astea10k.htm




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, 2008
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 Exchange Act:
   
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, $0.01 Par Value Per Share
 
The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Exchange  Act:  NONE
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 a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
     Large Accelerated filer __      Accelerated Filer __      Non-accelerated Filer       Smaller Reporting Company _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, 2008 (based on the closing price of $3.66 as reported by the Capital Market of The NASDAQ Stock Market LLC as of such date) was $8,018,515.  For purposes of determining this amount only, the registrant has defined affiliates of the registrant to include the executive officers and directors of registrant and holders of more than 10% of the registrant’s common stock on June 30, 2008.

As of March 5, 2009, 3,554,049 shares of the registrant’s Common Stock were outstanding.

 
 

 


DOCUMENTS INCORPORATED BY REFERENCE



Portions of the definitive Proxy Statement for the 2009 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.



TABLE OF CONTENTS
 
   
 Page
 
PART I
 
     
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Submission of Matters to a Vote of Security Holders
     
 
PART II
 
     
Item 5.
Market for Registrant’s Common Equity and Related
 
 
Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial
 
Condition and Results of Operations
 
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A(T).
Controls and Procedures
Item 9B.
Other Information
     
 
PART III
 
     
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and
 
 
Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and
 
Director Independence
 
Item 14.
Principal Accountant Fees and Services
     
 
PART IV
 
     
Item 15.
Exhibits and Financial Statement Schedules
 
Signature Page
 
Consent of Independent Registered Public Accounting Firm
80
 
Certificates
81
     
     

 
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PART I
Forward-Looking Statements

 This form 10-K may contain, in addition to historical information, forward-looking statements.  These forward-looking statements are based on the Company’s current assumptions, expectations and projections about future events.  Words like “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” and similar expressions are used to identify forward-looking statements, although not all forward-looking statements contain these words. These forward-looking statements are necessarily estimates reflecting the best judgment of the Company’s management and involve a number of risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed or implied by the forward-looking statements.  Among the factors that could cause actual results to differ from those expressed or implied by a forward-looking statement are those described in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K, and in the Company’s Quarterly Reports on Form 10-Q, as filed with the SEC.  Other unknown or unpredictable factors also could have material adverse effects on the Company’s future results, performance, or achievements.  In light of these risks, uncertainties, assumptions, and factors, actual results could differ materially from those expressed or implied in the forward-looking statements.  You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date stated, or if no date is stated, as of the date of this release.

The Company is not under any obligation and does not intend to make publicly available any update or other revision to any forward-looking statements to reflect circumstances existing after the date of this release or to reflect the occurrence or future events even if experience or future events make it clear that any expected results expressed or implied by these forward-looking statements will not be realized.

Item 1.                      Business.

Industry Overview – Service Management

In a very simplistic manner, service management is typically defined as a technician performing repair, installation, or regularly scheduled/preventive maintenance work at a customer site. It involves the management of incoming service requests, dispatching of service technicians, managing parts, managing contracts, prioritizing service based on service level agreement and severity of problem, and the repair, refurbish and retirement process for a piece of equipment. Field service organizations vary greatly in size, target industries and supported technologies.  Although every industry relies on field service to some degree, for some industries field service is critical.  Equipment from computers and peripherals to building systems, office equipment and medical equipment depend on field service.  Sometimes, this equipment is the lifeblood of a company, and any downtime or service interruptions can significantly impair operations or even endanger human life and safety.

Managing today's service enterprise means planning and coordinating service on a global scale. It means delighting your customers - and it calls for new technologies and business practices designed specifically to solve the service lifecycle management challenge. The benefits of implementing Service Management solutions are applicable in virtually every service organization, regardless of type, size, or geography served.  In fact, the larger and more global the organization, the greater the potential benefits are likely to be.  Typically benefits of implementing service management solutions fall into 5 categories:

1.      Reduced Service Costs
· Improved technician productivity
· Improved Inventory/parts management
· Optimized service delivery
· Reduced time in the “service-to-cash” cycle

2.      Streamlined Workflow
Best-of-breed service management solutions with industry best practices already built-in, enable practitioners to benefit not only from the automation of their current processes, but also by allowing them to redefine and improve their processes to deliver optimum results

 
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3.      Improved Service Levels
 
There are basically two ways to look at service management solutions - (1) as a tool for lowering the cost of doing business, and (2) as a means for improving existing service levels. While the cost savings may be very real, service management solutions can also be a significant contributor to the overall improvement in the levels of service performance for the organization, as follows:
·  
Complete Charge Capture of Service Delivery
·  
Maximized Cross-Selling and Up-Selling Opportunities
·  
Ability to Leverage Service as a Competitive Advantage
 
4.      Enhanced Quality and Growth
While most of the benefits described thus far focus primarily on transitioning from the past to the present, enhanced quality and growth clearly looks to the future of the organization - and this is where service management solutions can really excel. The three main forward-thinking benefits may be summarized as follows:

·  
Ability to Deliver Consistent Service Globally
·  
Modularity for Supporting Growth
·  
Improved Quality and Reduced Costs
 
5.           Increased Customer Satisfaction
The vast majority of today’s services managers recognize customer satisfaction for exactly what it is - an essential building block for long-term, profitable relationships that ultimately leads to customer loyalty and repeat business. Numerous studies have also shown that acquiring a customer is a lot more expensive than retaining an existing one. By utilizing service management solutions to anticipate customers’ needs and requirements, improve responsiveness, and deliver consistent service, services organizations can improve the way in which their customers perceive the quality of their service offerings - and this will go a long way in their ability to transform customer satisfaction into true customer loyalty.

General

Astea International Inc. and subsidiaries (collectively “Astea” or the “Company”) develop, market and support 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.
 
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Astea offers all the cornerstones of service lifecycle management, including customer management, service management, asset management, reverse logistics management and mobile workforce management.  This comprehensive approach provides unmatched expertise in service lifecycle workflow and integration needs throughout the service continuum.  Astea’s solutions empower companies by making more actionable data readily accessible, providing companies agility needed to achieve sustainable value more quickly and compete successfully in a global community.

Astea’s software has been licensed to approximately 630 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.  See Note 12 to the Consolidated Financial Statements Geographic Segment Data for revenues, income (loss) from operations and long lived assets related to each of the Company’s geographic operating regions for the past three years.

In addition to its own product development that is conducted at Company facilities in the United States and Israel, Astea participates in partnerships with complementary technology companies in order to reduce time-to-market with new product capabilities and continually increase its value proposition to customers. The Company’s product strategies are developed from the collective feedback from customers, industry consultants, technology partners and sales partners, in addition to its internal product management and development.  Astea also works with its active user community who closely advises and participates in ongoing product development efforts.

Astea provides customers with an array of professional consulting, training and customer support services to implement its products and integrate them with other corporate systems such as back-office financial and ERP applications. Astea also maintains and supports its software over its installed life cycle. The Company’s experience and domain expertise in service and sales management, distribution, logistics, finance, mobile technologies, internet applications and enterprise systems integration are made available to customers during their assessments of where and how their business processes can be improved.

The Company’s sales and marketing efforts are 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.


 
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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.
 
 
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In the first quarter of 2007, the latest software version, Astea Alliance 8.0 was released.  This version delivered extensive enhancements and new features to empower service-centric organizations to achieve a new level of service excellence.  Built on Microsoft .NET 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.

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 250 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:
·  
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 Links
Alliance Studio
Alliance Knowledge Base
 

 
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Astea Alliance Core Applications

Alliance Contact Center

The Alliance Contact Center application supports call centers, information desks, service hotlines, inside sales and telemarketing activities. Integrated multi-channel inbound/outbound capabilities enable customer service representatives to serve prospects and customers in their media of choice, including phone, fax, e-mail or Internet.  Integrated customer self-service portals with automated email response, automated call escalation and interface to Computer Telephony Integration (CTI) systems help streamline customer interaction processes. Work scheduling and demand balancing optimize staff utilization. Employee personal portals with access to comprehensive real-time customer data and decision support tools including intelligent knowledge management and scripting for problem resolution and inside sales, drive higher staff productivity.  Aside from more efficient customer service and higher levels of customer satisfaction, the objectives of Astea’s Alliance Contact Center software are to reduce overhead through improved first-call resolution rates and shorter service-call handling times.  A powerful, third-party knowledge 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.
 
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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.

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.
 

 
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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.

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 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.   Alliance 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 Alliance 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 as it 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.

 
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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 Laptop 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 of 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.

Astea Alliance Tools

Alliance Link

Alliance Link is an enterprise application integration product that interfaces 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 Link 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 behaviour 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 contribute to the system’s low cost of ownership.

Alliance Knowledge Base

Alliance Knowledge Base provides powerful and scalable enterprise search functionality for corporate content, across a network or on a portal, intranet or Internet site. Delivering single-point access to enterprise-wide data collections; full-text searches can be conducted quickly and easily across disparate data sources, from a single PC to corporate networks, intranets, extranets, websites and portals, improving knowledge retention and sharing across the organization. Alliance Search offers advanced functionality for entering queries and results navigation to help users quickly find the information they need. Alliance Search can provide user-friendly access to a vast range of information, including product manuals, technical support documentation, maintenance histories, repair notes, announcements, and much more. With search functionality, Alliance Search becomes much more than simply an operations tool; it can enable the sharing of all sorts of information, improve problem resolution times, and improve the quality of decision-making across an organization.
 

 
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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 Fleet Manager
·  
FX Resource Utilization
·  
FX Interchange
·  
FX Interchange for JD Edwards
·  
FX Mobility Express

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.

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 organization’s 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.
 

 
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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 customer’s 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 organization’s 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 a 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 Fleet Manager

FX Fleet Manager is FieldCentrix’s Global Positioning System (GPS) offering to help customers manage their mobile resources more effectively. FX Fleet Manager gives companies better control and management of their field operations and allows them to make decisions that will increase profitability, reduce service costs, enhance customer responsiveness and satisfaction, and improve productivity and efficiency. With FX Fleet Manager, dispatchers and office personnel will always know where mobile resources are located — in real-time. Are they where they should be? Are they lost? Are they safe? There’s an emergency service request — which resource is the closest with the right parts and skill sets? All this information and more are available to more efficiently manage mobile resources.

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 analyze 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 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.

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.
 

 
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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.

Astea Client Services

Professional Services:

Astea’s typical professional services engagement includes planning, prototyping and implementation of Astea’s products within the client’s organization.  Some customers may require customization, but they are relatively insignificant.

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.

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 daily 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.
 

 
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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 processes 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, minor 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 create Business Requirement Documents (BRDs) 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.

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.
 

 
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End-user training plans and documents are created during the implementation phase.  These plans and documentation are utilized to conduct end-user training sessions prior to go-live.

Technical Training:

Software and database installation/creation training is provided, as required and/or recommended.

System Administration training provides the customer IT staff pre-requisite knowledge to manipulate and manage administrative tasks associated with the Astea solutions.  Included within these tasks are:  Security, Batch Applications, Escalation, Import, etc.

Many customers are interested in performing their own personalization and minor 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 630 customers ranging from small, rapidly growing companies to large, multinational corporations with geographically dispersed operations and remote offices. More than 255 licenses (including 2008 sales) have been sold for Astea Alliance, 40 for FieldCentrix products and the remainder for DISPATCH-1 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 2008 no customers accounted for more than 10% of total revenues.  In 2007 two customers represented 11% and 10% of total revenues respectively.

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.”

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.”
 

 
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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 26% of the Company’s revenues in 2008 and 32% of the Company’s revenues in 2007.  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 Microsoft Message Queuing (MSMQ), Windows Presentation Foundation (WPF); Visual Studio 2008; Microsoft .NET Framework; Internet Information Server (IIS) and Microsoft.NET Enterprise Servers including Windows 2003 and 2008 Servers, SQL Server and BizTalk Server.

In addition to product development that is conducted at Company facilities in the United States and Israel, Astea may participate in partnerships with complementary technology companies to reduce time-to-market with new product capabilities in order to continually increase its value proposition to existing and prospective customers.

The Company’s total expense for product development for the years ended December 31, 2008 and 2007 was $4,224,000 and $4,402,000, respectively. These expenses amounted to 17% and 14% of total revenues for 2008 and 2007 respectively.  The Company’s capitalized software development costs were $2,118,000 and $1,836,000 in 2008 and 2007, respectively.  Capitalized software development costs increased approximately $300,000 in 2008 compared to 2007 principally due to the development of FieldCentrix version 4.5 which was released in late 2008.    At that time all costs related to improving the product were no longer capitalized and instead charged directly to product development expenses.  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.”
 

 
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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”), 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.”

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.
 

 
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Employees

As of December 31, 2008, the Company, including its subsidiaries, had a total of 158 full time employees worldwide, 88 in the United States, 16 in the United Kingdom, 5 in the Netherlands, 39 in Israel, 11 in Australia and 2 in Japan and 3 part time employees, 2 in the United States and 1 in the Netherlands ..  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.   In the first quarter of 2007, the Company delivered Astea Alliance version 8.0 which is built on the Microsoft .NET 2.0 platform offering more than 200 web services for ease of integration and accelerated development.

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.
 

 
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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 2008, it generated a net loss of $3.1 million.  The Company generated net income of $2.8 million in 2007 and a net loss of $7.1 million in fiscal 2006.  As of December 31, 2008, stockholders’ equity is approximately $7.1 million, which is net of an accumulated deficit of approximately $23.0 million.  Moreover, the Company expects to continue to incur additional operating expenses for research and development.  As a result, the Company will need to generate significant revenues to achieve and maintain profitability.  The Company may not be able to achieve the necessary revenue growth or profitability in the future.  If the Company does not attain or sustain profitability or raise additional equity or debt in the future, the Company may be unable to continue its operations.

Decreased Revenues from DISPATCH-1

In both 2008 and 2007, 2% of the Company’s total revenues were derived from licensing and 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 supersede 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.  In 2008, there were no DISPATCH-1 license sales to existing customers compared to $77,000 in 2007.  Total DISPATCH-1 revenues have been declining and insignificant in each of the last three fiscal years.  That trend is expected to continue.

While the Company has licensed Astea Alliance to over 255 companies worldwide from 1998 through 2008, and more than 40 companies for the FieldCentrix suite supported by the Company since September 2005, revenues from sales of both Astea Alliance and FieldCentrix may not be sufficient to support the expenses of the Company.  The Company’s future success will depend mainly on its ability to increase licensed users of both 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 to generate professional services, support and maintenance revenues to Astea Alliance and FieldCentrix customers 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 products, maintain an acceptable level of support and maintenance revenues or to lower its expenses, thereby avoiding future losses.
 

 
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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 the software 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

On rare occasions, the Company’s clients may request significant customization of Astea Alliance and FieldCentrix 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.

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 or incur additional and unexpected costs 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.
 

 
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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, there may be a lag between the time the Company incurs costs with regard to a particular customer or contract and the time the Company begins to receive or recognize revenues from such customer or contract.  Moreover, in the event of any downturn in any existing or potential customer’s business or the economy in general, purchases of the Company’s products may be deferred or canceled.

In addition, 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 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 delayed payment of a portion of license fees until implementation was complete and in some cases have disputed the consulting fees charged for implementation.  There can be no assurance the Company will not experience additional delays or disputes regarding payment in the future, particularly if the Company receives orders for large, complex installations.  Additionally, as a result of the application of the revenue recognition rules applicable to the Company’s licenses under generally accepted accounting principles, license revenues may be recognized in periods after those in which the respective licenses were signed.  The Company believes that period-to-period comparisons of its results of operations should not be relied upon as any indication of future performance.

Fluctuations in Quarterly Operating Results May Be Significant

The Company’s quarterly operating results have in the past and may in the future vary significantly depending on factors such as:

· Revenue from software sales;
· the timing of new product releases;
 
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· 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 (CRM) 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, which 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:
 
23


 
·  
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:
 
24

 
· 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 the Company was no longer able to gain access to this software 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.
 
 
25

 
Risks Associated with International Sales
 
Astea’s international sales accounted for 26% of the Company’s revenues in 2008 and 32% in 2007.  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.
 
26

 
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.
 
 
27

 
The NASDAQ Capital Market Compliance Requirements   
 
The Company’s common stock trades on Capital Market of The NASDAQ Stock Market LLC (“NASDAQ”), 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.  If the Company were to fail any of the requirements, the Company’s common stock could be delisted from NASDAQ’s Capital Market. The result of delisting from NASDAQ 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, there can be no assurance that the Company will be able to continue to satisfy such requirements.

Securities and Exchange Act of 1934 and Section 404 of the Sarbanes Oxley Act of 2002 Compliance Requirements

As a publicly traded company, the Company is subject to the reporting requirements of the Securities and Exchange Act of 1934.  Furthermore, the Company is categorized as a smaller reporting company, which means that the Company must have its’ auditors attest to the systems of internal control as of December 31, 2009 as required under Section 404 of the Sarbanes-Oxley Act of 2002.  Failure to adequately comply with either act can result in penalties and sanctions. In addition, the independent auditors may issue a qualified opinion on the Company’s systems of internal controls which may negatively impact customer and investor confidence in the Company.

Material Weakness in Internal Control

In connection with the preparation for the 2007 audit, management discovered errors in accounting for revenue.  The discovery of these errors required management to restate its annual financial statements for 2005 and 2006 as well as all quarters from March 31, 2006 through September 30, 2007.   Management 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 did not properly apply the provisions of US GAAP, namely AICPA Statement of Position (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 upon determining that there was a material weakness in accounting for revenues, expanded its internal contract documentation procedures as well as its professional service implementation plan review procedures in order to fully comply with all provisions of US GAAP, to correct the material weakness identified.  However, as of December 31, 2008, the material weakness in accounting for revenues remains and it is possible that errors in future financial statements could go undetected.

 
28

 
Increased Costs for Sarbanes-Oxley Compliance

The Company is considered a smaller reporting company for purposes of complying with section 404 of the Sarbanes-Oxley Act.  In 2007 and 2008, the Company must comply by reporting that it has examined and tested its internal controls and that it complies with the standards set for smaller reporting companies as of December 31, 2007 and 2008.  For the year ended December 31, 2009, 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.

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 which runs through April 2014. 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.

None

Item 4.                      Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report, through the solicitation of proxies or otherwise.

PART II

Item 5.                      Market for Registrant’s Common Equity and Related Stockholder Matters.

The Company’s Common Stock is traded on Capital Market of NASDAQ 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 for the past two fiscal years:


2008
 
High
   
Low
 
First quarter
  $ 5.77     $ 3.07  
Second quarter
    5.90       3.37  
Third quarter
    4.15       2.98  
Fourth quarter
    3.75       1.86  
                 



 
29

 

2007
 
High
   
Low
 
First quarter
  $ 7.37     $ 5.31  
Second quarter
    8.05       5.35  
Third quarter
    6.36       4.00  
Fourth quarter
    6.76       4.11  


As of March 5 2009, there were approximately 43 holders of record of the Company’s Common Stock.  On March 5, 2009, the last reported sale price of the Common Stock as reported by NASDAQ was $2.06 per share.

Dividend Policy

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 on common stock is appropriate. No dividends have been declared since June 2000.  The Company has no intention at this time to pay dividends on its common stock. Consequently, shareholders will need to sell their shares of our common stock to realize a return on their investment, if any.

In September 2008, the Company issued convertible preferred stock.  Dividends accrue daily at an initial rate of 6% and are payable quarterly only when they are declared by the board of directors.  The first dividend was paid at the end of 2008.  If a dividend is not declared and paid quarterly, then the dividend accrual rate will increase to 8% until it is paid.  After 2 years from the date of issuance, September 5, 2010, the annual dividend rate increases from 6% to 10%.
 
Securities Authorized for Issuance Under Equity Compensation Plans

 
 
Plan Category
Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants & Rights
Weighted Average Exercise Price of Outstanding Options, Warrants & Rights
Number Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in column (a))
 
(a)
(b)
(c)
Equity Compensation plans
approved by security holders
 
469,000
 
$5.57
 
143,000
Equity compensation plans not
approved by security holders
 
-
 
-
 
-
 
Total
 
469,000
 
$5.57
 
143,000



 
30

 

Item 6.                      Selected Financial Data

Years ended December 31,  
2008
   
2007
   
2006
   
2005
   
2004
 
(in thousands, except per share data)                              
Consolidated Statement of Income Data:                              
Revenues:                              
                               
       Software license fees
  $ 3,273     $ 8,089     $ 3,431     $ 8,057     $ 7,392  
       Services and maintenance
    20,578       22,281       14,751       13,908       11,315  
 
              Total revenues
    23,851       30,370       18,182       21,965       18,707  
Cost and Expenses:
                                       
       Cost of software license fees
    2,852       2,641       1,687       1,178       1,838  
       Cost of services and maintenance
    12,099       11,908       10,262       8,261       6,356  
       Product development
    4,224       4,402       3,842       2,461       1,431  
       Sales and marketing
    4,735       5,319       5,923       6,192       5,565  
       General and administrative
    3,103       3,405       3,757       3,003       2,051  
 
              Total costs and expenses (1)
    27,013       27,675       25,471       21,095       17,241  
                                         
(Loss) income from operations
       before interest and taxes
    (3,162 )     2,695       (7,289 )     870       1,466  
Interest income
    68       111       234       165       58  
(Los) income from
       operations before income taxes
    (3,094 )     2,806       (7,055 )     1,035       1,524  
Income tax expense
    41       41       29       7       -  
 
Net (loss) profit
    (3,135 )     2,765       (7,084 )     1,028       1,524  
 
Preferred dividend
    79       0       0       0       0  
Net (loss) income available to common stockholders
  $ (3,214 )   $ 2,765     $ (7,084 )   $ 1,028     $ 1,524  
 
Basic and diluted (loss) income per share
  $ (.90 )   $ .78     $ (2.00 )   $ .33     $ .51  
Shares used in computing basic  (loss) income
     per share
    3,554       3,550       3,547       3,093       2,960  
Shares used in computing diluted  (loss) income
     per share
    3,554       3,550       3,547       3,116       3,001  
Consolidated Balance Sheet Data at December 31,
                                       
Working capital (deficit)
  $ 1,294     $ 323     $ (3,580 )   $ 5,495     $ 3,969  
Total assets
    15,166       17,560       18,059       21,612       13,754  
Long-term debt, less current portion
    -       -       -       -       -  
Accumulated deficit
    (23,004 )     (19,869 )     (22,634 )     (15,550 )     (16,578 )
Total stockholders’ equity
    7,172       7,108       3,815       10,459       5,461  

(1)  
Results for 2008, 2007 and 2006 include expense of $308,000, $305,000 and $397,000 respectively 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.

 
31

 

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 increase 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 14% of the Company’s total revenues in 2008, 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, mapping and analytical 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 generally invoiced annually, is recognized ratably over the term of the agreement.
 

 
32

 
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 of America 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.

The Company 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, and SEC Staff Accounting Bulletin (“SAB”) 104, Revenue Recognition.

The Company 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 collectability 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 are required, revenues are deferred until customer acceptance has occurred.
 
If these criteria are not met, then revenue is deferred until such criteria are met or until the period(s) over which the last undelivered element is delivered. If there is objective and reliable evidence of fair value for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit's relative fair value. There may be cases, however, in which there is objective and reliable evidence of fair value of the undelivered item(s) but no such evidence for the delivered item(s). In those cases, the residual method is used to allocate the arrangement consideration. Under the residual method, the amount of consideration allocated to the delivered item(s) equals the total arrangement consideration less the aggregate fair value of the undelivered item(s). We apply the revenue recognition policies discussed below to each separate unit of accounting.
 
 
33

 
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.

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.
 
We believe that our accounting estimates used in applying our revenue recognition are critical because:
 
• the determination that it is probable that the customer will pay for the products and services purchased is inherently judgmental;
• the allocation of proceeds to certain elements in multiple-element arrangements is complex;
• the determination of whether a service is essential to the functionality of the software is complex;
• establishing company-specific fair values of elements in multiple-element arrangements requires adjustments from time-to-time to reflect recent prices charged when each element is sold separately; and
• the determination of the stage of completion for certain consulting arrangements is complex.

Changes in the aforementioned items could have a material effect on the type and timing of revenue recognized.

 If we were to change our pricing approach in the future, this could affect our revenue recognition estimates, in particular, if bundled pricing precludes establishment of VSOE.

In June 2006, the FASB reached a consensus on Emerging Issues Task Force ("EITF") Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation), ("EITF 06-03"). EITF 06-3 indicates that the income statement presentation on either a gross basis or a net basis of the taxes within the scope of the issue is an accounting policy decision that should be disclosed. EITF 06-3 is effective for interim and annual periods beginning after December 15, 2006. The adoption of EITF 06-3 did not change our policy of presenting taxes within the scope of EITF 06-3 on a net basis and had no impact on our consolidated financial statements.
 

 
34


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.

Accounts Receivable and Allowance for Doubtful Accounts

Regarding 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.

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.

We believe that our estimate of our allowance for doubtful accounts is critical because of the significance of our accounts receivable balance relative to total assets. If the general economy deteriorated, or factors affecting the profitability or liquidity of the industry changed significantly, then this could affect the accuracy of our allowance for doubtful account

Capitalized Software and Research and Development Costs

The Company accounts for its internal software development costs are 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, other headcount-related costs associated with product development and any related costs to third parties under sub-contracting or net of any collaborative arrangements.

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 beginning with the initial release to customers.  The Company’s estimated life for its capitalized software products is 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.
 

 
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We believe that our estimate of our capitalized software costs and the period for their amortization is critical because of the significance of our balance of capitalized software costs relative to our total assets. Potential impairment is determined by comparing the balance of unamortized capitalized software costs to the sales revenue projected for a capitalized software project. If efforts to sell that software project are terminated, or if the projected sales revenue from that software project drops below a level that is less than the unamortized balance, then an impairment would be recognized.

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. The valuation of goodwill uses two commonly accepted valuation methods, the market and income approaches.  The market approach analyzed the market valuations of similar companies based on recent market conditions.  The income approach analyzed the company’s expectation for future results based on current and expected economic conditions. No impairment of goodwill has been identified during any of the periods presented.
 
SFAS No. 142, Goodwill and Other Intangible Assets, prescribes a two-step method for determining goodwill impairment. In the first step, the Company determines the fair value of the reporting unit. The fair value of the reporting unit is determined using various valuation techniques, including a comparable companies market multiple approach and a discounted cash flow analysis (an income approach). The comparable companies utilized in our evaluation are generally the members of our peer group.  The impairment test must be performed more frequently if there are triggering events, as for example when the Company’s market capitalization significantly declines for a sustained period, which could cause the Company to do interim impairment testing that might result in an impairment to goodwill.
 
The determination of the fair value of the reporting unit and the allocation of that value to individual assets and liabilities within the reporting unit requires the Company to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to: the selection of appropriate peer group companies; control premiums appropriate for acquisitions in the industries in which the Company competes; the discount rate; terminal growth rates; and forecasts of revenue, operating income, depreciation and amortization, and capital expenditures.
 
Due to the inherent uncertainty involved in making these estimates, actual financial results could differ from those estimates. In addition, changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting unit or the amount of the goodwill impairment charge.
 
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 undiscounted 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.
 
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Share-Based Compensation – Option Plans

Beginning on January 1, 2006, the Company began accounting for stock options under the provision of SFAS 123(R), Share-Based Payment, 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.    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.

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.

Accounting for Income Taxes

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and operating loss and tax credit carryforwards and are measured using the enacted tax rates and laws that will be in effect when the difference and carryforwards are expected to be recovered or settled.  In accordance with Statement of Financial Accounting Standards (“FAS”) No. 109, Accounting for Income Taxes (“FAS 109”) , a valuation allowance for deferred tax assets is provided when we estimate that it is more likely than not that all or a portion of the deferred tax assets may not be realized through future operations.  This assessment is based upon consideration of available positive and negative evidence which includes, among other things, our most recent results of operations and expected future profitability.  We consider our actual historical results to have a stronger weight than other more subjective indicators when considering whether to establish or reduce a valuation allowance on deferred tax assets.

As of December 31, 2008, we had approximately $15.6 million of net deferred tax assets, against which we provided a 100% valuation allowance.  Our net deferred tax assets were generated primarily by operating losses.  Accordingly, it is more likely than not, that we will not realize these assets through future operations.

On January 1, 2007, we implemented the provisions of FAS interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB statement 109 (“FIN 48”).   FIN 48 clarifies the accounting for uncertainty in income taxes and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  Estimated interest is recorded as a component of interest expense and penalties are recorded as a component of general and administrative expense.  Such amounts were not material for 2008, 2007 and 2006.  The adoption of FIN 48 did not have a material impact on our financial position.

In 2008, the Israel Taxing Authority “ITA” notified the Company that it intends to re-examine a 2002 transaction that it had previously approved. The Company is vigorously defending itself in court and based on information to date, does not expect this issue to result in any additional tax to the company.
 

 
37

 
Convertible Preferred Stock

On September 24, 2008 the Company sold 826,446 shares of Series-A Convertible Preferred Stock (“preferred stock”) to its Chief Executive Officer at a price of $3.63 per share for a total of $3,000,000.  Dividends accrue daily on the preferred stock at an initial rate of 6% and shall be payable only when, as and if declared by the Company’s Board of Directors, quarterly in arrears.

The preferred stock may be converted into common stock at the initial rate of one share of common for each share of preferred stock.  The holder has the right during the first six months following issuance to convert up to 40% of the shares purchased, except in the event of a change in control of the Company, at which time there is no limit.  After six months there is no limit on the number of shares that may be converted.

The Company has the right to redeem, subject to board approval, up to 60% of the shares of preferred stock at its option during the first six months after issuance at a price equal to 110% of the purchase price plus all accrued and unpaid dividends.  The limitations on conversion and the redemption rights during this initial six-month period are not applicable in the event of certain change of control events.  Commencing two years after issuance, the Company shall have certain rights to cause conversion of all of the shares of preferred stock then outstanding.  Commencing four years after issuance, the Company may redeem, subject to board approval, all of the shares of preferred stock then outstanding at a price equal to the greater of (i) 130% of the purchase price plus all accrued and unpaid dividends and (ii) the fair market value of such number of shares of common stock which the holder of the preferred stock would be entitled to receive had the redeemed preferred stock been converted immediately prior to the redemption.

In accordance with relevant accounting pronouncements, the Company recorded the preferred stock on the Company’s consolidated balance sheet within Stockholders’ Equity.  In accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 68, “Increasing Rate Preferred Stock,” the preferred stock is recorded on the consolidated balance sheet at the amount of net proceeds received less an imputed dividend cost.  The imputed dividend cost of $218,000 was the result of the preferred stock having a dividend rate during the first two years after its issuance (6%) that is lower than the rate that becomes fixed (10%) after the initial two year period.  The imputed dividend cost of $218,000 will be amortized over the first two years from the date of issuance and is based upon the present value of the dividend discount using a 10% yield.

Recent Accounting Pronouncements

In April 2008, the FASB issued FASB Staff Position ("FSP") No. FAS 142-3, "Determination of Useful Life of Intangible Assets" ("FSP 142-3").  FSP 142-3 amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). The intent of this FSP is to improve the consistency between the useful life of an intangible asset determined under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R. FSP 142-3 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years.  We do not expect the implementation of FSP 142-3 to have a material impact on the financial position,  results of operations or cash flows of the Company.

In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS No. 161”), Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (“SFAS No.161”), which requires additional disclosures about the objectives of the derivative instruments and hedging activities, the method of accounting for such instruments under SFAS No. 133 and its related interpretations, and a tabular disclosure of the effects of such instruments and related hedged items on our financial position, financial performance, and cash flows. SFAS No. 161 is effective for us beginning January 1, 2009.  We do not expect the implementation of SFAS 161 to have a material impact on the financial position, results of operations or cash flows of the Company.
 

 
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In May 2008, the FASB issued Financial Accounting Standard (“FAS”) No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“FAS 162”).  FAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States.  FAS 162 is effective sixty days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”.  We do not expect the implementation of FAS 162 to have a material impact on the financial position, results of operations or cash flows of the Company.

In December 2007, the FASB issued Statement of Financial Accounting Standards ("FAS") No. 141 (revised 2007), Business Combinations ("FAS 141(R)") which replaces FAS No.141, Business Combinations. FAS 141(R) retains the underlying concepts of FAS 141 in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting, but FAS 141(R) changed the method of applying the acquisition method in a number of significant aspects. Changes prescribed by FAS 141(R) include, but are not limited to, requirements to expense transaction costs and costs to restructure acquired entities; record earn-outs and other forms of contingent consideration at fair value on the acquisition date; record 100% of the net assets acquired even if less than a 100% controlling interest is acquired; and to recognize any excess of the fair value of net assets acquired over the purchase consideration as a gain to the acquirer. FAS 141(R) is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. FAS 141(R) amends FAS 109 such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of FAS 141(R) would also apply the provisions of FAS 141(R). Early adoption is not allowed.  Once effective, this standard will be applied to all future business combinations.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements ("FAS 160").  FAS 160 amends Accounting Research Bulletin 51, Consolidated Financial Statements, to establish accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. FAS 160 also clarifies that all of those transactions resulting in a change in ownership of a subsidiary are equity transactions if the parent retains its controlling financial interest in the subsidiary. FAS 160 requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent's owners and the interests of the noncontrolling owners of a subsidiary.  FAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. FAS 160 shall be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements shall be applied retrospectively for all periods presented.  At this time, the Company does not have any non controlling interests in any subsidiaries.  If such an interest is obtained in the future, the Company will apply the rules of the standard as appropriate.
 

 
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In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," ("SFAS No. 159"). SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value and to provide additional information that will help investors and other users of financial statements to understand more easily the effect on earnings of a company's choice to use fair value. It also requires companies to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. We adopted SFAS No. 159 on January 1, 2008. There has been no material impact to our reporting as a result of adopting the standard.

The Company adopted the provisions of SFAS 157 effective November 15, 2007. Under this standard, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The Company has investments that are valued in accordance with the provisions of SFAS 157. SFAS 157 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
 
1.  
Level 1 - Valuations based on quoted prices in active markets for identical assets that the Company has the ability to access.
 
2.  
Level 2 - Valuations based inputs on other than quoted prices included within level 1, for which all significant inputs are observable, either directly or indirectly.
 
3.  
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
 
On December 31, 2008 the fair value for the Company’s investments was determined based upon quoted prices in active markets for identical assets (Level 1).
 
Results of Operations
 
The following table sets forth for the periods indicated, selected financial data and the percentages of the Company’s total revenues represented by each line item presented for the periods presented:

Years ended December 31,
2008
     
2007
 
 
Revenues:
           
     Software license fees
13.7
%
   
26.6
%
     Services and maintenance
86.3
     
73.4
 
         Total revenues
100.0
%
   
100.0
%
Costs and expenses:
           
     Cost of software license fees
12.0
%
   
8.7
%
     Cost of services and maintenance
50.7
     
39.2
 
     Product development
17.7
     
14.5
 
     Sales and marketing
19.9
     
17.5
 
     General and administrative
12.9
     
11.2
 
         Total costs and expenses
113.3
     
91.1
 
     Net (loss) income
   (13.1))
%
   
9.1
%

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Comparison of Years Ended December 31, 2008 and 2007

Revenues.  Total revenues decreased $6,519,000 or 21%, to $23,851,000 for the year ended December 31, 2008 from $30,370,000 for the year ended December 31, 2007.  Software license revenues decreased 60% in 2008, compared to 2007. Services and maintenance fees for 2008 amounted to $20,578,000, an 8% decrease from 2007.

Software license fee revenues decreased $4,816,000 or 60% to $3,273,000 in 2008 from $8,089,000 in 2007.  Astea Alliance license revenues decreased to $2, 300,000 in 2008 from $6,420,000 in 2007, a decrease of 64%. The overall decrease is attributable to a significant decline in license sales in all regions of the world in which the Company operates which resulted from the economic slowdown affecting the entire world at this time.  The timing of the sales cycle has also been extended contributing to the decline in license revenue. The Company also sold $973,000 of FieldCentrix licenses compared to $1,592,000 in 2007.  The Company did not have any license revenue in 2008 from its existing DISPATCH-1 customers compared to $77,000 in 2007.

Total services and maintenance revenues decreased $1,703,000 or 8% to $20,578,000 in 2008 from $22,281,000 in 2007.  Part of the decrease is attributable to the recognition in 2007 of $1,261,000 of Astea Alliance service and maintenance revenues related to a U.K. contract in which revenue was deferred from 2006 and 2005.   In addition, $869,000 of service and maintenance revenue was also recognized in 2007 for services performed in 2006 and 2005 but deferred due to the sales including certain undelivered analytical modules.  There was also a decrease in service and maintenance revenue of $417,000 from the Company’s FieldCentrix customer base. The decrease in FieldCentrix service and maintenance revenue resulted from a decrease in both headcount and the decrease in FieldCentrix license sales which impacted both implementation and pilot projects.  DISPATCH-1 service and maintenance revenues decreased 45% to $364,000 in 2008 from $657,000 in 2007.  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 beyond 2008.

In 2008 no customers represented 10% or more of total revenues.  In 2007, two customers represented 11% and 10% of total revenues.

Costs of Revenues.   Costs of software license fee revenues increased 8% to $2,852,000 in 2008 from $2,641,000 in 2007. The increase results from increased amortization of capitalized software development costs.  Amortization of capitalized software increased 18% to $2,639,000 in 2008 from $2,234,000 in 2007.  The principal reasons for the increase were due to the release of FieldCentrix version 4.5 at the end of the third quarter of 2008 which began amortization in the last quarter of 2008 and a full year of amortization from the 2007 release of Astea Alliance version 8.0.  Once the new versions were released, the Company started to amortize the development costs that had previously been capitalized.  The gross margin percentage on software license sales is 13% in 2008 and 67% in 2007.  The decline in the margin results from the overall decrease in license revenue in 2008 and the increase in cost of software license fees.

Costs of services and maintenance revenues increased 2% to $12,099,000 in 2008 from $11,908,000 in 2007.  The increase in cost of services and maintenance is primarily attributed to increases in salary expense in the U.S.  Partially offsetting the salary increase was a decline in share based compensation expense for employees which declined from $71,000 in 2007 to $44,000 in 2008.  The service and maintenance gross margin percentage decreased to 41% in 2008 from 47% in 2007.  The decreased margin is primarily attributable to a decrease in new projects resulting from lower license sales in 2008.

Product  Development.   Product development expense decreased 4%, or $178,000, to $4,224,000 in 2008 from $4,402,000 in 2007.  Development costs decreased due to a decreased in headcount in 2008 from the same period in 2007.   Additionally, $42,000 in share based compensation expense for employees was recorded at December 31, 2008 compared to $51,000 expense for year ending December 31, 2007.
 

 
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Product development as a percentage of total revenue increased to 18% in 2008 compared to 14% in 2007. This increase in costs relative to expenses is due to the overall decrease in revenues in 2008 compared to 2007.   Gross development expense before the capitalization of software costs and was $6,342,000 in 2008, a 3% increase from $6,238,000 in 2007.  Capitalized software totaled $2,118,000 in 2008 compared to $1,836,000 in 2007.  The increase in capitalized software of 15% over last year reflects the intense effort put forth by the Company to expand and improve its products.  In 2008, the Company released version 4.5 of its FieldCentrix offering.

Sales and Marketing.   Sales and marketing expenses decreased 11%, or $584,000, to $4,735,000 in 2008 from $5,319,000 in 2007.  The decrease is primarily the result of headcount changes during 2008 and lower commissions paid due to lower sales in 2008.   Additionally, $31,000 in share based compensation expense for employees was expensed in 2008 compared to $32,000 recorded at December 31, 2007.  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 20% in 2008 from 18% in 2007 principally resulting from the decrease in revenue in 2008 compared to 2007.

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 $3,103,000 in 2008 and $3,405,000 in 2007.  Expenses in 2008 declined $302,000, a 9% decrease.  This decrease is primarily due to a decrease in headcount.  Partially offsetting the cost decreases was an increase of $40,000 in share based compensation expense for employees in 2008 compared to 2007. As a percentage of total revenues, general and administrative expenses amounted to 13% in 2008 compared to 11% in 2007.  The increase in expenses previously described relative to revenues primarily results from the decrease in revenues.

Interest Income.   Net interest income decreased $43,000, to $68,000 in 2008 from $111,000 in 2007.  This decrease was primarily attributable to a decline in interest rates in 2008 compared to 2007 as well as reduced funds invested.

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 allowance was appropriate.  The Company made a provision of $41,000 in both 2008 and also 2007, 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 $3,475,000 or 35% to $6,315,000 in 2008 from $9,790,000 in 2007.  Part of the decrease in revenue from international operations was attributable to the recognition in 2007 of $1,679,000 in license, service and maintenance revenues which had been deferred from a transaction that occurred with a U.K. customer in 2004 and continued through 2006.  Excluding the revenue recognized in 2007 from the U.K. customer that had been deferred from previous years, total revenue from international operations was $8,111,000 which would reflect a 22% decrease in international revenues in 2008 over the same period in 2007.  The decrease in revenues results from a significant decrease in both license revenue and professional services in Europe as well as a decline in license revenue in the Asia Pacific region.  Overall, international operations generated a net loss of $255,000 for 2008 compared to net profit of $2,971,000 in 2007.  International operating costs increased by $190,000 due to higher cost of services and maintenance resulting from increased professional service work in our Pacific location.  The decrease in international net income of $3,226,000 is the direct result of the decrease in service and maintenance revenues and the recognition of deferred revenues from 2004 through 2006 for which all related costs had been recognized in prior years.
 

 
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Net income (loss).  The Company generated a net loss of $(3,135,000) for the year ended December 31, 2008 compared to net income of $2,765,000 in 2007.  The decrease of $5,900,000 is primarily the result of a 21% decrease in revenues which approximates the change in earnings.  The decrease in revenues is due to the failure to close license deals due to the slowing economy in 2008 as well as the recognition of $3,936,000 of revenue in 2007 deferred from 2006 and 2005 related to certain undelivered modules and specified upgrade that were delivered in 2007.

Liquidity and Capital Resources

Operating Activities

Net cash provided by operating activities was $1,335,000 for the year ended December 31, 2008, an increase of $386,000 over the year ended December 31, 2007 in which $949,000 of cash was generated by operations.  The increase was primarily attributable in a decrease in accounts receivable in 2008 which generated $4,839,000 of cash compared to 2007, an increase in depreciation and amortization of $267,000, a reduction in recognized deferred revenues of $1,888,000 compared to 2007 and a reduction in prepaid expenses of $61,000 compared to 2007.  The significant reduction in deferred revenues occurred due to the deferral of license, professional services and maintenance revenues at December 31, 2006 resulting from undelivered elements, all of which were delivered in 2007 and accordingly recognized in 2007.  Partially offsetting these increases in cash flow from operations are increased uses of cash consisting of a swing in net loss of $5,900,000 which resulted from a loss of $3,135,000 in 2008 compared to income of $2,765,000 in 2007 and a decrease in accounts payable and accrued expenses of $479,000.

 Investing Activities

The Company used $2,691,000 of cash for investing activities in 2008 compared to using $2,357,000 in 2007.  The increase in cash used for investing activities of $334,000 results from an increase in property and equipment purchases of $95,000 and an increase in capitalized software development costs of $282,000 in 2008. The increase in cash outflows in 2008 were partially offset by the reduction of acquisition costs payments related to the earn out provision on the purchase of FieldCentrix.  In addition there was a change in the release of $256,000 from restricted cash.

 Financing Activities

The Company generated $2,846,000 from financing activities in 2008 compared to $15,000 for the year ended December 31, 2007.  The increase in cash generated from financing activities is principally the result of $3,000,000 in proceeds from the issuance of preferred stock in 2008, offset by $106,000 in legal fees associated with the preferred stock transaction and $48,000 in preferred stock dividend payments.

At December 31, 2008, the Company had a working capital ratio of approximately 1.16:1 compared to 1.03:1 at December 31, 2007.
 

 
43

 
The Company had $3,144,000 in cash at year ended December 31, 2008, compared to $1,615,000 for year ended December 31, 2007.

The Company has projected revenues for 2009 that will generate enough funds to sustain its continuing operations.  In addition, the Company has initiated a number of cost containment programs which are expected to reduce the cost of operating the business. The Company expects its cash from operations to fund all of its financing needs for the upcoming year.  However, if actual results 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 2009 other than to replace its existing capital equipment as it becomes obsolete.  The impact of the strengthening dollar relative to the currency in the other regions of the world  in which it operates have also contributed to reducing operating costs in other parts of the world.  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.  This agreement was amended in June of 2007.  Maximum available borrowings under the Line represent the lesser of 80% of the Borrowing Base, which is eligible accounts receivables as defined, or $2.0 million.  Amounts outstanding on the line of credit were zero on December 31, 2008.  During 2008 the Company occasionally took loans against its line of credit which were all repaid in less than a month after borrowed.  The highest amount borrowed against the line was $375,000.  As of March 5, 2008, the Company had an available Borrowing Base of $2.0 million.

As of March 5, 2009, 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, 2008:

   
Payment Due By Period
 
   
Total
   
2009
     
2010-2011
     
2012-2013
   
2014 and after
 
Contractual Cash
  Obligations:
                                 
Long-term Debt
  $ -     $ -     $ -     $ -     $ -  
Capital Leases
    -       -       -       -       -  
Operating Leases
  $ 4,063,000     $ 1,160,000     $ 1,622,000     $ 1,097,000     $ 184,000  


   
Amounts of Commitment Expiration Per Period
 
   
Total
   
2009
     
2010-2011
     
2012- 2013
   
2014 and after
 
Other Commercial
  Commitments:
                                 
Letters of Credit
  $ -     $ -     $ -     $ -     $ -  

Dividends may be paid on common stock, when and if, declared by the Board of Directors.  However, no dividend has been paid on common stock since January 2000.  Dividends on convertible preferred stock are currently payable at 6%, payable on quarterly basis in arrears, as declared by the Board of Directors.  If not paid, the rate increases to 8% until paid.  In September 2010, the dividend will be increased to 10%.
 

 
44

Off-Balance Sheet Transactions

There are no off balance sheet transactions that would require disclosure in the above contractual obligations and commercial commitments table.

Item 7A.                      Quantitative and Qualitative Disclosures about Market Risk

 
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates. We do not hold financial instruments for trading purposes.
 

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.  As a result, as of December 31, 2008, the Company’s investments consisted of institutional money market funds and corporate bonds with maturities of less than 30 days.  The Company does not expect any material loss with respect to its investment portfolio.

Foreign Currency Risk

All costs associated with the Company’s foreign operations in Europe, Asia/Pacific and Israel are denominated in their respective local currencies and translated into U.S. dollars for financial reporting. As a result, the Company is exposed to risks to the extent that the rate of inflation in any of its foreign operating regions differs from the rate of revaluation of their related currencies in relation to the U.S. dollar or if the timing of such revaluations lags behind inflation in these regions.  In such an event, the costs of the Company’s operations in these regions, measured in U.S. dollars, will change and the U.S. dollar measured results of operations will be affected.

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.

 
45

 

Item 8.                 Financial Statements and Supplementary Data.

Report of Independent Registered Public Accounting Firm

 
The Board of Directors
 Astea International Inc.:
 

We have audited the accompanying consolidated balance sheets of Astea International Inc. and Subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations and stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated 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 audit 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 consolidated financial position of Astea International Inc. and Subsidiaries as of December 31, 2008 and 2007 and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2008  in conformity with accounting principles generally accepted in the United States of America.
 
 
As discussed in Note 2 to the consolidated financial statements, the Company has adopted Statement of Financial Accounting Standard (SFAS) No. 157, “Fair Value Measurements”, and SFAS No. 159, “the Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115”, on January 1, 2008.


/s/ Grant Thornton LLP
 
Philadelphia, Pennsylvania
March 27, 2009


46

 

ASTEA INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


   
December 31,
 
   
2008
   
2007
 
             
ASSETS
           
Current assets:
           
  Cash and cash equivalents
  $ 3,144,000     $ 1,615,000  
  Restricted cash
    -       150,000  
  Investments available for sale
    500,000       -  
  Receivables, net of allowance of  $177,000 and $206,000
    5,164,000       8,517,000  
  Prepaid expenses and other
    362,000       416,000  
 
   Total current assets
     9,170,000        10,698,000  
                 
Property and equipment, net
    385,000       418,000  
Intangibles, net
    1,159,000       1,439,000  
Capitalized software development costs, net
    2,718,000       3,238,000  
Goodwill
    1,538,000       1,540,000  
Other long term restricted cash
    146,000       163,000  
Other long-term assets
    50,000       64,000  
 
   Total assets
  $ 15,166,000     $ 17,560,000  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
  Accounts payable and accrued expenses
  $ 2,764,000     $ 3,632,000  
  Deferred revenues
    5,112,000       6,743,000  
 
    Total current liabilities
     7, 876,000        10,375,000  
                 
Long-term liabilities
               
     Deferred tax liability
    118,000       77,000  
                 
Commitments and Contingencies
               
                 
Stockholders’ equity:
               
   Convertible preferred stock, $.01 par value, 5,000,000 shares
     authorized, issued and outstanding 826,000 and 0
    8,000       -  
   Common stock, $.01 par value, 25,000,000 shares
     authorized, 3,596,000 and 3,596,000  shares issued respectively
    36,000       36,000  
   Additional paid-in-capital
    30,998,000       27,852,000  
   Cumulative translation adjustment
    (658,000 )     (703,000 )
   Accumulated deficit
    (23,004,000 )     (19,869,000 )
   Less:  Treasury stock at cost, 42,000 shares
    (208,000 )     (208,000 )
 
          Total stockholders’ equity
    7, 172,000       7,108,000  
 
          Total liabilities and stockholders' equity
  $ 15,166,000     $ 17,560,000  


See accompanying notes to the consolidated financial statements.

 
47

 

 
ASTEA INTERNATIONAL INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
   
   
Years ended December 31,
 
2008
   
2007
 
             
Revenues:
           
      Software license fees
  $ 3,273,000     $ 8,089,000  
      Services and maintenance
    20,578,000       22,281,000  
 
          Total revenues
    23,851,000       30,370,000  
 
Costs and expenses:
               
      Cost of software license fees
    2,852,000       2,641,000  
      Cost of services and maintenance
    12,099,000       11,908,000  
      Product development
    4,224,000       4,402,000  
      Sales and marketing
    4,735,000       5,319,000  
      General and administrative
    3,103,000       3,405,000  
                 
          Total costs and expenses
    27,013,000       27,675,000  
                 
(Loss) income from operations
    (3,162,000 )     2,695,000  
Interest income
    68,000       111,000  
(Loss) income before income taxes
    (3,094,000 )     2,806,000  
Income tax expense
    41,000       41,000  
 
Net (loss) income
    (3,135,000 )     2,765,000  
                 
 Preferred dividend
    79       -  
 
Net (loss) income available to common stockholders
  $ (3,214,000 )   $ 2,765,000  
 
Basic net (loss) income per share
  $ (.90 )   $ .78  
 
Diluted net (loss) income per share
  $ (.90 )   $ .78  
Weighted average shares used in computing basic
     net (loss) income per share
    3,554,000       3,550,000  
Weighted average shares used in computing diluted
     net (loss) income per share
    3,554,000       3,552,000  




See accompanying notes to the consolidated financial statements.

 
48

 


ASTEA INTERNATIONAL INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 

 
   
 
Common Stock
   
 
Preferred
Stock
   
Additional
Paid-in
Capital
   
Accumulated Compre-
hensive Loss
   
 
Accumulated Deficit
   
 
Treasury Stock
   
Total
Stock-holders' Equity
   
 
Comprehensive
Income (loss)
 
  Balance, December 31, 2006
  $ 36,000     $ -     $ 27,532,000     $ (911,000 )   $ (22,634,000 )   $ (208,000 )   $ 3,815,000        
                Exercise of stock options
                    15,000                               15,000        
                Stock-based compensation
                    305,000                               305,000        
                Currency translation adjustments
                            208,000                       208,000       208,000  
                Net Income
                                    2,765,000               2,765,000       2,765,000  
  Balance, December 31, 2007
    36,000       -       27,852,000       (703,000 )     (19,869,000       (208,000 )     7,108,000       2,973,000  
               Legal Fees – Preferred  Stock
                    (106,000 )                             (106,000 )        
               Dividends paid on preferred  stock
                    (48,000 )                             (48,000 )        
               Issuance of preferred stock
            8,000       2,992,000                               3,000,000          
               Stock-based compensation
                    308,000                               308,000          
               Currency translation adjustment
                            45,000                       45,000       45,000  
               Net Loss
                                    (3,135,000               (3,135,000 )     (3,135,000 )
 Balance, December 31, 2008
  $ 36,000     $ 8,000     $ 30,998,000     $ (658,000 )   $ (23,004,000 )   $ (208,000 )   $ 7,172,000     $ ( 3,090,000 )




See accompanying notes to the consolidated financial statements.

 
49

 

ASTEA INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
   
Years ended December 31, 
 
2008
   
2007
 
Cash flows from operating activities:
           
    Net (loss) income
  $ (3,135,000 )   $ 2,765,000  
    Adjustments to reconcile net (loss) income to net cash
        provided by (used in) operating activities:
               
            Depreciation and amortization
    3,193,000       2,926,000  
            Increase in provision for doubtful accounts
    80,000       276,000  
            Stock-based compensation
    308,000       305,000  
        Deferred tax expense
    41,000       41,000  
        Changes in operating assets and liabilities:
               
 Receivables
    3,218,000       (1,621,000 )
 Prepaid expenses and other
    60,000       (1,000 )
 Accounts payable and accrued expenses
    (788,000 )     (309,000 )
 Deferred revenues
    (1,656,000     (3,544,000 )
 Other assets
    14,000       111,000  
 
Net cash provided by (used in) operating activities
    1,335,000       949,000  
 
Cash flows from investing activities:
               
 Capitalized software development costs
    (2,118,000 )     (1,836,000 )
 Purchases of property and equipment
    (241,000 )     (146,000 )
            Purchase of short term investments
    (750,000 )     (500,000 )
            Sale of short term investments
    250,000       500,000  
 Payment of contingent purchase price
    -       (287,000 )
 Change in restricted cash
    168,000       (88,000 )
 
Net cash used in investing activities
    (2,691,000 )     (2,357,000 )
 Cash flows from financing activities:
               
       Proceeds from line of credit
    415,000       -  
       Repayment on line of  credit
    (415,000 )     -  
       Proceeds from exercise of stock options and employee
            stock purchase plan
    -       15,000  
       Issuance costs of preferred stock
    (106,000 )     -  
       Dividend paid on preferred stock
    (48,000 )     -  
       Proceeds from issuance of preferred stock
    3,000,000       -  
 
 Net cash provided by financing activities
    2,846,000       15,000  
 
Effect of exchange rate changes on cash and cash
    Equivalents
    39,000       (112,000 )
 
 Net increase (decrease) in cash and cash equivalents
    1,529,000       (1,505,000 )
Cash and cash equivalents balance, beginning of year
    1,615,000       3,120,000  
 
Cash and cash equivalents balance, end of year
  $ 3,144,000     $ 1,615,000  
             Cash paid for interest expense
  $ -     $ -  

See accompanying notes to the consolidated financial statements.


50


ASTEA INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


1.
Company Background

Astea International Inc. and Subsidiaries (collectively the “Company” or “Astea”) are 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 is a service management and dispatch solution system 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.    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, and SEC Staff Accounting Bulletin (“SAB”) 104, Revenue Recognition.
 

 
51

 
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 revenue recognition criteria are satisfied.  If collectability 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 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.  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 contracts are recorded in the period incurred, which may differ from the period in which revenue is recognized.

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.

Deferred revenue represents payments or accounts receivable from the Company’s customers for amounts billed in advance.

In June 2006, the FASB reached a consensus on Emerging Issues Task Force ("EITF") Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation), ("EITF 06-03"). EITF 06-3 indicates that the income statement presentation on either a gross basis or a net basis of the taxes within the scope of the issue is an accounting policy decision that should be disclosed. EITF 06-3 is effective for interim and annual periods beginning after December 15, 2006. The adoption of EITF 06-3 did not change our policy of presenting taxes within the scope of EITF 06-3 on a net basis and had no impact on our consolidated financial statements.

 
52

 
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 2008 and 2007, the Company billed $543,000 and $615,000, 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.

Investments Available for Sale

Investments that the Company designated as available-for-sale are reported at fair value, with unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income (loss).  The Company bases the cost of the investment sold on the specific identification method.  The available-for-sale investment consists of variable rate domestic obligations.  These are U.S. corporate obligations in which the yield adjusts weekly and can be sold any time with funds available in 5 days.

In February 2007, the FASB issued SFAS No. 157, "The Fair Value Option for Financial Assets and Financial Liabilities," ("SFAS No. 157"). SFAS No. 157 provides companies with an option to report selected financial assets and liabilities at fair value and to provide additional information that will help investors and other users of financial statements to understand more easily the effect on earnings of a company's choice to use fair value. It also requires companies to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. We are required to adopt SFAS No. 157 on January 1, 2008 and are currently evaluating the impact, if any, of SFAS No. 157 on our consolidated financial statements.

The Company adopted the provisions of SFAS 157 effective November 15, 2007. Under this standard, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The Company has investments that are valued in accordance with the provisions of SFAS 157. SFAS 157 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

1.  
Level 1 - Valuations based on quoted prices in active markets for identical assets that the Company has the ability to access.
 
2.  
Level 2 - Valuations based inputs on other than quoted prices included within level 1, for which all significant inputs are observable, either directly or indirectly.
 
 
53

 
3.  
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
 
On December 31, 2008 the fair value for the Company’s investments was determined based upon quoted prices in active markets for identical assets (Level 1).

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
 
2008
  $ 206,000     $ 80,000     $ 109,000     $ 177,000  
2007
  $ 163,000     $ 276,000     $ 233,000     $ 206,000  

Bad debt expense decreased in 2008 by 71% from 2007 due to improved collections on outstanding receivables. Bad debt expense in 2007 includes a large write-off of accounts receivable resulting from a Canadian customer becoming insolvent and filing for bankruptcy protection.

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, 2008 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, 2008, the Company has determined that no impairment has occurred.
 

 
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Capitalized Software Development Costs

Capitalized software costs are stated on the balance sheet at the lower of net book value or net realizable value of capitalized software 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, 2008, management believes that no revisions to the remaining useful lives or write-downs of capitalized software development costs are required.

Research and Development Costs

The Company reports research and development costs as Product Development expense in its statement of operations.  These costs include the costs incurred prior to the establishment of technological feasibility for new product development.  In addition, research and development costs also include costs related to improving the quality of the Company’s released software products and any costs incurred by third party companies that may be engaged from time to time, to assist the Company in its product development efforts.

      Goodwill

Goodwill represents the excess of the cost of businesses acquired over the fair value of the net assets acquired at the date of acquisition. Goodwill is not amortized but rather tested for impairment at least annually. The Company performs its annual impairment test as of the first day of the fiscal fourth quarter. The impairment test must be performed more frequently if there are triggering events, as for example when our market capitalization significantly declines for a sustained period, which could cause us to do interim impairment testing that might result in an impairment to goodwill.

SFAS No. 142, Goodwill and Other Intangible Assets, prescribes a two-step method for determining goodwill impairment. In the first step, the Company determines the fair value of the reporting unit and compares that fair value to the net book value of the reporting unit. The fair value of the reporting unit is determined using various valuation techniques, including a comparable companies market multiple approach and a discounted cash flow analysis (an income approach).

To measure the amount of the impairment, SFAS No. 142 prescribes that the Company determine the implied fair value of goodwill in the same manner as if the Company had acquired those business units. Specifically, the Company must allocate the fair value of the reporting unit to all of the assets of that unit, including any unrecognized intangible assets, in a hypothetical calculation that would yield the implied fair value of goodwill.
 

 
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Our annual impairment test, which was completed during the fourth quarter of 2008, indicated that the fair value of our one reporting unit exceeded the carrying value and, therefore, the goodwill amount was not impaired for our one reporting unit.

The determination of the fair value of the reporting units and the allocation of that value to individual assets and liabilities within those reporting units requires the Company to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to: the selection of appropriate peer group companies; control premiums appropriate for acquisitions in the industries in which the Company competes; the discount rate; terminal growth rates; and forecasts of revenue, operating income, depreciation and amortization, and capital expenditures.

Due to the inherent uncertainty involved in making these estimates, actual financial results could differ from those estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting unit or the amount of the goodwill impairment charge.

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 paid 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 were not included in the purchase price.  However, under FAS 141, as such sales transactions occurred, the related earnout amounts were added to the purchase price, specifically goodwill. The total addition to goodwill from the date the assets of FieldCentrix, Inc. were acquired through the end of the earnout period June 30, 2007 was $285,000. At December 31, 2008 goodwill was $1,538,000.

Major Customers

In 2008, no customers represented more than 10% of total revenues.  In 2007, two customers represented 11% and 10% of total revenues.  At December 31, 2008, one customer represented 13% of the total accounts receivable and two customers each represented 10% of total accounts receivable. One customer represented 21% of total accounts receivable at December 31, 2007.

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.
 

 
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Fair Value of Financial Instruments

Due to the short term nature of these accounts, the carrying values of cash, cash equivalents, account receivable, accounts payable and accrued expenses approximate the respective fair values.

Income Taxes

On January 1, 2007, we implemented the provisions of FAS interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB statement 109 (“FIN 48”).   FIN 48 clarifies the accounting for uncertainty in income taxes and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  Estimated interest is recorded as a component of interest expense and penalties are recorded as a component of general and administrative expense.  Such amounts were not material for 2008 and 2007.  The adoption of FIN 48 did not have a material impact on our financial position.

Income taxes are accounted for in accordance with SFAS No. 109, Accounting for Income Taxes, under the asset-and-liability method.  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 costs for the years ended December 31, 2008 and 2007 were $117,000 and $191,000 respectively and are included in sales and marketing costs.


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). General and administrative expenses include exchange gains (losses) of $202,000 and ($33,000) for the years ended December 31, 2008 and 2007, respectively.

Net (Loss) Income 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.
 

 
57

For the year ended December 31, 2008, the Company had a net loss.  In 2008 there were zero net additional dilutive shares assumed to be converted at an average exercise price of $3.13.  In addition, 100% of the outstanding convertible preferred stock, 826,000 shares, was eligible to be converted into common stock. For purposes of this calculation, if converted, it would have been assumed that they were converted into common stock and the related dividends were not paid.   However, all options outstanding at December 31, 2008 to purchase shares of common stock and shares of common stock issued on the assumed conversion of the eligible preferred stock were excluded from the diluted loss per common share calculation as the inclusion of these options would have been antidilutive.  At December 31, 2007 there was 2,513 net additional dilutive shares assumed to be converted at an average exercise price of $4.10.



Year Ended December 31,
 
2008
   
2007
 
Net (loss) income
  $ (3,135 )   $ 2,765  
Preferred Dividend
    79       -  
Net Income available to common shareholders
    (3,214 )     2,765  
Basic weighted average number of common shares outstanding
     3,554        3,550  
                 
Basic (loss) earnings per common share
  $ (.90 )   $ .78  
Effect of dilutive stock options
            2  
Diluted weighted average number of common shares outstanding
     3,554        3,552  
Diluted earnings (loss) per common share
  $ (.90 )   $ .78  
 
 
Comprehensive Income (Loss)

The Company follows SFAS No. 130 “Reporting Comprehensive Income.”  SFAS No. 130 establishes standards for reporting and presentation of comprehensive income (loss) and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements.  This statement also requires that all components of comprehensive income (loss) be displayed with the same prominence as other financial statements.  Comprehensive income (loss) consists of net income (loss) and foreign currency translation adjustments.  The effects of SFAS No. 130 are presented in the accompanying Consolidated Statements of Stockholders’ Equity.

Stock Compensation

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).
 

 
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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 Merton option pricing formula using the following assumptions as of December 31, 2008.

   
For the year ended
   
For the year ended
 
   
December 31, 2008
   
December 31, 2007
 
Risk-free interest rate
    2.23 %     4.22 %
Expected life (in years)
    4.28       4.18  
Volatility
    88 %     91 %
Expected dividends
    -       -  
Annual forfeiture rate
    19.23 %     18.99 %

The weighted-average fair value of options granted during the years ended December 31, 2008 and 2007 was estimated as $2.49 and $3.11, 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.

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, 2007.

Convertible Preferred Stock

On September 24, 2008 the Company issued 826,446 shares of Series-A Convertible Preferred Stock (“preferred stock”) to its Chief Executive Officer at a price of $3.63 per share for a total of $3,000,000.  Dividends accrue daily on the preferred stock at an initial rate of 6% and shall be payable only when, as and if declared by the Company’s Board of Directors, quarterly in arrears.
 

 
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The preferred stock may be converted into common stock at the initial rate of one share of common for each share of preferred stock.  The holder has the right during the first six months following issuance to convert up to 40% of the shares purchased, except in the event of a change in control of the Company, at which time there is no limit.  After six months there is no limit on the number of shares that may be converted.

The Company has the right to redeem, subject to board approval, up to 60% of the shares of preferred stock at its option during the first six months after issuance at a price equal to 110% of the purchase price plus all accrued and unpaid dividends.  The limitations on conversion and the redemption rights during this initial six-month period are not applicable in the event of certain change of control events.  Commencing two years after issuance, the Company shall have certain rights to cause conversion of all of the shares of preferred stock then outstanding.  Commencing four years after issuance, the Company may redeem, subject to board approval, all of the shares of preferred stock then outstanding at a price equal to the greater of (i) 130% of the purchase price plus all accrued and unpaid dividends and (ii) the fair market value of such number of shares of common stock which the holder of the preferred stock would be entitled to receive had the redeemed preferred stock been converted immediately prior to the redemption.

In accordance with relevant accounting pronouncements, the Company recorded the preferred stock on the Company’s consolidated balance sheet within Stockholders’ Equity.  In accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 68, “Increasing Rate Preferred Stock,” the preferred stock is recorded on the consolidated balance sheet at the amount of net proceeds received less an imputed dividend cost.  The imputed dividend cost of $218,000 was the result of the preferred stock having a dividend rate during the first two years after its issuance (6%) that is lower than the rate that becomes fixed (10%) after the initial two year period.  The imputed dividend cost of $218,000 will be amortized over the first two years from the date of issuance and is based upon the present value of the dividend discount using a 10% yield.


Recent Accounting Standards or Accounting Pronouncements

In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133. Statement 161 requires disclosure of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Statement 161 is effective for fiscal years beginning after November 15, 2008, with early adoption permitted.  We do not expect the implementation of this standard to have a material impact on the financial position, results of operations or cash flow of the Company.

In April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination of the Useful Life of Intangible Assets.  FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008 and early adoption is prohibited. We are currently evaluating the impact of the pending adoption of FSP FAS 142-3 on our consolidated financial statements.

In June 2006, the FASB ratified the consensus reached on EITF Issue No. 06-3, "How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)" ("EITF 06-3"). EITF 06-3 requires disclosure of the method of accounting for the applicable assessed taxes and the amount of assessed taxes that are included in revenues if they are accounted for under the gross method. EITF 06-3 is effective for the fourth quarter ending May 31, 2007; however, since the Company presents revenues net of any taxes collected from customers, no additional disclosures will be required.
 

 
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In December 2007, the FASB issued Statement of Financial Accounting Standards ("FAS") No. 141 (revised 2007), Business Combinations ("FAS 141(R)") which replaces FAS No.141, Business Combinations. FAS 141(R) retains the underlying concepts of FAS 141 in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting but FAS 141(R) changed the method of applying the acquisition method in a number of significant aspects. Changes prescribed by FAS 141(R) include, but are not limited to, requirements to expense transaction costs and costs to restructure acquired entities; record earn-outs and other forms of contingent consideration at fair value on the acquisition date; record 100% of the net assets acquired even if less than a 100% controlling interest is acquired; and to recognize any excess of the fair value of net assets acquired over the purchase consideration as a gain to the acquirer. FAS 141(R) is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. FAS 141(R) amends FAS 109 such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of FAS 141(R) would also apply the provisions of FAS 141(R). Early adoption is not allowed. We are currently evaluating the effects, if any, that FAS 141(R) may have on our consolidated financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements ("FAS 160").  FAS 160 amends Accounting Research Bulletin 51, Consolidated Financial Statements, to establish accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. FAS 160 also clarifies that all of those transactions resulting in a change in ownership of a subsidiary are equity transactions if the parent retains its controlling financial interest in the subsidiary. FAS 160 requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent's owners and the interests of the noncontrolling owners of a subsidiary. FAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. FAS 160 shall be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements shall be applied retrospectively for all periods presented. We are currently evaluating the effects, if any, that FAS 160 may have on our consolidated financial statements.
 
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," ("SFAS No. 159").  SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value and to provide additional information that wil help investors and other users of financial statements to understand more easily the effect on earnings of a company's choice to use fail value.  It also requires companies to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet.  We adopted SFAS No. 159 on January 1, 2008.  It did not have a material impact on our consolidated financial statements. 

 
3.  
Receivables

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 or statements of work for professional services, for work performed but not yet invoiced.  Billed receivables are shown net of reserves for estimated uncollectible amounts.  Receivables consist of the following:
 
 
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December 31,
 
   
2008
   
2007
 
Billed receivables
  $ 4,534,000     $ 7,470,000  
Unbilled receivables
    630,000       1,047,000  
    $ 5,164,000     $ 8,517,000  



   4.           Property and Equipment

          Property and equipment consist of:

         
December 31,
 
   
Useful Life
   
2008
   
2007
 
Computers and related equipment
   
3
    $ 4,070,000     $ 3,542,000  
Furniture and fixtures
   
10
      555,000       512,000