SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended: Commission File Number:
December 31, 2003 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
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(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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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class Name of each exchange
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None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
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Title of Each Class
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Common Stock, $.01 par value
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No: .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2):
Yes: No: X .
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As of March 22, 2004, 1,914,157 shares of Common Stock, $.01 par value per
share, were outstanding. The aggregate market value, held by non-affiliates, of
shares of the Common Stock, based upon the average of the bid and ask prices for
such stock on June 30, 2003 (the last business day of the registrant's most
recently completed second fiscal quarter) was approximately $3,410,000.
1
PART I
ITEM 1. Business
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GENERAL
Background
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ASA International Ltd. (the "Registrant" or the "Company") provides
networked automation systems and ongoing monthly support to approximately 780
businesses in North and South America. The Company designs and develops
proprietary enterprise software for the following markets: tire dealer and
retreader, law firms, system integrators and e-focused companies, and
manufacturing and distribution companies. The Company installs its software on a
variety of computers and networks, and various Unix/Open Systems hardware
platforms, and provides implementation, education, custom development, and
long-term software support to its customers.
The Company targets its products and services to distinct identifiable
markets. The Company considers its operation to be a single reporting segment
due to the comparable economic characteristics of its products and services as
well as similarities in the nature of the products and services offered, the
processes to develop and upgrade its products and services, and the methods to
market and distribute its products and services to customers. The Company's
current operations are comprised of four product lines and a corporate services
group that supports all four product lines. The four current product lines are:
Tire Systems. Our tire systems procuct line consists of an integrated
offering of systems and services designed specifically for the multi-user
environments of today's tire and automotive after-market businesses. The Company
markets its flagship products TireMax(R) and TirePro(R) and offers e-commerce
and business-to-business services through eTireLink as well as ASP services. In
2003, a Business Intelligence data mining product called Analytix was released
which interfaces to TireMax(R) and TirePro(R).
Legal Systems. Our legal systems product line is offered under the name of
RainMaker(TM), as a provider of integrated financial management, practice
management, and business intelligence software solutions for law firms in the
United States.
Enterprise Software for Project-Based Organizations. Our enterprise
application software product line consists of software designed exclusively for
organizations that provide project-based services, such as value added
resellers, systems integrators, software companies, technology consulting,
professional services, and contract furnishing providers. Marketed under the
name "Khameleon Software," the Company offers a modular suite of back-office and
front-office software applications capable of processing all transactions and
activities for the entire service delivery including; sales force automation,
project accounting, contract management, sales and distribution, service desk,
and financial management.
Manufacturing and Distribution Systems. Our manufacturing and distribution
systems product line consists of enterprise application software designed for
small-to-medium size manufacturers and distributors. Marketed under the name
"Verticent," the Company targets vertical industries where it has both
experience and proven success, including metal service centers, metal
fabricators, industrial machinery, outsourced manufacturers, and
configure-to-order manufacturers.
The Company, founded in 1969, was organized as a Massachusetts corporation
on December 15, 1982 and was reincorporated as a Delaware corporation on May 5,
1986. As used in this Report, the term "Company" includes ASA International Ltd.
and its wholly owned subsidiaries, ASA Properties, Inc., ASA International
Ventures, Inc., ASA Tire Systems Inc., RainMaker Software, Inc. (formerly ASA
Legal Systems, Inc.), Khameleon Software Inc., Verticent, Inc., ASA Aircraft LLC
and Pilot Services, Inc. ASA Properties, Inc. is the sole and managing member of
10 Speen Street LLC, which is the owner of the Company's corporate headquarters.
The Company's consulting and general business systems operations began in
1969 under the direction of the Company's founder and Chief Executive Officer,
Alfred C. Angelone.
2
Acquisitions and Divestitures within the Past Five Years
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Design Data
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In November 1999, the Company acquired the business of Design Data
Systems Corporation, a Florida corporation, pursuant to an Asset Purchase
Agreement (the "Design Data Purchase Agreement") by and among the Company, the
Seller, individually (only with respect to certain sections of the Design Data
Purchase Agreement), and the Company's Bank, as Escrow Agent (the "Escrow
Agent") (only with respect to certain sections of the Design Data Purchase
Agreement). The Design Data Purchase Agreement provides that the transaction is
effective as of September 30, 1999 (the "Closing Date"). Pursuant to and as more
fully set forth in the Design Data Purchase Agreement, the Company had the right
and obligation to purchase certain of the assets and assume certain of the
liabilities of Seller for a purchase price of $5,000,000 (the "Purchase Price").
Of the Purchase Price, $4,750,000 was due and payable on the Closing Date and
$250,000 was to be deposited with the Escrow Agent to be held pursuant to the
terms of the Design Data Purchase Agreement. Also on the Closing Date, the
Company entered into a certain Asset Acquisition and Exchange Cooperation
Agreement (the "Exchange Agreement") with SQL Acquisition LLC, a Delaware
limited liability company ("SQL"), Fidelity National 1031 Exchange Services,
Inc., a California corporation, and Pacific American Property Exchange
Corporation, a California corporation and sole member and manager of SQL. The
Company entered into the Exchange Agreement for the purpose of seeking the
ability to effectuate a like-kind exchange pursuant to Section 1031 of the
Internal Revenue Code of 1986, as amended. Pursuant to and as more fully set
forth in the Exchange Agreement, the Company reserved the right to exchange
certain software and related intellectual property of Seller (the "Replacement
Property") for certain other relinquished property of the Company. In connection
therewith, the Company assigned to SQL the Company's right and obligation under
the Design Data Purchase Agreement to acquire the Replacement Property pursuant
to a certain Assignment Agreement dated the Closing Date between the Company,
Seller and SQL. The Company completed the like-kind exchange involving
$4,300,000 of Replacement Property on September 15, 2000.
ASA Italy
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In September 2000, the Company sold all of its shares of its Italian
subsidiary, ASA Italy S.r.l., an Italian limited company ("S.r.l.") to
management of the S.r.l. for nominal cash consideration. In connection with the
sale, S.r.l. acknowledged and agreed to pay a debt of approximately $9,000
incurred by the Company on behalf of S.r.l.
SmartTime
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In August 2000, the Company completed the sale of its SmartTime business to
InterPro Business Solutions, Inc. (formerly InterPro Expense Systems, Inc.), a
Delaware corporation ("InterPro"). Pursuant to an Option to Purchase Agreement
dated August 2, 1999 by and between the Company, InterPro, and ASA InterPro
SmartTime LLC, a Delaware limited liability company, InterPro exercised its
option to purchase the SmartTime business from the LLC for the aggregate
purchase price of $7,020,000 less the option fees paid on August 2, 1999 of
$1,660,000 and $540,000 paid on August 1, 2000. The terms and conditions of the
acquisition under the option are contained in the Asset Purchase Agreement dated
as of August 2, 1999 (the "SmartTime Purchase Agreement"). As set forth in the
SmartTime Purchase Agreement and Exhibits, on August 2, 1999, InterPro had
loaned to the Company $3,200,000 pursuant to a promissory note due on or before
August 31, 2000 (the "ASA Note"). Interest of $160,000 on the ASA Note was
prepaid to August 1, 2000. InterPro completed the transaction by paying the
remaining $4,820,000 of the purchase by (a) delivering the ASA Note (valued at
$3,213,151 as a result of interest accrued from August 1 through August 31,
2000), and (b) paying the remainder of $1,606,849 in cash.
The results for the operations of this product line are shown in the
Consolidated Statements of Operations for the year ended December 31, 2000 under
the caption "Equity in Loss from Affiliate."
CommercialWare
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Effective March 3, 1999, the Company sold substantially all of the assets of
the Company's CommercialWare Division ("CWI") to CommercialWare, Inc., a
Delaware Corporation ("CW"). CWI provided enterprise order management and
fulfillment systems to consumer, business catalog, direct marketing and
3
electronic commerce firms. In connection therewith, the Company transferred to
the purchaser certain of the liabilities of CWI. The Company received (i) cash
in the amount of $4,000,000, (ii) a promissory note in the amount of $1,700,000,
(iii) a junior promissory note in the amount of $500,000, (iv) 30,000 shares of
CW's common stock, par value $.01 per share, and (v) one (1) share of CW's
Series A Preferred Stock.
International Trade and Transportation Systems Group
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On November 1, 2002, the Company and ASA Investment Partnership ("AIP"), a
partnership between the Company and its Chief Executive Officer, exchanged their
respective 5.49% and 10.51% membership interests in TradePoint Systems LLC
("TradePoint") for $400,000 and 332,799 shares of the Company's common stock,
respectively (the "Exchange"). Also on November 1, 2002, the Company paid to
TradePoint $400,000 in full satisfaction of certain of the Company's obligations
to TradePoint pursuant to a lease by TradePoint from the Company of office space
at the Company's Nashua, New Hampshire facility (the "Lease").
In December 1996, the Company transferred substantially all of the assets
and liabilities of the Company's International Trade and Transportation Systems
Division to TradePoint in exchange for a 16% membership interest in TradePoint
and a subordinated promissory note (the "Note") in the principal amount of
$600,000 (the "1996 Transaction"). The remaining 84% interest in TradePoint is
owned by the former President and a director of the Company and his spouse. In
connection with the 1996 Transaction, the former President resigned from all of
his positions with the Company. In exchange for his interest in TradePoint, the
former President (i) contributed all of the 332,799 shares of common stock of
the Company owned by him; (ii) assigned to the Company a 16% partnership
interest in AIP; and (iii) canceled all of his options to purchase 245,000
shares of the Company's common stock. In October 2002, the Company transferred a
10.51% membership interest in TradePoint to AIP.
The Note was repaid in full during 2000. In connection with the Exchange,
the Company and TradePoint modified or terminated various agreements entered
into in connection with the 1996 Transaction. As a result, neither the Company
nor AIP has any continuing interest in TradePoint or any of the assets used in
TradePoint's business, and neither the Company nor TradePoint has any continuing
obligations to the other party, except for certain obligations of TradePoint to
the Company pursuant to the Lease.
CompuTrac, Inc.
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On August 1, 2002, the Company and CompuTrac, Inc., a Texas corporation
("CompuTrac"), completed the merger of CompuTrac into RainMaker Software, Inc.,
a wholly owned subsidiary of the Company, pursuant to an Agreement and Plan of
Merger (the "Merger Agreement"). Under the terms of the Merger Agreement,
CompuTrac stock was converted into a right to receive a pro rata share of
685,340 shares of ASA Common Stock and approximately $1,425,000 in cash, subject
to certain conditions and adjustments. The final number of shares issued totaled
682,335 due to approximately 3,000 in shares not issued to dissenting former
CompuTrac shareholders. CompuTrac shareholders received .20648 shares of ASA
common stock and approximately $.2156 in cash for each share of CompuTrac common
stock held at the time of the merger. Since the sum of the amounts assigned to
the assets acquired and the liabilities assumed exceeded the cost of CompuTrac,
the excess over cost was allocated as a pro rata reduction of the amounts that
otherwise would be assigned to all of the acquired assets. The excess over cost
was approximately $1,096,389, computed using a purchase price of $3,219,231.
The purchase price is based on a value of $2.70 per share for the 222,213
shares covered under the Stock Repurchase Agreement and a value of approximately
$2.02 for the 460,223 remaining shares issued. The $2.02 value for these shares
is based on the closing price of ASA's stock as of the merger date of August 1,
2002. Identified intangible assets, consisting principally of software, which
totaled approximately $941,000 after the pro rata reduction of the amounts that
otherwise would be assigned, will be amortized over an estimated life of five
years. The merger followed the approval of the transaction by the shareholders
of each company in July 2002.
The share/per share amounts for the merger have been restated to reflect
the May 30, 2003 reverse/forward split of the Company's common stock.
4
PowerCerv Corporation
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On December 1, 2002, the Company completed the purchase of substantially all
of the assets of PowerCerv Corporation. Under terms of an Asset Purchase
Agreement (the "PowerCerv Purchase Agreement"), in addition to assuming certain
PowerCerv liabilities, the Company paid PowerCerv $500,000 cash ($100,000 of
which had been advanced to PowerCerv as a loan) and issued a $90,000 note at
1.81% per annum due in six months. The purchase price was increased by
approximately $16,000 for adjustments specified under the terms of the PowerCerv
Purchase Agreement. The closing of the transaction was completed after the
approval of the transaction by the shareholders of PowerCerv. The net assets
acquired consisting of approximately $1,114,000 of goodwill, $232,000 of
software, $360,000 of other assets, and the assumption of approximately
$1,019,000 of liabilities were recorded at their fair values.
During the past year, there have been no bankruptcy proceedings,
receivership, or similar proceedings with respect to the Registrant, nor has
there been any merger or consolidation of the Registrant, and, except as noted
above, there has been no disposition of any material amount of the Registrant's
assets.
BUSINESS
The following paragraphs describe in greater detail the business conducted
by the Registrant.
Tire Systems
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The Company provides integrated hardware and software multi-user solutions
on Sun, and Hewlett-Packard Unix/Linux-based systems to independent tire
dealers, wholesalers, and retreaders in the United States, Canada and Latin
America for Business-to-Business ("B2B") via the Internet, point-of-sale, work
orders, inventory control, purchasing, and accounting functions. The systems
range in price between $25,000 and $300,000.
In September 1988, July 1989, September 1990, and November 1996,
respectively, the Company acquired Associated Software Consultants Organization,
Inc., Snyder Computing Systems, Computers Northwest, and certain assets of
Progressive Computer Systems, Inc., all of which specialized in supplying
computer systems to independent tire dealers. In recent years, the Company has
consolidated its position in the independent tire dealer marketplace. The
Company believes that it has the largest installed base of independent tire
retailer and distributor multi-user computer systems in the United States.
Within this operating group, the Company also continues to maintain,
upgrade, and support legacy manufacturing management and control and accounting
software based primarily on the Digital (HP) hardware platform.
Legal Systems
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The Company provides integrated financial management, practice management,
and business intelligence systems for mid-large size law firms throughout the
United States. The Company's RainMaker Platinum products are a fully integrated
suite of legal specific applications designed to run on PC networks. The
products are written using Microsoft development tools and Microsoft relational
database technology. Systems range in price between approximately $50,000 and
$200,000.
The Company entered the legal systems marketplace in June 1991 by
acquiring Quorum Legal Systems of Plymouth Meeting, Pennsylvania from Control
Data Corporation. In January 1992, the Company acquired the fixed assets of
Legal Data Systems of Boston, Massachusetts. In November 1994, the Company
acquired certain software products of Precedent Technologies, Inc., of New Hope,
Pennsylvania. In July 1999, the Company acquired substantially all of the assets
of Chase Technologies, Inc., of Washington Crossing, Pennsylvania. In August
2002, the Company completed the merger with CompuTrac, Inc., of Richardson,
Texas.
Enterprise Software for Project-Based Organizations.
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Marketed under the name Khameleon Software, the Company's products are
designed exclusively for organizations that provide project-based services.
Khameleon offers a modular suite of applications, including sales force
5
automation, project accounting, contract management, sales and distribution,
service desk, and financial management. Khameleon's products run exclusively on
Oracle's premier database technology. Systems range in price from approximately
$50,000 to $200,000.
The Company entered this market in November 1999 when it acquired Design
Data Systems Corporation of Clearwater, Florida.
Manufacturing and Distribution Systems.
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Marketed under the name Verticent the Company provides a comprehensive
enterprise business system designed for the unique needs of small-to-medium size
manufacturers and distributors. Incorporating enterprise resource planning,
customer relationship management, e-business, and business intelligence
solutions, the Verticent enterprise business system is designed to leverage
up-to-date technology for a flexible, comprehensive, yet affordable, system
which can be implemented quickly, and which can be administered with minimal
resources. Systems range in price from approximately $50,000 to $250,000.
The Company entered the Manufacturing and Distribution Systems market in
December 2002 when it acquired substantially all of the assets of PowerCerv
Corporation of Tampa, Florida.
Marketing
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The Company markets its products and services to new prospects and existing
customers primarily using the Company's direct sales force, assisted by
technical personnel. These personnel are trained in the Company's product and
service offerings and in the operations of the Company's customers. The Company
uses its own personnel, rather than third-party distributors, because the
Company's prospects and existing customers often lack comprehensive computer and
systems technical expertise and require a "consultative" selling approach,
involving a long selling cycle.
More importantly, the Company's objective is to develop a direct, long-term
relationship with each customer. This marketing approach requires substantial,
specialized knowledge of the requirements of the Company's customers generally
not available from third-party distribution arrangements. These requirements
result from the intangible nature of applications software and related services,
the sophistication of the Company's products and the need for each customer to
understand how the Company's products and services will work to meet the
customer's requirements. The Company's sales force is supported by marketing
personnel who develop advertising and marketing campaigns; produce product
literature, periodic newsletters, and direct mail campaigns; arrange attendance
at trade shows and conventions; and sponsor seminars.
Marketing to a new prospect consists of identifying the prospect, qualifying
the prospect and, if the prospect is qualified, preparing and presenting a sales
proposal. In the tire, legal, project-based services, and manufacturing and
distribution applications software markets served by the Company, the total
markets are well defined through the respective industry and professional
organizations. In these markets, trade shows and direct contacts are used to
determine how prospects are satisfying their information processing
requirements.
Once a prospect is qualified as to interest in the Company's products and/or
services, the direct sales and, as required, support personnel, visit the
prospect to understand the prospect's specific requirements. This process
usually results in the preparation of a written proposal, which describes the
hardware, software, and services that will meet the prospect's requirements.
This sales cycle can be long, ranging from six months to beyond one year. The
Company believes the success of its sales activities depends upon this
consultative approach.
The Company believes that its customer base presents continuing
opportunities for sales of additional software and services. The Company's
products and services generally become an integral part of the customer's
business. As a result, the quality of customer support is essential in selling
to existing customers.
The Company maintains frequent contact with customers through sales and
service representatives. The Company provides customer support lines to handle
customer system operational issues within a prescribed response time, and
continually communicates with its customers through newsletters and customer
seminars. Through frequent contact with its customers by marketing and service
activities, the Company believes that it can better understand customer
requirements and direct its product development activities toward developing and
enhancing products that should be well accepted by both existing customers and
new prospects.
6
Sources and Availability of Raw Materials
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The Company's systems operate on computer hardware supplied by leading
hardware manufacturers pursuant to Original Equipment Manufacturer or Value
Added Reseller Agreements. These agreements are renewable on a year-to-year
basis, and entitle the Company to purchase equipment at various discounts based
upon volume and the type of equipment. The loss of the Company's ability to
purchase equipment from such manufacturers would not have a material adverse
effect on the Company's business. The Company could also continue to purchase
from hardware distributors, but on terms less favorable than from the original
manufacturer. The Company believes that its relationship with the hardware
manufacturers is satisfactory.
The Company purchases all of its computer hardware and peripheral equipment
from hardware vendors, and performs only software installation, testing, final
system configuration, and quality control. The Company believes there are
several alternative suppliers for system components used by the Company.
Patents and Proprietary Technology
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The Company does not believe that patents are material to its business. The
Company relies primarily upon trade secrets, unpatented proprietary know-how,
and continuing technological innovation to develop and maintain its competitive
position. In particular, the Company generally provides only "run time" code for
its software to its tire and legal clients, although certain legal clients may
also purchase "source" code. In addition, most Khameleon Software and Verticent,
Inc. clients have source code licenses. Insofar as the Company relies on trade
secrets and unpatented know-how, there can be no assurance that others may not
independently develop similar technology or that secrecy will not be breached.
Certain product names of the Company are recognized as trademarks in interstate
commerce and are or may be registered trademarks.
Seasonality
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The Company has not experienced material seasonality in its business, other
than that due to the economic fluctuation of the economies of North and South
America.
Working Capital Items
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The Company does not have any unusual trade practices which would require
restrictions on working capital.
Revenue by Product Line
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During the fiscal years ended December 31, 2003, 2002, and 2001, the
Company's revenue by product line was approximately as follows:
2003 2002 2001
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Product Line Revenue % Revenue % Revenue %
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Tire Systems $ 6,625,000 41% $ 8,438,000 53% $ 6,852,000 47%
Legal Systems 5,385,000 34% 4,567,000 28% 3,416,000 23%
Project-Based
Services Systems 2,019,000 13% 2,913,000 18% 4,477,000 30%
Manufacturing and
Distribution Systems 1,887,000 12% 138,000 1% -- --
----------- --- ----------- --- ----------- ---
$15,916,000 100% $16,056,000 100% $14,745,000 100%
=========== === =========== === =========== ===
7
Backlog
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Set forth below is information concerning the Company's backlog at December
31, 2003 and 2002, respectively:
Backlog at December 31,
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2003 2002
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Support Support
Product Line Total Contracts Total Contracts
- ------------ ----- --------- ----- ---------
Tire Systems/Legacy Products $ 3,700,000 $ 2,900,000 $ 3,100,000 $ 2,700,000
Legal Systems 3,700,000 3,200,000 3,900,000 3,600,000
Project-based Services Systems 1,100,000 1,100,000 1,400,000 1,300,000
Manufacturing and
Distribution Systems 900,000 900,000 500,000 500,000
------------- ------------- ------------- -------------
$ 9,400,000 $ 8,100,000 $ 8,900,000 $ 8,100,000
============= ============= ============= =============
The Company expects that all of the backlog existing at December 31, 2003
will be filled in fiscal year 2004. Support contracts are generally cancelable
by the Company or the Company's customers upon 90 days prior written notice.
Competition
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The Company has five main competitors in the Tire Market: MaddenCo,
CarParts, Quality Design Systems (QDS), Signal, and Goodyear. A new entrant to
the market, TireWare, is developing a browser based application for
Point-of-Sale. MaddenCo has a mature client base and is not growing or losing
customers at a significant rate. QDS is owned by Bandag, Incorporated (NYSE
ticker symbol: BDG). QDS focuses primarily on the low end (single-location)
dealerships and has recently begun to offer the product to prospects with
multiple locations. Signal has a legacy base of clients that they maintain.
Goodyear has both company owned and independent dealers operating on their
system. The Company believes that the principal competitive factors are initial
price, ongoing cost of ownership, ease of startup, and overall customer
satisfaction. The Company believes it competes favorably with respect to all of
these factors.
The Legal Systems market is highly competitive. The Company's primary
competitors for legal systems are CMS/DATA Corp., Elite Data Processing, Juris,
Prolaw, Omega, and Provantage. The Company believes that the principal
competitive factors in the legal systems business are: vendor reputation and
references; the ability to provide 32 bit client/server products with a GUI
front end and MS SQL Server back end; the ability to easily interface with other
Windows-based applications; the ability to run both the "front-office" and the
"back-office" applications on a single network; product reliability; and the
quality of professional services and support. The Company believes it competes
favorably with respect to all of these factors.
The Enterprise Software market for Project-based Organizations is highly
competitive. The primary competitors for the Company's Khameleon product line
are SOFTRAX, Microsoft Great Plains, Microsoft Navision, Oracle, Deltek, and
Lawson. The Company believes the principal competitive factors for these systems
are: cost; name recognition; the quality of professional services and support;
and the ability to manage the complex business processes associated with project
accounting, contract management, and revenue recognition. While the Company
believes it competes favorably with respect to most of these factors, it has
embarked on a marketing campaign to increase the visibility of its product in
the marketplace. This campaign includes the use of telemarketing, email
broadcasting, search engine optimization, on-line advertising, and public
relations.
8
The Enterprise Software market for small-to-medium size Manufacturers and
Distributors is intensely competitive. The primary competitors for the Company's
Verticent product line include Axis Computer Systems, Invera, Metalware, Lilly
Software, Made2Manage, Epicor, and Microsoft Navision. The Company believes the
principal competitive factors for these systems are cost, name recognition, the
quality of professional services and support, and the ability to manage the
complex business processes faced by Verticent's targeted vertical industries,
including rules-based order configuration, dimensional variability, cut
optimization, mill test reporting, remnant inventory, electronic data
interchange, and landed cost, among others. While the Company believes it
competes favorably with respect to most of these factors, it has embarked on a
marketing campaign to increase the visibility of its product in the marketplace.
This campaign includes the use of telemarketing, email broadcasting, search
engine optimization, print and on-line advertising, and public relations.
New Accounting Pronouncements
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In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." This Interpretation clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 requires an enterprise
to consolidate a variable interest entity if that enterprise will absorb a
majority of the entity's expected losses, is entitled to receive a majority of
the entity's expected residual returns, or both. FIN 46 also requires
disclosures about unconsolidated variable interest entities in which an
enterprise holds a significant variable interest. FIN 46 is currently effective
for variable interest entities created or entered into after January 31, 2003.
FASB Staff Position 46-6, which was issued in October 2003, delayed the
effective date of FIN 46 to the first reporting period ending after December 15,
2003 for variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The adoption of FIN 46 did
not have a material effect on the Company's results of operations or financial
position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." This Statement clarifies
under what circumstances a contract with an initial net investment meets the
characteristics of a derivative, clarifies when a derivative contains a
financing component, amends the language used in FIN 45, and amends certain
other existing pronouncements. The provisions of SFAS No. 149 are effective for
contracts entered into or modified after June 30, 2003. The adoption of SFAS No.
149 did not have a material effect on the Company's results of operations or
financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS No. 150 requires that an issuer classify a financial instrument
that is within its scope as a liability (or an asset in some circumstances),
which, under previous guidance, may have been classified as equity. The
provisions of SFAS No. 150 are effective for financial instruments entered into
or modified after May 31, 2003 and otherwise shall generally be effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS No. 150 did not have a material effect on the Company's results
of operations or financial position.
Research and Development
- ------------------------
During the last three fiscal years, the amounts spent by the Company on
Company-sponsored research and development activities and on customer-sponsored
research activities relating to the development of new products, services, or
techniques or the improvement of existing products, services, or techniques were
not material.
Government Regulation
- ---------------------
There is presently no material government regulation with respect to the
Company's business. Approvals for computer hardware from Underwriter's
Laboratories and the Federal Communications Commission are obtained by the
hardware manufacturer. However, the extent to which future federal, state, or
9
local governmental regulations may regulate the Company's activities cannot be
predicted, and the Company may be subject to restrictions on export of its
computer systems to other countries if it seeks further expansion into non-U.S.
markets.
Employees
- ---------
As of December 31, 2003, the Company had 110 full time employees. Of these
employees, 8 are executive officers or senior managers, 14 are engaged in
marketing and sales, 49 in customer support and training, 23 in product/custom
development or engineering and 16 in general and administrative positions. The
Company's ability to develop, market and sell products and to establish and
maintain its competitive position in light of new technological developments
will depend, in large part, on its ability to attract and retain qualified
personnel. The Company believes that it has been successful to date in
attracting skilled personnel critical to its business. No employees are covered
by collective bargaining agreements. Management of the Company believes that its
relationship with its employees is satisfactory.
Financial Information about Geographic Areas
- --------------------------------------------
See Item 15(a)1, Note I, in the Company's Notes to Consolidated Financial
Statements.
ITEM 2. Properties
----------
The Company's corporate headquarters are located in a 32,000 square foot
office building at 10 Speen Street, Framingham, Massachusetts. This property is
owned by 10 Speen Street LLC, a Delaware limited liability company. ASA
Properties, Inc., a wholly owned subsidiary of the Company, is the managing and
sole member of 10 Speen Street LLC. The Company occupies approximately 16% of
the space in the building, while tenants lease the remainder of the space. In
September 1998, the Company refinanced this facility with a $3,000,000 mortgage
loan at 7.24% for 10 years with monthly principal and interest payments of
$20,445 through October 2008 and a final payment of approximately $2,638,000 of
principal, together with interest thereon.
In October 2003, the Company sold its 25,600 square foot office building in
Nashua, New Hampshire for $2,300,000 in cash. Approximately $960,000 of the
proceeds was used to satisfy mortgage loan obligations for the building. The
sale resulted in a pretax gain of approximately $650,000. Concurrent with the
sale of the building, the Company signed a five-year lease for approximately
10,000 square feet of the building currently used by the Tire Systems product
line for office space.
Certain of the Company's Legal Systems operations are located in
approximately 10,000 square feet of a 20,000 square foot office building at 222
Municipal Drive, Richardson, Texas, which was acquired as part of the CompuTrac
transaction in August 2002. There is no mortgage outstanding on the facility and
the carrying costs are approximately $11,000 per month. The portion of the
building not in use by the Company is currently unoccupied.
The Company maintains the following additional offices:
Location Monthly Rent Current Date of Lease
-------- ------------ Office Area Expiration
----------- ----------
Blue Bell, Pennsylvania $ 13,786 9,667 s.f. January 31, 2006
Kirkland, Washington $ 6,190 3,720 s.f. October 31, 2006
Nashua, New Hampshire $ 12,739 10,191 s.f. October 31, 2008
Tampa, Florida $ 16,819 12,232 s.f. December 31, 2008
10
ITEM 3. Legal Proceedings
-----------------
Various legal actions arising in the normal course of business have been
brought against the Company. Management believes these matters will not have a
material adverse effect on the Company's consolidated financial position or
results of operations.
ITEM 4. Submission of Matters to a Vote of Security-Holders
---------------------------------------------------
No matter was submitted to a vote of security-holders during the fourth
quarter of the fiscal year ended December 31, 2003, through the solicitation of
proxies or otherwise.
PART II
ITEM 5. Market for Company's Common Equity and Related Stockholder Matters
The Common Stock of ASA International Ltd. is traded on the National
Association of Securities Dealers Automated Quotation System (NASDAQ) under the
symbol ASAA. The table below indicates the high and low sales prices of the
Company's Common Stock during 2002 and 2003:
Calendar Year 2002 Low High
------------------ --- ----
First Quarter $2.46 $3.24
Second Quarter $2.20 $2.90
Third Quarter $1.50 $3.00
Fourth Quarter $1.56 $2.40
Calendar Year 2003 Low High
------------------ --- ----
First Quarter $1.78 $2.90
Second Quarter $1.50 $2.46
Third Quarter $1.94 $2.40
Fourth Quarter $2.15 $3.21
These quotations represent prices between dealers and do not include retail
markups, markdowns, or commissions, and may not necessarily represent actual
transactions. There were 383 holders of record of the Company's outstanding
Common Stock as of March 22, 2004. Each holder of Common Stock is also the
holder of a Preferred Stock Purchase Right which entitles the holder to purchase
one one-hundredths of a share of Series A Junior Participating Preferred Stock
of the Company for each share of Common Stock held by such person upon
satisfaction of certain conditions set forth in the Company's Shareholders
Rights Plan.
Under the terms of a share repurchase program authorized by the Company's
Board of Directors in June 1990, August 1998, July 1999, January 2000, October
2000 and November 2002, the Company is authorized to repurchase up to $2,750,000
of its Common Stock. In 2003, the Company repurchased shares under the program
in the months indicated as follows:
11
2003 Number of Shares Per Share Purchase Price
---- ---------------- ------------------------
April 2,750 $2.12
May 4,350 2.17
August 22,700 2.19
September 5,200 2.19
October 5,000 2.19
As of December 31, 2003, the Company may still repurchase up to
approximately $500,000 of its Common Stock under the program. Although it is not
obligated to do so, the Company may continue to repurchase shares of Common
Stock when market conditions for the purchase of its stock meet its
requirements.
During 2002 and 2003, the Company purchased 23,148 and 55,548 shares
respectively, of its stock at $2.70 per share under the Stock Repurchase
Agreement related to the CompuTrac acquisition. Also during 2003, the Company
purchased 3,392 shares at $2.10 per share from a shareholder.
All share/per share amounts reflect the May 30, 2003, reverse/forward split
of the Company's common stock.
Since its organization, the Company has not paid any dividends on its Common
Stock and its Board of Directors does not contemplate declaring any dividends in
the foreseeable future. The declaration and payment of dividends in the future
will be determined by the Board of Directors in light of conditions then
existing, including the Company's earnings, its financial condition and
requirements (including working capital needs), any agreements restricting the
payment of dividends and other factors. The Company's current banking
arrangements prohibit the payment of dividends by the Company.
ITEM 6. Selected Consolidated Financial Data
------------------------------------
(in thousands, except per share amounts)
The following selected consolidated financial data are derived from the
consolidated financial statements of the Company. The statement of operations
data for the years ended December 31, 2003, 2002, and 2001 and the balance sheet
data as of December 31, 2003 and 2002 are derived from and qualified by
reference to the consolidated financial statements and notes thereto included
herein and audited by Sansiveri, Kimball & McNamee L.L.P., the Company's
independent certified public accountants, as set forth in their report and also
included elsewhere herein. The statement of operations for the years ended
December 31, 2000, and 1999, and the balance sheet data as of December 31, 2000,
and 1999 are derived from financial statements audited by BDO Seidman, LLP, the
Company's then independent certified public accountants.
The financial information set forth below should be read in conjunction
with, and is qualified in its entirety by, the detailed information in the
consolidated financial statements and notes thereto appearing elsewhere herein.
(000's omitted)
Years Ended Decdmber 31,
------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Operating Data: (a) (b) (c) (d)(e)
Revenues $ 15,916 $ 16,056 $ 14,745 $ 19,633 $ 25,623
Costs of Revenue, Expenses and
Other Income and Expenses
excluding income tax expense 16,847 15,383 15,194 19,349 21,534
Earnings (Loss)
from Operations (1,647) 295 (931) (5,242) 491
Net Earnings (Loss) (515) 408 (309) 29 2,167
Basic Earnings (Loss) per
Common Share $ (0.25) $ 0.12 $ (0.10) $ 0.01 $ 0.67
Diluted Earnings (Loss) per
Common Share $ (0.25) $ 0.11 $ (0.10) $ 0.01 $ 0.63
Balance Sheet Data: 2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Total Assets $ 17,799 $ 19,896 $ 16,748 $ 18,601 $ 27,870
Long-Term Obligations 3,210 3,596 3,661 3,744 3,915
Long-Term Liabilities - other 830 999 709 725 769
Shareholders' Equity 10,437 10,747 9,405 9,716 10,240
12
Factors That Effect the Comparability of the Financial Information
(a) Includes pretax management fee of $149,000 earned for the period of
January 1, 2002 through July 31, 2002 related to the acquisition of
CompuTrac, Inc., which was completed on August 1, 2002. Revenues for
CompuTrac, Inc. were $699,000 for the year ended December 31, 2002.
Revenues related to the assets acquired from PowerCerv Corporation in
December 2002 were $138,000.
(b) Includes the pretax gain on the sale in September 2000 of ASA Italy
(formerly Cedes) of $14,000. ASA Italy's revenues were $3,513,000,
$2,898,000, and $1,326,000 for the years ended December 31, 1998, 1999,
and 2000, respectively.
(c) Includes the pretax gain on the sale in August 2000 of SmartTime
Software of $6,716,000. SmartTime's revenues were $5,890,000 and
$2,915,000 for the years ended December 31, 1998 and 1999, respectively.
(d) Includes the pretax gain on the sale in March 1999 of CommercialWare of
$3,824,000. CommercialWare's revenues were $10,776,000 for the year
ended December 31, 1998.
(e) Includes the continuing operations of Design Data Systems Corporation
from the date of its acquisition on November 4, 1999.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
This Annual report on Form 10-K 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.
RESULTS OF OPERATIONS
Comparison of 2003 to 2002
(000's omitted)
-------------------------------------------------------
Revenue Increase/(Decrease)
------------------------- --------------------------
2003 2002 Amount Percentage
Services $ 12,169 $ 10,916 $ 1,253 11%
Product licenses 2,782 3,606 (824) (23)%
Computer and add-on hardware 965 1,534 (569) (37)%
--------- ------------ ------------ -----------
Total Revenue $ 15,916 $ 16,056 $ (140) (1)%
========= ============ ============ ===========
13
During 2002, the Company completed the acquisition of two product lines. The
revenues related to these product lines for the year ended December 31, 2003 and
2002 were as follows:
Revenue Revenue
ASA Acquisition for for
Line Acquired From Product Line Date 2003 2002
------------------ ------------ ---- ---- ----
CompuTrac, Inc. Legal August 2002 $ 2,504,000 $ 699,000
PowerCerv Corporation Manufacturing & November 2002 1,887,000 138,000
Distribution ------------ ----------
Total $ 4,391,000 $ 837,000
============ ==========
REVENUE
Total Revenue. 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. The Company's
total revenues decreased by approximately $140,000 for the year ended December
31, 2003, compared to the year ended December 31, 2002. Revenue from existing
businesses (which excludes the effect in 2002 and 2003 of PowerCerv) decreased
by approximately $1,888,000 or 12% for the year ended December 31, 2003, when
compared to the same period in 2002 and approximately $1,887,000 and $138,000 in
revenue from the products acquired from PowerCerv for the years ended December
31, 2003 and December 31, 2002, respectively, is excluded.
Services. 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 increased by
approximately $1,253,000, or 11%, for the year ended December 31, 2003 compared
to the year ended December 31, 2002. Services revenue from existing businesses
decreased approximately $323,000, or 3% for the period when approximately
$1,714,000 and $138,000 in service revenue from the products acquired from
PowerCerv for the years ended December 31, 2003 and December 31, 2002, is
excluded. Service revenue decreased for the Company's tire and project-based
services systems product lines. The decrease in service revenues was due
primarily to reduced client requirements for training and consulting services.
Product licenses. The Company's software license revenues are derived primarily
from the licensing of the Company's enterprise products. Product license
revenues decreased by approximately $824,000, or 23%, for the year ended
December 31, 2003, compared to the year ended December 31, 2002. Product license
revenues decreased for all product lines except for project-based services
systems from the year ended December 31, 2003 when compared to the year ended
December 31, 2002. Product license revenue from existing businesses decreased by
approximately $996,000, or 28% for the period when approximately $172,000 in
product license revenue from the products acquired from PowerCerv is excluded.
The decrease in license revenue for the year ended December 31, 2003 compared to
the same period in 2002 was primarily attributable to overall continuing
economic uncertainty and a persisting delay in decisions by customers to make
expenditures on information technology.
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 $569,000, or 37%, for the year ended December 31,
2003, compared to the year ended December 31, 2002. The decrease in hardware
revenues from existing businesses was due to decreased hardware sales by the
tire systems product line. Clients are electing to use third party sources for
their hardware needs as price competition continues to increase.
14
COST OF REVENUE
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 increased by approximately
$1,101,000, or 20%, for the year ended December 31, 2003, compared to the year
ended December 31, 2002. The increase includes approximately $957,000 in cost of
services from the newly acquired manufacturing and distribution software product
line. The gross margin percentage for services for the period decreased to
approximately 46% from 50% of revenue from services for the same period in 2002.
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. 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 increased by approximately
$200,000, or 6%, for the year ended December 31, 2003, compared to the year
ended December 31, 2002. Expenses from existing businesses decreased by $83,000
or 3% when approximately $347,000 and $65,000 in license revenue and development
expenses for the newly acquired manufacturing and distribution software product
line for the years ended December 31, 2003 and 2002, respectively, are excluded.
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 consists primarily of
the costs of third-party hardware products. Cost of hardware revenues decreased
by approximately $390,000, or 34%, for the year ended December 31, 2003,
compared to the year ended December 31, 2002. The decrease was due to decreased
sales of hardware products by the Company's tire systems product line. The gross
margin percentage for hardware sales decreased to 20% for the year ended
December 31, 2003, from 24% for the year ended December 31, 2002. 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 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
$150,000, or 7%, for the year ended December 31, 2003, compared to the year
ended December 31, 2002. Sales and marketing expenses from existing businesses
decreased by $473,000, or 16%, when approximately $665,000 and $42,000 in
expenses for the newly acquired manufacturing and distribution systems product
line for the years ended December 31, 2003 and 2002, respectively, are excluded.
This change, along with an increase in sales and marketing expenses for the
legal product line was partially offset by a decrease in such expenses from the
Company's tire systems and project-based services product lines for the year
ended December 31, 2003 compared to the similar period ended December 31, 2002.
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 increased
approximately $570,000, or 18%, for the year ended December 31, 2003, compared
to the year ended December 31, 2002. The change primarily reflects the general
and administrative expenses from the newly acquired manufacturing and
distribution software product line, a decrease in rental income along with
increased operating costs for the Company's real estate operations, and
increased expenses related to corporate overhead and the legal systems product
line.
OTHER INCOME
Gain on Sale of Building. In October 2003, the Company sold its 25,600 square
foot office building in Nashua, New Hampshire for $2,300,000 in cash.
Approximately $960,000 of the proceeds was used to satisfy mortgage loan
obligations for the building. The sale resulted in a pretax gain of
approximately $654,000.
The net loss for the year ended December 31, 2003 was approximately $515,000, as
compared to net earnings of approximately $408,000 for the year ended December
31, 2002. The change results from a decrease in earnings from operations of
approximately $1,942,000, a decrease in license and management fees and other
income-net of approximately $210,000 and a decrease in interest income-net of
approximately $106,000, partially offset by the gain on the sale of building of
approximately $654,000 and a decrease in income tax expense of approximately
$681,000.
15
Comparison of 2002 to 2001
(000's omitted)
-----------------------------------------------------------
Revenue Increase/(Decrease)
---------------------------- ---------------------------
2002 2001 Amount Percentage
Services $ 10,916 $ 10,139 $ 777 8%
Product licenses 3,606 3,395 211 6%
Computer and add-on hardware 1,534 1,211 323 27%
------------ ------------ ------------
Total Revenue $ 16,056 $ 14,745 $ 1,311 9%
============ ============ ============
During 2002, the Company completed the acquisition of two product lines. The
revenues related to these product lines for the year ended December 31, 2002 are
as follows:
ASA Revenue
--- Acquisition for
Line Acquired From Product Line Date 2002
------------------ ------------ ---- ----
CompuTrac, Inc. Legal August $ 699,000
2002
PowerCerv Corporation Manufacturing & November 138,000
Distribution 2002
-------------
Total $ 837,000
=============
The product line acquired from CompuTrac, Inc. has been combined as part of the
Company's Legal Systems product line which has been renamed Rainmaker Software.
The product line acquired from PowerCerv Corporation remains as a separate
manufacturing and distribution product line from the Company which has been
named Verticent.
REVENUE
Total Revenue. 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. The Company's
total revenues increased by approximately $1,311,000, or 9%, for the year ended
December 31, 2002, compared to the year ended December 31, 2001. Revenues for
the year ended December 31, 2002 include approximately $699,000 and $138,000 in
revenue from CompuTrac, Inc., and Verticent (formerly PowerCerv Corporation),
respectively.
Services. 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
16
notice as specified in the agreements. Service revenues increased by
approximately $777,000, or 8%, for the year ended December 31, 2002, compared to
the year ended December 31, 2001. Service revenues increased for all product
lines except the project-based services product line for the year ended December
31, 2002 when compared to the same period in 2001. The increase in service
revenues was due primarily to increased client requirements for training and
consulting services. Service revenues for the year ended December 31, 2002
include approximately $668,000 and $138,000 in revenue from CompuTrac, Inc., and
Verticent, respectively.
Product Licenses. The Company's software license revenues are derived primarily
from the licensing of the Company's enterprise products. Software license
revenues increased by approximately $211,000 or 6% for the year ended December
31, 2002, compared to the year ended December 31, 2001. An increase in product
license revenue from the tire dealer and legal systems product lines was
partially offset by a decrease in license revenue for the project-based services
product line. Product license revenue for the year ended December 31, 2002
includes approximately $31,000 in revenue from CompuTrac, Inc.
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
increased by approximately $323,000, or 27%, for the year ended December 31,
2002, compared to the same year ended December 31, 2001. The increase in
hardware revenues was due to increased hardware sales by the tire systems
product line.
COST OF REVENUE
Services. The Company's cost of services consists of the costs incurred
providing client training, consulting, and ongoing support as well as other
client service-related expenses. Cost of services increased by approximately
$88,000, or 2%, for the year ended December 31, 2002, compared to the year ended
December 31, 2001. The gross margin percentage for services for the period
increased to 50% for the year ended December 31, 2002 from 47% for the
comparable period in 2001. The Company's revenues and margin from services
fluctuate from period to period due to changes in the mix of contracts and
projects.
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 increased by approximately
$113,000, or 4%, for the year ended December 31, 2002, compared to the year
ended December 31, 2001. The cost of product licenses and development increased
for all product lines for year ended December 31, 2002 when compared to same
period in 2001. The cost of product licenses as a percentage of product licenses
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. The Company's costs of hardware revenues consist
primarily of the costs of third-party hardware products. Cost of hardware
revenues increased by approximately $216,000, or 23%, for the year ended
December 31, 2002, compared to the year ended December 31, 2001. The increase in
dollar amount for the cost of hardware revenues was due primarily to increased
unit sales of hardware products by the Company's tire systems product line. The
gross margin percentage for the hardware sales increased to 24% for the year
ended December 31, 2002, from 22% for the year ended December 31, 2001. 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.
17
EXPENSES
Marketing and Sales. The Company's 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
decreased by approximately $165,000, or 5%, for the year ended December 31,
2002, compared to the year ended December 31, 2001. The decrease in marketing
and sales expenses reflects a decrease in sales and marketing expenses for the
project-based services product line partially offset by increased sales and
marketing expenses from the tire and legal systems product lines.
General and Administrative. The Company's 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 by approximately $167,000, or 5%, for the year ended December 31,
2002, compared to the year ended December 31, 2001. The change primarily
reflects decreased general and administrative expenses for the project-based
services product line.
Net earnings for the year ended December 31, 2002 were approximately $408,000,
as compared to a net loss of approximately $309,000 for the year ended December
31, 2001. The change results from an increase in income from operations of
approximately $1,226,000 along with management fee income of approximately
$149,000 for which there was no comparable amount in the year ended December 31,
2001. These amounts were partially offset by a decrease in interest income-net
of approximately $153,000, a decrease in other income-net of approximately
$77,000, the elimination of the gain on sale of product lines of approximately
$23,000 and an increase in income tax expense of $405,000.
RELATED PARTY TRANSACTIONS
Amounts due from related parties represent unsecured periodic advances reduced
by repayments. There is no interest charged on these advances. The amount in
current receivables represents the repayments anticipated to be received within
a twelve-month period from the date of the balance sheet. At December 31, 2002,
the Note Receivable - related party represents a demand note bearing interest at
an annual rate of 6.4%. In March 2003, the Company received 55,000 shares of the
Company's Common Stock from the Chairman of the Company as consideration for the
note and related accrued interest which totaled approximately $211,000. The
shares received were recorded as treasury stock at the then current market value
of $2.63 with the difference of approximately $66,000 recorded as a bonus. No
further loans or advances have been or will be made subsequent to the
prohibition of such loans or advances by the Sarbanes-Oxley Act of 2002.
LIQUIDITY AND CAPITAL RESOURCES
The Company had total cash and cash equivalents at December 31, 2003 of
approximately $4,746,000, an increase of approximately $236,000 from December
31, 2002. The Company had a maximum line of credit subject to a formula totaling
$1,500,000 available at December 31, 2003. At December 31, 2003, the Company had
approximately $1,670,000 invested in marketable securities, an increase of
approximately $1,647,000 from December 31, 2002.
In October 2003, the Company completed the sale of its office facility at 615
Amherst Street, Nashua, New Hampshire. The 25,600 square foot building was sold
for $2,300,000 in cash with outstanding debt on the building including a
prepayment penalty of approximately $960,000 paid from the cash proceeds at the
time of closing. The sale resulted in a pretax gain for the Company of
approximately $650,000 and net cash proceeds of approximately $1,156,000. The
Company also signed a five-year lease for approximately 10,000 square feet of
the facility currently occupied by its Tire Systems Group.
In May 2003, the Company purchased 225,625 shares of common stock of Omtool Ltd.
The aggregate purchase price of the shares was $676,875. The shares were
purchased under a Stock Purchase Agreement with two third parties which requires
that the Company pay, under certain conditions, an additional amount under a
formula to the third parties should the Company subsequently purchase additional
shares of Omtool stock. At the current time, no additional purchases of Omtool
Ltd.'s common stock by the Company are contemplated. Mr. Robert Voelk, who is
Chairman and CEO of Omtool Ltd., is a member of the Company's Board of
Directors.
In May 2003, the Company's stockholders approved a reverse/forward split of the
Company's common stock which resulted in a one-for-two reverse split and a cash
out of stockholders who owned fewer than 200 shares. A total of approximately
$159,000 was paid out for cashed out and fractional shares, which totaled
approximately 71,600 post-split shares.
In January 2003, the Company co-signed and guaranteed a Promissory Note on
behalf of a newly formed, 100% owned subsidiary, ASA Aircraft, LLC. The note for
$893,000 was signed under a Demand Loan and Security Agreement with a bank for
the purchase of a 50% interest in an aircraft. The total purchase price of the
aircraft was $900,000. The Company is obligated for 50% of the $893,000 note and
is a guarantor on the remaining 50%. The co-borrower on the note is an unrelated
party that is liable for 50% of the note and is also a guarantor of the
Company's liability. The 5-year note with interest at prime (4.00% at December
31, 2003) plus .25% calls for monthly principal and interest payments of $6,861
through December 2007 with a final payment of approximately $666,869 plus
18
interest due in December 2007. The Promissory Note is collateralized by the
aircraft with cross guarantees by each of the borrowers. Under the provisions of
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Guarantees of Indebtedness of Others," 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.
In December 2002, the Company completed the purchase of substantially all of the
assets of PowerCerv Corporation. Under the terms of an Asset Purchase Agreement
(the "PowerCerv Purchase Agreement"), in addition to assuming certain PowerCerv
liabilities, the Company paid PowerCerv $500,000 cash ($100,000 of which had
been advanced to PowerCerv as a loan) and issued a $90,000 note at 1.81% per
annum. The total amount due on this Note of approximately $90,800 was paid in
June 2003. The purchase price was also increased by approximately $16,000 for
adjustments specified under the terms of the PowerCerv Purchase Agreement which
was paid in the first quarter of 2003. The assets acquired now comprise the
Company's manufacturing and distribution software product line which was tested
for impairment during the fourth quarter of 2003 under the provisions of
Statement of Accounting Standard No. 142, "Goodwill and Other Intangible Assets
("SFAS 142"). The test was applied utilizing the estimated fair value of this
reporting unit as of December 31, 2003, determined based on a combination of the
manufacturing and distribution software product line's discounted cash flows and
acquisition multiples of comparable businesses. As a result of this analysis,
the Company recorded a non-cash impairment charge of $171,000, or ($0.08) per
share.
The Company expects to continue to pursue strategic acquisitions. These
acquisitions have been, and are expected to continue to be, financed in a number
of ways. Management believes, subject to the conditions of the financial
markets, that it should be able to continue its program of acquisitions. These
acquisitions could present challenges to the Company's management, such as
integrating and incorporating new operations, product lines, technologies and
personnel. If the Company's management is unable to manage these challenges, the
Company's business, financial condition or results of operations could be
materially adversely affected. Any acquisition, depending on its size, could
result in significant dilution to the Company's stockholders. Furthermore, there
can be no assurance that any acquired products will gain acceptance in the
Company's markets.
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. It may be difficult to
accurately predict the sales cycle of any large order. 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.
Inflation. General inflation over the last three years has not had a material
effect on the Company's cost of doing business.
Off-balance Sheet Arrangements. The Company has engaged in certain financial
transactions that, under generally accepted accounting principles are either not
recorded on the Consolidated Balance Sheet or are recorded in amounts that
differ from the full contract amounts.
19
The Company co-signed and guaranteed a Promissory Note on behalf of a newly
formed, 100% owned subsidiary, ASA Aircraft, LLC. The note for $893,000 was
signed under a Demand Loan and Security Agreement with a bank for the purchase
of a 50% interest in an aircraft. The total purchase price of the aircraft was
$900,000. The Company is obligated for 50% of the $893,000 note and is a
guarantor on the remaining 50%. The co-borrower on the note is an unrelated
party that is liable for 50% of the note and is also a guarantor of the
Company's liability. The five-year note with interest at prime (4.00% at
December 31, 2003) plus .25% calls for monthly principal and interest payments
of $6,861 through December 2007 with a final payment of approximately $666,869
plus interest due in December 2007. The Promissory Note is collateralized by the
aircraft with cross guarantees by each of the borrowers. Under the provisions of
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Guarantees of Indebtedness of Others," 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. The
total balance outstanding on the note at December 31, 2003 is $850,000, of which
$425,000 is included in the Company's balance sheet.
The Company has contractual obligations to make future payments on operating
lease commitments. Operating lease commitments are not reflected on the
Company's Consolidated Balance Sheets. Details of these contractual obligations
as at December 31, 2003 are disclosed by remaining maturity in Footnote J to the
Company's Consolidated Financial Statements.
The Company exchanged the assets and liabilities of its CommercialWare Division
(CWI) for approximately $4,000,000 in cash, a $1,700,000 three year note at
7.06%, a 10% interest in a newly formed entity, CommercialWare, Inc., and a
$500,000 Junior Note. The Junior Note was collected in 2000. The interest rate
on the three-year note was amended retroactively to the date of CWI's sale to
15% in April 2001, as a result of a restructuring of CWI's debt. Under the terms
of the sale of CWI, the note and any accrued interest are secured by the
intellectual property of CWI. In June 2002, the Company received a second note
for $2,558,197 at 12% for five years, which represents a restatement of the
original Note Receivable of $1,700,000, along with the interest due under the
first amendment to the Note negotiated in April 2001. The terms of the second
Note call for monthly principal and interest payments of $35,000 after an
initial payment of $105,000, which was received in June 2002. The monthly
principal and interest payments increase as follows over the term of the second
note: April 2003, $50,000; November 2003, $55,000; April 2004, $60,000; January
2005, $65,000; with a final payment of approximately $25,000 in June 2007.
Interest income of approximately $278,000 and $381,000 has been received and
recorded in the Statements of Operations for the years ended December 31, 2003
and 2002, respectively.
Contractual Obligations. The following table sets forth the Company's
contractual obligations as of December 31, 2003:
Less Than 1 - 3 3 - 5 More Than
Total 1 Year Years Years 5 Years
----------- ---------- ----------- ----------- ---------
Long-term debt (a) $ 3,294,000 $ 77,000 $ 162,000 $ 3,055,000 $ --
Operating leases (b) 2,388,000 549,000 1,454,000 385,000 --
----------- ---------- ----------- ----------- ---------
Total $ 5,682,000 $ 626,000 $ 1,616,000 $ 3,440,000 $ --
=========== ========== =========== =========== =========
(a) Represents the carrying value of long-term obligations, which includes
mortgage note, demand note and capital leases.
(b) Represents minimum rental commitments under non-cancellable operating
leases with initial term of one year or more.
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.
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 December 31, 2003 was $1,466,719, net of an allowance for
doubtful accounts of $122,646.
20
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 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 and acquisition multiples of comparable businesses, which requires the
Company to make certain assumptions and estimates regarding industry economic
21
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.
Recently Issued Accounting Pronouncements.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." This Interpretation clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 requires an enterprise
to consolidate a variable interest entity if that enterprise will absorb a
majority of the entity's expected losses, is entitled to receive a majority of
the entity's expected residual returns, or both. FIN 46 also requires
disclosures about unconsolidated variable interest entities in which an
enterprise holds a significant variable interest. FIN 46 is currently effective
for variable interest entities created or entered into after January 31, 2003.
FASB Staff Position 46-6, which was issued in October 2003, delayed the
effective date of FIN 46 to the first reporting period ending after December 15,
2003 for variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The adoption of FIN 46 did
not have a material effect on the Company's results of operations or financial
position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement clarifies under
what circumstances a contract with an initial net investment meets the
characteristics of a derivative, clarifies when a derivative contains a
financing component, amends the language used in FIN 45, and amends certain
other existing pronouncements. The provisions of SFAS No. 149 are effective for
contracts entered into or modified after June 30, 2003. The adoption of SFAS No.
149 did not have a material effect on the Company's results of operations or
financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that an issuer classify a financial instrument that is within
its scope as a liability (or an asset in some circumstances), which, under
previous guidance, may have been classified as equity. The provisions of SFAS
No. 150 are effective for financial instruments entered into or modified after
May 31, 2003 and otherwise shall generally be effective at the beginning of the
first interim period beginning after June 15, 2003. The adoption of SFAS No. 150
did not have a material effect on the Company's results of operations or
financial position.
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.
22
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.
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 noncompetition 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.
23
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,
2004. 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
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.
24
ITEM 7A. Quantitative and Qualitative Disclosure about Market Risk
---------------------------------------------------------
The Company is exposed to the impact of interest rate changes and changes in
the value of its investments.
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
its excess cash in short-term floating rate instruments which carry a degree of
interest rate risk. These instruments may produce less income than expected if
interest rates fall.
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 8. Financial Statements and Supplementary Data
-------------------------------------------
The financial statements and supplementary data are listed under Part IV,
Item 15, in this Report.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
In November 2001, the Company decided to replace BDO Seidman, LLP with
Sansiveri, Kimball & McNamee, L.L.P., as its independent public accountants to
audit the financial statements for the year ended December 31, 2001. The
decision to change independent public accountants was approved by the Company's
Board of Directors.
In connection with the audits for the years ended December 31, 2000 and
1999, and through the date of the change in accountants, there were no
disagreements with BDO Seidman, LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures,
which disagreements, if not resolved to their satisfaction would have caused
them to make reference in connection with their opinion on the subject matter of
the disagreements.
The report of BDO Seidman, LLP on our financial statements for the years
ended December 31, 2000 and 1999 did not contain an adverse opinion or a
disclaimer of opinion, and was not qualified or modified as to uncertainty,
audit scope or accounting principle.
ITEM 9A. Controls and Procedures
-----------------------
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures pursuant to the Securities
Exchange Act of 1934, as amended, as of the end of the period covered by this
report. Based on such evaluation, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that, as of the end of such period, the
Company's disclosure controls and procedures are effective. There have not been
any changes in the Company's internal control over financial reporting during
the Company's fourth fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
25
PART III
ITEM 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
Directors
The directors of ASA are elected annually and hold office until the next annual
meeting of stockholders and until their successors shall have been elected and
qualified. The following table sets forth the age of each director, the year
each director was elected a director and the positions presently held by each
director with ASA.
First
Became Positions and Offices
Name Age Director with ASA
- ---- --- -------- --------
Alfred C. Angelone 65 1982 Chairman of the Board, Chief Executive
Officer and President
Chas B. Blalack 46 2002 Director
Alan J. Klitzner 62 1998 Director
William A. Kulok 63 1993 Director
James P. O'Halloran 71 1991 Director
Robert L. Voelk 48 1997 Director
Executive Officers
The executive officers of ASA, their ages and positions held with ASA are as
follows:
Year
First
Became Positions and Offices
Name Age Officer with ASA
- ---- --- ------- --------
Alfred C. Angelone 65 1982 Chief Executive Officer and President
Terrence C. McCarthy 53 1989 Vice President, Secretary and Treasurer
Wayne C. Croswell 48 2002 Group Vice President and President of
ASA's Tire Systems Product Line.
Occupations of Directors and Executive Officers
The following table sets forth the principal occupation of each of the directors
and executive officers during the past five years:
26
Principal Occupation During
Name Past Five Years
- ---- ---------------
Alfred C. Angelone Chairman, Chief Executive Officer and President of ASA.
Chas B. Blalack Managing member of Maritime Capital LLC, a private equity
Firm; formerly General Partner of Wind River Capital, LLC,
a privately held company in the acquisitions,
restructuring, and operations consulting business in the
Eastern United States; formerly Senior Managing Director
of Capital Markets / Finance & Operations for Spencer
Trask & Co.; and formerly General Partner of Greenwich
Ventures, LLC, a fund that focused on the Internet and
technology.
Alan J. Klitzner Chairman of Klitzner Industries, Inc., a privately
held manufacturer of emblematic jewelry.
William A. Kulok Director, World Trade Center Palm Beach, an organization
that produces trade shows and events; formerly President,
North American Corporate Games, an organization that
produces multi-sport festivals for executives; formerly
Chairman of Community Productions, Inc., a privately held
producer of expositions and educational programs; and
formerly President of Kulok Capital, Inc., a privately
held venture capital firm.
James P. O'Halloran Formerly Senior Vice President, Treasurer and Chief
Financial Officer, Pegasystems Inc., a publicly held
software company; formerly President of G & J Associates,
Ltd., formerly The Janus Group, Ltd., a privately held
consulting firm; formerly Vice President, Private Equity
Managers, a privately held venture capital firm; and
formerly Partner, Arthur Andersen & Co.
Robert L. Voelk Chairman and Chief Executive Officer of eSped.com, a
privately held software company; Chief Executive Officer,
President and Chairman of Omtool, Ltd., a publicly held
communications software company; and formerly Executive
Vice President and director of ASA.
Terrence C. McCarthy Vice President, Secretary and Treasurer of ASA.
Wayne C. Croswell Group Vice President and President of ASA's Tire Systems
Product Line.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
executive officers, directors and persons who beneficially own more than ten
percent (10%) of ASA's stock to file initial reports of ownership on Form 3 and
reports of changes in ownership on Form 4 with the Securities and Exchange
Commission and any national securities exchange on which ASA's securities are
registered. Executive officers, directors and greater than ten percent (10%)
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beneficial owners are required by the Securities and Exchange Commission's
regulations to furnish ASA with copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms furnished to ASA and
written representations from the executive officers and directors of ASA, ASA
believes that all Section 16(a) filing requirements applicable to its executive
officers, directors and greater than ten percent (10%) beneficial owners were
complied with during Fiscal 2003.
Audit Committee. The Company has a separately designated standing Audit
Committee established in accordance with Section 3(a)(58)(A) of the Exchange
Act. The members of the Audit Committee are James P. O'Halloran, William A.
Kulok, and Robert L. Voelk.
Audit Committee Financial Expert. The Board of Directors has determined that
James P. O'Halloran is an audit committee financial expert as defined by Item
401(h) of Regulations S-K of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and is independent within the meaning of Exchange Act,
Section 10A(m)(3).
Code of Conduct. The Company has adopted a Code of Conduct that applies to its
Chief Executive Officer, Chief Financial Officer, Corporate Controller, and
other senior financial officers. The Code of Conduct is posted on the Company's
website, http://www.asaint.com, under "Financial Information/ Code of Conduct."
The Company intends to satisfy the disclosure requirement regarding any
amendment to, or waiver from, a provision of the Code of Conduct that applies to
any senior financial officer by posting such information on its website.