recognition provisions of FAS 123
to
options granted under the Company’s stock option plan in all periods
presented.
|
Year
ended December 31
|
|||||||
|
2005
|
2004
|
||||||
|
Net
income - as restated
|
$
|
1,217,000
|
$
|
1,524,000
|
|||
|
Add:
Stock based compensation
included in net income as reported
|
-
|
-
|
|||||
|
Deduct
stock based compensation
determined under fair value based
methods for all awards
|
(388,000
|
)
|
(252,000
|
)
|
|||
|
Net
income - pro forma
|
$
|
829,000
|
$
|
1,272,000
|
|||
|
Basic
income per share - as reported
|
$
|
.39
|
$
|
.51
|
|||
|
Diluted
income per share - as reported
|
$
|
.39
|
$
|
.51
|
|||
|
Basic
income per share - pro forma
|
$
|
.27
|
$
|
.43
|
|||
|
Diluted
income per share - pro forma
|
$
|
.27
|
$
|
.42
|
|||
Prior
to
the adoption of SFAS 123(R), the Company included all tax benefits associated
with stock-based compensation as operating cash flows in the consolidated
statements of cash flows. SFAS 123(R), requires any reduction in taxes payable
resulting from tax deductions that exceed the recognized compensation expense
(excess to tax benefits) to be classified as financing cash flows. The Company
did not have any excess tax benefit for the year ending December 31,
2006.
Reclassifications
Certain
reclassifications of prior years’ amounts have been made to conform to the
current year presentation.
58
Recent Accounting Standards or Accounting Pronouncements
In
June
2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for
Uncertainty in Income Taxes-an Interpretation of FASB Statement 109”, which
establishes that the financial statement effects of a tax position taken or
expected to be taken in a tax return are to be recognized in the financial
statements when it is more likely than not, based on the technical merits,
that
the position will be sustained upon examination. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The adoption of FIN 48 is not expected
to have a material impact on our results of operations or our financial
position.
In
September2006, the FASB issued FAS No 157, Fair Value Measurement (“FAS 157”).
FAS 157 defines fair value, establishes a framework for measuring fair value
in
accordance with generally accepted accounting principles, and expands disclosure
about fair value measurements. FAS 157 is effective for years beginning after
November 15, 2007. The adoption of this Statement is not expected to have a
material effect on the Company’s consolidated financial statements.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements, “(SAB 108). SAB
108 was issued to provide interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be considered in
quantifying a current year misstatement. The effective date of SAP 108 is for
fiscal years ended on or before November 15, 2006. This pronouncement did not
have any impact on the Company’s consolidated financial statements.
4. Receivables
|
December
31,
|
2006
|
|
2005
|
||||
|
Billed
receivables
|
$
|
5,301,000
|
$
|
4,719,000
|
|||
|
Unbilled
receivables
|
1,559,000
|
318,000
|
|||||
|
$
|
6,860,000
|
$
|
5,037,000
|
||||
Billed
receivables represent billings for the Company’s products and services to end
users and value added resellers. Unbilled receivables represent contractual
amounts due within one year under software licenses that have been delivered
but
have not been billed. Billed receivables are shown net of reserves for estimated
uncollectible amounts.
5. Property
and Equipment
|
December
31,
|
||||||||||
|
Useful
Life
|
2006
|
2005
|
||||||||
|
Computers
and related equipment
|
3
|
$
|
3,165,000
|
$
|
2,879,000
|
|||||
|
Furniture
and fixtures
|
10
|
512,000
|
504,000
|
|||||||
|
Leasehold
improvements
|
*
|
128,000
|
122,000
|
|||||||
|
Software
|
1-3
|
365,000
|
280,000
|
|||||||
|
Office
equipment
|
3-7
|
1,234,000
|
1,238,000
|
|||||||
|
5,404,000
|
5,023,000
|
|||||||||
|
Less:
Accumulated
depreciation and amortization
|
(4,756,000
|
)
|
(3,985,000
|
)
|
||||||
|
$
|
648,000
|
$
|
1,038,000
|
|||||||
*Leasehold
improvements are amortized over the assets estimated useful life or lease term,
whichever is less.
59
Depreciation
and amortization expense for the years ended December 31, 2006, 2005
and 2004
was
$717,000, $538,000 and $286,000, respectively.
6. Capitalized
Software Development Costs
|
December
31,
|
||||||||||
|
Remaining
Weighted Average
Life
|
2006
|
2005
|
||||||||
|
Capitalized
software development costs
|
1.42
|
$
|
9,585,000
|
$
|
6,764,000
|
|||||
|
Less:
Accumulated amortization
|
(5,949,000
|
)
|
(4,709,000
|
)
|
||||||
|
$
|
3,636,000
|
$
|
2,055,000
|
|||||||
The
Company capitalized software development costs for the years ended December
31,
2006, 2005 and 2004 of $2,821,000, $1,555,000 and $1,380,000, respectively.
Amortization of software development costs for the years ended December 31,
2006, 2005 and 2004 was $1,240,000, $1,020,000 and $1,088,000, respectively,
and
is reflected in cost of software license fees in the financial statements.
The
Company amortizes software developments cost on a straight-line basis over
the
estimated useful lives of the product (two years) and expects to amortize
approximately $2,105,000 during 2007 and $1,531,000 in 2008 based on products
currently released for sale.
7. Intangible
Assets
Intellectual
property and customer lists (“intangible assets”) acquired as part of the
FieldCentrix acquisition are amortized on a straight-line basis over their
estimated annual lives or over the period of their expected benefit, generally
ranging from 5 to 10 years. Amortization expense related to these intangible
assets was $280,000 and $81,000 for the years ended December 31, 2006 and 2005,
respectively.
|
Accumulated
Amortization
|
Net
Carrying Value
|
||||||||||||||||||
|
Description
|
Weighted
Avg.
Life
|
Gross
Cost
|
2006
|
2005
|
2006
|
2005
|
|||||||||||||
|
Software
|
5
years
|
$
|
720,000
|
$
|
186,000
|
$
|
42,000
|
$
|
534,000
|
$
|
678,000
|
||||||||
|
Customer
Relationship List
|
10
years
|
1,360,000
|
175,000
|
39,000
|
1,185,000
|
1,321,000
|
|
||||||||||||
|
$
|
2,080,000
|
$
|
361,000
|
$
|
81,000
|
$
|
1,719,000
|
$
|
1,999,000
|
||||||||||
Estimated
amortization expense for each of the next five years is as follows:
|
Amortization
Expense
|
|
|
2007
|
280,000
|
|
2008
|
280,000
|
|
2009
|
280,000
|
|
2010
|
238,000
|
|
2011
|
136,000
|
60
8.
Accounts Payable and Accrued Expense
|
December
31,
|
|
2006
|
|
2005
|
|||
|
Accounts payable
|
$
|
1,025,000
|
$
|
926,000
|
|||
|
Accrued compensation and related benefits
|
1,568,000
|
1,389,000
|
|||||
|
Accrued professional services
|
316,000
|
182,000
|
|||||
|
Sales and payroll taxes
|
403,000
|
695,000
|
|||||
|
Other accrued liabilities
|
618,000
|
777,000
|
|||||
|
$
|
3,930,000
|
$
|
3,969,000
|
||||
9.
Income Taxes
Astea
accounts for income taxes pursuant to SFAS No. 109, Accounting
for Income Taxes,
which
provides for an asset and liability approach to accounting for income taxes.
Deferred tax assets and liabilities represent the future tax consequences of
the
differences between the financial statement carrying amounts for assets and
liabilities versus the tax bases of assets and liabilities. Under this method,
deferred tax assets are recognized for deductible temporary differences,
operating loss and tax credit carryforwards. Deferred liabilities are recognized
for taxable temporary differences. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
The impact of tax rate changes on deferred tax assets and liabilities is
recognized in the year that the change is enacted.
The
provision for income taxes is as follows:
|
Years
ended December 31,
|
2006
|
2005
|
2004
|
|||||||
|
Current:
|
||||||||||
|
Federal
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
State
|
-
|
-
|
-
|
|||||||
|
Foreign
|
-
|
-
|
-
|
|||||||
|
|
- |
-
|
-
|
|||||||
|
Deferred:
|
||||||||||
|
Federal
|
$
|
27,000
|
$
|
6,000
|
$
|
-
|
||||
|
State
|
2,000
|
1,000
|
-
|
|||||||
|
$
|
29,000
|
$
|
7,000
|
$
|
-
|
|||||
Pre-tax
loss for domestic locations for the years ended December 31, 2006 and 2005
was
$4,078,000 and $55,000, respectively. For years ended December 31, 2004 domestic
pre-tax income was $913,000. Foreign locations had pre-tax loss of $875,000
for
the year ended December 31, 2006 and pre-tax income of $1,279,000 and $611,000
for years ended December 31, 2005 and 2004, respectively.
61
The
approximate income tax effect of each type of temporary difference is as
follows:
|
December
31,
|
2006
|
2005
|
|||||
|
Deferred
income tax assets:
|
|||||||
|
Revenue recognition
|
$
|
40,000
|
$
|
29,000
|
|||
|
Accruals and reserves not
currently deductible for tax
|
203,000
|
122,000
|
|||||
|
Benefit of net operating loss carryforward
|
10,201,000
|
8,447,000
|
|||||
|
Benefit of foreign net operating loss
carryforward
|
2,041,000
|
2,548,000
|
|||||
|
Depreciation
|
221,000
|
65,000
|
|||||
|
Alternative minimum tax
|
370,000
|
370,000
|
|||||
|
Capital loss carryforward
|
-
|
10,000
|
|||||
|
Non-qualified stock options
|
24,000
|
||||||
|
13,100,000
|
11,591,000
|
||||||
|
Deferred
income tax liabilities:
|
|||||||
|
Capitalized software development costs
|
(1,346,000
|
)
|
(761,000
|
)
|
|||
|
Amortization of deductible goodwill
|
(36,000
|
)
|
(7,000
|
)
|
|||
|
(1,382,000
|
)
|
(768,000
|
)
|
||||
|
Net deferred tax asset before allowance
|
(11,718,000
|
)
|
(10,823,000
|
)
|
|||
|
Valuation allowance
|
(11,754,000
|
)
|
(10,830,000
|
)
|
|||
|
Net deferred income tax liability
|
$
|
(36,000
|
)
|
$
|
(7,000
|
)
|
|
Realization
of deferred tax assets is primarily dependent on future taxable income, the
amount and timing of which is uncertain. The valuation allowance is adjusted
on
a periodic basis to reflect management’s estimate of the realizable value of the
net deferred tax assets. Therefore, a valuation allowance has been recorded
for
the entire net deferred tax asset with the exception of $36,000 related to
the
deferred tax liability associated with indefinite-lived intangible assets in
accordance with SFAS No. 142. Because indefinite-lived intangible assets and
goodwill are not amortized for book purposes, the related deferred tax
liabilities will not reverse until some indeterminate future period when the
assets becomes impaired, are disposed of, or in the case of indefinite-lived
intangible assets, begin to reverse if they are reclassified as an amortizing
intangible asset. SFAS No. 109 requires the expected timing of future reversals
of deferred tax liabilities to be taken into account when evaluating the
realizability of deferred tax assets. Therefore, the Company believes the
reversal of deferred tax liabilities related to indefinite-lived intangible
assets and goodwill should not be considered a source of future taxable income
when assessing the realization of the Company’s deferred tax assets. And as a
result a deferred expense has been recorded.
In
2004
the Company utilized $494,000 of its reserved deferred tax asset to offset
its
provision for income taxes, primarily from the utilization of its net operating
loss carryforward and turning of certain accruals. In the years ended December
31, 2006 and 2005, there were no income taxes owed, as the Company had tax
losses.
The
Company has a tax holiday in Israel, which expires in 2014. Net income for
the
Israeli subsidiary was $425,000 and $417,000 for the years ended December 31,
2006 and 2005, respectfully. The Israeli subsidiary has net carryforward losses
for Israeli tax purposes of approximately $0.7 million.
As
of
December 31, 2006, the Company had a net operating loss carryforward for United
States federal income tax purposes of approximately $30,002,000.
Included in the aggregate net operating loss carryforward is $8,895,000 of
tax
deductions related to equity transactions, the benefit of which will be credited
to stockholders’ equity, if and when realized after the other tax deductions in
the carryforwards have been realized. The net operating loss carryforwards
expire in 2016 through 2025.
62
The
Company does not provide for federal income taxes or tax benefits on the
undistributed earnings or losses of its international subsidiaries because
earnings are reinvested and, in the opinion of management, will continue to
be
reinvested indefinitely. At December 31, 2006, the Company had not provided
federal income taxes on cumulative earnings of individual international
subsidiaries of $2,691,000. Should these earnings be distributed in the form
of
dividends or otherwise, the Company would be subject to both U.S. income taxes
and withholding taxes in various international jurisdictions. Determination
of
the related amount of unrecognized deferred U.S. income tax liability is not
practicable because of the complexities associated with its hypothetical
calculation. As noted above, the Company has significant net operating loss
carryforwards for U.S. federal income taxes purposes, which are available to
offset the potential tax liability if the earnings were to be
distributed.
The
extent to which the loss carryforward can be used to offset future taxable
income and tax liabilities, respectively, may be limited, depending on the
extent of ownership changes within any three-year period.
10.
Line of Credit
On
May
23, 2006 the Company entered into a secured revolving line of credit (Line)
agreement with a bank. Maximum available borrowings under the Line represent
the
lesser of 80% of the Borrowing Base, which is defined as Eligible Accounts
Receivables, or $4.0 million. Amounts outstanding on the line of credit were
zero on December 31, 2006. Interest is payable monthly based on the Bank’s prime
rate, which was 8.25% at December 31, 2006. The Company pays a quarterly fee
for
the unused portion of the line of credit. The fee is .25% for the unused portion
of the available line of credit. For 2006, the Company paid $5,000 in unused
line of credit fees.
11. Commitments
and Contingencies
The
Company leases facilities and equipment under noncancelable operating leases.
Rent expense for facility leases for the years ended December 31, 2006, 2005
and
2004 was $1,065,000, $780,000 and $701,000, respectively. Equipment and vehicle
expense for the years ended December 31,, 2006, 2005 and 2004 was $249,000,
$210,000 and $154,000.
Future
minimum lease payments under the Company’s leases as of December 31, 2006 are as
follows:
|
Operating
Leases
|
||||
|
2007
|
$
|
1,398,000
|
||
|
2008
|
778,000
|
|||
|
2009
|
167,000
|
|||
|
2010
|
37,000
|
|||
|
2011
|
18,000
|
|||
|
Thereafter
|
17,000
|
|||
|
Total
minimum lease payments
|
$
|
2,415,000
|
||
The
Company has a letter of credit of $225,000 as of December 31, 2006 related
to a
lease obligation. The letter of credit is collateralized by a certificate of
deposit of $225,000 which is reported as restricted cash. The letter of credit
may be reduced by $75,000 per year in November. Under the lease agreement,
it is
set to expire in February 2009.
63
From
time
to time, the Company may be involved in certain legal actions and customer
disputes arising in the ordinary course of business. In the Company’s opinion,
the outcome of such actions will not have a material adverse effect on the
Company’s financial position or results of operations.
12. Profit
Sharing Plan/Savings Plan
The
Company maintains a discretionary profit sharing plan, including a voluntary
Section 401(k) feature, covering all qualified and eligible employees. Company
contributions to the profit sharing plan are determined at the discretion of
the
Board of Directors. The Company matches 25% of eligible employees’ contributions
to the 401(k) plan up to a maximum of 1.5% of each employee’s compensation. The
Company contributed approximately $85,000, $53,000 and $50,000 for the years
ended December 31, 2006, 2005 and 2004, respectively.
13.
Equity
Plans
Share-Based
Awards
Effective
January 1, 2006, the Company adopted the fair value recognition provisions
of Statement of Financial Accounting Standards No. 123(R), or SFAS 123(R),
Share-Based
Payments,
using
the modified-prospective transition method, and therefore, has not restated
its
financial statements for prior periods. For awards expected to vest,
compensation cost recognized in the year ended December 31, 2006 includes
the following: (a) compensation cost, based on the grant-date estimated
fair value and expense attribution method of SFAS 123, related to any
share-based awards granted through, but not yet vested as of January 1,
2006, and (b) compensation cost for any share-based awards granted on or
subsequent to January 1, 2006, based on the grant-date fair value estimated
in accordance with the provisions of SFAS 123(R).
SFAS
No.
123(R) requires companies to estimate the fair value of share-based payment
awards issued in the form of stock options on the date of the grant using an
option-pricing model. The value of the portion of the award that is ultimately
expected to vest is recognized as an expense over the requisite service period.
The Company estimated, at the adoption of SFAS No. 123(R), the value of an
additional paid-in capital pool for tax impacts related to employee share-based
compensation awards for which compensation costs were reflected in our pro
forma
disclosures required under SFAS No. 123 to be approximately $357,000. Although
not recorded in the financial statements, this pool (a hypothetical credit
in
paid-in capital) can be utilized to charge tax expense (recorded as deferred
tax
asset), which are ultimately not realizable when stock options are exercised
or
expire. As the Company presently has valuation allowances related to its
deferred tax assets, the use of the hypothetical pool could not occur until
such
valuation reserve has been eliminated.
As
a
result of adopting SFAS 123(R), for the year ended December 31, 2006 loss
before income taxes and net loss was $397,000 higher than if the Company had
continued to account for share-based compensation under APB 25. The basic and
diluted loss per share for the year ended December 31, 2006 was $0.11
greater than if the Company had continued to account for share-based
compensation under APB 25.
As
of
December 31, 2006, the total unrecognized compensation cost related to
non-vested options amounted to $686,000, which is expected to be recognized
over
the options’ remaining vesting periods of 3.86 years. No income tax benefit was
realized by the Company in the year ended December 31, 2006 as the Company
reported an operating loss and maintained a full valuation allowance on its
net
deferred tax asset.
64
Stock
Option Plans
The
Company has Stock Option Plans (the “Plans”) under which incentive and
non-qualified stock options may be granted to its employees, officers, directors
and others. Generally, incentive stock options are granted at fair value, become
exercisable over a four-year period, and are subject to the employee’s continued
employment. Non-qualified options are granted at exercise prices determined
by
the Board of Directors and vest over varying periods. A summary of the status
of
the Company’s stock options as of December 31, 2006, 2005 and 2004 and changes
during the years then ended are as follows:
|
OPTIONS
OUTSTANDING
|
OPTIONS
EXERCISABLE
|
|||||||||||||||
|
Shares
Available
for Grant
|
Shares
|
Wtd.
Avg.
Exercise
Price
|
Shares
|
Wtd.
Avg.
Exercise
Price
|
||||||||||||
|
Balance,
December 31, 2003
|
116,000
|
478,000
|
$
|
5.99
|
213,000
|
$
|
7.91
|
|||||||||
|
Granted
|
110,000
|
5.65
|
-
|
-
|
||||||||||||
|
Cancelled
|
(155,000
|
)
|
6.32
|
-
|
-
|
|||||||||||
|
Exercised
|
(37,000
|
)
|
4.70
|
-
|
-
|
|||||||||||
|
Expired
|
-
|
-
|
-
|
-
|
||||||||||||
|
Balance,
December 31, 2004
|
113,000
|
396,000
|
$
|
5.73
|
190,000
|
$
|
7.09
|
|||||||||
|
Granted
|
205,000
|
7.22
|
-
|
-
|
||||||||||||
|
Cancelled
|
(129,000
|
)
|
6.95
|
-
|
-
|
|||||||||||
|
Exercised
|
(162,000
|
)
|
4.88
|
-
|
-
|
|||||||||||
| Expired | - | - | - | - | ||||||||||||
|
Balance,
December 31, 2005
|
36,000
|
310,000
|
$
|
7.04
|
89,000
|
$
|
9.11
|
|||||||||
|
Authorized
|
-
|
-
|
-
|
|||||||||||||
|
Granted
|
222,000
|
6.91
|
-
|
-
|
||||||||||||
|
Cancelled
|
(99,000
|
)
|
6.84
|
-
|
-
|
|||||||||||
|
Exercised
|
(6,000
|
)
|
3.23
|
-
|
-
|
|||||||||||
|
Expired
|
-
|
-
|
-
|
|||||||||||||
|
Balance,
December 31, 2006
|
242,000
|
427,000
|
$
|
6.71
|
118,000
|
$
|
6.59
|
|||||||||
During
the second quarter of 2006, the shareholders of the Company approved the 2006
Stock Option Plan in order to fulfill the Company’s needs of attracting new
managerial and technical talent and retaining existing talent. The 2006 Plan
authorizes the issuance of a maximum of 350,000 shares of Common Stock of the
Company.
The
following table summarizes outstanding options that are vested and expected
to
vest under the Company’s stock option plans as of December 31,
2006.
|
Number
of Shares
|
Weighted
Average
Price
Per
Share
|
Weighted
Average Remaining Contractual Term (in years)
|
Aggregate
Intrinsic
Value
|
||||||||||
|
Outstanding
Options
|
427,000
|
$
|
6.71
|
8.25
|
$
|
409,569
|
|||||||
|
Ending
Vested and Expected to Vest
|
309,000
|
$
|
6.70
|
0.95
|
$
|
325,632
|
|||||||
|
|
|||||||||||||
|
Options
Exercisable
|
118,000
|
$
|
6.59
|
5.91
|
$
|
186,345
|
|||||||
|
|
|||||||||||||
The
intrinsic value of options exercised for the years ending December 31, 2006,
2005 and 2004 was $35,000, $1,201,000 and $55,000 respectively. The total fair
value of shares vested for the years December 31, 2006, 2005 and 2004 was
$263,000, $69,000 and $243,000, respectively
The
Company’s policy is to issue shares from the pool of authorized but unissued
shares upon the exercise of stock options.
65
A
summary
of the status of the Company’s nonvested share options as of December 31, 2006
is presented below:
|
Non
Vested Shares
|
Shares
|
Wtd.
Avg. Grant Date
Fair
Value
|
|||||
|
Nonvested
at December 31, 2005
|
221,000
|
$
|
6.53
|
||||
|
Granted
|
222,000
|
$
|
6.91
|
||||
|
Vested
|
(54,000
|
)
|
$
|
5.32
|
|||
|
Forfeited
or expired
|
(80,000
|
)
|
$
|
6.84
|
|||
|
Nonvested
at December 31, 2006
|
309,000
|
$
|
6.70
|
||||
In
accordance with Staff Accounting Bulletin No. 107, we classified share-based
compensation expense within the cost of services and maintenance, development,
sales and marketing, and general and administrative expenses. The following
table shows total share based compensation expense included in the Consolidated
Statement of Operations:
|
Year
Ended
December
31, 2006
|
||||
|
Cost
of Revenues
|
$
|
45,000
|
||
|
Development
|
90,000
|
|||
|
Sales
& Marketing
|
123,000
|
|||
|
General
& Administrative
|
139,000
|
|||
|
Pre-tax
share based compensation
|
$
|
397,000
|
||
|
Income
tax benefit
|
-
|
|||
|
Share-based
compensation expense, net
|
$
|
397,000
|
||
Employee
Stock Purchase Plan
In
May
1995, the Company adopted an employee stock purchase plan (the “ESPP”) which
allows full-time employees with one year of service the opportunity to purchase
shares of the Company’s common stock through payroll deductions at the end of
bi-annual purchase periods. The purchase price is the lower of 85% of the
average market price on the first or last day of the purchase periods. An
employee may purchase up to a maximum of 100 shares or 10% of the employee’s
base salary, whichever is less, provided that the employee’s ownership of the
Company’s stock is less than 5% as defined in the ESPP. Pursuant to the ESPP,
50,000 shares of common stock were reserved for issuance. During 2005 and 2004
shares purchased were 500 and 500, respectively. The plan expired on June 30,
2005 and was not renewed.
14.
FieldCentrix
Acquisition
On
September 21, 2005, the Company, through a newly formed wholly-owned subsidiary,
FC Acquisition Corp., acquired substantially all of the assets of FieldCentrix,
Inc., a leading provider of mobile workforce automation, pursuant to an Asset
Purchase Agreement for $3,336,000 of Company stock. The total cost of the
acquisition including earnout through December 31, 2006, legal, accounting
and
investment banking fees was $3,777,000.
In
the
Acquisition, the Company acquired substantially all of the assets of
FieldCentrix, including cash, accounts receivables, personal property, contracts
with customers, intellectual property, existing customer relationships and
assumed certain liabilities of FieldCentrix. In consideration for the assets
acquired and liabilities assumed from FieldCentrix, the Company issued 421,106
shares of its unregistered stock to FieldCentrix, Inc. The shares were valued
at
$3,336,000 based upon the average closing price of the Company’s common stock
for five trading days preceding the closing of the Acquisition ($7.922). The
Purchase Agreement also provides for certain quarterly cash earnout payments
payable to FieldCentrix through June 30, 2007 related to the collection of
gross
license revenues for certain sales of FieldCentrix products, and collections
on
certain professional services for FieldCentrix customers.
66
Ten
percent of the shares issued were deposited into escrow to cover any claims
for
indemnification made by the Company or FC Acquisition Corp. against FieldCentrix
under the Purchase Agreement. This stock escrow was released to FieldCentrix
on
September 30, 2006. Additionally, FieldCentrix deposited $177,243 into an escrow
account to cover any uncollected accounts receivable and/or maintenance revenues
of customers who had not consented to the assignment of their contracts with
FieldCentrix Inc. to FC Acquisition Corp. The cash escrow was analyzed in
January 2006 with a portion being released to FC Acquisition Corp. for the
total
of uncollected accounts receivable and unassigned maintenance contracts that
existed at the date of the acquisition.
The
purchase price of FieldCentrix was allocated as follows:
|
Assets
acquired
|
Total
Allocation
|
|||
|
Cash
|
$
|
906,000
|
||
|
Accounts
receivable
|
384,000
|
|||
|
Prepaid
expenses
|
80,000
|
|||
|
Property
and
equipment
|
730,000
|
|||
|
Software
|
721,000
|
|||
|
Customer
relations
|
1,360,000
|
|||
|
Other
assets
|
31,000
|
|||
|
Goodwill
|
1,253,000
|
|||
|
5,465,000
|
||||
|
Less
liabilities assumed:
|
||||
|
Accrued
expenses
|
721,000
|
|||
|
Deferred
revenue
|
967,000
|
|||
|
1,688,000
|
||||
|
Total
purchase price
|
$
|
3,777,000
|
||
Goodwill
is expected to be deductible for tax purposes.
The
acquisition of the long lived assets described above resulted in depreciation
and amortization expense to the Company. All assets above were depreciated
or
amortized, as appropriate, using the straight-line method over the following
estimated useful lives. Certain assets were fully depreciated in 2006. Those
with longer lives continue to be depreciated and amortized over the estimated
useful lives.
67
15.
Unaudited
Pro Forma Financial Information
Unaudited
pro forma financial information for the years ended December 31, 2005 and 2004
as though the FieldCentrix acquisition had occurred on January 1, 2004 is as
follows:
|
Year
ended
December
31,
|
|||||||
|
|
2005
(restated)
|
|
2004
(restated)
|
||||
|
Revenues
|
$
|
26,921,000
|
$
|
27,150,000
|
|||
|
Net
(loss)
|
$
|
(1,894,000
|
)
|
$
|
(2,568,000
|
)
|
|
|
Net
(loss) per common share
|
|||||||
|
Basic
|
$
|
(.56
|
)
|
$
|
(.77
|
)
|
|
|
Diluted
|
$
|
(.56
|
)
|
$
|
(.77
|
)
|
|
|
Weighted
shares outstanding
|
|||||||
|
Basic
|
3,397,000
|
3,318,000
|
|||||
|
Diluted
|
3,397,000
|
3,318,000
|
|||||
68
16. Geographic
Segment Data
The
Company and its subsidiaries are engaged in the design, development, marketing
and support of its service management software solutions. Substantially all
revenues result from the license of the Company’s software products and related
professional services and customer support services. The Company’s chief
executive officer reviews financial information presented on a consolidated
basis, accompanied by disaggregated information about revenues by geographic
region for purposes of making operating decisions and assessing financial
performance. Accordingly, the Company considers itself to have three reporting
segments, specifically the license, implementation and support of its
software.
|
Year
ended December 31,
|
2006
|
|
2005
(restated)
|
|
2004
(restated)
|
|||||
|
Revenues:
|
||||||||||
|
Software license fees
|
||||||||||
|
United States
|
||||||||||
|
Domestic
|
$
|
3,546,000
|
$
|
2,983,000
|
$
|
4,285,000
|
||||
|
Export
|
-
|
-
|
-
|
|||||||
|
Total United States
|
||||||||||
|
software
license fees
|
3,546,000
|
2,983,000
|
4,285,000
|
|||||||
|
|
||||||||||
|
United Kingdom
|
589,000
|
4,580,000
|
1,674,000
|
|||||||
|
Other foreign
|
535,000
|
677,000
|
1,433,000
|
|||||||
|
Total foreign software
|
||||||||||
|
license fees
|
1,124,000
|
5,257,000
|
3,107,000
|
|||||||
|
Total software license fees
|
4,670,000
|
8,240,000
|
7,392,000
|
|||||||
|
Services
and maintenance
|
||||||||||
|
United States
|
||||||||||
|
Domestic
|
10,580,000
|
8,128,000
|
6,719,000
|
|||||||
|
Export
|
593,000
|
304,000
|
749,000
|
|||||||
|
Total United States service
|
||||||||||
|
and maintenance revenue
|
11,173,000
|
8,432,000
|
7,468,000
|
|||||||
|
|
||||||||||
|
United Kingdom
|
1,822,000
|
2,248,000
|
1,824,000
|
|||||||
|
Other foreign
|
2,619,000
|
3,234,000
|
2,023,000
|
|||||||
|
Total foreign service and
|
||||||||||
|
maintenance revenue
|
4,441,000
|
5,482,000
|
3,847,000
|
|||||||
|
Total service and
|
||||||||||
|
maintenance revenue
|
15,614,000
|
13,914,000
|
11,315,000
|
|||||||
|
Total
revenue
|
$
|
20,284,000
|
$
|
22,154,000
|
$
|
18,707,000
|
||||
|
Net
income(loss) from operations
|
||||||||||
|
United States
|
$
|
(4,107,000
|
)
|
$
|
(62,000
|
)
|
$
|
913,000
|
||
|
United Kingdom
|
(1,533,000
|
)
|
256,000
|
(657,000
|
)
|
|||||
|
Other foreign
|
658,000
|
1,023,000
|
1,268,000
|
|||||||
|
Net income(loss) from
operations
|
$
|
(4,982,000
|
)
|
$
|
1,217,000
|
$
|
1,524,000
|
|||
|
|
||||||||||
|
Long
lived assets
|
||||||||||
|
United States
|
$
|
7,050,000
|
$
|
6,000,000
|
$
|
1,865,000
|
||||
|
United Kingdom
|
59,000
|
67,000
|
55,000
|
|||||||
|
Other foreign
|
322,000
|
314,000
|
183,000
|
|||||||
|
Total
asset
|
$
|
7,431,000
|
$
|
6,381,000
|
$
|
2,103,000
|
||||
69
17.
Selected
Consolidated Quarterly Financial Data (Unaudited)
|
2006
Quarter Ended
|
Dec
31,
|
Sep
30,
(restated)
|
Jun
30,
(restated)
|
Mar
31,
(restated)
|
|||||||||
|
Revenues
|
$
|
5,693,000
|
$
|
6,349,000
|
$
|
4,399,000
|
$
|
3,843,000
|
|||||
|
Gross
profit
|
2,637,000
|
3,509,000
|
1,497,000
|
692,000
|
|||||||||
|
Net
income(loss)(1)
|
(713,000
|
)
|
45,000
|
(2,035,000
|
)
|
(2,279,000
|
)
|
||||||
|
Basic
net income(loss) per share
|
$
|
(.20
|
)
|
$
|
.01
|
$
|
(.57
|
)
|
$
|
(.64
|
)
|
||
|
Diluted
net income(loss) per share
|
$
|
(.20
|
)
|
$
|
.01
|
$
|
(.57
|
)
|
$
|
(.64
|
)
|
||
|
Shares
used in computing basic net income(loss) per share (in
thousands)
|
3,549
|
3,549
|
3,547
|
3,543
|
|||||||||
|
Shares
used in computing diluted net income(loss) per share (in
thousands)
|
3,549
|
3,567
|
3,547
|
3,543
|
|||||||||
|
2005
Quarter Ended
|
Dec
31,
(restated)
|
Sep
30,
(restated)
|
Jun
30,
(restated)
|
Mar
31,
(restated)
|
|||||||||
|
Revenues
|
$
|
5,329,000
|
$
|
8,089,000
|
$
|
5,127,000
|
$
|
3,609,000
|
|||||
|
Gross
profit
|
2,584,000
|
5,757,000
|
2,870,000
|
1,504,000
|
|||||||||
|
Net
income(loss)
|
(701,000
|
)
|
2,629,000
|
199,000
|
(910,000
|
)
|
|||||||
|
Basic
net income(loss) per share
|
$
|
(.20
|
)
|
$
|
.89
|
$
|
.07
|
$
|
(.31
|
)
|
|||
|
Diluted
net income(loss) per share
|
$
|
(.20
|
)
|
$
|
85
|
$
|
.06
|
$
|
(.31
|
)
|
|||
|
Shares
used in computing basic net income(loss) per share (in
thousands)
|
3,
455
|
2,968
|
2,962
|
2,960
|
|||||||||
|
Shares
used in computing diluted net income(loss) per share (in
thousands)
|
3,485
|
3,106
|
3,056
|
2,960
|
|||||||||
| (1) |
Results
of 2006 include cost of $397,000 for stock compensation plans as
required
under SFAS 123(R), effective at January 1, 2006. Prior years do not
contain cost of stock compensation
plans
|
In
connection with the preparation of the 2006 Form 10-K, an error in the Company’s
accounting for revenue recognition relating to a particular contract from 2004
was identified. In the fourth quarter of 2004, our U.K. subsidiary entered
into
a contract with a new customer, which contained a specified upgrade right for
which we could not establish VSOE. According to accounting requirements, such
revenue should be deferred until the upgrade was delivered and accepted.
However, even though it was delivered in the first quarter of 2005, changes
in
the customers requirements, and subsequent concessions granted by the Company
in
October 2005 (which included an additional specified upgrade right) further
delayed our ability to establish delivery and acceptance of the license which
occurred. This additional specified upgrade was delivered in the first quarter
of 2007. Accordingly, all revenue recognized in relation to the customer must
be
deferred until the complete upgrade was delivered to the customer. It was
determined that revenue of $36,000, $126,000 and $129,000 must be deferred
for
the first, second and third quarters of 2006, respectively. The impact of the
restatement was to decrease basic and diluted earnings per share by ($.01)
in
the first quarter of 2006, ($.03) in the second quarter of 2006, and ($.04)
for
the third quarter of 2006. For 2005, revenue of $161,000, $232,000, $160,000
and
$58,000 must be deferred for the first, second, third and fourth quarters,
respectively. The impact of the restatement was to decrease both basic and
diluted earnings per share by ($.06) in the first quarter, ($.08) in the second
quarter and ($.05) in the third quarter. For the fourth quarter of 2005, basic
earnings per share decreased ($.01) and diluted earnings per share decreased
($.02).
70
The
Company will amend its 2006 Forms 10-Q for the interim periods ended March
31,
2006, June 30, 2006 and September 30, 2006 shortly after the filing of this
Form
10-K.
Item
9. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
None.
Item
9A. Controls
and Procedures.
The
Company’s management team, under the supervision and with the participation of
the Company’s principal executive officer and principal financial officer,
evaluated the effectiveness of the design and operation of the Company’s
disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities
Exchange Act of 1934 (“Exchange Act”), as of the last day of the period covered
by this report, December 31, 2006. The term disclosure controls and procedures
means the Company’s controls and other procedures that are designed to ensure
that information required to be disclosed by the Company in the reports that
the
Company files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities
and
Exchange Commission’s rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by the Company in the reports that the
Company files or submits under the Exchange Act is accumulated and communicated
to management, including the Company’s principal executive and principal
financial officers, or persons performing similar functions, as appropriate
to
allow timely decisions regarding required disclosure. Based on this evaluation,
the Company’s principal executive officer and principal financial officer
concluded that, because of the material weaknesses in the Company’s internal
control over financial reporting described below, the Company’s disclosure
controls and procedures were not effective as of December 31, 2006. To address
the material weaknesses in the Company’s internal control over financial
reporting described below, we performed additional manual procedures and
analysis and other post-closing procedures in order to prepare the consolidated
financial statements included in this report. As a result of these expanded
procedures, the Company believes that the consolidated financial statements
contained in this report present fairly, in all material respects, our financial
condition, results of operations and cash flows for the fiscal years covered
thereby in conformity with generally accepted accounting principles in the
United States (“GAAP”).
In
connection with the preparation of the 2006 Form 10-K, an error in the Company’s
accounting for revenue recognition relating to a particular contract from 2004
was identified. In the fourth quarter of 2004, our U.K. subsidiary entered
into
a contract with a new customer. In 2004, the Company recognized all of the
license revenue. In 2005 and the first three quarters of 2006, the Company
recognized services and maintenance revenue based on work performed for the
customer. However, the contract contained a specified upgrade right, which
was
delivered in the first quarter of 2005. According to accounting requirements,
a
specified upgrade right must be valued using vendor specific objective evidence
(VSOE). The Company uses the residual method for recognizing revenue on its
software licenses. In such instances, the accounting rules state that VSOE
for a
specified upgrade right cannot be determined and therefore, revenue must be
deferred until all elements of the arrangement (which would include the
specified upgrade) are delivered. Although the specified upgrade was delivered
in the first quarter of 2005, changes in the customer’s requirements and
subsequent concessions granted by the Company in October 2005 (which included
an
additional specified upgrade right), further delayed our ability to establish
that delivery and acceptance of the license had occurred. This additional
specified upgrade was delivered in the first quarter of 2007. Accordingly all
revenue, including license, service and maintenance should have been deferred
until the delivery and acceptance of the final element. Therefore, the Company
restated its financial statements to defer all license, service and maintenance
revenue recognized in relation to this contract in 2004, 2005 and the first
three quarters of 2006, which was $610,000, $611,000 and $457,000, respectively.
71
In
connection with the completion of its audit of and the issuance of an
unqualified report on the Company's consolidated financial statements for the
fiscal year ended December 31, 2006, the Company's independent registered public
accounting firm, BDO Seidman, LLP ("BDO"), communicated to the Company's Audit
Committee that the following matter involving the Company's internal controls
and operations was considered to be a material weakness, as defined under
standards established by the Public Company Accounting Oversight
Board:
The
Company does not maintain sufficiently detailed documentation regarding how
modifications to its standard software license terms (and the related accounting
impact, if any) comply with provisions in US GAAP, namely SOP 97-2 Software
Revenue Recognition and SOP 98-9 Modification of SOP 97-2 Software Revenue
Recognition with Respect to Certain Transactions and related practice aids
issued by the American Institute of Certified Public Accountants (AICPA).
A
material weakness is a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the financial statements will not be prevented or detected
by
the entity’s internal control.
The
Company intends to immediately expand its internal contract documentation
procedures in order to fully comply with all provisions of US GAAP, in order
to
completely correct the material weakness identified.
There
were no changes that occurred during the fiscal quarter ended December 31,
2006
that have materially affected, or are reasonable likely to materially affect,
our internal controls over financial reporting.
Item
9B. Other
Information
None
Item
10. Directors
and Executive Officers of the Registrant.
Certain
information required by Part III is omitted from this Report in that the Company
will file a definitive proxy statement with 120 days after the end of this
fiscal year pursuant to Regulation 14A (the “Proxy Statement”) for its 2006
Annual Meeting of Stockholders proposed to be held on May 30, 2007, and the
information therein is incorporated herein reference.
Item
10A. Departure
of Directors or Principal Officers; Election of Directors; Appointment of
Principal Officers
The
information set forth under the captions “Executive Officers” of the Proxy
Statement is incorporated herein by reference.
Item
11. Executive
Compensation
The
information in the Proxy Statement set forth under the captions “Executive
Compensation Summary” and “Report on Executive Compensation” is incorporated
herein by reference.
Item
12. Security
Ownership of Certain Beneficial Owners and Management.
The
information set forth under the captions “Security Ownership of Certain
Beneficial Owners and Management’ of the Proxy Statement is incorporated herein
by reference.
72
Item
13. Certain
Relationships and Related Transactions
The
information required by this Item is incorporated by reference from the Proxy
Statement under the heading “Certain Relationships and Related
Transactions”.
Item
14. Principal
Accountant Fees and Services
The
information required by this Item is incorporated by reference from the Proxy
Statement under the heading “Principal Accountant Fees and
Service”.
PART
IV
Item
15. Exhibits
and Financial Statement Schedules
(a)(1)(A) Consolidated
Financial Statements.
i)
Consolidated
Balance Sheets at December 31, 2006 and 2005
|
ii)
|
Consolidated
Statements of Operations for the years ended December 31, 2006, 2005,
and
2004
|
iii)
Consolidated
Statements of Stockholders’ Equity for the years ended December 31,
2006,
2005, and 2004
|
iv)
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2006, 2005,
and
2004
|
v) Notes
to
the Consolidated Financial Statements
(a)(1)(B) Report
of Independent Registered Public Accounting Firm.
(a)(2)
Schedules.
a) Schedule
II - Valuation and Qualifying Accounts
Schedule
listed above has been omitted because the information required to be set forth
therein is not applicable or is shown in the accompanying Financial Statements
or notes thereto.
(a)(3) List
of Exhibits.
The
following exhibits are filed as part of and incorporated by reference into
this
Annual Report on Form 10-K:
|
Description
|
|
|
3(i).1
|
Certificate
of Incorporation of the Company (Incorporated herein by reference
to
Exhibit 3.1 to the Company’s Registration Statement on Form S-1, as
amended (File No. 33-92778)).
|
|
3(ii).1
|
By-Laws
of the Company (Incorporated herein by reference to Exhibit 3.2
to the
Company’s Registration Statement on Form S-1, as amended (File No.
33-92778)).
|
|
4.1
|
Specimen
certificate representing the Common Stock (Incorporated herein
by
Reference to Exhibit 4.1 to the Company’s Registration Statement on
Form S-1, as amended (File No.
33-92778)).
|
73
|
10.1
|
1994
Amended Stock Option Plan (Incorporated herein by reference to
Exhibit
10.1 to the
Company’s Registration Statement on Form S-1, as amended (File No.
33-92778)).
|
|
10.2
|
Form
of Non-Qualified Stock Option Agreement under the 1994 Amended
Stock
Option Plan (Incorporated herein by reference to Exhibit 10.2 to
the
Company’s Registration Statement on Form S-1, as amended (File No.
33-92778)).
|
|
10.3
|
Form
of Incentive Stock Option Agreement under the 1994 Amended Stock
Option
Plan (Incorporated herein by reference to Exhibit 10.3 to the Company’s
Registration Statement on Form S-1, as amended (File No.
33-92778)).
|
|
10.4
|
1991
Amended Non-Qualified Stock Option Plan (Incorporated herein by
reference
to Exhibit 10.4 to the Company’s Registration Statement on Form S-1,
as amended (File No. 33-92778)).
|
|
10.5
|
Form
of Non-Qualified Stock Option Agreement under the 1991 Amended
Non-Qualified Stock Option Plan (Incorporated herein by reference
to
Exhibit 10.5 to the Company’s Registration Statement on Form S-1, as
amended (File No. 33-92778)).
|
|
10.6
|
1995
Employee Stock Purchase Plan (Incorporated herein by reference
to Exhibit
10.6 to the Company’s Registration Statement on Form S-1, as amended
(File No. 33-92778)).
|
|
10.7
|
Amendment
No. 1 to 1995 Employee Stock Purchase Plan (Incorporated herein
by
reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 1997).
|
|
10.8
|
1995
Employee Stock Purchase Plan Enrollment/Authorization Form (Incorporated
herein by reference to Exhibit 4.7 to the Company’s Registration Statement
on Form S-8, filed on September 19, 1995 (File No.
33-97064)).
|
|
10.9
|
Amended
and Restated 1995 Non-Employee Director Stock Option Plan (Incorporated
herein
by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K
for the year ended December 31, 1997).
|
|
10.10
|
Form
of Non-Qualified Stock Option Agreement under the 1995 Non-Employee
Director Stock Option Plan (Incorporated herein by reference to
Exhibit
4.5 to the Company’s Registration Statement on Form S-8, filed on
September 19, 1995 (File No. 33-97064)).
|
|
10.11
|
1997
Stock Option Plan (Incorporated herein by reference to Exhibit
10.10 to
the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 1996).
|
|
10.12
|
Form
of Non-Qualified Stock Option Agreement under the 1997 Stock Option
Plan.
(Incorporated herein by reference to Exhibit 10.11 to the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31,
1996).
|
|
10.13
|
Form
of Incentive Stock Option Agreement under the 1997 Stock Option
Plan
(Incorporated herein by reference to Exhibit 10.12 to the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31,
1996).
|
|
10.14
|
1998
Stock Option Plan (Incorporated herein by reference to Exhibit
10.14 to
the Company’s Annual Report on Form 10-K for the year ended December 31,
1997).
|
|
10.15
|
Form
of Non-Qualified Stock Option Agreement under the 1998 Stock Option
Plan.
(Incorporated
herein by reference to Exhibit 10.15 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 1997).
|
|
10.16
|
Form
of Incentive Stock Option Agreement under the 1998 Stock Option
Plan.
(Incorporated
herein by reference to Exhibit 10.16 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 1997).
|
|
10.28
|
2001
Stock Option Plan (Incorporated herein by reference to Exhibit
99.1 to the
Company’s Registration Statement on Form S-8 (File No.
333-107757)).
|
|
21.1
|
Subsidiaries
of the Registrant.
|
|
23.1*
|
Consent
of BDO Seidman, LLP.
|
74
|
24.1*
|
Powers
of Attorney (See the Signature Page).
|
|
31.1*
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - President
and
Chief Executive Officer
|
|
31.2*
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Chief
Financial Officer
|
|
32.1*
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002 - President and Chief Executive
Officer
|
|
32.2*
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906
|
Exhibits.
The
Company hereby files as part of this Annual Report on Form 10-K the exhibits
listed in Item 14(a)(3) set forth above.
75
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized this 2nd day of April
2007.
|
ASTEA
INTERNATIONAL INC.
|
|
|
By:
/s/
Zack Bergreen
|
|
|
Zack
Bergreen
|
|
|
Chief
Executive Officer
|
POWER
OF
ATTORNEY
KNOW
ALL
MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Zack Bergreen and Rick Etskovitz, jointly and
severally, his attorney-in-fact, each with the power of substitution, for him
in
any and all capacities, to sign any amendments to this Report on Form 10-K
and
to file same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming
all
that each of said attorney-in-fact, or his substitute or substitutes, may do
or
cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
|
/s/
Zack Bergreen
|
Chief
Executive Officer
|
April
2, 2007
|
|
Zack
Bergreen
|
(Principal
Executive Officer)
|
|
|
/s/
Rick Etskovitz
|
Chief
Financial Officer
|
April
2, 2007
|
|
Rick
Etskovitz
|
(Principal
Financial and Accounting
|
|
|
Officer)
|
||
|
/s/
Eileen Smith
|
Controller
|
April
2, 2007
|
|
Eileen
Smith
|
||
|
/s/
Thomas J. Reilly, Jr.
|
Director
|
April
2, 2007
|
|
Thomas
J. Reilly, Jr.
|
|
|
|
/s/
Zack Bergreen
|
Director
|
April
2, 2007
|
|
Zack
Bergreen
|
|
|
|
/s/
Adrian Peters
|
Director
|
April
2, 2007
|
|
Adrian
Peters
|
|
|
|
/s/
Eric Siegel
|
Director
|
April
2, 2007
|
|
Eric
Siegel
|
|
76
Consent
of Independent Registered Public Accounting
Firm
Astea
International Inc. Subsidiaries
Horsham,
Pennsylvania
We
hereby
consent to the incorporation by reference in the Registration Statements (Nos.
333-33825, 333-107757, 333-34865, and 333-61981) on Form S-8 and (Nos.
333-11949, 333-90394, and 333-17459) on Form S-3 of Astea International, Inc.
and subsidiaries of our report dated March 30, 2007, relating to the
consolidated financial statements of Astea International, Inc. and subsidiaries
appearing in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2006.
BDO
Seidman, LLP
Woodbridge,
NJ
April
2,
2007
77