| ASTEA INTERNATIONAL INC Item 1A Risk Factors The Company does not provide forecasts of its future financial performance |
| From time to time, however, information provided by the Company or statements made by its employees may contain “forward looking” information that involves risks and uncertainties |
| In particular, statements contained in this Annual Report on Form 10-K that are not historical fact may constitute forward looking statements and are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 |
| The Company’s actual results of operations and financial condition have varied and may in the future vary significantly from those stated in any forward looking statements |
| Factors that may cause such differences include, but are not limited to, the risks, uncertainties and other information discussed within this Annual Report on Form 10-K, as well as the accuracy of the Company’s internal estimates of revenue and operating expense levels |
| 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 through 2003 |
| The Company generated net income of dlra1dtta8 million in 2005 and dlra2dtta1 million in fiscal 2004 |
| However, it generated net losses of dlra5dtta5 million in fiscal 2003 and dlra1dtta3 million in fiscal 2002 |
| As of December 31, 2005, stockholders’ equity is approximately dlra11dtta8 million, which is net of an accumulated deficit of approximately dlra14dtta2 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 |
| 18 _________________________________________________________________ Decreased Revenues from DISPATCH-1 In each of 2005, 2004, and 2003, 6prca, 14prca, and 21prca respectively, of the Company’s total revenues was derived from the licensing of DISPATCH-1 and the providing of professional services in connection with the implementation, deployment and maintenance of DISPATCH-1 installations |
| ” The Company originally introduced Astea Alliance in August 1997 in order to target a market segment in which DISPATCH-1 was not cost-effective or attractive |
| Subsequent, rapid changes in technology have now positioned the Astea Alliance suite, introduced in 2001 and which includes the Astea Alliance functionality, to supercede DISPATCH-1 as the company’s flagship product |
| In 2005, there was dlra16cmam000 of license revenues from DISPATCH In 2004, there was dlra805cmam000 of license revenues of DISPATCH-1 |
| Total DISPATCH-1 revenues have declined in each of the last three fiscal years and that trend is expected to continue |
| While the Company has licensed Astea Alliance to over 225 companies worldwide in 1998 through 2005, revenues from sales of Astea Alliance alone may not be sufficient to support the expenses of the Company |
| The Company’s future success will depend mainly on its ability to increase licenses of the Astea Alliance suite offerings, on developing new products and product enhancements to complement its existing product offerings, on its ability to continue support and maintenance revenues from DISPATCH-1, and on its ability to control its operating expenses |
| Any failure of the Company’s products to achieve or sustain market acceptance, or of the Company to sustain its current position in the Customer Relationship Management software market, would have a material adverse effect on the Company’s business and results of operations |
| There can be no assurance that the Company will be able to increase demand for Astea Alliance, obtain an acceptable level of support and maintenance revenues from DISPATCH-1, or to lower its expenses, thereby avoiding future losses |
| Need for Development of New Products The Company’s future success will depend upon its ability to enhance its current products and develop and introduce new products on a timely basis that keep pace with technological developments, industry standards and the increasingly sophisticated needs of its customers, including developments within the client/server, thin-client and object-oriented computing environments |
| Such developments may require, from time to time, substantial capital investments by the Company in product development and testing |
| The Company intends to continue its commitment to research and development and its efforts to develop new products and product enhancements |
| There can be no assurance that the Company will not experience difficulties that could delay or prevent the successful development, introduction and marketing of new products and product enhancements; that new products and product enhancements will meet the requirements of the marketplace and achieve market acceptance; or that the Company’s current or future products will conform to industry requirements |
| Furthermore, reallocation of resources by the Company, such as the diversion of research and development personnel to development of a particular feature for a potential or existing customer, can delay new products and certain product enhancements |
| Some of our customers adopted our software on an incremental basis |
| These customers may not expand usage of our software on an enterprise-wide basis or implement new software products introduced by the Company |
| The failure of the software to perform to customer expectations or otherwise to be deployed on an enterprise-wide basis could have a material adverse effect on the Company’s ability to collect revenues or to increase revenues from new as well as existing customers |
| If the Company is unable to develop and market new products or enhancements of existing products successfully, the Company’s ability to remain competitive in the industry will be materially adversely effected |
| 19 _________________________________________________________________ Rapid Technological Change In this industry there is a continual emergence of new technologies and continual change in customer requirements |
| Because of the rapid pace of technological change in the application software industry, the Company’s current market position could be eroded rapidly by product advancements |
| In order to remain competitive, the Company must introduce new products or product enhancements that meet customers’ requirements in a timely manner |
| If the Company is unable to do this, it may lose current and prospective customers to competitors |
| The Company’s application environment relies primarily on software development tools from Microsoft Corporation |
| If alternative software development tools were to be designed and generally accepted by the marketplace, we could be at a competitive disadvantage relative to companies employing such alternative developmental tools |
| Burdens of Customization Certain of the Company’s clients request customization of Astea Alliance products to address unique characteristics of their businesses or computing environments |
| In these situations, the Company applies contract accounting to determine the recognition of license revenues |
| The Company’s commitment to customization could place a burden on its client support resources or delay the delivery or installation of products, which, in turn, could materially adversely affect its relationship with significant clients or otherwise adversely affect business and results of operations |
| In addition, the Company could incur penalties or reductions in revenues for failures to develop or timely deliver new products or product enhancements under development agreements and other arrangements with customers |
| If customers are not able to customize or deploy the Company’s products successfully, the customer may not complete expected product deployment, which would prevent recognition of revenues and collection of amounts due, and could result in claims against the Company |
| Risk of Product Defects; Failure to Meet Performance Criteria The Company’s software is intended for use in enterprise-wide applications that may be critical to its customer’s business |
| As a result, customers and potential customers typically demand strict requirements for installation and deployment |
| The Company’s software products are complex and may contain undetected errors or failures, particularly when software must be customized for a particular customer, when first introduced or when new versions are released |
| Although the Company conducts extensive product testing during product development, the Company has at times delayed commercial release of software until problems were corrected and, in some cases, has provided enhancements to correct errors in released software |
| The Company could, in the future, lose revenues as a result of software errors or defects |
| Despite testing by the Company and by current and potential customers, errors in the software, customizations or releases might not be detected until after initiating commercial shipments, which could result in additional costs, delays, possible damage to the Company’s reputation and could cause diminished demand for the Company’s products |
| This could lead to customer dissatisfaction and reduce the opportunity to renew maintenance contracts or sell new licenses |
| Continued Dependence on Large Contracts May Result in Lengthy Sales and Implementation Cycles and Impact Revenue Recognition and Cash Flow The sale and implementation of the Company’s products generally involve a significant commitment of resources by prospective customers |
| As a result, the Company’s sales process often is subject to delays associated with lengthy approval processes attendant to significant capital expenditures, definition of special customer implementation requirements, and extensive contract negotiations with the customer |
| Therefore, the sales cycle varies substantially from customer to customer and typically lasts between four and nine months |
| During this time the Company may devote significant time and resources to a prospective customer, including costs associated with multiple site visits, product demonstrations and feasibility studies |
| The Company may experience a number of significant delays over which the Company has no control |
| Because the costs associated with the sale of the product are fixed in current periods, timing differences between incurring costs and recognizing of revenue associated with a particular project may result |
| Moreover, in the event of any downturn in any existing or potential customer’s business or the economy in general, purchases of the Company’s products may be deferred or canceled |
| 20 _________________________________________________________________ Furthermore, the implementation of the Company’s products typically takes several months of integration of the product with the customer’s other existing systems and customer training |
| A successful implementation requires a close working relationship between the customer and members of the Company’s professional service organization |
| These issues make it difficult to predict the quarter in which expected orders will occur |
| Delays in implementation of products could cause some or all of the professional services revenues from those projects to be shifted from the expected quarter to a subsequent quarter or quarters |
| When the Company has provided consulting services to implement certain larger projects, some customers have in the past delayed payment of a portion of license fees until implementation was complete and in some cases have disputed the consulting fees charged for implementation |
| There can be no assurance the Company will not experience additional delays or disputes regarding payment in the future, particularly if the Company receives orders for large, complex installations |
| Additionally, as a result of the application of the revenue recognition rules applicable to the Company’s licenses under generally accepted accounting principles, license revenues may be recognized in periods after those in which the respective licenses were signed |
| The Company believes that period-to-period comparisons of its results of operations should not be relied upon as any indication of future performance |
| Fluctuations in Quarterly Operating Results May Be Significant The Company’s quarterly operating results have in the past and may in the future vary significantly depending on factors such as: · Revenue from software sales; · the timing of new product releases; · market acceptance of new and enhanced versions of the Company’s products; · customer order deferrals in anticipation of enhancements or new products; · the size and timing of significant orders, the recognition of revenue from such orders; · changes in pricing policies by the Company and its competitors; · the introduction of alternative technologies; · changes in operating expenses; · changes in the Company’s strategy; · personnel changes; · the effect of potential acquisitions by the Company and its competitors; and general domestic and international economic and political factors |
| The Company has limited or no control over many of these factors |
| Due to all these factors, it is possible that in some future quarter the Company’s operating results will be materially adversely affected |
| Fluctuations in Quarterly Operating Results Due to Seasonal Factors The Company expects to experience fluctuations in the sale of licenses for its products due to seasonal factors |
| The Company has experienced and anticipates that it may experience relatively lower sales in the first fiscal quarter due to patterns in capital budgeting and purchasing cycles of current and prospective customers |
| The Company also expects that sales may decline during the summer months of its third quarter, particularly in the European markets |
| Moreover, the Company generally records most of its total quarterly license revenues in the third month of the quarter, with a concentration of these revenues in the last half of that third month |
| This concentration of license revenues is influenced by customer tendencies to make significant capital expenditures at the end of a fiscal quarter |
| The Company expects these revenue patterns to continue for the foreseeable future |
| Thus, its results of operations may vary seasonally in accordance with licensing activity, and will also depend upon recognition of revenue from such licenses from time to time |
| The Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as an indication of future performance |
| 21 _________________________________________________________________ General Economic Conditions May Affect Operations As business has grown, the Company has become increasingly subject to the risks arising from adverse changes in domestic and global economic conditions |
| Economic slowdowns in the United States and in other parts of the world, can cause many companies to delay or reduce technology purchases and investments |
| Similarly, the Company’s customers may delay payment for Company products causing accounts receivable to increase |
| In addition, terrorist attacks could further contribute to the slowdown in the economies of North America, Europe and Asia |
| The overall impact to the Company of such a slowdown is difficult to predict, however, revenues could decline, which would have an adverse effect on the Company’s results of operations and on its financial condition, as well as on its ability to sustain profitability |
| Competition in the Customer Relationship Management Software Market is Intense The Company competes in the CRM software market |
| This market is highly competitive and the Company expects competition in the market to increase |
| The Company’s competitors include large public companies such as Oracle, who owns PeopleSoft and Siebel, as well as traditional enterprise resource planning (ERP) software providers such as SAP that are developing CRM capabilities |
| In addition, a number of smaller privately held companies generally focus only on discrete areas of the CRM software marketplace |
| Because the barriers to entry in the CRM software market are relatively low, new competitors may emerge with products that are superior to the Company’s products or that achieve greater market acceptance |
| Moreover, the CRM industry is currently experiencing significant consolidation, as larger public companies seek to enter the CRM market through acquisitions or establish other cooperative relationships among themselves, thereby enhancing their ability to compete in this market with their combined resources |
| Some of the Company’s existing and potential competitors have greater financial, technical, marketing and distribution resources than the Company |
| These and other competitors pose business risks to the Company because: · 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 |
| 22 _________________________________________________________________ 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: · be time consuming to defend; · result in costly litigation or damage awards; · divert management’s attention and resources; · cause product shipment delays; or · require the Company to seek to enter into royalty or licensing agreements, which may not be available on terms acceptable to the Company, if at all |
| A successful claim of intellectual property infringement against the Company or the Company’s failure or inability to license the infringed or similar technology could seriously harm its business because the Company would not be able to sell the impacted product without exposing itself to litigation risk and damages |
| Furthermore, redevelopment of the product so as to avoid infringement could cause the Company to incur significant additional expense and delay |
| Dependence on Technology from Third Parties The Company integrates various third-party software products as components of its software |
| The Company’s business would be disrupted if this software, or functional equivalents of this software, were either no longer available to the Company or no longer offered to the Company on commercially reasonable terms |
| In either case, the Company would be required to either redesign its software to function with alternate third-party software or develop these components itself, which would result in increased costs and could result in delays in software shipments |
| Furthermore, the Company might be forced to limit the features available in its current or future software offerings |
| 23 _________________________________________________________________ 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 |
| Risks Associated with International Sales Astea’s international sales accounted for 50prca of the Company’s revenues in 2005, 39prca in 2004, and 34prca in 2003 |
| 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 |
| Moreover, the currency unification in Europe may change the market for the Company’s business software |
| 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 |
| 24 _________________________________________________________________ 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 US 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 US 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 US 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 US dollars will increase and the US dollar-measured results of operations will suffer |
| Historically, Israel has experienced periods of high inflation |
| 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 |
| 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 38prca of the outstanding Common Stock of the Company |
| 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 |
| 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 |
| 25 _________________________________________________________________ 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 5cmam000cmam000 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 |
| NASDAQ Capital Market Compliance Requirements The Company’s common stock trades on The NASDAQ Capital Market, which has certain compliance requirements for continued listing of common stock, including a series of financial tests relating to shareholder equity, public float, number of market makers and shareholders, and maintaining a minimum bid price per share for the Company’s common stock |
| The result of delisting from The NASDAQ SmallCap Market could be a reduction in the liquidity of any investment in the Company’s common stock and a material adverse effect on the price of its common stock |
| Delisting could reduce the ability of holders of the Company’s common stock to purchase or sell shares as quickly and as inexpensively as they could have done in the past |
| This lack of liquidity would make it more difficult for the Company to raise capital in the future |
| Although the Company is currently in compliance with all continued listing requirements of the Nasdaq Capital, there can be no assurance that the Company will be able to continue to satisfy such requirements |