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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For Quarter Ended: Commission File Number:
June 30, 2004 O-14741
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ASA International Ltd.
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(Exact name of Registrant as specified in its Charter)
Delaware 02-0398205
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10 Speen Street, Framingham, MA 01701
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (508) 626-2727
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No: .
--- ---
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes: No: X .
--- ---
As of June 30, 2004 there were 1,863,706 shares of Common Stock of the
Registrant outstanding.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
ASA INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2004 2003
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,279,616 $ 4,745,899
Marketable securities-mutual fund 2,521,971 --
Receivables:
Trade (net of allowance for doubtful accounts of
$111,161 in 2004 and $122,646 in 2003) 1,673,401 1,466,719
Related parties 36,421 37,942
Other 35,535 26,348
Current portion of note receivable 550,576 475,157
Other current assets 781,759 153,369
----------- -----------
TOTAL CURRENT ASSETS 9,879,279 6,905,434
----------- -----------
PROPERTY AND EQUIPMENT:
Land and buildings 3,449,659 3,449,660
Computer equipment 2,405,392 2,382,102
Office furniture and equipment 1,042,524 1,026,689
Leasehold improvements 115,846 115,846
Vehicles and aircraft 1,283,849 1,141,710
Capital leases 93,146 93,146
----------- -----------
8,390,416 8,209,153
Accumulated depreciation and amortization 4,378,644 4,221,458
----------- -----------
NET PROPERTY AND EQUIPMENT 4,011,772 3,987,695
----------- -----------
SOFTWARE
(less cumulative amortization
of $6,914,388 and $6,613,115 ) 1,151,355 1,252,628
RECEIVABLES FROM RELATED PARTIES -
net of current portion 238,434 255,093
NOTES RECEIVABLE - net of current portion 1,374,830 1,689,867
GOODWILL 942,795 942,795
MARKETABLE SECURITIES -- 1,669,625
OTHER ASSETS 1,150,032 1,095,417
----------- -----------
$18,748,497 $17,798,554
=========== ===========
See notes to condensed consolidated financial statements.
2
ASA INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2004 2003
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
CURRENT LIABILITIES:
Current maturities of long-term obligations $ 75,430 $ 83,982
Accounts payable 513,153 418,946
Accrued expenses - other 1,080,569 1,215,529
Accrued income taxes 1,242,783 344,025
Accrued commissions 184,238 141,780
Customer deposits 177,058 278,747
Deferred revenue 735,234 838,464
----------- -----------
TOTAL CURRENT LIABILITIES 4,008,465 3,321,473
----------- -----------
LONG-TERM OBLIGATIONS,
NET OF CURRENT MATURITIES 3,272,665 3,210,434
----------- -----------
DEFERRED INCOME TAXES 50,000 447,100
----------- -----------
COMMON STOCK SUBJECT TO REPURCHASE 173,986 383,044
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, par value
$.01 per share: Authorized and unissued,
1,000,000 shares, 60,000 shares of which are
designated as Series A Junior Participating
Preferred Stock -- --
Common stock, par value
$.01 per share: Authorized, 8,000,000 shares;
issued 2,485,477 and 2,485,477 shares;
outstanding, 1,863,706 and 1,924,653 shares 24,864 24,855
Additional paid-in capital 7,275,159 7,101,709
Retained earnings 6,189,455 4,745,346
Accumulated other comprehensive income:
Unrealized gain on marketable securities -- 595,650
----------- -----------
13,489,478 12,467,560
Less treasury stock, at cost 2,246,097 2,031,057
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 11,243,381 10,436,503
----------- -----------
$18,748,497 $17,798,554
=========== ===========
See notes to condensed consolidated financial statements
3
ASA INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended
June 30,
-------------------------
2004 2003
-------------------------
(Unaudited)
REVENUES
Services $ 3,004,240 $ 3,191,481
Product licenses 966,505 650,832
Computer and add-on hardware 233,586 253,882
----------- -----------
NET REVENUE 4,204,331 4,096,195
----------- -----------
COST OF REVENUE
Services 1,502,355 1,623,495
Product licenses and development 815,758 886,488
Computer and add-on hardware 170,866 199,729
----------- -----------
TOTAL COST OF REVENUE 2,488,979 2,709,712
----------- -----------
EXPENSES
Marketing and sales 864,766 818,785
General and administrative 751,492 950,252
----------- -----------
TOTAL EXPENSES 1,616,258 1,769,037
----------- -----------
EARNINGS (LOSS) FROM OPERATIONS 99,094 (382,554)
INTEREST INCOME (EXPENSE) - NET 25,746 4,818
OTHER INCOME (EXPENSE) - NET -- 13,746
GAIN ON SALE OF MARKETABLE EQUITY SECURITIES 755,139 --
----------- -----------
EARNINGS (LOSS) BEFORE INCOME TAXES 879,979 (363,990)
INCOME TAXES 487,000 (114,000)
----------- -----------
NET EARNINGS (LOSS) $ 392,979 $ (249,990)
=========== ===========
BASIC EARNINGS (LOSS) PER
COMMON SHARE
NET EARNINGS (LOSS) $ 0.21 $ (0.12)
=========== ===========
DILUTED EARNINGS (LOSS) PER
COMMON SHARE:
NET EARNINGS (LOSS) $ 0.20 $ (0.12)
=========== ===========
See notes to condensed consolidated financial statements.
4
ASA INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended
June 30,
-------------------------
2004 2003
-------------------------
(Unaudited)
REVENUES
Services $ 6,031,641 $ 6,410,470
Product licenses 1,979,935 1,477,233
Computer and add-on hardware 431,322 503,656
----------- -----------
NET REVENUE 8,442,898 8,391,359
----------- -----------
COST OF REVENUE
Services 2,990,922 3,285,533
Product licenses and development 1,696,325 1,764,916
Computer and add-on hardware 320,354 391,756
----------- -----------
TOTAL COST OF REVENUE 5,007,601 5,442,205
----------- -----------
EXPENSES
Marketing and sales 1,656,280 1,690,106
General and administrative 1,628,106 1,876,316
----------- -----------
TOTAL EXPENSES 3,284,386 3,566,422
----------- -----------
EARNINGS (LOSS) FROM OPERATIONS 150,911 (617,268)
INTEREST INCOME (EXPENSE) - NET 38,087 36,140
GAIN ON SALE OR MARKETABLE EQUITY SECURITIES 2,218,111 --
OTHER INCOME (EXPENSE) - NET -- 62,363
----------- -----------
EARNINGS (LOSS) BEFORE INCOME TAXES 2,407,109 (518,765)
INCOME TAXES 963,000 (162,000)
----------- -----------
NET EARNINGS (LOSS) $ 1,444,109 $ (356,765)
=========== ===========
BASIC EARNINGS (LOSS) PER
COMMON SHARE
NET EARNINGS (LOSS) $ 0.76 $ (0.17)
=========== ===========
DILUTED EARNINGS (LOSS) PER
COMMON SHARE
NET EARNINGS (LOSS) $ 0.74 $ (0.17)
=========== ===========
See notes to condensed consolidated financial statements.
5
ASA INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- --------------------------
2004 2003 2004 2003
--------------------------- --------------------------
(Unaudited) (Unaudited)
NET EARNINGS (LOSS) $ 392,979 $ (249,990) 1,444,109 $ (356,765)
OTHER COMPREHENSIVE INCOME (LOSS)
NET OF INCOME TAX:
Unrealized gain (loss) on
marketable securities 34,020 53,899 753,083 55,871
Reclassification adjustment for securities
sold, net of tax (456,233) -- (1,348,733) --
----------- ----------- ----------- -----------
COMPREHENSIVE EARNINGS (LOSS) $ (29,234) $ (196,091) $ 848,459 $ (300,894)
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
6
ASA INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
---------------------------
2004 2003
---------------------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 1,444,109 ($ 356,765)
Adjustments to reconcile net earnings (loss)
to net cash provided by (used for) operating activities:
Depreciation and amortization 510,875 655,958
Deferred taxes (281,475) --
Realized gain on sale of marketable securities (2,218,111) --
Doubtful receivables provision (77,788) --
Changes in assets and liabilities, net
of effects of acquisitions:
Receivables (136,559) 379,896
Other current assets (628,206) (297,547)
Accounts payable 94,207 119,330
Accrued expenses 1,058,222 (663,378)
Customer deposits (101,690) (77,516)
Deferred revenue (103,230) (255,508)
----------- -----------
Total adjustments (1,883,755) (138,765)
----------- -----------
Net cash provided by (used for) operating activities (439,646) (495,530)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (691,189) (595,991)
Disposals of property and equipment 486,418 --
Additions to software (200,000) --
Additions to marketable securities - mutual fund (2,521,971) (676,875)
Proceeds from sale of marketable securities 2,924,497 --
Payments on notes receivable 239,436 300,648
Decrease in sales-types leases -- 29,513
Other assets (66,864) 210,565
----------- -----------
Net cash used for investing activities 170,327 (732,140)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in long-term debt 95,290 446,500
Payments of long-term debt (41,611) (63,266)
Repurchase of common stock subject to repurchase (37,498) (74,998)
Purchase of treasury stock (215,040) (159,923)
Issuance of common stock 1,895 --
Decrease in other notes -- (90,000)
Cash paid in reverse split -- (158,617)
----------- -----------
Net cash provided by (used for) financing activities (196,964) (100,304)
----------- -----------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) (466,283) (1,327,974)
Balance, beginning of period 4,745,899 4,509,686
----------- -----------
Balance, end of period $ 4,279,616 $ 3,181,712
=========== ===========
See notes to condensed consolidated financial statements
7
Non Cash Investing and Financing Activities:
During the six months ended June 30, 2004, the Company was released from its
obligation to buy 65,000 shares under the provisions of the Repurchase Agreement
described below in Note 11. As a result, $171,560 of the liability for Common
Stock Subject to Repurchase was reduced, with this amount recorded as an
adjustment to Additional Paid in Capital.
In June 2004, upon the sale of an aircraft, the Company paid-off the outstanding
debt on the aircraft of approximately $415,000 with a portion of the proceeds
from a loan used to finance the purchase of a new aircraft.
8
ASA INTERNATIONAL LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Basis of Presentation
---------------------
As permitted by the rules of the Securities and Exchange Commission applicable
to quarterly reports on Form 10-Q, these notes are condensed and do not contain
all disclosures required by accounting principles generally accepted in the
United States. Reference should be made to the financial statements and related
notes included in the Company's Annual Report on Form 10-K.
In the opinion of management, the accompanying financial statements reflect all
adjustments, all of which were of a normal recurring nature necessary for a fair
presentation of the Company's results of operations for the three and six month
periods ended June 30, 2004 and June 30, 2003, respectively.
The results disclosed in the Condensed Consolidated Statement of Operations for
the three and six month periods ended June 30, 2004 are not necessarily
indicative of the results expected for the full year.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Registrant's Annual Report on Form 10-K for
the year ended December 31, 2003.
Note 2. Marketable Securities
---------------------
The Company accounts for its investments under Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities (SFAS No. 115). This standard requires the following:
o Securities that a company has the positive intent and ability to hold to
maturity are classified as held-to-maturity securities and reported at
amortized cost.
o Securities that are bought and held principally for the purpose of selling
them in the near term are classified as trading securities and reported at
fair value, with unrealized gains and losses included in earnings.
o Securities not classified as either held-to-maturity securities or trading
securities are classified as available-for-sale securities and reported at
fair value, with unrealized gains and losses excluded from earnings and
reported in a separate component of stockholders' equity.
Management determines the appropriate classification of its investments in
marketable securities at the time of purchase and re-evaluates such
determination at each balance sheet date.
As of June 30, 2004, marketable securities consisted of mutual funds. As of June
30, 2004, such mutual fund investments are considered as trading securities
under the provisions of SFAS No. 115 and are reported at fair value with
material unrealized gains and losses reflected in earnings.
Note 3. Sale of Marketable Equity Securities
------------------------------------
The Company purchased 451,250 shares of common stock of Omtool Ltd. in a
transaction completed in May 2003. In June 2004, the Company sold 101,250 shares
of common stock of Omtool Ltd. in public resales at a price of approximately
$9.01 per share, net of broker's commissions, for a total of approximately
$912,000 in cash, excluding costs related to the sale. In March 2004, the
Company had sold 350,000 shares of common stock of Omtool Ltd. to Omtool in a
private transaction at a price of $5.75 per share for a total of $2,012,500 in
cash, excluding costs related to the sale. The foregoing share amounts have been
adjusted to reflect Omtool Ltd.'s April 27, 2004 two-for-one stock split. These
sales resulted in a pretax gain of approximately $2,218,000. The Company has now
sold all of its shares of Omtool Ltd.
9
Note 4. Sale and Purchase of Aircraft
-----------------------------
In June 2004, the Company sold its 50% interest in an aircraft it had purchased
in January 2003. The Company, along with the owner of the other 50% interest in
the aircraft, each sold their respective interests in the aircraft for
approximately $874,000 with the proceeds used to pay in full each party's
proportionate share of the Promissory Note co-signed and co-guaranteed at the
time of the aircraft's purchase. The Company's guarantee on the Note ended upon
payoff. The total balance on the Note at the time of pay-off was approximately
$830,000, with the Company's proportionate share approximating $415,000. No gain
or loss was recorded on the sale as the cash proceeds from the sale approximated
the net book value of the aircraft.
Concurrent with the foregoing aircraft sale, the Company purchased a 33%
interest in another aircraft for $600,000 through its 100% owned subsidiary, ASA
Aircraft, LLC for a total purchase price of $1,800,000. A note for $1,530,000
was signed under a Demand Loan and Security Agreement with a bank for the
purchase of the 33% interest in the aircraft. The Company is obligated for 33%
of the $1,530,000 note, and is a guarantor on the remaining 67%. The Company
funded its 33% share of the $270,000 downpayment on the aircraft or $90,000
along with the 33% share of the downpayment or $90,000 of one of the
co-borrowers. The co-borrower has agreed to repay the $90,000 to the Company by
December 31, 2004. The two other co-borrowers on the note are each liable for
33% of the note and are also guarantors of the Company's liability. The 5-year
note with interest at prime (4.00% at June 30, 2004) plus .25% calls for monthly
principal and interest payments of $11,521 through December 2007 with a final
payment of approximately $1,142,206 plus interest due in July 2009. The
Promissory Note is collateralized by the aircraft with cross guarantees by each
of the three borrowers. Under the provisions of FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Guarantees of Indebtedness of Others," and based upon the bank's appraisal of
the value of the aircraft and that only 85% of the purchase price was financed,
management of the Company has determined that the fair value of the guarantee
related to the note is nominal and not material to the Company's financial
statements.
Note 5. License Agreement
-----------------
In June 2004 the Company entered into a license agreement to become a reseller
of an enterprise software product for smaller-sized independent tire dealers.
Under the terms of the agreement, which extends through December 31, 2005, the
Company paid a one-time license fee of $200,000 for the exclusive right to
market the software along with a total of $200,000 prepaid license fees which
are earned by the licensor as the product is sublicensed by the Company. Any
unearned prepaid license fees remaining at the end of the license term would be
retained by the licensor. The agreement can be terminated at will by either
party subject to the refund to the Company or by the licensor of the one-time
license fee and any unearned prepaid license fees if the licensor terminates the
agreement without cause before the end of the term.
10
Note 6. Earnings (Loss) per Share
-------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- -----------------------------
2004 2003 2004 2003
-------------------------- -----------------------------
Numerator
Net earnings (loss) $ 392,979 $ (249,990) $ 1,444,109 $ (356,765)
Numerator for diluted earnings (loss) per
share income available to common
shareholders $ 392,979 $ (249,990) $ 1,444,109 $ (356,765)
Denominator:
Denominator for basic and diluted loss
per share - weighted average shares 1,877,352 2,044,452 1,896,553 2,092,472
Effect of dilutive
securities:
Employee stock options 64,681 - 59,564 -
-------------------------- -----------------------------
Dilutive potential common shares
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 1,942,033 2,044,452 1,956,117 2,092,472
=========== =========== ========== ===========
Basic earnings (loss) per share $ 0.21 $ (0.12) $ 0.76 $ (0.17)
=========== =========== ========== ===========
Diluted earnings (loss) per share $ 0.20 $ (0.12) $ 0.74 $ (0.17)
=========== =========== ========== ===========
The following table summarizes securities which were outstanding as of June 30,
2004 and 2003 but not included in the calculation of diluted loss per share
because such shares are antidilutive:
---------- -----------
2004 2003
---------- -----------
Employee Stock Options 47,650 186,265
========== ===========
Note 7. Stock Options
-------------
At June 30, 2004, the Company has four stock based compensation plans. The
Company applies APB Opinion 25, "Accounting for Stock Issued to Employees," and
related Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its stock option plans. Had
compensation cost for the Company's four stock option plans been determined
based on the fair value at the grant dates for awards under those plans
consistent with the method of FASB Statement No. 123, "Accounting for
Stock-Based Compensation," the Company's net earnings (loss) and earnings (loss)
per share would have been adjusted to the pro forma amounts indicated below:
11
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ---------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net earnings (loss) As reported $ 392,979 $ (249,990) $ 1,444,109 $ (356,765)
Pro forma 367,176 (274,566) 1,392,503 (397,816)
Basic earnings (loss) As reported $ 0.21 $ (0.12) $ 0.76 $ (0.17)
per share Pro forma 0.20 (0.13) 0.73 (0.19)
Diluted earnings (loss) As reported $ 0.20 $ (0.12) $ 0.74 $ (0.17)
per share Pro forma 0.19 (0.13) 0.71 (0.19)
Note 8. Reverse/Forward Stock Splits and Going Private Transaction
----------------------------------------------------------
In April 2004, the Company announced that its Board of Directors had unanimously
approved a reverse 1-for-600 split of the Company's common stock to be followed
immediately by a forward 600-for-1 split. If the transaction is approved by the
Company's stockholders and implemented, the Company expects to have fewer than
300 stockholders of record, which would enable the Company to voluntarily
terminate the registration of its common stock under the Securities Exchange Act
of 1934 and go private. As a private company, the Company would no longer be
required to file periodic reports and other information with the Securities and
Exchange Commission ("SEC").
Pursuant to the transaction, stockholders holding fewer than 600 shares of the
Company common stock immediately before the transaction will receive from the
Company cash payment for fractional shares equal to $5.00 per pre-split share.
Stockholders holding 600 or more shares of the Company common stock immediately
before the transaction will continue to hold the same number of shares after
completion of the transaction and will not receive any cash payment. The Board
of Directors received an opinion from its financial advisor, vFinance
Investments, Inc., that the cash consideration to be paid in the proposed
transaction is fair, from a financial point of view, to the Company's
stockholders.
The proposed transaction is subject to approval by the holders of a majority of
the issued and outstanding shares of the Company common stock. Stockholders will
be asked to approve the transaction at the Company's next annual meeting of
stockholders, currently expected to be held in September of this year.
In April 2004, the Company also filed a preliminary proxy statement and Schedule
13E-3 with the SEC which outlined the transaction. Amendments to the preliminary
proxy statement and Schedule 13E-3 filed with the SEC in June and July 2004.
Note 9. Notes Payable - Bank
--------------------
In May 2004, the Company renewed through June 30, 2005, its revolving demand
loan agreement with a bank for up to $1,500,000 which bears interest at prime
plus 1/2%.
Note 10. Employee Stock Ownership Plan
-----------------------------
In June 2003, the Company established an Employee Stock Ownership Plan ("ESOP")
effective January 1, 2003. The ESOP is designed to enable Company employees to
accumulate ownership of Company stock. All employees on the payroll of the
Company over the age of 21 and with at least 1,000 hours of Company service
during a plan year are eligible to participate in the ESOP. The ESOP has a
five-year cliff vesting, with credit given for service prior to the ESOP
effective date. Benefits may be paid in a lump sum or installments, in Company
stock, cash or a combination of both.
12
The Company may, but is not required to, make contributions to the ESOP in cash
or Company stock. The ESOP may borrow money to purchase Company stock. Employee
contributions are not permitted. Company contributions may be used by the ESOP
to repay any current loan obligation incurred to purchase Company stock, to
purchase Company stock from existing shareholders, or to purchase Company stock
directly from the Company. The ESOP may also invest in assets other than Company
stock, or may hold ESOP assets in cash. As of June 30, 2004, no contributions
have been made to the ESOP.
Note 11. Common Stock Subject to Repurchase
----------------------------------
In connection with the Company's merger with CompuTrac, Inc. the Company entered
into a Repurchase Stock Agreement (the Repurchase Agreement) with Harry W.
Margolis and certain members of this family. During the six months ended June
30, 2004, the Company was released from its obligation to buy 65,000 shares
under the provisions of the Repurchase Agreement. Therefore, the Company reduced
its liability for common stock subject to repurchase related to these shares. As
of June 30, 2004, the remaining liability consists of 64,439 shares of common
stock subject to repurchase at $2.70 per share.
Note 12. Segment Reporting and Geographic Information:
---------------------------------------------
The Company has four principal operating and reportable segments engaged in the
design, development and servicing of its proprietary enterprise software for (1)
tire dealers, (2) law firms, (3) project-based services companies, and (4)
manufacturing and distribution companies. The Company also has a fifth
reportable segment comprised of its corporate services group which provides
centralized administrative support for its operating businesses, in areas such
as human resources, legal, tax, audit, insurance, and budgeting and planning.
The corporate services group also includes the assets and operating costs of the
Company's real estate and aircraft which are not reportable separately. The
operating segments were determined based on the nature of the products and
services offered. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision-maker in deciding how to allocate
resources and in assessing performance. The Company's chief executive officer
has been identified as the chief operating decision maker. The Company's chief
operating decision maker directs the allocation of resources to operating
segments based on the profitability and cash flows of each respective segment
prior to the allocation to the business segment of the costs associated with the
corporate services group.
The Company evaluates performance based on several factors, of which the primary
financial measure is business segment operating income before taxes. The
accounting policies of the business segments are the same as those described in
"Note A: Summary of Significant Accounting Policies" of the Company's Annual
Report on Form 10-K. The measurements used in reporting segment information
compared to those used in the company's financial statements are the same. There
is typically no intersegment sales activity.
13
The following tables show the operations of the Company's reportable segments:
Project- Manufacturing
based and
Tire Legal Services Distribution Corporate Consolidated
--------------------------------------------------------------------------------------------------
Three Months Ended
June 30, 2004
- ----------------------
Revenues from $ 1,872,000 $1,491,000 $ 393,000 $ 448,000 $ - $ 4,204,000
unaffiliated customers
Earnings (loss)before 251,000 305,000 (85,000) (24,000) (348,000) 99,000
taxes (1)
Total assets (2) 1,652,000 2,266,000 756,000 1,359,000 12,715,000 18,748,000
Property additions 3,000 - - 5,000 600,000 608,000
Interest expense - - - - (57,000) (57,000)
Interest income - - - - 83,000 83,000
Depreciation and 30,000 84,000 94,000 13,000 33,000 210,000
amortization
Three Months Ended
June 30, 2003
- ----------------------
Revenues from $1,773,000 $1,370,000 $ 475,000 $ 478,000 $ - $ 4,096,000
unaffiliated customers
Earnings (loss)before 271,000 182,000 (289,000) (124,000) (423,000) (383,000)
taxes (1)
Total assets (2) 3,108,000 2,928,000 1,426,000 1,808,000 9,348,000 18,618,000
Property additions 3,000 8,000 - - 25,000 36,000
Interest expense - - - - (83,000) (83,000)
Interest income - - - - 88,000 88,000
Depreciation and 44,000 94,000 188,000 10,000 92,999 428,999
amortization
Six Months Ended
June 30, 2004
- ----------------------
Revenues from $3,711,000 $2,769,000 $1,012,000 $ 951,000 $ - $ 8,443,000
unaffiliated customers
Earnings (loss) 399,000 496,000 36,000 10,000 (790,000) 151,000
before taxes (1)
Total assets (2) 1,652,000 2,266,000 756,000 1,359,000 12,715,000 18,748,000
Property additions 20,000 - - 20,000 651,000 691,000
Interest expense - - - - (116,000) (116,000)
Interest income - - - - 154,000 154,000
Depreciation and 57,000 169,000 188,000 26,000 71,000 511,000
amortization
14
Six Months Ended
June 30, 2003
- ----------------------
Revenues from $3,516,000 $2,708,000 $1,152,000 $ 1,015,000 $ - $ 8,391,000
unaffiliated customers
Earnings (loss) 495,000 310,000 (372,000) (198,000) (852,000) (617,000)
before taxes (1)
Total assets (2) 3,108,000 2,928,000 1,426,000 1,808,000 9,348,000 18,618,000
Property additions 3,000 8,000 - - 609,000 620,000
Interest expense - - - - (175,000) (175,000)
Interest income - - - 21,000 190,000 211,000
Depreciation and 60,000 141,000 342,000 20,000 93,000 656,000
amortization
(1) Earnings (loss) before taxes of the principal businesses exclude the effects
of net other income, interest income/expense, and a gain on the sale of
marketable equity securities.
(2) Total business assets are the owned or allocated assets used by each
business. Corporate assets consist of cash and cash equivalents, marketable
securities, notes receivable, certain land and buildings, vehicles and aircraft,
and certain other assets.
Note 13. Subsequent Events
-----------------
Split-dollar life insurance programs are not specifically exempted by the
Sarbanes-Oxley Act of 2002, which prohibits loans to executive officers. In July
2004, ASA terminated the Company's Chief Executive Officer's split-dollar life
insurance program, which had not been modified since the adoption of
Sarbanes-Oxley, and replaced it with a new executive benefit package that
includes an executive life plan and a supplemental retirement plan. The
replacement was based on a comparison of the costs and benefits of the old
split-dollar plan and the new benefit plan.
The new executive life plan is a $2,000,000 policy that will be owned by a trust
of which the Officer or his designees are the beneficiaries. The Company will
pay the annual premiums of approximately $53,921 for the plan, which will be
reported as income to the Officer and will be deductible to the Company as paid,
and will continue to pay such premiums through the Officer's retirement as a
retirement benefit.
The new supplemental retirement plan is a $2,670,313 policy that will be owned
by the Company. The Company will fund the first year premium of approximately
$560,000 and pay annual premiums of approximately $60,000 for the following nine
years. The cash surrender value to the Company of the terminated split-dollar
life insurance policy of approximately $540,572, will be used to fund the first
year premium. The new policy will be used to reimburse the Company for its
funding of post-retirement income of the Officer of $200,000 for ten years,
which will be reported as income to the Officer and will be deductible to the
Company as paid. In the event that the Officer dies prior to retirement, his
beneficiary will receive a lump sum payment of $2,100,000, which would be
reported as income to the beneficiary and deductible by the Company. Upon his
death subsequent to retirement, any unpaid post retirement income due under the
plan will be paid by the Company to the Officer's beneficiary.
The benefits of the replacement to the Company include termination of a
split-dollar life insurance program that the Company could not modify since the
adoption of Sarbanes-Oxley Act and use of more highly rated insurance carriers.
On a cost basis, the costs of the old split-dollar plan (approximately $115,000
on an annual basis) and the new benefit plan are similar. The new insurance
coverage was effective on June 1, 2004 upon payment of an initial deposit of
approximately $37,000.
In July 2004, Company entered into an agreement to guarantee $500,000 in payment
obligations to a bank under a letter of credit on behalf of CommercialWare, Inc.
The guarantee extends from July 19, 2004 until March 2, 2005 and is secured by a
subordinated security interest in the tangible assets of CommercialWare, Inc.
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
This Quarterly report on Form 10-Q contains forward-looking information about
the Company. In addition to the historical information contained herein, the
discussions in this document include statements that constitute forward-looking
statements under the Safe Harbor provisions of the Private Securities Litigation
Reform Act of 1995, including with respect to the Company's revenues, gross
margins, acquisitions and expected cash flow. The Company is hereby setting
forth statements identifying important factors that may cause the Company's
actual results to differ materially from those set forth in any forward-looking
statements made by the Company. Some of the most significant factors include:
the risks associated with acquisitions; the ability of the Company to adapt to
the rapid changes in the software industry and compete with companies with
significantly greater financial and technical resources; the loss of executive
officers and key personnel who are critical to the Company's business; the
volume and timing of orders received during the period, which are difficult to
forecast; the successful completion and sale of new products and enhancements to
existing products; the availability of additional capital in the future and
financial market volatility; and general economic and business conditions.
Management believes these forward-looking statements are reasonable. However,
caution should be taken not to place undue reliance on any such forward-looking
statements since such statements speak only as of the date when made.
Accordingly, there can be no assurances that any anticipated future results will
be achieved and the forward-looking statements contained herein should not be
relied upon as predictions of future results. Furthermore, the Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Management Overview
The Company designs and develops proprietary enterprise software for the tire
dealer, legal, project-based services, and manufacturing and distribution
software markets. The Company's revenues are derived from the licensing of the
Company's software products, from client service and support, and from the sale
of third party computer and add-on hardware.
Business Environment
The software industry is subject to economic cycles, and has in the past
experienced and is likely in the future to experience, recessionary periods.
During the two year period ending June 30, 2004, many sectors of the software
industry experienced the effects of a downturn in economic conditions. This
downturn lead to reduced demand for the products and services provided by
software companies like ASA. These changes in demand and in economic conditions
have limited, and may continue to limit, sales of licenses to new and existing
customers. These conditions have also resulted in longer customer sales cycles,
and delays in or rescheduling of orders. Such conditions have and could continue
to affect ASA's results of operations, since a significant portion of the
Company's operating costs (such as personnel, rent and depreciation) are fixed
in advance of a particular quarter. During these downturns, the Company
carefully monitors and often adjusts the number of its employees in an effort to
control its personnel costs which is its largest variable and controllable
operating expense. Since the Company operates in highly competitive markets, it
is required to make ongoing investments in sales and marketing activities and
continue to produce new and enhanced software products.
Overview of Company Operations
The Company's ability to increase its overall revenues is dependent on its
ability to generate sales of its proprietary enterprise software or add-on
modules to new and/or existing customers. Such software sales are typically
accompanied by professional services revenue associated with customer
requirements for implementation and training. Proprietary enterprise software
sales, along with its ability to retain its existing customers, allow the
Company to maintain or increase its core of ongoing revenues from maintenance
and support. The Company's ability to attain profitability is largely dependent
upon its ability to properly match its operating costs, primarily its personnel
costs, to its existing revenue level on a timely basis. The Company forecasts
16
annually the level of revenue anticipated for the upcoming year and plans
staffing levels and its cost structure accordingly to produce profitable
operations. Each month the Company monitors its progress against its forecast,
and should the Company determine that the required level of revenue is not
likely to be attained, its expenditures are adjusted to the existing revenue
level. In order to minimize the likelihood for frequent and disruptive cost and
personnel reductions, the Company has traditionally targeted modest revenue
growth (10% or less) from year to year. Staffing and other expenditures are
matched to existing, predictable revenue rather than a level of revenue growth
that may be too optimistic.
In an effort to improve its prospects for growth in a historically volatile
industry, the Company has also pursued a strategy of growth through
acquisitions. These acquisitions have primarily involved the purchase of entire
companies, although software products complementary to the Company's existing
product lines have also been acquired. The Company has successfully consummated
and integrated a number of acquisitions in the past which have contributed to an
increase in the Company's revenue and earnings. However, the timing of
identifying and completing the acquisition of suitable and affordable companies
is highly unpredictable. In addition, these acquisitions involve many risks
associated with successfully integrating the acquired operations, products,
technologies, personnel and businesses and realizing anticipated synergies, and
economies of scale.
REVENUE
Results of Operations
Second Quarter of 2004
compared to
Second Quarter of 2003
(000's omitted)
-------------------------------------------------------
Revenue Increase / (Decrease)
-------------------- --------------------------
2004 2003 Amount Percentage
---- ---- ------ ----------
Services $3,004 $3,191 $(187) (6%)
Product licenses 966 651 315 48%
Computer and add-on hardware 234 254 (20) (8%)
------ ------ -----
Net revenue $4,204 $4,096 $ 108 3%
====== ====== =====
The Company's total revenues increased by approximately $108,000 for the quarter
ended June 30, 2004, compared to the quarter ended June 30, 2003. The changes in
the components of the Company's revenue are explained as follows:
Product license revenue
- -----------------------
Three Months Ended June 30, 2004
compared to
Three Months Ended June 30, 2003
-------------------------------------------------------
(000's omitted) Revenue Increase / (Decrease)
-------------------- --------------------------
2004 2003 Amount Percentage
---- ---- ------ ----------
Tire $ 519 $ 395 $ 124 31%
Legal 394 141 253 179%
Project-based Services 28 73 (45) (62%)
Manufacturing and Distribution 25 42 (17) (40%)
----- ----- -----
Total product license revenue $ 966 $ 651 $ 315 48%
===== ===== ===== =====
The Company's software license revenues are derived primarily from the licensing
of the Company's enterprise products. Product license revenues increased by
approximately $315,000, or 48%, for the quarter ended June 30, 2004, compared to
the the quarter ended June 30, 2003. During the quarter ended June 30, 2004, the
Company sold approximately $344,000 in enterprise software, comprising
approximately 21 enterprise software systems at an average price of
approximately $16,000 per system, compared to approximately $300,000 in
enterprise software, comprising approximately 9 systems, averaging approximately
$33,000, in the prior year's quarter ended June 30, 2003. In addition, the
Company sold approximately $623,000 of additional software modules, primarily to
existing customers during the quarter ended June 30, 2004, compared to
approximately $351,000 in add-on software module sales during the prior year's
comparable period.
17
Product license revenues increases for the tire and legal systems segments of
approximately $124,000 and $253,000, respectively were partially offset by
decreases in product license revenues of approximately $45,000 and $17,000 for
the project-based services and the manufacturing and distribution systems from
the quarter ended June 30, 2004 when compared to the quarter ended June 30,
2003. The increase in product license revenue for tire and legal systems is due
to improving demand in those market segments and also reflects, for legal
systems, the impact of broadening its product offerings through the integration
of the software products acquired from CompuTrac.
Services Revenue
- ----------------
Three Months Ended June 30, 2004
compared to
Three Months Ended June 30, 2003
---------------------------------------------------------
(000's omitted) Revenue Increase / (Decrease)
------------------------ --------------------------
2004 2003 Amount Percentage
---- ---- ------ ----------
Tire $1,134 $1,125 $ 9 1%
Legal 1,097 1,229 (132) (11%)
Project-based Services 350 402 (52) (13%)
Manufacturing and Distribution 423 435 (12) (3%)
------ ------ ------
Total service revenue $3,004 $3,191 $ (187) (6%)
====== ====== ====== ======
The Company's services are comprised of fees generated from training,
consulting, software modifications, and ongoing client support provided under
maintenance agreements that renew automatically unless either party gives prior
notice as specified in the agreements. Service revenues decreased by
approximately $187,000, or 6%, for the quarter ended June 30, 2004 compared to
the quarter ended June 30, 2003.
Service revenue decreased for all Company's segments except service revenues
for tire sytems which remained approximately unchanged from the prior year's
quarter. The decrease in service revenues was due primarily to the smaller
number of enterprise software systems sold during the prior year period which
reduced client requirements for training and consulting services. As noted
above, software sales lead to additional service revenues including ongoing
support revenue, and are typically accompanied by professional services revenue
associated with customer requirements for implementation and training.
Computer and add-on hardware
- ----------------------------
The Company's hardware revenues are derived from the resale of third-party
hardware products to the Company's clients in conjunction with the licensing of
the Company's software. Hardware revenues decreased by approximately $20,000, or
8%, for the quarter ended June 30, 2004, compared to the quarter ended June 30,
2003. The decrease in hardware revenues from existing businesses was due to
decreased hardware sales by the tire systems segment. Clients are electing to
use third party sources for their hardware needs as price competition continues
to increase.
COST OF REVENUE
Product licenses and development. The Company's cost of software license
revenues consists of the costs of amortization of capitalized software costs,
and the costs of sublicensing third-party software products. The amount also
includes the expenses associated with the development of new products and the
enhancement of existing products (net of capitalized software costs), which
consist primarily of employee salaries, benefits, and associated overhead costs.
Cost of software license revenues and development decreased by approximately
$71,000, or 8%, for the quarter ended June 30, 2004, compared to the quarter
ended June 30, 2003. The project-based services and legal systems segments
18
accounted for approximately $86,000 and $45,000, respectively of this decrease.
The decrease in costs for the project-based services segment was largely the
result of a decrease in software amortization costs. The decrease in such costs
for the legal systems segment was a result of a decrease of 5 in the number of
employees involved in product development for the period ending June 30, 2004
compared to the same period in 2003. The costs of product license and
development also decreased slightly ($5,000) for the manufacturing and
distribution systems. These decreases were partially offset by an increase in
development expenses for the tire systems segment of approximately $65,000
related to new product development activities. The cost of product licenses as a
percentage of product license revenue may fluctuate from period to period due to
the mix of sales of third-party software products in each period contrasted with
certain fixed expenses such as the amortization of capitalized software.
Services. The Company's cost of services consists of the costs incurred in
providing client training, consulting, and ongoing support as well as other
client service-related expenses. Cost of services decreased by approximately
$121,000, or 7%, for the quarter ended June 30, 2004, compared to the quarter
ended June 30, 2003. The decrease the cost of services for the period was
primarily the result of a reduction of approximately 2 in the number of
employees providing services for the project-based services systems segment for
the period ending June 30, 2004 compared to the same period in 2003. The cost of
services for the project-based services segment decreased by approximately
$131,000 for the period. Small decreases in the cost of services also occurred
in the legal ($10,000) and the manufacturing and distribution systems ($12,000)
segments are a result of decreased revenue from services noted above for these
segments. The tire segment's cost of services increased by approximately $32,000
as a result of the increase in revenue from services noted above. The gross
margin percentage for services for the period increased to approximately 50%
from 49% for the same period in 2003. The Company's margin from services
fluctuates from period to period due to changes in the mix of contracts and
projects.
Computer and Add-on Hardware. Cost of hardware revenues consists primarily of
the costs of third-party hardware products. Cost of hardware revenues decreased
by approximately $29,000, or 14%, for the quarter ended June 30, 2004, compared
to quarter ended June 30, 2003. The decrease was due to decreased sales of
hardware products by the Company's tire systems segment. The gross margin
percentage for hardware sales increased to 27% for the quarter ended June 30,
2004, from 21% for the quarter ended June 30, 2003. Margins on computer and
add-on hardware can fluctuate based on the mix of computer and ancillary
hardware products sold.
EXPENSES
Marketing and Sales. Marketing and sales expenses consist primarily of employee
salaries, benefits, commissions and associated overhead costs, and the cost of
marketing programs such as direct mailings, trade shows, seminars, and related
communication costs. Marketing and sales expenses increased by approximately
$46,000, or 6%, for the quarter ended June 30, 2004, compared to the the quarter
ended June 30, 2003. The change resulted from an increase in sales and marketing
expenses for the tire and legal systems segments of approximately $81,000 and
$68,000. Costs increased as a result of the addition of sales personnel by tire
(3) and legal systems (2), and as a result of increased license revenue,
additional commission expenses were incurred. The manufacturing and distribution
and the project-based services segments sales and marketing expenses decreased
by approximately $60,000 and $43,000, respectively due to a reduction in sales
personnel of approximately 1 and 2 personnel, respectively, during the quarter
ended June 30, 2004 compared to the similar period ended June 30, 2003. The
decreases reflect actions taken to eliminate the costs of personnel performing
below targeted quota.
General and Administrative. General and administrative expenses consist
primarily of employee salaries and benefits for administrative, executive, and
finance personnel and associated overhead costs, as well as consulting,
accounting, and legal expenses. General and administrative expenses decreased
approximately $199,000, or 21%, for the quarter ended June 30, 2004, compared to
the quarter ended June 30, 2003. The decrease in general and administrative
expenses for the tire systems segment of approximately $20,000 for the period is
due primarily to reduced payroll costs related to a manager transferred to
client services. General and administrative expenses for the project-based
19
services and the manufacturing and distribution segments decreased by
approximately $37,000 and $52,000, respectively. The majority of the decrease in
costs for both segments resulted from the payroll cost savings achieved by
combining the accounting and administrative functions, ($28,000 and $23,000,
respectively), and the closing of the project-based services group's separate
office space in Clearwater, Florida, ($9,000 and $29,000, respectively). The
operations of both of these segments are now housed in the same offices in
Tampa, Florida. The decrease in general and administrative expenses for the
legal systems segment of approximately $15,000 for the period is due to reduced
outside service and occupancy costs. General and administrative expenses for
corporate overhead decreased by approximately $75,000 due to a reduction in
bonus expense.
OTHER INCOME
Gain on Sale of Marketable Equity Securities. In June 2004, the Company sold
101,250 shares of common stock of Omtool Ltd. at an average price of
approximately $9.01 per share, net of broker's commissions, for a total of
approximately $912,000 in cash. The sale resulted in a pretax gain of
approximately $755,000.
Net earnings for the quarter ended June 30, 2004 were approximately $393,000, as
compared to a net loss of approximately $249,000 for the quarter ended June 30,
2003. The change results from an increase in earnings from operations of
approximately $482,000, the gain on the sale of marketable equity securities of
approximately $755,000, and an increase in interest income-net of approximately
$20,000, partially offset by a decrease in other income-net of approximately
$14,000 and an increase in income tax expense of approximately $601,000.
Results of Operations
Six Months Ended June 30, 2004
compared to
Six Months Ended June 30, 2003
-------------------------------------------------------
(000's omitted) Revenue Increase / (Decrease)
-------------------- -------------------------
2004 2003 Amount Percentage
---- ---- ------ ----------
Services $6,032 $6,410 $ (378) (6%)
Product licenses 1,980 1477 503 34%
Computer and add-on hardware 431 504 (73) (14%)
------ ------ ------
Net revenue $8,443 $8,391 $ 52 1%
====== ====== ====== =====
REVENUE
The Company's total revenues increased by approximately $52,000 for the six
months ended June 30, 2004, compared to the six months ended June 30, 2003. The
changes in the components of the Company's revenue are explained as follows:
Product licenses.
- -----------------
Six Months Ended June 30, 2004
compared to
Six Months Ended June 30, 2003
-------------------------------------------------------
(000's omitted) Revenue Increase / (Decrease)
-------------------- -------------------------
2004 2003 Amount Percentage
---- ---- ------ ----------
Tire $1,009 $ 769 $ 240 31%
Legal 581 276 305 111%
Project-based Services 264 270 (6) (2%)
Manufacturing and Distribution 126 162 (36) (22%)
------ ----- -----
Total product license revenue $1,980 $1,477 $ 503 34%
====== ====== ===== =====
20
Product license revenues increased by approximately $503,000, or 34%, for the
six months ended June 30, 2004, compared to the the six months ended June 30,
2003. Product license revenues increased for tire and legal systems segments by
approximately $240,000 and $305,000, respectively, for the six months ended June
30, 2004 when compared to the six months ended June 30, 2003. Product license
revenues decreased for the project-based services and the manufacturing and
distribution systems segments by approximately $6,000 and $36,000, respectively,
for the six months ended June 30, 2004 when compared to the six months ended
June 30, 2003. During the six months ended June 30, 2004, the Company sold
approximately $873,000 in enterprise software comprising approximately 31
systems at an average price of approximately $28,000 per system compared to the
sale of approximately $799,000 in enterprise software comprising approximately
25 systems averaging $32,000 in the prior year's six months ended June 30, 2003.
In addition, the Company sold approximately $1,107,000 of additional software
modules, primarily to existing customers during the six months ended June 30,
2004 compared to approximately $678,000 in add-on software module sales during
the prior year's comparable period.
Services Revenue
- ----------------
Six Months Ended June 30, 2004
compared to
Six Months Ended June 30, 2003
-------------------------------------------------------
(000's omitted) Revenue Increase / (Decrease)
--------------------- -------------------------
2004 2003 Amount Percentage
---- ---- ------ ----------
Tire $2,286 $2,245 $ 41 2%
Legal 2,188 2,431 (243) (10%)
Project-based Services 733 882 (149) (17%)
Manufacturing and Distribution 825 852 (27) (3%)
------ ------ ------
Total service revenue $6,032 $6,410 $ (378) (6%)
====== ====== ====== ======
Service revenues decreased by approximately $378,000, or 6%, for the the six
months ended June 30, 2004 compared to the six months ended June 30, 2003.
Service revenue decreased for the Company's tire and project-based services
systems segments. Service revenue decreased for all the Company's segments
except tire sytems services revenues which increased slightly from the prior
year's quarter. The decrease in service revenues was due primarily to the
smaller number of enterprise software systems sold during the prior year period
which reduced client requirements for training and consulting services. As noted
above, software sales lead to additional service revenues including ongoing
support revenue, and are typically accompanied by professional services revenue
associated with customer requirements for implementation and training.
Computer and add-on hardware
- ----------------------------
Hardware revenues decreased by approximately $73,000, or 14%, for the six months
ended June 30, 2004, compared to the six months ended June 30, 2003. The
decrease in hardware revenues from existing businesses was due to decreased
hardware sales by the tire systems segment. Clients are electing to use third
party sources for their hardware needs as price competition continues to
increase.
COST OF REVENUE
Services. Cost of services decreased by approximately $295,000, or 9%, for the
six months ended June 30, 2004, compared to the six months ended June 30, 2003.
The cost of services for the tire segment increased approximately $105,000
during the period due to a lower gross margin on projects for the period
compared to the prior year and the effect of a slight increase in service
revenue. The cost of services for the legal, project-based services and
manufacturing and distribution systems segments all decreased by approximately
$88,000, $274,000 and $38,000, respectively during the period. The cost of
21
services for the project-based services and manufacturing and distribution
systems segments decreased due to the service personnel reductions made
throughout the year ended December 31, 2003 and the deferral of the replacement
of personnel lost to attrition. A decrease in the cost of services for the legal
systems segments related to the effect of lower service revenues was partially
offset by an increase in such costs related to lower gross margin on projects
for the period compared to the prior year. The overall gross margin percentage
for services for the period increased to approximately 50% from 49% of revenue
from services for the same period in 2003. The Company's revenue and margin from
services fluctuate from period to period due to changes in the mix of contracts
and projects.
Product licenses and development. Cost of software license revenues and
development decreased by approximately $69,000, or 4%, for the six months ended
June 30, 2004, compared to the six months ended June 30, 2003. The project-based
services and legal systems segments accounted for approximately $164,000 and
$59,000, respectively of this decrease. The decrease in costs for the
project-based services segment was largely the result of a decrease in software
amortization costs ($154,000). The decrease in such costs for the legal systems
segment was a result of a decrease of 5 in the number of employees involved in
product development for the period ending June 30, 2004 compared to the same
period in 2003. The costs of product license and development also decreased
slightly ($15,000) for the manufacturing and distribution systems. These
decreases were partially offset by an increase in development expenses for the
tire systems segment of approximately $169,000 related to new product
development activities. The cost of product licenses as a percentage of product
license revenue may fluctuate from period to period due to the mix of sales of
third-party software products in each period contrasted with certain fixed
expenses such as the amortization of capitalized software.
Computer and Add-on Hardware. Cost of hardware revenues decreased by
approximately $71,000, or 18%, for the six months ended June 30, 2004, compared
to six months ended June 30, 2003. The decrease was due to decreased sales of
hardware products by the Company's tire systems segment. The gross margin
percentage for hardware sales increased to 26% for the six months ended June 30,
2004, from 22% for the six months ended June 30, 2003. Margins on computer and
add-on hardware can fluctuate based on the mix of computer and ancillary
hardware products sold. Accordingly, the Company expects hardware gross margins
to continue to fluctuate in the future.
EXPENSES
Marketing and Sales. Marketing and sales expenses decreased by approximately
$34,000, or 2%, for the six months ended June 30, 2004, compared to the the six
months ended June 30, 2003. The change resulted from an increase in sales and
marketing expenses for the tire and legal systems segments of approximately
$115,000 and $56,000. This increase was the result of the addition of sales
personnel by tire (3) and legal systems (2), and an increase in commission
expenses associated with higher license revenues. In the manufacturing and
distribution and the project-based services segments, sales and marketing
expenses decreased by approximately $143,000 and $62,000, respectively due to a
reduction in sales personnel of approximately 1 and 2 personnel, respectively,
during the quarter ended June 30, 2004, compared to the similar period ended
June 30, 2003. The change reflects actions taken to eliminate the costs of
personnel performing below targeted quota.The decrease for the manufacturing and
distribution segment also reflects the elimination of the allocated costs for
the sales and marketing activities of an executive who was terminated.
General and Administrative. General and administrative expenses decreased
approximately $248,000, or 13%, for the six months ended June 30, 2004, compared
to the six months ended June 30, 2003. The change includes decreases in general
and administrative expenses from all Company segments as well as corporate
overhead. The decrease in general and administrative expenses for the tire
systems segment of approximately $17,000 for the period is due primarily to
reduced payroll costs related to a manager transferred to client services.
General and administrative expenses for the project-based services and the
manufacturing and distribution segments decreased by approximately $58,000 and
$76,000, respectively. The majority of the decrease in costs for both segments
resulted from the payroll cost savings achieved by combining the accounting and
administrative functions, ($36,000 and $27,000, respectively), and the closing
of the project-based services group's separate office space in Clearwater,
Florida ($22,000 and $49,000, respectively). The operations of both of these
segments are now housed in the same offices in Tampa, Florida. The decrease in
general and administrative expenses for the legal systems segment of
22
approximately $35,000 for the period is due to reduced outside service and
occupancy costs. General and administrative expenses decreased by approximately
$62,000 for corporate overhead due to a reduction in bonus expense of
approximately $75,000 which was partially offset by small increases in overhead
expenses.
Bad Debt Expense. During the six months ended June 30, 2004, the Company's
balance in the allowance for doubtful accounts decreased from approximately
$123,000 at December 31, 2003 to approximately $111,000 at June 30, 2004. During
the six months ended June 30, 2004, the project-based services segment wrote-off
approximately $9,000 for a customer for a disputed amount, and also wrote-off a
number of customer balances or invoices, each of which was individually less
than $5,000, which totaled approximately $12,000, and which were also for
disputed amounts or amounts deemed uncollectible. The tire, legal and
manufacturing and distribution systems segments also wrote-off a number of
customer balances on invoices, each of which was individually less than $5,000,
and which totaled approximately $3,000, $4,000, and $6,000, respectively,
related to disputed amounts or amounts deemed uncollectible. Approximately
$22,000 was added to the allowance for doubtful accounts during the six months
ended June 30, 2004.
OTHER INCOME
Gain on Sale of Marketable Equity Securities. The Company purchased 451,250
shares of common stock of Omtool Ltd. in a transaction completed in May 2003. In
June 2004, the Company sold 101,250 shares of common stock of Omtool Ltd. in
public resales at a price of approximately $9.01 per share, net of broker's
commissions, for a total of approximately $912,000 in cash, excluding costs
related to the sale. In March 2004, the Company had sold 350,000 shares of
common stock of Omtool Ltd. to Omtool in a private transaction at a price of
$11.50 per share for a total of $2,012,500 in cash, excluding costs related to
the sale. The foregoing share amounts have been adjusted to reflect Omtool
Ltd.'s April 27, 2004 two-for-one stock split. These sales resulted in a pretax
gain of approximately $2,218,000. The Company has now sold all of its shares of
Omtool Ltd.
Net earnings for the six months ended June 30, 2004 were approximately
$1,444,000, as compared to a net loss of approximately $357,000 for the six
months ended June 30, 2003. The change results from an increase in earnings from
operations of approximately $768,000, the gain on the sale of marketable equity
securities of approximately $2,218,000, and an increase in interest income-net
of approximately $2,000, partially offset by a decrease in other income-net of
approximately $62,000 and an increase in income tax expense of approximately
$1,125,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company had total cash and cash equivalents at June 30, 2004 of
approximately $4,280,000, a decrease of approximately $466,000 from December 31,
2003. The Company and its subsidiaries had a maximum line of credit totaling
$1,500,000, subject to a formula, which was available at June 30, 2004. At June
30, 2004, the Company had approximately $2,522,000 invested in marketable
securities in a mutual fund, and had no such investments at December 31, 2003.
The Company purchased 451,250 shares of common stock of Omtool Ltd. in a
transaction completed in May 2003. In June 2004, the Company sold 101,250 shares
of common stock of Omtool Ltd. in public resales at a price of approximately
$9.01 per share, net of broker's commissions, for a total of approximately
$912,000 in cash, excluding costs related to the sale. In March 2004, the
Company had sold 350,000 shares of common stock of Omtool Ltd. to Omtool in a
private transaction at a price of $5.75 per share for a total of $2,012,500 in
cash, excluding costs related to the sale. The foregoing share amounts have been
adjusted to reflect Omtool Ltd.'s April 27, 2004 two-for-one stock split. These
sales resulted in a pretax gain of approximately $2,218,000. The Company has now
sold all of its shares of Omtool Ltd.
In June 2004, the Company sold its 50% interest in an aircraft it had purchased
in January 2003. The Company, along with the owner of the other 50% interest in
the aircraft, each sold their respective interests in the aircraft for
approximately $874,000 with the proceeds used to pay in full, each party's
23
proportionate share of the Promissory Note co-signed and co-guaranteed at the
time of the aircraft's purchase. The Company's guarantee on the Note ended upon
payoff. The total balance on the Note at the time of pay-off was approximately
$830,000, with the Company's proportionate share approximating $415,000. No gain
or loss was recorded on the sale as the cash proceeds from the sale approximated
the net book value of the aircraft. Concurrent with the foregoing aircraft sale,
the Company purchased a 33% interest in another aircraft through its 100% owned
subsidiary, ASA Aircraft, LLC for a total purchase price of $1,800,000. A note
for $1,530,000 was signed under a Demand Loan and Security Agreement with a bank
for the purchase of the 33% interest in the aircraft. The Company is obligated
for 33% of the $1,530,000 note, and is a guarantor on the remaining 67%. The two
other co-borrowers on the note are unrelated parties that are each liable for
33% of the note and are also guarantors of the Company's liability. The 5-year
note with interest at prime (4.00% at June 30, 2004) plus .25% calls for monthly
principal and interest payments of $11,521 through December 2007 with a final
payment of approximately $1,142,206 plus interest due in July 2009. The
Promissory Note is collateralized by the aircraft with cross guarantees by each
of the three borrowers.
In July 2004, ASA terminated the Company's Chief Executive Officer's
split-dollar life insurance program, which had not been modified since the
adoption of Sarbanes-Oxley, and replaced it with a new executive benefit package
that includes an executive life plan and a supplemental retirement plan. The
replacement was based on a comparison of the costs and benefits of the old
split-dollar plan and the new benefit plan.
The new executive life plan is a $2,000,000 policy that will be owned by a trust
of which the Officer or his designees are the beneficiaries. The Company will
pay the annual premiums of approximately $53,921 for the plan, which will be
reported as income to the Officer and will be deductible to the Company as paid,
and will continue to pay such premiums through the Officer's retirement as a
retirement benefit.
The new supplemental retirement plan is a $2,670,313 policy that will be owned
by the Company. The Company will fund the first year premium of approximately
$560,000 and pay annual premiums of approximately $60,000 for the following nine
years. The cash surrender value to the Company of the terminated split-dollar
life insurance policy of approximately $540,572, will be used to fund the first
year premium. The new policy will be used to reimburse the Company for its
funding of post-retirement income of the Officer of $200,000 for ten years,
which will reported as income to the Officer and will be deductible to the
Company as paid. In the event that the Officer dies prior to retirement, his
beneficiary will receive a lump sum payment of $2,100,000, which would be
reported as income to the beneficiary and deductible by the Company. Upon his
death subsequent to retirement, any unpaid post retirement income due under the
plan will be paid by the Company to the Officer's beneficiary.
In July 2004, Company entered into an agreement to guarantee $500,000 in payment
obligations to a bank under a letter of credit on behalf of CommercialWare, Inc.
The guarantee extends from July 19, 2004 until March 2, 2005 and is secured by a
subordinated security interest in the tangible assets of CommercialWare, Inc.
In April 2004, the Company announced that its Board of Directors had unanimously
approved a reverse 1-for-600 split of the Company's common stock to be followed
immediately by a forward 600-for-1 split. If the transaction is approved by the
Company's stockholders and implemented, the Company expects to have fewer than
300 stockholders of record, which would enable the Company to voluntarily
terminate the registration of its common stock under the Securities Exchange Act
of 1934 and go private. As a private company, the Company would no longer be
required to file periodic reports and other information with the Securities and
Exchange Commission ("SEC").
Pursuant to the transaction, stockholders holding fewer than 600 shares of the
Company common stock immediately before the transaction will receive from the
Company cash payment for fractional shares equal to $5.00 per pre-split share.
Stockholders holding 600 or more shares of the Company common stock immediately
before the transaction will continue to hold the same number of shares after
completion of the transaction and will not receive any cash payment. The Board
of Directors received an opinion from its financial advisor, vFinance
Investments, Inc., that the cash consideration to be paid in the proposed
transaction is fair, from a financial point of view, to the Company's
stockholders. The total cash to be paid for fractional shares is estimated to be
approximately $1,630,000, based on an estimate of approximately 326,000 shares
24
of Common Stock held by the record and beneficial stockholders holding fewer
than 600 shares. The expenses of the transaction, all of which will be paid by
the Company and which include professional fees and other expenses related to
the transaction, are expected to total approximately $260,000.
The Company has experienced significant fluctuations in its quarterly operating
results and anticipates such fluctuations in the future. Quarterly revenues and
operating results depend on the volume and timing of orders received during the
quarter which are difficult to forecast. Large orders for the Company's products
often have a lengthy sales cycle while the customer evaluates and receives
approvals for the purchase of the products. Accurately predicting the sales
cycle of any large order may be difficult. If one or more large orders fail to
close as forecasted in a fiscal quarter, the Company's revenues and operating
results could be materially adversely affected. In addition, the Company
typically receives a substantial portion of its product orders in the last month
of the quarter. Orders are shipped as received and, as a result, the Company
often has little or no backlog except for support and service revenue. The
Company acknowledges the potential adverse impact that such fluctuations and
general economic uncertainty could have on its ability to maintain liquidity and
raise additional capital.
The Company's future financial performance is also dependent in large part on
the successful development, introduction, and customer acceptance of new and
enhanced versions of its software products. Due to the rapid change in vendor
hardware platforms, operating systems, and updated versions, the complexity and
expense of developing, testing, and maintaining the Company's products has
increased. The Company intends, as it has in the past, to fund this development
primarily from its cash from operations and bank debt. There can be no assurance
that these efforts will be successful or result in significant product
enhancements.
Subject to the foregoing, the Company believes that based on the level of
operating revenue, cash on hand, and available bank debt, it has sufficient
capital to finance its ongoing business.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of the Company's financial condition and
results of operations are based upon the consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosures
of contingent assets and liabilities. On an on-going basis, management evaluates
estimates, including those related to the allowance for doubtful accounts,
software, acquired software and other acquired intangibles, the likelihood of
the utilization of certain tax loss carry-backs and carry-forwards for certain
of the transactions completed by the Company, and the valuation allowance on
deferred tax assets. The Company bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. The Company believes the following critical
accounting policies affect its more significant judgments and estimates used in
the preparation of its consolidated financial statements. For a detailed
discussion on the application of these and other accounting policies, see Note A
in the notes to the consolidated financial statements included in the Company's
annual report on Form 10-K for the year ended December 31, 2003.
Accounts Receivable. Accounts receivable balances are evaluated on a continual
basis and allowances are provided for potentially uncollectible accounts based
on management's estimate of the collectibility of customer accounts. If the
financial condition of a customer were to deteriorate, resulting in an
impairment of their ability to make payments, an additional allowance may be
required. Allowance adjustments are charged to operations in the period in which
the facts that give rise to the adjustments become known. The accounts
receivable balance at June 30, 2004 was $1,673,401, net of an allowance of
$111,161, and at December 31, 2003 was $1,466,719, net of an allowance for
doubtful accounts of $122,646.
25
Revenue Recognition. The Company recognizes revenue in accordance with the
American Institute of Certified Public Accountants (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."
Revenue is recognized when all of the following are met: pervasive evidence of
an arrangement exists; delivery has occurred; the vendor's fee is fixed and
determinable; and collectibility is probable. For multiple-element license
arrangements, the license fee is allocated to the various elements based on fair
value. When a multiple-element arrangement includes rights to a post-contract
customer support, the portion of the license fee allocated to such support is
recognized ratably over the term of the arrangement. For arrangements to deliver
software that requires significant modification or customization, revenue is
recognized on the percentage-of-completion method.
Computer hardware revenue is recognized upon shipment of product to the client.
Service revenues include post-contract client support, consulting, and training
support. Post-contract client support is generally provided under self-renewing
maintenance agreements. Revenue on these maintenance agreements is recognized
ratably over the contract term. Consulting and training services revenue is
recognized in the period the service is rendered.
Based on the Company's reading and interpretation of these SOPs, the Company
believes that its current sales contract terms and business arrangements have
been properly reported. However, the AICPA and its Software Revenue Recognition
Task Force continue to issue interpretations and guidance for applying the
relevant standards to a wide range of sales contract terms and business
arrangements that are prevalent in the software industry. Also, the Securities
and Exchange Commission (SEC) has issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements," which provides guidance related
to revenue recognition based on interpretations and practices followed by the
SEC. Future interpretations of existing accounting standards or changes in the
Company's business practices could result in future changes in its revenue
accounting policies that could have a material adverse effect on its business,
financial condition and results of operations.
The Company's revenue recognition policy is significant because the Company's
revenue is a key component of its results of operations. In addition, the
Company's revenue recognition determines the timing of certain expenses, such as
commissions and license costs. The Company follows very specific and detailed
guidelines in measuring revenue; however, certain judgments affect the
application of the Company's revenue policy. Revenue results are difficult to
predict, and any shortfall in revenue or delay in recognizing revenue could
cause the Company's operating results to vary significantly from quarter to
quarter and could result in future operating losses.
Software. The Company accounts for the costs of computer software developed in
accordance with Statement of Financial Accounting Standard No. 86. Accordingly,
the costs of purchased software, and of that software developed internally (once
technological feasibility is established) associated with coding new
applications or modules and enhancing and porting existing applications
software, are capitalized. Amortization of these costs is based on the greater
of the charge resulting from the application of either the straight-line method
over five years or the proportion of current sales to estimated future revenues
of each product. The Company periodically reviews the carrying value of its
software to determine whether an impairment exists. Relevant cash flow and
profitability information, including estimated future operating results, trends,
and other available information are considered in assessing whether the carrying
value of the software can be recovered. If it is determined that the carrying
value of the software will not be recovered from the undiscounted cash flows,
the carrying value of the software would be considered impaired and reduced by a
charge to operations in the amount of the impairment. An impairment charge is
measured as any deficiency in the amount of undiscounted future cash flows
available to recover the carrying value related to the software. Future adverse
changes in market conditions could result in an inability of the Company to
recover the carrying value of the software, thereby possibly requiring an
impairment charge in the future.
Goodwill and other acquired intangibles. The determination of the value of such
intangible assets requires management to make estimates and assumptions that
affect the Company's consolidated financial statements. As a result of the
adoption of Statement of Financial Accounting Standards No. 142 "Goodwill
26
and Other Intangible Assets" ("SFAS 142"), the Company annually reviews goodwill
and other intangible assets that have indefinite lives for impairment and when
events or changes in circumstances indicate the carrying value of these assets
might exceed their current fair values. Fair value is determined using
discounted cash flow analysis, which requires the Company to make certain
assumptions and estimates regarding industry economic factors and future
profitability of acquired businesses. If actual results are not consistent with
these assumptions and judgments, the Company could be exposed to a material
impairment charge.
Long-Lived Assets. The Company accounts for long-lived assets in accordance with
SFAS 144, and accordingly, reviews its long-lived assets and identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. In performing the
review for recoverability, the Company estimates the future cash flows expected
to result from the use of the asset and its eventual disposition. If the sum of
the undiscounted expected future cash flows is less than the carrying amount of
the asset, an impairment loss is recognized. Otherwise, an impairment loss is
not recognized. Measurement of an impairment loss for long-lived assets and
identifiable intangibles would be based on the fair value of the asset.
The Company has identified the policies above as critical to the Company's
business operations and the understanding of the Company's results of
operations. The impact and any associated risks related to these policies on the
Company's business operations is discussed in Management's Discussion and
Analysis of Financial Condition and Results of Operations where such policies
affect the Company's reported and expected financial results. For a detailed
discussion on the application of these and other accounting policies, see Note A
in the Notes to the Consolidated Financial Statements in Item 14 of the
Company's Annual Report on Form 10-K. Note that the Company's preparation of the
Annual Report on Form 10-K requires us to make estimates and assumptions that
affect the reported amount of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the Company's financial statements, and
the reported amounts of revenue and expenses during the reporting period. There
can be no assurance that actual results will not differ from those estimates.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
ASA is heavily dependent on the software industry and changes in the industry
could harm ASA's business and operating results.
The software industry is subject to economic cycles and has in the past
experienced, and is likely in the future to experience, recessionary periods. In
particular, many sectors of the software industry are currently experiencing the
effects of a downturn in economic conditions. This downturn is leading to
reduced demand for the services provided by software companies like ASA. These
changes in demand and in economic conditions have resulted and may continue to
result in customer cancellation or rescheduling of orders, which could affect
ASA's results of operations. In addition, a protracted general recession in the
software industry could have a material adverse effect on ASA's business,
financial condition and results of operations.
ASA's operating results may fluctuate substantially, which may cause its stock
price to fall.
ASA's quarterly and annual results of operations have varied in the past, and
ASA's operating results may vary significantly in the future due to a number of
factors including, but not limited to, the following:
o timing of orders from major customers;
o mix of products and services;
o pricing and other competitive pressures;
o delays in new product development, which could cause ASA to be unable to
meet customer delivery schedules;
o economic conditions in the software industry; and
o ASA's ability to time expenditures in anticipation of future revenues.
27
ASA is subject to risks associated with acquisitions, and these risks could harm
ASA's operating results and cause its stock price to decline.
ASA has historically pursued a strategy of growth through acquisitions. These
acquisitions have primarily involved acquisitions of entire companies.
Acquisitions of companies and businesses and expansion of operations involve
certain risks, including the following:
o the potential inability to successfully integrate acquired operations,
product lines, technologies, personnel and businesses or to realize
anticipated synergies, economies of scale or other value;
o diversion of management's attention;
o difficulties in coordinating management of operations at new sites;
o difficulties associated with managing and integrating operations in distant
geographic locations;
o the possible need to restructure, modify or terminate customer
relationships of the acquired company; and
o loss of key employees of acquired operations.
ASA may experience problems in integrating operations previously acquired by ASA
or operations associated with any future acquisition. ASA cannot assure you that
any recent or future acquisition will result in a positive contribution to ASA's
results of operations. In particular, the successful combination of ASA with any
business ASA acquires in the future will require substantial effort for each
company, including the integration and coordination of marketing and sales
efforts. The diversion of the attention of management and any difficulties
encountered in the transition process, including the interruption of, or a loss
of momentum in, the activities of any future acquisition, problems associated
with integration of management information and reporting systems, and delays in
implementation of consolidation plans, could harm ASA's ability to realize the
anticipated benefits of any future acquisition. Any failure by ASA to realize
the anticipated benefits of its acquisitions could harm its business, financial
condition and operating results, and could cause the price of ASA's common stock
to decline. In addition, future acquisitions may result in significantly
dilutive issuances of equity securities, the incurrence of additional debt,
large one-time write-offs and the creation of goodwill or other intangible
assets that could result in amortization expense or impairment charges. These
factors could harm ASA's business, financial condition and operating results and
cause the price of ASA's common stock to decline.
Some executive officers and key personnel are critical to ASA's business and
these officers and key personnel may not remain with ASA in the future.
ASA's success depends upon the continued service of some executive officers and
other key personnel. Generally, ASA's employees are not bound by employment or
non-competition agreements, and there can be no assurance that ASA will retain
its officers and key employees. If ASA loses the services of Alfred C. Angelone,
chairman and chief executive officer of ASA, or one or more of its other
executive officers or key employees, or if one or more of these individuals
decides to join a competitor or otherwise compete with ASA, ASA's business,
operating results and financial condition could be seriously harmed.
ASA may need additional capital in the future, which may not be available.
ASA has entered into a revolving demand loan agreement with a bank for up to
$1,500,000 (which cannot exceed 80% of qualified accounts receivables), bearing
interest at a rate approximating prime plus .5%, which extends through June 30,
2005. The revolving demand loan is subject to certain terms and conditions,
including maintenance of a stated tangible net worth, stated debt service
coverage and debt to tangible net worth ratios. Payment of dividends is
prohibited under the terms of the agreement. Borrowings are secured by the
personal property of ASA. Although ASA has no indebtedness under the revolving
demand loan agreement, ASA may need to borrow money in the future. If ASA is
unable to borrow under the agreement, ASA may be unable to raise sufficient
additional capital when needed, on favorable terms, or at all. If ASA's
borrowings under the agreement are insufficient, the agreement includes
provisions and covenants that would restrict ASA's ability to incur further
indebtedness. If ASA's capital resources are insufficient to meet future capital
requirements, ASA will have to raise additional funds. The sale of equity or
28
convertible debt securities in the future may be dilutive to ASA's stockholders.
If ASA is unable to obtain adequate funds on reasonable terms, ASA may be
required to curtail operations significantly or to obtain funds by entering into
financing agreements on unattractive terms.
ASA may need to refinance its headquarters in the future, which may not be
possible.
ASA has a mortgage related to its corporate headquarters in Framingham,
Massachusetts. The mortgage note, in the original amount of $3,000,000 with
interest at 7.24% for 10 years, provides for monthly principal and interest
payments of $20,445 through October 2008 with a final payment of approximately
$2,638,000 plus interest. If ASA's capital resources are insufficient to meet
the monthly or final payment obligations, ASA will have to raise additional
funds or relocate its headquarters, which may not be possible on attractive or
reasonable terms.
ASA's operating results are subject to fluctuations.
ASA has historically experienced significant fluctuations in its quarterly
operating results and anticipates such fluctuations in the future. ASA's
quarterly revenues and operating results depend on the volume and timing of
orders received during the quarter, which are difficult to forecast. Large
orders for ASA's products often have a lengthy sales cycle while the customer
evaluates and receives approvals for the purchase of the products. Accurately
predicting the sales cycle of any large order may be difficult. If one or more
large orders fail to close as forecasted in a fiscal quarter, ASA's revenues and
operating results could be materially adversely affected. In addition, ASA
typically receives a substantial portion of its product orders in the last month
of a quarter. Orders are shipped as received and, as a result, ASA often has
little or no backlog except for support and service revenue. Such fluctuations
and general economic uncertainty could have a material adverse impact on ASA's
ability to maintain liquidity and raise additional capital.
Failure to manage ASA's growth may seriously harm its business.
ASA's business has grown in recent years through both internal expansion and
acquisitions, and continued growth may cause a significant strain on ASA's
infrastructure and internal systems. To manage ASA's growth effectively, ASA
must continue to improve and expand its management information systems. Future
acquisitions could place additional strains on ASA's management infrastructure.
If ASA is unable to manage growth effectively, its results of operations could
be harmed.
The trading price of ASA's common stock may be volatile.
The trading prices of ASA's common stock has been and could in the future be
subject to significant fluctuations in response to variations in quarterly
operating results, developments in the software industry, changes in general
economic conditions and economic conditions in the software industry changes, in
securities analysts' recommendations regarding ASA's securities, and other
factors. In addition, the stock market in recent years has experienced
significant price and volume fluctuations which have affected the market prices
of technology companies and which have been unrelated to or disproportionately
impacted by the operating performance of those companies. These broad market
fluctuations may cause the market price of ASA's common stock to decline.
Item 3. Quantitative And Qualitative Disclosure About Market Risk
---------------------------------------------------------
The Company is exposed to the impact of interest rate changes and investment
changes.
Interest Rate Risk. The Company's exposure to market rate risk for changes in
interest rates relates primarily to the Company's cash equivalent investments.
The Company has not used derivative financial instruments. The Company invests
certain of its excess cash in short-term floating rate instruments and senior
secured floating rate loan funds which carry a degree of interest rate risk.
These instruments may produce less income than expected if interest rates fall.
29
Investment Risk. The Company has invested, and may invest in the future, in
equity instruments of privately held companies for business and strategic
purposes. These investments are included in other long-term assets and are
accounted for under the cost method when ownership is less than 20%. For these
non-quoted investments, the Company's policy is to regularly review the
assumptions underlying the operating performance and cash flow forecasts in
assessing the carrying values. The Company identifies and records impairment
losses on long-lived assets when events or circumstances indicate that such
assets might be impaired.
Item 4. Controls and Procedures
-----------------------
Within the 90 days prior to the date of this report, the company carried out an
evaluation, under the supervision and with the participation of the company's
management, including the company's chief executive officer and chief financial
officer, of the effectiveness of the design and operation of the company's
disclosure controls and procedures pursuant to Rule 13a-14 of the Securities
Exchange Act of 1934. Based upon that evaluation, the chief executive officer
and chief financial officer concluded that the company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the company (including its consolidated subsidiaries) required to be
included in the company's periodic SEC filings. There have been no significant
changes in the company's internal controls or in other factors that could
significantly affect internal controls subsequent to the date the company
carried out its evaluation.
30
PART II
OTHER INFORMATION
Item 5. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
10.1 Promissory Note made payable to Regions Bank by ASA Aircraft
LLC, RSR Aircraft LLC, and Cosmed Aviation LLC executed on June
25, 2004.
10.2 Business Loan Agreement by and between Regions Bank, ASA
Aircraft LLC, RSR Aircraft LLC, and Cosmed Aviation LLC executed
on June 25, 2004.
10.3 Aircraft Security Agreement between Regions Bank, ASA Aircraft
LLC, RSR Aircraft LLC, and Cosmed Aviation LLC executed on June
25, 2004
10.4 Commercial Guaranty between Regions Bank, ASA Aircraft LLC, RSR
Aircraft LLC, and Cosmed Aviation LLC executed on June 25, 2004.
10.5 Third Amended and Restated Security Agreement by and among
CommercialWare, Inc., Transaction Smartware, Inc., ASA
International Ltd. and Capital Resource Partners IV, L.P., dated
dated July 19, 2004
10.6 Letter Agreement by and among CommercialWare, Inc., ASA
International Ltd. and Capital Resource Partners IV, L.P., dated
July 19, 2004
10.7 License Agreement between ASA International Ltd and Quality
Design Systems, Inc. dated June 1, 2004
31.1 Section 302 Certification of Chief Executive Officer.
31.2 Section 302 Certification of Chief Financial Officer.
32.1 Section 906 Certification of Chief Executive Officer.
32.2 Section 906 Certification of Chief Financial Officer.
(b) Reports on Form 8-K
-------------------
The Registrant filed three Current Reports on Form 8-K during the
quarter ended June 30, 2004.
On April 16, 2004, the Registrant filed a Form 8-K reporting under Item
5 that the Registrant had issued a press release announcing that ASA's Board of
Directors had unanimously approved a reverse 1-for-600 split of ASA's common
stock to be followed immediately by a forward 600-for-1 split.
On May 14, 2004, the Registrant filed a Form 8-K reporting under Item
12 that the Registrant had issued a press release announcing results of
operations for the first fiscal quarter ended March 31, 2004.
On June 29, 2004, the Registrant filed a Form 8-K reporting under Item
5 that the Registrant had sold its remaining 101,250 shares of Omtool common
stock in the public market.
31
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ASA International Ltd.
----------------------
(Registrant)
08/13/04 /s/ Alfred C. Angelone
- -------- ----------------------
(Date) (Signature)
Alfred C. Angelone
Chief Executive Officer
08/13/04 /s/ Terrence C. McCarthy
- -------- ------------------------
(Date) (Signature)
Terrence C. McCarthy
Vice President, Secretary, and Treasurer
32