ITEM 1. Business
GENERAL
ASA International Ltd. (the "Registrant" or the "Company") provides networked automation systems and ongoing monthly support to approximately 900 businesses in the United States, Canada, South America, Western Europe, and Australia. The Company designs and develops proprietary enterprise and point-solution software for the electronic time and labor management market, for catalog direct marketers, and for the legal, Italian manufacturing, and tire dealer markets. The Company installs its software on a variety of computers and networks, including IBM Corporation ("IBM"), Hewlett Packard ("HP"), and various Unix/Open Systems hardware platforms, and provides implementation, training, custom development, and long-term software and hardware support to its clients.
The Company is comprised of five product lines and a corporate services group. The Company's SmartTime Software Group provides electronic time recording solutions for payroll and pay rules to companies with greater than 500 employees and over $10 million in sales. The Tire Systems Group provides integrated hardware and software solutions to independent tire dealers, wholesalers, and retreaders. The Legal Systems Group provides integrated accounting and practice management solutions to law firms. The CommercialWare Group, which was sold in March 1999, specialized in delivering enterprise systems to consumer and business direct marketing companies and companies engaging in e-commerce. The ERP Systems Group provides integrated client/server based ERP (Enterprise Resource Planning) systems to manufacturing companies throughout Italy.
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. ("Properties"), ASA International Ventures, Inc. ("Ventures"), and ASA Italy, S.r.l. 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.
Effective March 3, 1999, the Company sold substantially all of the assets of the Registrant's CommercialWare Division ("CWI") to CommercialWare, Inc., a Delaware Corporation (the Purchaser). 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 the Purchaser's common stock, par value $.01 per share, and (v) one (1) share of Purchaser's Series A Preferred Stock.
In December 1996, the Company completed the disposition of substantially all of the assets and liabilities of the Company's International Trade and Transportation Systems Group (the "International Group") to TradePoint Systems LLC ("TradePoint"), a New Hampshire limited liability company. In exchange for the assets of the International Group and the assumption of the International Group's liabilities, the Company received a 16% membership interest in TradePoint and a subordinated promissory note in the face amount of $600,000 from TradePoint (the "Note"). The remaining 84% interest in TradePoint is owned by Christopher J. Crane, the former president of and a former director of the Company. Simultaneously, with the completion of this transaction, Mr. Crane resigned from all of his positions with the Company. In exchange for his interest in TradePoint, Mr. Crane (i) contributed all of the Company's common stock, $.01 par value per share (the "Common Stock") owned by him, totaling 665,597 shares; (ii) assigned to the Company a 16% partnership interest in the ASA Investment Partnership, a partnership by and among Mr. Crane, the Company, and Alfred C. Angelone, the Company's Chief Executive Officer and Chairman; and (iii) canceled all of his options to purchase 245,000 shares of Common Stock. The consideration to be paid was determined by negotiations between the parties and was independently evaluated on behalf of the Company by Shields & Company, Inc. The Company accounts for its investment in TradePoint under the cost method.
In connection with the transaction, TradePoint granted to the Company an irrevocable proxy covering the Company's Common Stock owned by TradePoint. The Company has the right to cause TradePoint to redeem the 16% membership interest in TradePoint held by the Company by notice given on or after March 1, 2002, in exchange for the Company's Common Stock held by TradePoint and the fair market value of the 16% membership interest in TradePoint. TradePoint has the right to redeem the Company's membership interest by notice given on or after December 31, 2001 in exchange for the Company's Common Stock held by it and the greater of $400,000 or the fair market value of the 16% membership interest in TradePoint.
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 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.
SmartTime Software (Formerly ASA Business Systems) - --------------------------------------------------
The Company designs, develops, markets, implements and supports Client/Server Enterprise-Wide software that manages the "source-to-gross" payroll process of its customers. The Company's SmartTime(R) product (first introduced in 1993) facilitates the electronic collection of time, attendance, and labor data (the source), which is then processed by automatically applying the unique pay rules of the customer to produce gross hours for payroll processing. The Company's SmartRules(R) product, an object-oriented developed tool and calculation engine that interfaces with SmartTime, allows customers who have a dynamic, complex pay rule environment, to maintain and modify those pay rules without the need for custom programming. The Company believes that it currently maintains approximately 10% market share in its target markets.
The Company offers a comprehensive set of professional and consulting services to all of its customers, including training, implementation assistance, operations and application support, and custom software development.
The Company also continues to maintain, upgrade, and support legacy manufacturing management and control and accounting software based primarily on the DEC hardware platform.
Tire Systems - ------------
The Company provides integrated hardware and software multi-user solutions on Sun, Compaq/DEC and Unix-based systems to independent tire dealers, wholesalers, and retreaders in the United States, Canada and South America for point-of-sale, work orders, inventory control, purchasing, and accounting functions. The systems range in price between approximately $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 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 systems in the United States.
Legal Systems - -------------
The Company provides integrated client/server-based financial management systems for law firms throughout the United States. The Company's Visual Pyramid product is a powerful, fully integrated suite of legal specific applications designed to run on PC networks. The product is written using MS Visual Studio for the front end and MS SQL Server for the back end. Systems range in price between approximately $50,000 and $500,000.
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 Incorporated of New Hope, Pennsylvania. The Company believes it has an estimated 12% share of the mid-sized law firm market.
ERP Systems - -------------
The Company, through its ERP Systems Group located in Venice, Italy, provides fully integrated client/server based ERP systems which run under the UNIX and NT operating systems. The product line, called "GX," is targeted at mid-range companies with 20 to 60 users throughout Italy. The products were developed using C++ and operate with many popular relational databases including Oracle, Microsoft SQL, and Informix.
CommercialWare - --------------
As discussed above, the CommercialWare division was sold on March 3, 1999. Prior to such time, the Company provided enterprise order management and fulfillment systems to consumer, business catalog, direct marketing and electronic commerce firms.
Marketing - ---------
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 prospects and the Company's 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 its 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, direct marketing, and legal markets served by the Company, the total domestic market is 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. For the time and attendance product line, the prospects for the Company's products are more diverse and difficult to target. In these markets, the Company engages in "prospecting" to identify interest in the Company's products by companies who are currently seeking products or services of the type offered by the Company. The prospecting process includes trade publication advertising, purchased mailing lists, telemarketing, direct mail, seminars, and trade shows to generate appointments for the direct sales force with qualified prospects.
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 to 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.
Sources and Availability of Raw Materials - -----------------------------------------
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 the manufacturer would not have an adverse effect on the Company's business. The Company's products have been ported to run under the Unix operating system. 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 IBM hardware for certain of the Company's market segments from IBM under Industry Remarketer Agreements. The Company believes that its relationship with IBM is satisfactory based upon IBM's selection of the Company as an Authorized Industry Remarketer for these segments.
The Company also purchases HP hardware for certain of the Company's market segments from HP under a Value-Added Reseller Program. The Company believes that its relationship with HP is satisfactory given the selection of the Company as a Value-Added Reseller for these markets.
The Company purchases all of its computer hardware and peripheral equipment from IBM, HP, or other vendors, and performs only software installation, testing, final system configuration, and quality control. With the exception of multi-user systems purchased from IBM and HP, the Company believes there are several alternative suppliers for system components used by the Company.
Patents and Proprietary Technology - ----------------------------------
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 time recording/labor management systems and certain legal clients may also purchase "source" code. In addition, most catalogue dire ct marketing clients purchase 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 - -----------
The Company has not experienced material seasonality in its business, other than that due to the economic fluctuation of the economies of the United States, Canada, and Italy.
Working Capital Items - ---------------------
The Company does not have any unusual trade practices which would require restrictions on working capital.
Customers - ---------
During fiscal year-ended December 31, 1998, the Company's revenue by product line was approximately as follows:
Product Line Revenue($) % - ------------ ----------- ---
SmartTime Software $ 6,870,000 19% Tire Systems 8,735,000 25 Legal Systems 5,150,000 15 CommercialWare 10,776,000 30 ASA Italy 3,513,000 10 ASA Consulting 424,000 1 ----------- ----
$35,468,000 100% =========== ====
Backlog - -------
Set forth below is information concerning the Company's backlog at December 31, 1998 and 1997, respectively:
Backlog at December 31, -----------------------
1998 1997 ---- ---- Support Support Product Line Total Contracts Total Contracts - ------------ ----- --------- ----- ---------
SmartTime Software $ 2,700,000 $1,100,000 $ 2,900,000 $1,100,000 Tire Systems 4,300,000 1,900,000 3,000,000 2,000,000 Legal Systems 2,900,000 1,600,000 2,400,000 1,500,000 ASA Italy 1,100,000 600,000 - - CommercialWare - - 2,400,000 900,000 ----------- ---------- ---------- ---------- $11,000,000 $5,200,000 $10,700,000 $5,500,000 =========== ========== =========== ==========
Support contracts are generally cancelable by the Company or the Company's customers upon 90 days prior written notice.
Competition - -----------
The Company's primary competitors in its target market for time and attendance and labor reporting software are Kronos, JeTech, InTime Systems, FasTech and ABI TruTrack. The Company believes the principal competitive factors in this market are: management of complex pay rules; technological sophistication and vision; scaleability; platform independence; and rapid application deployment and development. The Company believes it competes favorably with respect to all of these factors.
The Company's primary competitors for tire systems are Madden Co., Signal Software and TireMaster. The Company believes the principal competitive factors for tire systems are: complete point of sale functionality to assist sales personnel to maximize gross margin on each sale; the ability to post data automatically to the accounting system; the ability to track the manufacturing process of tire retreaders; the ability to have electronic connectivity to manufacturers; and the availability of marketing products which assist in retaining and increasing existing customer business. 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, Barrister, Prolaw, and Omega. 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; Year 2000 compliance; 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 mid-range ERP market in Italy is highly competitive with the principal competition coming from highly competent and efficient local providers. The principal competitive factors are market visibility, reputation and references, solid technology, Year 2000 and EURO compliance, product functionality, and quality of professional services. The Company believes it competes favorable with respect to each of these factors.
Prior to its sale on March 3, 1999, CWI engaged in the direct marketing systems market which is highly competitive. CWI's major competitors are Smith-Gardner, Sigma Micro, and Computer Solutions. The direct marketing product competed on price/performance, ease of use, and sophistication of software. CWI believed it competed favorably with respect to all these factors. The next generation product, Mozart, unveiled in 1994, was CASE-developed and competed favorably with the products of competitors.
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 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, 1998, the Company had 213 full time employees. Of these employees, 10 are executive officers or senior managers, 33 are engaged in marketing and sales, 82 in customer support and training, 63 in product/custom development or engineering and 25 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.
ITEM 2.
ITEM 2. Description of 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 the LLC. The SmartTime Software business is also located at this facility. The Company occupies approximately 44% 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 30 year amortization. The carrying costs for the building, which was acquired in October 1991, include monthly principal and interest payments of $20,445 along with operating costs and taxes.
The Company's Tire Systems operations are located in approximately 7,000 square feet of a 24,000 square foot office building at 615 Amherst Street, Nashua, New Hampshire, purchased in December 1992. Approximately 12,000 square feet of the facility is leased to TradePoint Systems, LLC under a long-term lease. The carrying costs for the facility include approximately $10,000 per month for principal and interest on twenty-year mortgage notes plus operating costs and taxes.
The Company maintains the following additional offices:
Current Date of Lease Location Monthly Rent Office Area Expiration - -------- ------------ ----------- ----------------
Blue Bell, Pennsylvania $12,487 9,667 s.f. January 31, 2006
Kirkland, Washington $ 5,728 3,720 s.f. October 31, 2001
Udine, Italy $ 1,765 3,068 s.f. December 31, 2000
Venice, Italy $ 4,891 5,801 s.f. February 28, 2001
ITEM 3.
ITEM 3. Legal Proceedings -----------------
There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their property is subject.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security-Holders ---------------------------------------------------
(a) No matter was submitted to a vote of security-holders during the fourth quarter of the fiscal-year ended December 31, 1998, through the solicitation of proxies or otherwise.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
PART II
ITEM 5.
ITEM 5. Market Price of and Dividends on the 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 1997 and 1998:
Calendar Year 1997 Low High ------------------ ------- --------
First Quarter $0.880 $1.625 Second Quarter $1.031 $1.313 Third Quarter $1.000 $3.375 Fourth Quarter $1.875 $2.813
Calendar Year 1998 Low High ------------------ ------- --------
First Quarter $1.750 $2.313 Second Quarter $1.750 $2.250 Third Quarter $1.719 $2.125 Fourth Quarter $2.000 $2.563
These quotations represent prices between dealers and do not include retail markups, markdowns, or commissions, and may not necessarily represent actual transactions. There were 1,277 holders of record of the Company's outstanding Common Stock as of March 24, 1999.
Under the terms of a share repurchase program authorized by the Company's Board of Directors in June 1990 and August 1998, the Company is authorized to repurchase up to $1,000,000 of its Common Stock. The Company repurchased shares as follows for the months indicated:
1991 Number of Shares Per Share Purchase Price ---- ---------------- ------------------------ December 25,000 $1.06
1992 Number of Shares Per Share Purchase Price ---- ---------------- ------------------------ March 5,000 $1.15 May 10,000 $1.53 July 3,000 $1.81 August 6,700 $1.81 8,100 $2.00 September 45,000 $1.94 15,000 $2.00 5,000 $1.99 October 5,000 $1.88
1993 Number of Shares Per Share Purchase Price ---- ---------------- ------------------------ March 5,000 $1.54 August 10,000 $2.93 September 1,800 $3.02
1997 Number of Shares Per Share Purchase Price ---- ---------------- ------------------------ December 23,000 $2.29
1998 Number of Shares Per Share Purchase Price ---- ---------------- ------------------------ May 15,000 $2.15 June 20,000 2.05 July 15,000 2.03 August 80,000 1.99 September 55,000 1.97 October 25,000 2.13 ---------- ------- ----- 1998 Total 210,000 $2.02
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.
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.
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, 1998, 1997, and 1996, and the balance sheet data as of December 31, 1998 and 1997, are derived from and qualified by reference to the consolidated financial statements and notes thereto included herein and audited by BDO Seidman, LLP, the Company's independent certified public accountants, as set forth in their report and also included elsewhere herein.
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.
Years Ended December 31, ------------------------
1998 1997 1996 1995 1994 ---- ---- ---- ---- ----
Operating Data: - --------------- Revenues $35,468 $25,507 $25,471 $31,032 $27,111 Costs and Expenses, excluding income tax expense 34,398 24,534 26,362 29,983 26,545 Earnings (Loss) from Operations 1,532 1,485 (144) 1,502 920 Net Earnings (Loss) 417 388 (649) 457 166
Basic Earnings (Loss) per Common Share $.12 $.12 $(.17) $.12 $.04 Diluted Earnings (Loss) per Common Share $.11 $.11 $(.17) $.11 $.04
December 31, ------------ 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Balance Sheet Data: - ------------------- Total Assets $19,732 $17,826 $16,630 $19,515 $20,131 Long-Term Obligations 4,068 2,696 3,012 2,707 3,112 Long-Term Liabilities - other 305 - - - - Shareholders' Equity 8,809 8,398 8,012 10,110 9,652
ITEM 7.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -------------------------------------------------
In addition to the historical information contained herein, the discussions contained in this document include forward-looking statements. By way of example, the discussions include statements regarding revenues, gross margins, future marketing efforts, potential acquisitions, and Year 2000 implications. Such statements involve a number of risks and uncertainties, including but not limited to those discussed below and those identified from time to time in the Company's filings with the Securities and Exchange Commission. These risks and uncertainties could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements. The Company assumes no obligation to update these forward-looking statements to reflect events or circumstances arising after the date hereof.
Results of Operations - ---------------------
Comparison of 1998 to 1997 - --------------------------
(000's omitted) --------------------------------------- Revenue Increase/(Decrease) ------------------ ------------------- 1998 1997 Amount Percentage ---- ---- -------- ----------
Product licenses $ 8,490 $ 6,178 $ 2,312 37% Services 18,218 14,005 4,213 30% Computer and add-on hardware 8,760 5,324 3,436 65%
------- ------- -------
Net Revenue $35,468 $25,507 $ 9,961 39% ======= ======= =======
REVENUE
In March 1999, the Company completed the disposition of its CommercialWare Division (direct marketing systems product line). In the three years ended December 31, 1998, 1997, and 1996, this group's revenues totaled approximately $10,776,000, $7,603,000 and $6,530,000, or 30%, 30% and 26% of total Company revenue.
Net revenue. The Company designs and develops proprietary enterprise and point-solution software for the electronic time and labor recording market, for catalog direct marketers until the sale of its CommercialWare division in March 1999, and for the tire dealer, legal, and ERP (enterprise resource planning) markets. The Company entered the ERP market in January 1998 with the acquisition of substantially all the assets of Cedes S.r.l. and SIPI-U S.r.l., subsidiaries of the Findest Group of Padova, Italy. 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 $9,961,000, or 39%, for the year ended December 31, 1998, compared to the year ended December 31, 1997, with the ERP systems product line acquired in January 1998 accounting for $3,513,000 or 14% of the increase in revenue.
Product licenses. The Company's software license revenues are derived primarily from the licensing of the Company's enterprise and point-solution products. Product license revenues increased by approximately $2,312,000, or 37%, for the year ended December 31, 1998, compared to the same period in 1997, with the newly acquired ERP systems product accounting for $629,000 or 10% of the increase in product license revenue. The increase in dollar amount was primarily due to increased market acceptance of the Company's software products, and the increased capacity created by growth in the Company's direct sales force and marketing efforts.
Services. Services are comprised of fees generated from training, consulting, software modifications, and ongoing client support provided under self-renewing maintenance agreements. Service revenues increased by approximately $4,213,000, or 30%, for the year ended December 31, 1998, compared to the same period in 1997, with the newly acquired ERP systems product accounting for $2,721,000, or 19%, of the increase in services revenue.
Computer and add-on hardware. 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 $3,436,000, or 65%, for the year ended December 31, 1998, compared to the same period in 1997, with the newly acquired ERP systems product accounting for $163,000, or 3%, of the increase in computer add-on hardware revenue. The increase in hardware revenues from existing businesses was due primarily to the increase of hardware unit sales accompanying increased product license sales.
COST OF REVENUE
Product licenses and development. 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 $1,325,000 for the year ended December 31, 1998, compared to the same period in 1997. The change primarily reflects the costs associated with license revenue increases from the electronic time recording, tire, and legal systems product lines. The cost of product licenses as a percentage of product license revenue may fluctuate from period to period due to the mix of sales of third-party software products in each period contrasted with certain fixed expenses such as the amortization of capitalized software.
Services. 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 $3,732,000 for the year ended December 31, 1998, compared to the same period in 1997. The gross margin percentage for services for the year ended 1998 decreased to approximately 36%, from 43% of revenue from services in the same period in 1997. The Company's revenue and margin from services fluctuate from period to period due to changes in the mix of contracts and projects.
Computer and add-on hardware. Cost of hardware revenues consists primarily of the costs of third-party hardware products. Cost of hardware revenues increased by approximately $2,635,000, or 53%, for year ended December 31, 1998, compared to the same period in 1997. The increase in dollar amount for the cost of hardware revenues for the year ended December 31, 1998 was due primarily to increased unit sales of hardware products accompanying increased product license sales.
The gross margin percentage for hardware sales increased to 13% for the year ended December 31, 1998, from 6%, in the same period in 1997. Margins on computer and add-on hardware do fluctuate based on the mix of computer and ancillary hardware products sold. Accordingly, the Company expects hardware gross margins to fluctuate in the future. The Company continues to direct its efforts toward building service and license revenues to offset the historical decline and uncertainty in hardware revenue and margins.
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 $1,090,000, or 24%, for the year ended December 31, 1998, compared to the same period in 1997. The change in marketing and sales expenses primarily reflects increases in sales staffing, the higher sales commissions associated with increased revenues, and the additional expenses related to the newly acquired ERP systems product line.
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 by approximately $1,027,000, or 35%, for the year ended December 31, 1998, compared to the same period in 1997. The change primarily reflects additional expenses related to the ERP, Tire Systems, and Direct Marketing product lines.
Net earnings for 1998 were approximately $417,000, as compared to net earnings of approximately $388,000 in 1997. The change resulted from an increase in earnings from operations of approximately $47,000, and a decrease in other expense of approximately $184,000, partially offset by an increase in net interest expense of approximately $134,000, and an increase in income tax expense of approximately $68,000. Interest expense for the current year includes a one-time charge of approximately $248,000 related to the early payoff of a mortgage on Company-owned real estate, which was refinanced.
Comparison of 1997 to 1996 - --------------------------
(000's omitted) --------------------------------------- Revenue Increase/(Decrease) ------------------ ------------------- 1997 1996 Amount Percentage ---- ---- -------- ----------
Product licenses $ 6,178 $ 4,831 $ 1,347 28% Services 14,005 15,832 (1,827) (12%) Computer and add-on hardware 5,324 4,808 516 11% ------- ------- -------
Net Revenue $25,507 $25,471 $ 36 0% ======= ======= =======
REVENUE
In December 1996, the Company completed the disposition of its International Trade and Transportation Systems Group. In the two years ended December 31, 1996 and 1995, this group's revenues totaled approximately $6,718,000 and $6,968,000, or 26% and 22% of total Company revenue, respectively.
Net revenue. The Company designs and develops proprietary enterprise and point-solution software for the electronic time and labor management market, for catalog direct marketers, and for the tire dealers and legal markets. The Company's revenues are derived from the sale of third party computer and add-on hardware, from the licensing of the Company's software products, and from service and support. The Company's net revenues remained approximately the same for the year ended December 31, 1997, compared to the year ended December 31, 1996. Revenue from existing businesses increased by approximately $6,754,000, or 36%, for the period, when approximately $6,718,000 in revenue from the Company's international trade product line, which was sold in December 1996, is excluded from the results for 1996.
Product licenses. The Company's software license revenues are derived primarily from the licensing of the Company's enterprise and point-solution products. Software license revenues increased by approximately $1,347,000, or 28%, for the year ended December 31, 1997, compared to the same period in 1996. Product license revenue from existing businesses increased by approximately $2,566,000, or 71%, for the period, when compared to 1996, and the product license revenue from the international trade product line of approximately $1,219,000 for 1996 is eliminated. The increase in dollar amount was primarily due to increased market acceptance of the Company's software products, and the increased capacity created by growth in the Company's direct sales force and marketing efforts.
Services. Services are comprised of fees generated from training, consulting, custom development, and ongoing client support provided under self-renewing maintenance agreements. Service revenues decreased by approximately $1,827,000, or 12%, for the year ended December 31, 1997, compared to the year ended December 31, 1996. Service revenue from existing businesses increased by approximately $1,766,000, or 14%, for the period, when compared to 1996, and the service revenue from the international trade product line of approximately $3,593,000 for 1996 is eliminated. The change was due to increases in software license revenues which were accompanied by client requirements for training and consulting services, and to the increase in support revenues as a result of a larger installed customer base.
Computer and add-on hardware. Hardware revenues are derived from the resale of third-party hardware products to the Company's customers in conjunction with the licensing of the Company's software. Hardware revenues increased by approximately $516,000, or 11%, for the year ended December 31, 1997, compared to the same period in 1996. Hardware revenue from existing businesses increased by approximately $2,423,000, or 84% for the period, when approximately $1,907,000 in hardware revenue from the Company's international trade product line is excluded from the results for 1996. The increase of hardware revenues from existing businesses was due primarily to the increase of hardware unit sales accompanying increased product license sales.
COST OF REVENUE
Product licenses and development. 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 costs 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 related overhead costs. Cost of software license revenues and development decreased by approximately $117,000 for the year ended December 31, 1997, compared to the same period in 1996. The change primarily reflects the elimination of the expenses of the international trade product line. The cost of product licenses as a percentage of product license revenue may fluctuate from period to period due to the mix of sales of third-party software products in each period contrasted with certain fixed expenses such as the amortization of capitalized software.
Services. Cost of services consists of the costs incurred in providing client training, consulting, and ongoing support as well as other client service-related expenses. Cost of services decreased by approximately $2,083,000 for the year ended December 31, 1997, compared to the same period in 1996. The decrease primarily reflects the elimination of the cost of service related to the international trade product line which was sold in December 1996. The gross margin percentage for services for 1997 increased to approximately 43%, from 36%, of revenue from services in 1996. The Company's revenue and margin from services fluctuate from period to period due to changes in the mix of contracts and projects.
Computer and add-on hardware. Cost of hardware revenues consists primarily of the costs of third-party hardware products. Cost of hardware revenues increased by approximately $918,000, or 23%, for the year ended December 31, 1997, compared to the prior year. The cost of hardware revenue from existing businesses increased by approximately $2,479,000, or 99%, when approximately $1,561,000 in cost of hardware from the Company's international trade product line is excluded from the results for 1996. The increase in dollar amount for the cost of hardware revenues for the year ended December 31, 1997 was due primarily to increased unit sales of hardware products, accompanying increased product license sales, and a decrease in gross margin on hardware product sales as discussed below.
The gross margin percentage for hardware sales decreased to 6%, for the year ended December 31, 1997, from 15% in the same period in 1996. Margins on computer and add-on hardware fluctuate based on the mix of computer and ancillary hardware products sold and that computer hardware has become a commodity. Accordingly, the Company expects hardware gross margins to continue to fluctuate in the future. The Company continues to direct its efforts toward building service and license revenues to offset the historical decline in hardware revenue and margins.
EXPENSES
Marketing and sales. Marketing and sales expenses consist primarily of employee salaries, benefits, commissions and related overhead costs, and the cost of marketing programs such as direct mailings, trade shows, seminars, and advertising. Marketing and sales expenses increased by approximately $361,000, or 9%, for the year ended December 31, 1997, compared to the same period in 1996. The change in marketing and sales expenses primarily reflects increases in sales staffing and the higher sales commissions associated with increased revenues, offset by the elimination of expenses related to the international trade product line.
General and administrative. General and administrative expenses consist primarily of employee salaries and benefits for administrative, executive, and finance personnel and related overhead costs, as well as consulting, accounting, and legal expenses. General and administrative expenses decreased by approximately $643,000, or 18%, for the year ended December 31, 1997, compared to the same period in 1996. The change primarily reflects the elimination of the expenses related to the international trade product line.
Net earnings for the year ended December 31, 1997 were approximately $388,000, as compared to a net loss of approximately $649,000 for the year ended December 31, 1996. The change resulted from an increase in earnings from operations of approximately $1,630,000, decreases in net interest expense and other expense of approximately $96,000 and $138,000, respectively, partially offset by an increase in income tax expense of $827,000.
Liquidity and Capital Resources - -------------------------------
The Company had total cash and cash equivalents at December 31, 1998 of approximately $4,262,000, an increase of approximately $2,980,000 from December 31, 1997. The Company and its subsidiaries currently have a maximum line of credit totaling $1,500,000, all of which was available at December 31, 1998. This line is scheduled to expire in 1999. The Company expects to renew the line under approximately the same terms of which no assurance can be given.
In September of 1998, the Company refinanced its Corporate Headquarters building in Framingham, Massachusetts. The mortgage loan, totaling $3,000,000 with interest at 7.24% for 10 years with 30 year amortization, provides for monthly principal and interest payments of $20,445 through October 2008 with a final principal payment of approximately $2,638,000 plus interest. The financing required the payoff of the principal on a previous mortgage of $1,169,206 along with a prepayment fee on the previous mortgage of approximately $248,000. The proceeds of the loan were used to pay-off the Company's term loan with the remainder retained for general corporate purposes.
In November 1998, the Company entered into a joint venture agreement with a third party whereby the Company will sell and support software products in the United States and Canada. The Company has agreed to provide $500,000 in funding for this venture. No activity occurred under the Joint Venture Agreement during 1998.
Effective March 3, 1999, the Company sold substantially all of the assets of the Registrant's CommercialWare Division ("CWI") to CommercialWare, Inc., a Delaware Corporation (the Purchaser). In addition and pursuant to the Purchase Agreement, 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 the Purchaser's common stock, par value $.01 per share, and (v) one (1) share of Purchaser's Series A Preferred Stock.
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, although the Company has no specific plans with regard to acquisitions and has no commitments as of the date of this report.
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 prospect 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 order fails 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 technology, the complexity and expense of developing, testing, and maintaining the Company's products has increased. There can be no assurance that these efforts will be successful or result in significant product enhancements. The Company intends, as it has in the past, to fund this development primarily from cash from operations and bank debt.
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.
New Accounting Standards Not Yet Adopted - ----------------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative and Hedging Activities" ("SFAS 133"). SFAS 133 requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet, or to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk, or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Historically, the Company has not entered into derivatives contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect adoption of the new standard to affect its financial statements.
Other Information; Year 2000 Issue Disclosure - ----------------------------------------------
The Company has continued to evaluate the potential impact of the Year 2000 Issue, which concerns the inability of computer hardware and software programs to properly recognize and process date-sensitive information relating to the 21st century. Certain of the Company's internal use software and existing products are currently Year 2000 compliant, while others have required modification so that the software will function properly with respect to dates in the Year 2000 and thereafter. In addition, the Company has been, and is currently, providing customers upgrade alternatives to Year 2000 compliant versions of the Company's products. The total cost of compliance measures is not estimated to be material and is being funded through operating cash flows and expensed as incurred. The Company presently believes that due to its use of currently Year 2000 compliant systems, along with the modification of non-compliant software and products, the Year 2000 issue will not pose significant operational problems for the Company or its customers. Although the Company believes its systems and software are, or will be, Year 2000 compliant in all material respects, there can be no assurance that the Company's current systems and products do not contain undetected errors or defects with Year 2000 date functions that may result in material costs to the Company.
The Company has also contacted certain of its significant vendors to determine the extent to which the Company's products are vulnerable to those third parties' failure to correct their own Year 2000 issues. Generally, computer systems and software provided by third parties and included in the Company's systems are developed by leading suppliers with Year 2000 programs in process. There can be no guarantee that the systems and software of other companies, on which the Company's systems rely, will be timely or properly converted. Failure of these third party products to operate properly with regard to the Year 2000 and thereafter could require the Company to incur unanticipated expenses to remedy any problems, which could have a material adverse effect on the Company's business, results of operations, and financial condition.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK ---------------------------------------------------------
Risk. The Company is exposed to the impact of interest rate changes and foreign currency fluctuations.
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.
Foreign Currency Risk. International revenues from the Company's foreign subsidiary and other foreign sources were approximately 12% of all revenues. International sales are made primarily from the Company's foreign subsidiary in Italy and are denominated in the local currency. Accordingly, the foreign subsidiary uses the local currency as its local currency. The Company's international business is subject to risk typical of an international business, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, the Company's future results could be materially adversely impacted by changes in these or other factors. The Company is exposed to foreign currency exchange rate fluctuations as the financial results of its foreign subsidiary are translated into U.S. dollars in consolidation. As exchange rates vary, these results, when translated, may vary from expectations and adversely impact overall profitability. The effect of foreign exchange rate fluctuations on the Company in 1998 was not material.
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data -------------------------------------------
The financial statements and supplementary data are listed under Part IV, Item 14, in this Report.
ITEM 9.
ITEM 9. Disagreements with Accountants on Accounting and Financial Disclosure ------------------------------------------------
Not applicable.
PART III
Items 10-13 are incorporated herein by reference from the Company's definitive proxy statement to be filed with the Securities and Exchange Commission.
PART IV
ITEM 14.
ITEM 14. Exhibits, Financial Statement Schedules and Reports On Form 8-K ------------------------------------------------------
(a)1. Financial Statements. --------------------- The Consolidated Financial Statements required to be filed herein are as follows: Independent Auditors' Report Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Comprehensive Income Consolidated Statements of Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements
(a)2. Financial Statement Schedules. ----------------------------- None
(a)3. Exhibits. --------- The following exhibits are filed with this report:
10 Lease for 475 Sentry Parkway, Blue Bell, Pennsylvania, dated August 26, 1998.
21 Subsidiaries of Registrant.
23 Consent of BDO Seidman, LLP, independent certified public accountants.
27 Financial Data Schedule.
A) The following exhibits were filed with the Registrants: Form 10-Q on November 16, 1998 and are incorporated herein by reference:
10-1 Commercial Lease dated September 15, 1998, between 10 Speen Street, LLC as Lessor, and ASA International Ltd., as Lessee, for the property located at 10 Speen Street, Framingham, MA.
10-2 Indemnification Agreement made September 21, 1998, by 10 Speen Street, LLC and ASA International Ltd., as Indemnitors, for the benefit of John Hancock Real Estate Finance, Inc., as Mortgagee.
10-3 Guarantee Agreement effective September 21, 1998 by ASA International Ltd., as Guarantor, in favor of John Hancock Real Estate Finance, Inc.
B) The following exhibits were filed with the Registrant's Form 8-K on November 4, 1998 and are incorporated herein by reference:
10-1 Rights Agreement, dated as of October 21, 1998 between the Registrant and American Securities Transfer & Trust, Inc., as Rights Agent, which includes as Exhibit B thereto the Form of Rights Certificate.
10-2 Letter to the holders of the Registrant's Common Stock, dated November 4, 1998 (including summary of Rights).
10-3 Press release, dated October 22, 1998.
C) The following exhibit was filed with the Registrant's Form 10-Q filed on August 13, 1998 and is incorporated herein by reference:
10-1 Promissory Note (Revolver) between ASA International Ltd. and CoreStates Bank, N.A., dated June 30, 1998.
D) The following documents are incorporated by reference to the Registrant's Report on Form 10-K filed on March 31, 1997:
10-1 Amendment Letter dated December 10, 1996 to the Loan Agreement between ASA International Ltd., ASA Incorporated and ASA Legal Systems Company, Inc., and CoreStates Bank, N.A., dated November 3, 1994.
10-2 Promissory Note (Term) between ASA International Ltd. and CoreStates Bank, N.A., dated December 10, 1996.
10-4 Security Agreement between ASA International Ventures, Inc. and CoreStates Bank, N.A., dated December 10, 1996.
10-5 Guarantee between ASA International Ltd. and CoreStates Bank, N.A., dated December 10, 1996.
E) The following exhibits and Financial Statements were filed with the Registrant's Form 8-K on January 15, 1997 and are incorporated herein by reference:
2(b) Pro forma financial information for the Registrant.
The following unaudited pro forma condensed consolidated financial statements are filed with this report:
Pro Forma Condensed Consolidated Balance Sheet at September 30, 1996 to
Pro Forma Condensed Consolidated Statements of Operations. Year Ended December 31, 1995 Nine Months Ended September 30, 1996
The Pro Forma Condensed Consolidated Balance Sheet of the Registrant as of September 30, 1996 reflects the financial position of the Registrant after giving effect to the disposition of the assets and assumption of the liabilities discussed in Item 2 and assumes the disposition took place on September 30, 1996. The Pro Forma Condensed Consolidated Statements of Operations for the fiscal year ended December 31, 1995 and the nine months ended September 30, 1996 assume that the disposition occurred on January 31, 1995, and are based on the operations of the Registrant for the year ended December 31, 1995, and the nine months ended September 30, 1996, respectively.
The unaudited pro forma condensed consolidated financial statements have been prepared by the Registrant based upon assumptions deemed proper by it. The unaudited pro forma condensed consolidated financial statements are not necessarily indicative of the future financial position or results of operations or actual results that would have occurred had the transactions been in effect as of the dates presented.
The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the Registrant's historical financial statements and related notes.
2(c) Reorganization Agreement by and between the Registrant, TradePoint Systems LLC and Christopher J. Crane.
F) The following exhibits were filed with the Registrant's Form 8-K on November 27, 1996 and are incorporated herein by reference:
2(a) First Amendment to the Asset Purchase Agreement (the "Purchase Agreement") by and between the Company and Progressive Computer Systems, Inc. dated October 18, 1996.
2(b) Second Amendment to the Purchase Agreement dated November 15, 1996.
G) The following exhibits were filed with the Registrant's Form 8-K on September 20, 1996 and are incorporated herein by reference:
2 Agreement by and between the Registrant and Progressive Computer Systems, Inc. dated as of August 30, 1996.
H) The following documents are incorporated by reference to the Registrant's Report on Form 10-K filed on March 28, 1996:
2-1 The Commonwealth of Massachusetts Articles of Merger Merging ASA Incorporated and ASA Legal Systems Company, Inc. into ASA International Ltd., dated December 28, 1995.
2-2 Certificate of Ownership and Merger Merging ASA Incorporated and ASA Legal Systems Company, Inc. into ASA International Ltd., dated December 28, 1995.
3a Certificate of Incorporation of ASA International Ventures, Inc., dated December 28, 1995.
3b Bylaws of ASA International Ventures, Inc.
10-3 Consent to Assignment of Lease for 960 Harvest Drive, Blue Bell, Pennsylvania.
10-4 Agreement for Purchase and Sale of Assets between ASA International Ventures, Inc. and ASA Incorporated, dated December 29, 1995.
10-5 Agreement for Purchase and Exchange of Assets between ASA International Ventures, Inc. and ASA International Ltd., dated December 29, 1995.
10-6 Agreement for Exchange of Intangibles between ASA International Ventures, Inc. and ASA International Ltd., dated December 29, 1995.
I) The following document is incorporated by reference to the Registrant's Form 8-K filed on August 31, 1995:
16 The Registrant announced that it had retained BDO Seidman, LLP, as its new independent accountants, replacing its prior independent accountants, Deloitte & Touche LLP.
J) The following documents are incorporated by reference to the registrant's Report on Form 10-K filed on March 30, 1995:
10-1 Loan Agreement between ASA International Ltd., ASA Incorporated and ASA Legal Systems Company, Inc., and CoreStates Bank, N.A., dated November 3, 1994.
10-4 Security Agreement between ASA International Ltd. and CoreStates Bank, N.A., dated November 3, 1994.
K) The following documents are incorporated by reference to the Registrant's Report on Form 10-K filed on March 30, 1994:
10-5 Promissory Note between ASA Properties, Inc., and Granite State Development Corporation, dated December 23, 1992.
10-6 Servicing Agent Agreement between ASA Properties, Inc., and Colson Services Corporation, dated May 12, 1993.
10-15 Amendment to Merger Agreement by and among the Company, ASA Incorporated, CommercialWare, Donald Askin, and Jonathan Ellman, dated September 15, 1993.
L) The following documents are incorporated by reference to the Registrant's Report on Form 10-K filed on March 30, 1993:
10-4 Mortgage and Security Agreement between ASA Properties, Inc. and Sun Life Assurance Company of Canada.
10-5 Promissory Note of ASA Properties, Inc. in favor of Sun Life Assurance Company of Canada.
M) The following document is incorporated by reference to the Registrant's Form 8-K filed on September 29, 1993:
10-1 Agreement and Plan of Merger by and among the Company, ASA Incorporated, CommercialWare, Donald Askin, and Jonathan Ellman, dated as of August 31, 1993.
N) The following documents are incorporated by reference to the Registrant's Report on Form 10-K filed on March 31, 1988:
3b Bylaws, as amended.
O) The following documents are incorporated by reference to the Company's Registration Statement on Form S-18 (File number 33-5832-B):
4c Specimen Convertible Note.
P) The following documents are incorporated by reference to the Company's Registration Statement on Form S-1 (File number 33-15381):
3a Certificate of Incorporation, as amended.
(b) Reports on Form 8-K. --------------------
On November 4, 1998, the Company filed a report on Form 8-K in which the Company announced the approval of a Shareholder Rights Plan by its Board of Directors.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ASA INTERNATIONAL LTD.
By /s/ Alfred C. Angelone ----------------------------------- Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, report has been signed below by the following persons on the dates indicated.
Name Capacity Date - ---- -------- ----
/s/ Alfred C. Angelone Director, Chief March 30, 1999 - -------------------------- Executive Officer, Alfred C. Angelone and President (principal executive officer and principal accounting officer)
/s/ James P. O'Halloran Director March 30, 1999 - -------------------------- James P. O'Halloran
/s/ Gordon J. Rollert Director March 30, 1999 - -------------------------- Gordon J. Rollert
/s/ Alan J. Klitzner Director March 30, 1999 - -------------------------- Alan J. Klitzner
/s/ William A. Kulok Director March 30, 1999 - -------------------------- William A. Kulok
/s/ Robert L. Voelk Director March 30, 1999 - -------------------------- Robert L. Voelk
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders ASA INTERNATIONAL LTD.
We have audited the accompanying consolidated balance sheets of ASA International Ltd. and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ASA International Ltd. and subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles.
As discussed in the Summary of Significant Accounting Policies, the Company changed its method of recognizing revenue in 1998 with the adoption of Statement of Position 97-2, "Software Revenue Recognition."
/s/ BDO Seidman, LLP
Boston, Massachusetts March 6, 1999
ASA INTERNATIONAL LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, ------------- 1998 1997 ---- ---- ASSETS
CURRENT ASSETS: Cash and cash equivalents $ 4,262,438 $ 1,282,817 Receivables -- net 5,187,076 5,926,610 Computer hardware held for resale 202,487 237,642 Other current assets 502,126 651,843 Net assets of CommercialWare division 1,312,962 - ----------- ----------- TOTAL CURRENT ASSETS 11,467,089 8,098,912 ----------- ----------- PROPERTY AND EQUIPMENT: Land and buildings 4,018,949 3,863,351 Computer equipment 3,278,879 2,883,864 Office furniture and equipment 934,032 856,224 Leasehold improvements 36,574 36,574 Vehicles 463,402 258,814 ----------- ----------- 8,731,836 7,898,827
Accumulated depreciation and amortization 3,889,322 3,617,402 ----------- ----------- NET PROPERTY AND EQUIPMENT 4,842,514 4,281,425 ----------- ----------- SOFTWARE (less cumulative amortization of $6,480,122 and $6,634,296) 1,908,723 3,496,798
COST EXCEEDING NET ASSETS ACQUIRED (less cumulative amortization of $1,369,222 and $1,634,320) 60,278 695,755
OTHER ASSETS 1,453,751 1,252,812
----------- ----------- $19,732,355 $17,825,702 =========== ===========
See notes to consolidated financial statements.
December 31, ------------ 1998 1997 ---- ---- LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES: Accounts payable $1,174,792 $2,263,573 Accrued expenses 2,735,837 1,575,813 Accrued commissions 539,628 538,558 Customer deposits 789,705 497,190 Deferred revenue 726,117 820,563 Current maturities of long-term obligations 152,571 420,423 ---------- ----------- TOTAL CURRENT LIABILITIES 6,118,650 6,116,120 ---------- ----------- LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES 4,067,797 2,696,020 ---------- ----------- LONG-TERM LIABILITIES - Other 304,769 - ---------- ----------- DEFERRED INCOME TAXES 432,000 616,000 ---------- ----------- COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY: Preferred stock, par value $.01 per share: Authorized and unissued, 1,000,000 shares, 60,000 shares of which are designated as Series A Junior Participating Preferred Stock - - Common stock, par value $.01 per share: Authorized, 6,000,000 shares; issued 4,376,858 and 4,096,502 shares; outstanding, 3,348,462 and 3,278,106 shares 43,768 40,965 Additional paid-in capital 7,793,774 7,394,281 Retained earnings 2,964,622 2,548,013 Accumulated other comprehensive income 17,026 - ----------- ----------- 10,819,190 9,983,259
Less treasury stock, at cost 2,010,051 1,585,697 ----------- -----------
8,809,139 8,397,562 ----------- -----------
$19,732,355 $17,825,702 =========== ===========
See notes to consolidated financial statements.
ASA INTERNATIONAL LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
--Years Ended December 31,-- 1998 1997 1996 ---- ---- ----
REVENUES Product licenses $ 8,490,301 $ 6,177,507 $ 4,830,947 Services 18,217,434 14,005,494 15,831,948 Computer and add-on hardware 8,760,421 5,323,734 4,808,082 ------------ ------------ ------------ NET REVENUE 35,468,156 25,506,735 25,470,977 ------------ ------------ ------------ COST OF REVENUE Product licenses and development 4,650,739 3,326,174 3,442,981 Services 11,742,580 8,010,547 10,093,562 Computer and add-on hardware 7,626,820 4,992,025 4,073,528 ------------ ------------ ------------ TOTAL COST OF REVENUE 24,020,139 16,328,746 17,610,071 ------------ ------------ ------------ EXPENSES Marketing and sales 5,577,389 4,487,320 4,126,394 General and administrative 4,002,374 2,974,900 3,617,931 Amortization of goodwill 336,183 230,360 260,833 ------------ ------------ ------------ TOTAL EXPENSES 9,915,946 7,692,580 8,005,158 ------------ ------------ ------------ EARNINGS (LOSS) FROM OPERATIONS 1,532,071 1,485,409 (144,252) INTEREST EXPENSE (603,299) (419,039) (424,738) INTEREST INCOME 140,837 90,780 - OTHER EXPENSE - (184,000) (322,333) ------------ ------------ ------------ EARNINGS (LOSS) BEFORE INCOME TAXES (CREDIT) 1,069,609 973,150 (891,323)
INCOME TAXES (CREDIT) 653,000 585,000 (242,000) ------------ ------------ ------------
NET EARNINGS (LOSS) $ 416,609 $ 388,150 $ (649,323) ============ ============ ============
BASIC EARNINGS (LOSS) PER COMMON SHARE: NET EARNINGS (LOSS) $.12 $.12 $(.17) ============ ============ ============
DILUTED EARNINGS (LOSS) PER COMMON SHARE: NET EARNINGS (LOSS) $.11 $.11 $(.17) ============ ============ ============
See notes to consolidated financial statements.
ASA INTERNATIONAL LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
--Years Ended December 31,-- 1998 1997 1996 ---- ---- ----
NET INCOME (LOSS) $ 416,609 $ 388,150 $ (649,323) OTHER COMPREHENSIVE INCOME NET OF INCOME TAX: Foreign currency translation 17,026 - - ----------- ----------- ------------ COMPREHENSIVE INCOME (LOSS) $ 433,635 $ 388,150 $ (649,323) ============ ============ ============
See notes to consolidated financial statements.
ASA INTERNATIONAL LTD AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ASA INTERNATIONAL LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS --Years Ended December 31,-- 1998 1997 1996 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) $ 416,609 $ 388,150 $ (649,323) ------------ ----------- ------------- Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization 2,316,093 1,864,730 2,397,313 Deferred taxes (184,000) 236,000 (237,000) Doubtful receivables provision 203,131 125,381 32,546 Loss on sale of TradePoint - - 322,333 Changes in assets and liabilities, net of effects of acquisitions: Receivables (2,383,472) (2,298,020) 604,265 Computer hardware held for resale (39,591) (149,892) 150,874 Other current assets 210,744 58,287 (55,759) Accounts payable (1,274,586) 902,988 316,633 Accrued expenses 3,416,443 629,577 (496,868) Customer deposits 450,277 119,640 (381,817) Deferred revenue 473,952 7,192 498,942 ------------ ----------- ------------ Total adjustments 3,188,991 1,495,883 3,151,462 ------------ ----------- ------------ Net cash provided by operating activities 3,605,600 1,884,033 2,502,139 ------------ ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (1,040,547) (249,743) (302,729) Additions to software (8,283) (39,967) (1,506,559) Reductions (increases) in sales-type leases (582) - 146,002 Cash received in acquisition, net of cash paid 98,272 - - Cash transferred upon sale of TradePoint - - (718,197) Other assets (350,893) 257,623 56,912 ------------ ----------- ------------ Net cash used for investing activities (1,302,033) (32,087) (2,324,571) ------------ ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in bank and other notes - (795,000) (230,000) Reduction in long-term debt (2,084,463) (643,042) (414,613) Increase in long-term debt 3,182,042 250,000 675,000 Increase in long-term liabilities (8,748) - - Issuance of common stock 207 7,929 62,258 Purchase of Treasury Stock (424,354) (53,255) - Repurchase of stock options - (10,000) - ------------ ----------- ------------ Net cash provided by (used for) financing activities 664,684 (1,243,368) 92,645 ------------ ----------- ----------- EFFECT OF EXCHANGE RATES ON CASH & CASH EQUIVALENTS 11,370 - - ------------ ----------- ------------ cash and cash equivalents: Net increase 2,979,621 608,578 270,213 Balance, beginning of year 1,282,817 674,239 404,026 ------------ ----------- ------------ Balance, end of year $4,262,438 $1,282,817 $ 674,239 ============ =========== ============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
During 1997, the Company acquired $102,634 of equipment through a capital lease transaction.
During 1998 and 1997, the Company issued contingently issuable common stock in the amount of $27,089 and $52,911.
During 1998, the Company acquired substantially all of the assets of Cedes S.r.l. and SIPI-U S.r.l. (now known as ASA Italy). Assets acquired, liabilities assumed, and consideration paid for this acquisition were as follows:
Fair value of assets acquired excluding cash received of $306,733 $ 1,356,742 Liabilities assumed (1,080,014) Issuance of common stock (375,000) ------------ Net cash received $ (98,272) ============
See notes to consolidated financial statements.
ASA INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997, 1996
A. Summary of Significant Accounting Policies:
Business description and principles of consolidation The Company develops, markets, and provides services for its proprietary enterprise and point-solution software products and distributes computer hardware to its software customers. The consolidated financial statements include the accounts of ASA International Ltd. and its wholly owned subsidiaries, ASA Properties, Inc., ASA International Ventures, Inc., and ASA Italy S.r.l., after elimination of all material inter-company balances and transactions.
Cash equivalents The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. On a cash basis, interest income received approximates the amounts reported on the statements of operations. The Company had approximately $2,473,000 and $642,000 invested in money market funds at December 31, 1998 and 1997, respectively.
Concentration of credit risks Concentration of credit risk with respect to accounts receivable is limited due to the large number of customers comprising the Company's customer base. Customers' financial condition is reviewed on an ongoing basis, and collateral is not required. The Company maintains reserves for potential credit losses and such losses, in the aggregate, have not exceeded management's expectations.
Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Many of the Company's estimates and assumptions used in the financial statements relate to the Company's products, which are subject to rapid technological change. It is possible that changes may occur in the near term that would affect management's estimates with respect to capitalized software.
Computer hardware held for resale Inventory is stated at the lower of cost (first-in, first-out method) or market.
Property and equipment Property and equipment are stated at cost. Depreciation for equipment and vehicles is recorded on the straight-line method, based on the estimated useful lives of the related assets (ranging from 3 to 7 years). Buildings are depreciated over 40 years. Equipment under capital leases and leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the assets.
ASA INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Advertising The Company expenses advertising costs as incurred. Advertising expense was approximately $653,000, $513,000, and $475,000 in the years ending December 31, 1998, 1997, and 1996, respectively.
Costs exceeding net assets acquired Costs exceeding net assets of businesses acquired are amortized on a straight-line basis over periods of 10 and 20 years. On an annual basis, the Company reviews the carrying value of the costs exceeding net assets acquired against projections of undiscounted cash flows and, if necessary, records impairment.
Revenue recognition The Company is engaged as a seller and licensor of software. Effective January 1, 1998, the Company adopted Statement of Position ("SOP") 97-2, Software Revenue Recognition" for purposes of recognizing revenue on software transactions. In accordance with SOP 97-2, 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. The effect of adopting SOP 97-2 on the 1998 Statement of Operations was to decrease income before income taxes and net income by approximately $446,000 and $174,000, respectively.
During 1998, SOP 98-9 was issued. The provisions of SOP 98-9 amend certain provisions of SOP 98-4 and SOP 97-2. The adoption of these standards had no material effect on the Company's financial position or results of operations.
Prior to adoption of SOP 97-2, the Company followed SOP 91-1 for purposes of recognizing revenue for software transactions. In accordance with SOP 91-1, product license revenue was recognized upon shipment to the client provided that no significant vendor obligation remained in connection with software being licensed and the collectibility of the sale was probable.
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.
Research and development The Company expenses research and development costs as incurred. Costs incurred other than capitalized costs for software were not material.
ASA INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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. Total amortization of software charged to operations was approximately $1,446,000, $1,201,000, and $1,655,000 for the years ended December 31, 1998, 1997, and 1996, respectively.
Income taxes Deferred tax assets or liabilities are recognized for the estimated tax effects of temporary differences between the tax and financial reporting basis of the Company's assets and liabilities and for loss carryforwards based on enacted tax laws and rates.
Comprehensive income In 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income." SFAS No. 130 establishes rules for the reporting of comprehensive income and its components. Comprehensive income consists of net income and foreign currency translation adjustments and is presented in the consolidated statements of comprehensive income. The adoption of SFAS No. 130 had no impact on total shareholders' equity.
Net earnings (loss) per share The Company follows SFAS No. 128 "Earnings per Share." Under SFAS 128, Basic Earnings Per Share (EPS) excludes the effect of any dilutive options, warrants or convertible securities and is computed by dividing the net income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing the net income (loss) available to common shareholders by the sum of the weighted average number of common shares and common share equivalents computed using the average market price for the period under the treasury stock method.
Foreign currency translation The Company has determined that the local currency of its Italian Subsidiary is the functional currency. In accordance with Statement of Financial Accounting Standard No. 52, "Foreign Currency Translation," the assets and liabilities denominated in foreign currency are translated into U.S. dollars at the current rate of exchange existing at period-end and revenues and expenses are translated at average monthly exchange rates. Related translation adjustments are reported as a separate component of shareholders' equity, whereas, gains or losses resulting from foreign currency transactions are included in results of operations.
ASA INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
New Accounting Standards Not Yet Adopted - ----------------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative and Hedging Activities" ("SFAS 133"). SFAS 133 requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet, or to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk, or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Historically, the Company has not entered into derivatives contracts either to hedge existing risks or for speculative purposes. The Company does not expect adoption of this new standard to affect its financial statements.
B. Business Acquisitions and Divestitures:
Acquisitions In January 1998, the Company acquired substantially all of the assets of Cedes S.r.l. and SIPI-U S.r.l. ("Cedes"), subsidiaries of the Findest Group of Padova, Italy. Cedes sells enterprise resource planning (ERP) software to mid-range companies in Italy. The transaction involved an exchange of approximately $30,000 in cash, assumption of certain liabilities, and issuance of 200,000 shares of the Company's Common Stock in exchange for the assets of Cedes. The acquisition was recorded using the purchase method of accounting whereby the net assets acquired were recorded at their fair values based on the Company's estimate of these values.
The acquisition price of CommercialWare, Inc. (CWI) in December 1993, contemplated a contingent future payment in Company stock or cash (an adjustment to purchase price) based on the future performance of CWI and the market value of the Company's stock. Certain former owners of CWI received in March 1997 and 1998 deficiency payments in Company stock amounting to 104,122 shares and 80,146 shares, respectively, based on the difference between the market price for the measurement period, as defined, and $5 per share.
Divestitures In December 1996, the Company disposed of substantially all of the assets and liabilities of the Company's international trade product line (Product). Product's revenues totaled approximately $6,718,000, or 26%, of total Company revenue for the year ended December 31, 1996. In exchange for the assets of Product and the assumption of its liabilities, the Company received a 16% membership interest in TradePoint Systems, LLC (Trade), the acquiring corporation, and a subordinated promissory note in the face amount of $600,000 from Trade. The note bears interest of 12%, is due on December 31, 2002, and is
ASA INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
being repaid in monthly installments of principal and interest of $11,730. Included in other assets at December 31, 1998 and 1997 was the outstanding balance on this note of $460,000 and $534,000, respectively. The remaining 84% interest in Trade is owned by the former President and Director of the Company (Buyer). In exchange for his interest in Trade, Buyer (i) contributed all of the Company's common stock, $.01 par value per share (the "Common Stock") owned by him, totaling 665,597 shares; (ii) assigned to the Company a 16% partnership interest in the ASA Investment Partnership, a partnership by and among Buyer the Company, and the Company's Chief Executive Officer and Chairman; and (iii) canceled all of his options to purchase 245,000 shares of Common Stock. The Company recorded a loss on the transaction of $322,333, based on the fair value of the consideration received, less the book value of the net assets exchanged. The consideration to be paid was determined by negotiations between the parties and was independently evaluated on behalf of the Company by an investment banking firm. The Company's investment in Trade, which is valued at $500,000, is accounted for under the cost method and is included in other assets at December 31, 1998 and 1997.
In connection with the transaction, Trade granted to the Company an irrevocable proxy covering the Company's Common Stock owned by Trade. The Company has the right to cause Trade to redeem the 16% membership interest in Trade held by the Company by notice given on or after March 1, 2002, in exchange for the Company's Common Stock held by Trade, and the fair market value of the 16% membership interest in Trade. Trade has the right to redeem the Company's membership interest by notice given on or after December 31, 2001, in exchange for the Company's Common Stock held by it, and the greater of $400,000, or the fair market value of the 16% membership interest in Trade.
In 1990, the Company sold the assets of its BIT unit which provided computer systems to the hardgoods distribution market segment. A portion of the consideration paid consisted of a promissory note for $300,000, with a five-year term at 6% interest (discounted value of $272,000 at 10% interest), and 10,000 shares of Class B Non-Voting Stock of the acquiring corporation, Distribution Management Systems, Inc. (DMS). The note was paid in full during 1995. The DMS shares, originally valued at $334,000, included under the category of other assets at December 31, 1998 and 1997, were written down to a net realizable value of approximately $150,000 during 1997. The writedown of approximately $184,000 is recorded in other expense for the year ended December 31, 1997.
ASA INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
C. Receivables:
December 31, ------------ 1998 1997 ---- ---- Trade $5,198,384 $5,954,179
Amounts due from officers and employees 204,572 117,498
Other 15,340 18,375 ---------- ---------- 5,418,296 6,090,052 Less allowance for doubtful accounts 231,220 163,442 ---------- ---------- $5,187,076 $5,926,610 ========== ==========
Amounts due from officers and employees represent unsecured periodic advances reduced by repayments. There is no interest charged on these advances.
The allowance for doubtful accounts at December 31, 1995 was $60,246. During the three years ending December 31, 1998, 1997, and 1996, the provisions for doubtful accounts were $203,131, $145,886 and $236,830, and write-offs were $135,353, $75,236 and $204,284, respectively.
D. Notes Payable, Long-Term Obligations, Commitments, and Contingencies:
December 31, ------------ 1998 1997 ---- ---- Long-term obligations
Term loans $ 182,041 $ 750,000 Mortgage notes 3,948,071 2,213,391 Capital lease obligations 90,256 153,052 ---------- ---------- 4,220,368 3,116,443 Less current maturities 152,571 420,423 ---------- ---------- $4,067,797 $2,696,020 ========== ==========
The current carrying value of long-term obligations approximate their fair market value.
ASA INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Revolving credit note The Company has a revolving credit agreement for $1,500,000 (which cannot exceed 80% of acceptable accounts receivable), all of which was available at December 31, 1998. The agreement, which extends through June 30, 1999, stipulates interest at prime (7.75% at December 31, 1998), plus .5%. Short-term borrowings under the revolving credit agreement, at and for the year ended December 31, are as follows:
December 31, ------------ 1998 1997 1996 ---- ---- ---- Balance outstanding at December 31 $ - $ - $ 795,000 =========== =========== =========== Interest rate at December 31 8.25% 9.50% 9.25% =========== =========== =========== Maximum amount outstanding during the year $ - $1,055,000 $1,935,000 =========== =========== =========== Average amount outstanding during the year $ - $ 337,000 $1,342,000 =========== =========== =========== Weighted average interest rate during the year based on average month-end balances - 9.44% 9.29% =========== =========== ===========
This credit facility requires the Company to maintain a stated tangible net worth amount and debt service coverage. Payment of dividends is prohibited under the terms of this agreement. This note is secured by the personal property of the Company.
Term loans The term loan outstanding at December 31, 1998, is due on December 31, 2003 and payable in semi-annual installments of approximately $37,000, plus interest at 3.8%.
The term loan outstanding at December 31, 1997, dated December 10, 1996, and due on December 1, 2000 was paid in full in 1998.
Mortgage notes The Company has three mortgage notes outstanding at December 31, 1998. In September 1998, the Company completed the refinancing of its mortgage related to its Corporate Headquarters in Framingham, Massachusetts. The new 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 principal payment of approximately $2,638,000 plus interest.
ASA INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The financing required a prepayment fee to the prior lender for early pay-off on the existing mortgage of $248,000. This fee was recorded as interest expense in the Statement of Operations for the year ended December 31, 1998. A note on a second building acquired in December 1992 requires monthly principal and interest (at 9.5%) payments of $5,710 over twenty years. In May 1993, the Company received $507,000 in mortgage financing for the improvement and updating of this facility under a note from the Small Business Administration. The twenty year note, with interest at approximately 6.6%, calls for monthly principal and interest payments of $4,277. Each of these notes is collateralized by the buildings which they financed.
Equipment loans and capital lease obligations The Company purchases or leases various vehicles and computer equipment under loan and capital lease agreements. The agreements require monthly or quarterly payments of varying amounts and expire through 2000.
Interest paid was approximately $603,000, $383,000, and $425,000, for the years ended December 31, 1998, 1997, and 1996, respectively. The Company and its subsidiaries lease office and warehouse facilities under operating leases expiring on various dates through January 2006. Total rent expense charged to operations approximated $270,000, $240,000, and $229,000, in 1998, 1997, and 1996, respectively.
At December 31, 1998, long-term obligations and minimum rental commitments under noncancellable operating and capital leases with initial terms of one year or more are as follows:
Capital Leases Long-Term Obligations Operating Leases -------------- --------------------- ----------------
1999 $60,937 $ 95,487 $ 311,622 2000 34,090 105,106 326,840 2001 - 111,233 219,590 2002 - 117,233 158,750 2003 - 123,730 161,925 Thereafter - 3,577,323 347,692 ------- ---------- ---------- 95,027 4,130,112 1,526,419
Less imputed interest 4,771 - - ------- ---------- ---------- $90,256 $4,130,112 $1,526,419 ======= ========== ==========
The amount recorded under capital leases included in computer equipment is approximately $358,000 at December 31, 1998 and 1997. Accumulated depreciation and amortization was approximately $300,000 and $244,000, at December 31, 1998 and 1997, respectively.
ASA INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
E. Income Taxes (Credits):
Income (loss) from operations before income taxes is as follows:
Years Ended December 31, ------------------------ 1998 1997 1996 ---- ---- ---- Domestic $ 922,066 $ 973,150 $(891,323) Foreign 147,543 - - ----------- --------- ----------
Total $1,069,609 $ 973,150 $(891,323) =========== ========= ==========
Years Ended December 31, ------------------------ 1998 1997 1996 ---- ---- ---- Current: Federal $ 394,000 $ 108,000 $ (5,000) State 308,000 241,000 - Foreign 135,000 - -
Deferred (184,000) 236,000 (237,000) ---------- ---------- ----------
$ 653,000 $ 585,000 $(242,000) ========== ========== ==========
A non-US subsidiary computes taxes at rates in effect in Italy. Earnings from this subsidiary may also be subject to additional income and withholding taxes when they are distributed as dividends. These earnings are not expected to be remitted because they are permanently reinvested locally by the subsidiary. Undistributed earnings of the non-US subsidiary deemed to be permanently invested were approximately $12,000 at December 31, 1998.
On a cash basis, income taxes paid in 1998, 1997, and 1996 were approximately $633,000, $64,000, and $60,300, respectively.
ASA INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Income taxes are reconciled with the U.S. federal statutory rate as follows:
Years Ended December 31, ------------------------ 1998 1997 1996 ---- ---- ---- Income taxes (credits) at U.S. statutory federal rate $364,000 $331,000 $(303,000) State income tax (credit), net of federal income tax benefit 117,000 133,000 (30,000) Non-deductible amortization of intangibles 81,000 78,000 86,000 Foreign tax differential 85,000 - - Other, net 6,000 43,000 5,000 --------- --------- ----------
$653,000 $585,000 $(242,000) ========= ========= ==========
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes and (b) operating loss and tax credit carryforwards. The tax effects of significant items comprising the Company's net deferred tax liability as of December 31, 1998 and 1997 are as follows:
1998 1997 ---- ---- Deferred tax liabilities: Software development deducted for tax, not book $ 833,000 $ 1,295,000 Differences between book and tax basis of property 29,000 2,000 Deferred gain on divestiture 175,000 175,000 Other 8,000 16,000 ------------ ------------ 1,045,000 1,488,000
Deferred tax assets: Operating loss carryforwards - 22,000 Tax credit carryforwards 366,000 614,000 Accruals/reserves 217,000 203,000 Other 30,000 33,000 ------------ ------------ 613,000 872,000 ------------ ------------ Net deferred tax liability $ (432,000) $ (616,000) ============ ============
ASA INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company has available at December 31, 1998 general business credit carryforwards of $267,000, which expire through the year 2012, and an alternative minimum tax credit carryforward of $99,000, which does not expire.
F. Capital Transactions:
Series A Junior Participating Preferred Stock In October 1998 the Company's Board of Directors adopted a Shareholders Rights Plan (the "Plan"), which provides a dividend of one preferred share purchase right (a "Right") for each outstanding share of the Company's common stock, par value $.01 per share. Except as set forth below and subject to adjustment as set forth in the Plan, each Right will entitle the holder to buy one one-hundredth of a share of authorized Series A Junior Participating Preferred Stock, par value $.01 per share ("Series A Preferred Stock") at a purchase price of $10 per right. Initially, the Rights will attach to all Common Stock Certificates representing shares then outstanding, and may not be traded apart from the stock. The Rights become exercisable on the tenth day after public announcements that a person or group has acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the Company's outstanding common stock, commencement of a tender or exchange offer that would result in a beneficial ownership by a person or group of 20% or more of the Company's common stock, or a person or group acquired 10% or more of the outstanding common stock and is deemed an Adverse Person under the terms of the Plan. If, after the Rights become exercisable, the Company is a party to certain merger or business combination transactions, or transfers 50% or more of its assets or earnings power, or if an acquirer engages in certain self-dealing transactions, each Right (except those held by the acquirer) will entitle its holder to buy a number of shares of the Company's Series A Preferred Stock or, in certain circumstances, a number of shares of the acquiring company's common stock, in either case having a market value equal to two times the exercise price of the Right. The Rights may be redeemed by the Company at any time up to ten days after a person or group acquires 20% or more of the Company's common stock at a redemption price of $.01 per Right. The Rights will expire on October 20, 2008.
The Company has reserved 60,000 shares of Series A Junior Participating Preferred Stock for the exercise of the Rights.
Treasury Stock Approximately $343,000 of the balance in treasury stock represents the Company's 75% investment in a partnership which consists of shares of its own common stock. The Chief Executive Officer holds the remaining 25% of the investment.
Stock options At December 31, 1998, the Company has four stock-based compensation plans, which are described below. The Company applies APB Opinion 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost for the Company's four stock option plans been
ASA INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
determined based on the fair value at the grant dates for awards under those plans consistent with the method of FASB Statement 123, Accounting for Stock-Based Compensation, the Company's net income (loss) and earnings (loss) per share would have been adjusted to the pro forma amounts indicated below:
1998 1997 1996 ---- ---- ----
Net income (loss) As reported $416,609 $388,150 $(649,323) Pro forma $384,132 $348,771 $(680,665)
Basic Earnings (loss) per share As reported $.12 $.12 $(.17) Pro forma $.11 $.11 $(.18)
Diluted Earnings (loss) per share As reported $.11 $.11 $(.17) Pro forma $.10 $.10 $(.18)
The Company's four stock option plans, the 1986, 1988, 1993, and 1995 Stock Option Plans, provide for the granting of incentive stock options and nonqualified stock options to purchase an aggregate of 980,000 shares of common stock at a price not less than fair market value on the date the option is granted.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1998, 1997, and 1996, respectively: dividend yield of 0% for all years, and expected volatility of 46% for 1998, 47% for 1997, and 30% for 1996, risk-free rates ranging from 5.50% to 5.80% for 1998, 5.76% to 6.73% for 1997, and 5.88% to 6.67% for 1996, and expected lives ranging from 12 to 18 months for 1998, from 12 to 48 months for 1997, and 18 to 24 months for 1996.
A summary of the status of the Company's stock option plans as of December 31, 1998, 1997, and 1996, and changes during the years ending on those dates, is presented below:
ASA INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of December 31, 1998, the 415,752 options outstanding under the Plan have exercise prices between $.88 and $2.63, and a weighted-average remaining contractual life of approximately 5 years.
As of December 31, 1998 the 319,735 exercisable options outstanding under the Plan have exercise prices between $.88 and $2.63 and a weighted-average remaining contractual life of approximately 3 1/2 years.
Common stock reserved At December 31, 1998, the Company has reserved 964,252 shares of its common stock for incentive and nonqualified stock options.
G. Earnings per Share:
The weighted average number of common shared outstanding used in the computation of earnings (loss) per share is summarized as follows:
ASA INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1998 1997 1996 ---- ---- ----
Denominator:
Denominator for basic earnings per share - weighted average shares 3,456,362 3,278,689 3,830,771
Effect of dilutive securities:
Employee stock options 178,546 135,919 -
Contingently issuable shares - 80,146 - ----------- ----------- ----------- Dilutive potential common shares Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 3,634,908 3,494,754 3,830,771 =========== =========== ===========
The following table summarizes securities that which were outstanding as of December 31, 1998, 1997, and 1996, but not included in the calculation of diluted net earnings (loss) per share because such shares are antidilutive:
Year Ended December 31, -------------------------- 1998 1997 1996 ---- ---- ----
Employee stock options 3,900 4,000 626,000 Contingently issuable shares - - 184,000
H. Transactions with Major Suppliers:
In 1998, 1997, and 1996, the Company made significant purchases from two hardware suppliers totaling approximately $2,900,000, $2,700,000, and $3,581,000, respectively.
ASA INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
I. Major Customers:
The Company had sales to one customer approximating 13% of gross sales for the fiscal year ended December 31, 1997. Accounts receivable relating to this customer was 7% of total accounts receivable at December 31, 1997. There were no major customers in 1998 and 1996 from which the Company derived sales in excess of 10%.
J. Geographic Information:
The following is a summary of selected geographic information as of December 31, 1998, 1997, and 1996.
Revenues: 1998 1997 1996 ---- ---- ---- United States $31,500,000 $25,000,000 $24,700,000 Italy 3,500,000 - - Other 500,000 500,000 800,000 ----------- ----------- ----------- Total $35,500,000 $25,500,000 $25,500,000 =========== =========== ===========
Revenues are attributed to countries based on location of customers.
Long-lived assets: 1998 1997 1996 ---- ---- ---- United States $7,528,000 $9,727,000 $11,404,000 Italy 737,000 - - Other - - - ---------- ---------- ----------- Total $8,265,000 $9,727,000 $11,404,000 ========== ========== ===========
K. Commitments:
The Company maintains a defined contribution benefit plan covering substantially all its employees. The Company makes contributions to the plan at the discretion of the Board of Directors based upon a percentage of employee compensation as provided by the terms of the plan. Contributions charged to operations in 1998, 1997, and 1996 were approximately $132,000, $62,000, and $168,000, respectively.
ASA INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The long term liability amount outstanding in the December 31, 1998 balance sheet represents an employee severance liability as calculated in conformance with Italian law. The liability is computed on the basis of: the category of employee, their length of service, annual compensation, and includes the effect of inflation. The Company's liability under the law is fully accrued at December 31, 1998.
In November 1998, the Company entered into a joint venture agreement with a third party whereby the Company will sell and support software products in the United States and Canada. The Company has agreed to provide $500,000 in funding for this venture. No activity occurred under the joint venture agreement during 1998.
L. Subsequent Event:
In March 1999, 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 Company will not reflect the $500,000 Junior Note as part of the proceeds due to the uncertainty of the ultimate collection of this Note. Financial data relative to the CWI operation is as follows:
Year Ended December 31, -------------------------- 1998 1997 1996 ---- ---- ----
Revenues $10,776,000 $7,603,000 $6,530,000 Net earnings 278,000 553,000 367,000 Basic earnings per share .08 .17 .10 Diluted earnings per share .08 .16 .10
Assets applicable to CWI, net of related liabilities assumed, have been segregated in the accompanying balance sheet and shown as net assets of CommercialWare division.
A summary of net assets of CWI division at December 31, 1998, is as follows:
Current assets $ 3,510,543 Property and equipment 239,804 Excess of cost over net assets acquired 562,578 Other assets 657,503 Current liabilities (3,657,466) ------------ Net assets $ 1,312,962 ============