SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended: September 30, 1999 Commission File Number: O-14741
------------------ -------
ASA International Ltd.
-----------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Delaware 02-0398205
- -------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10 Speen Street, Framingham, MA 01701
- ---------------------------------------- -----------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: 508-626-2727
------------
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes: X No:
----- ----
As of September 30, 1999, there were 3,149,062 shares of Common Stock
of the Registrant outstanding.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
ASA INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,907,311 $ 4,262,438
Receivables - net 3,890,089 5,187,076
Computer hardware held for resale 210,178 202,487
Marketable securities 6,220,455 -
Other current assets 1,046,164 502,126
Net assets of CommercialWare division - 1,312,962
Net assets of SmartTime division 408,373 -
----------- -----------
TOTAL CURRENT ASSETS 16,682,570 11,467,089
PROPERTY AND EQUIPMENT (less
depreciation of $2,942,872 and
$3,889,322, respectively) 4,866,083 4,842,514
SOFTWARE (less amortization of
$4,220,922 and $6,480,122,
respectively) 802,286 1,908,723
COST EXCEEDING NET ASSETS ACQUIRED
(less amortization of $1,402,316
and $1,369,222, respectively) 27,185 60,278
NOTE RECEIVABLE 1,700,000 -
OTHER ASSETS 1,267,128 1,453,751
----------- -----------
$25,345,252 $19,732,355
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
ASA INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ 3,200,000 $ -
Accounts payable 767,049 1,174,792
Deferred option and license fees 2,460,000 -
Accrued expenses 1,625,476 2,735,837
Other current liabilities 2,616,872 2,208,021
------------ -----------
TOTAL CURRENT LIABILITIES 10,669,397 6,118,650
LONG-TERM OBLIGATIONS, NET OF CURRENT
MATURITIES 3,970,188 4,067,797
LONG-TERM LIABILITIES - OTHER 277,014 304,769
DEFERRED TAXES 432,000 432,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock 43,844 43,768
Additional paid-in capital 7,800,081 7,793,774
Retained earnings 4,738,514 2,964,622
Accumulated other comprehensive
income (loss) (38,386) 17,026
------------ -----------
12,544,053 10,819,190
Less: treasury stock, at cost 2,547,400 2,010,051
------------ -----------
9,996,653 8,809,139
------------ -----------
$25,345,252 $19,732,355
============ ============
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
ASA INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
September 30,
----------------------------
1999 1998
----------------------------
(Unaudited)
REVENUE
Services $ 3,233,545 $ 4,563,399
Product licenses 1,101,531 2,629,730
Computer and add-on hardware 923,533 2,270,466
------------ ------------
NET REVENUE 5,258,609 9,463,595
COST OF REVENUE
Services 2,350,975 3,124,760
Product licenses and development 654,992 1,118,454
Computer and add-on hardware 733,482 2,112,638
------------ ------------
TOTAL COST OF REVENUE 3,739,449 6,355,852
EXPENSES
Marketing and sales 862,304 1,708,983
General and administrative 805,006 882,197
Amortization of goodwill 11,032 50,130
------------ ------------
TOTAL EXPENSES 1,678,342 2,641,310
EARNINGS (LOSS) FROM OPERATIONS (159,182) 466,433
EQUITY IN EARNINGS (LOSS) FROM AFFILIATE (16,828) -
INTEREST EXPENSE - NET (32,132) (282,184)
------------ ------------
EARNINGS (LOSS) BEFORE INCOME TAXES (208,142) 184,249
INCOME TAXES (BENEFIT) (125,000) 111,000
------------ ------------
NET EARNINGS (LOSS) $ (83,142) $ 73,249
============ ============
EARNINGS (LOSS) PER COMMON SHARE:
BASIC ($.03) $.02
============ ============
DILUTED ($.03) $.02
============ ============
See Notes to Condensed Consolidated Financial Statements.
ASA INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended
September 30,
----------------------------
1999 1998
----------------------------
(Unaudited)
REVENUE
Services $11,077,578 $13,231,288
Product licenses 4,177,661 6,157,002
Computer and add-on hardware 3,406,305 5,241,849
------------ ------------
NET REVENUE 18,661,544 24,630,139
COST OF REVENUE
Services 6,907,673 8,402,914
Product licenses and development 2,729,983 3,330,520
Computer and add-on hardware 2,566,531 4,677,440
------------ ------------
TOTAL COST OF REVENUE 12,204,187 16,410,874
EXPENSES
Marketing and sales 3,065,301 4,344,308
General and administrative 2,637,280 2,683,341
Amortization of goodwill 33,095 161,637
------------ ------------
TOTAL EXPENSES 5,735,676 7,189,286
EARNINGS FROM OPERATIONS 721,681 1,029,979
EQUITY IN EARNINGS (LOSS) FROM AFFILIATE (16,828) -
INTEREST EXPENSE - NET (80,066) (422,522)
OTHER INCOME - NET 3,822,105 -
------------ ------------
EARNINGS BEFORE INCOME TAXES 4,446,892 607,457
INCOME TAXES 2,673,000 365,000
------------ ------------
NET EARNINGS $ 1,773,892 $ 242,457
============ ============
EARNINGS PER COMMON SHARE:
BASIC $.55 $.07
============ ============
DILUTED $.51 $.07
============ ============
See Notes to Condensed Consolidated Financial Statements.
ASA INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
1999 1998 1999 1998
------------------- --------------------
(Unaudited) (Unaudited)
NET INCOME (LOSS) $ (83,142) $ 73,249 $1,773,892 $242,457
OTHER COMPREHENSIVE INCOME
(LOSS) NET OF INCOME TAX:
Foreign currency translation (45,409) 32,258 (55,412) 30,555
---------- -------- ----------- --------
COMPREHENSIVE INCOME (LOSS) $(128,551) $105,507 $1,718,480 $273,012
========== ======== =========== ========
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
ASA INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1999 1998
----------------------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
NET EARNINGS $ 1,773,892 $ 242,457
------------ -------------
ADJUSTMENTS TO RECONCILE NET EARNINGS
TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
DEPRECIATION AND AMORTIZATION 854,878 1,524,041
CHANGES IN ASSETS AND LIABILITIES 2,608,003 37,913
GAIN ON SALE OF PRODUCT LINE (3,824,420) -
------------- ------------
TOTAL ADJUSTMENTS (361,539) 1,561,954
------------- ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,412,353 1,804,411
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
ADDITIONS TO PROPERTY AND EQUIPMENT (603,817) (774,589)
ADDITIONS TO SOFTWARE (84,400) (5,053)
ADDITIONS TO MARKETABLE SECURITIES (6,220,455) -
INCREASE IN SALES-TYPE LEASES (3,051) (12,890)
CASH RECEIVED IN DIVESTITURE 3,437,382 -
CASH RECEIVED IN ACQUISITION,
NET OF CASH PAID - 98,275
OTHER ASSETS 181,061 (8,992)
------------ ------------
NET CASH USED FOR
INVESTING ACTIVITIES (3,293,280) (703,249)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
INCREASE IN NOTES PAYABLE 3,200,000 -
INCREASE (DECREASE) IN LONG-TERM DEBT (119,466) 953,513
INCREASE (DECREASE) IN LONG-TERM
LIABILITIES (27,755) 283,985
CASH PAID IN LIEU OF STOCK - (140,000)
PURCHASE OF TREASURY STOCK (537,349) (371,169)
ISSUANCE OF COMMON STOCK 6,383 206
------------ -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 2,521,813 726,535
------------ -----------
EFFECT OF EXCHANGE RATES ON CASH &
CASH EQUIVALENTS 3,987 30,557
------------ ------------
CASH AND CASH EQUIVALENTS:
NET INCREASE 644,873 1,858,254
BALANCE, BEGINNING OF YEAR 4,262,438 1,282,817
------------ ------------
BALANCE, END OF PERIOD $ 4,907,311 $ 3,141,071
============= ============
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
ASA INTERNATIONAL LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
- ------------------------------
As permitted by the rules of the Securities and Exchange Commission applicable
to quarterly reports on Form 10-Q, these notes are condensed and do not contain
all disclosures required by generally accepted accounting principles. Reference
should be made to the financial statements and related notes included in the
Company's Annual Report on Form 10-K.
In the opinion of management, the accompanying financial statements reflect all
adjustments which were of a normal recurring nature necessary for a fair
presentation of the Company's results of operations for the three months and
nine months ended September 30, 1999 and September 30, 1998, respectively.
The results disclosed in the Condensed Consolidated Statement of Operations for
the three months and nine months ended September 30, 1999 are not necessarily
indicative of the results expected for the full year.
Note 2 - Divestiture
- --------------------
In March 1999, the Company exchanged substantially all of 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%, approximately 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. The pretax gain on the
sale of CWI was approximately $3,824,000.
<PAGE>
ASA INTERNATIONAL LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 3 - Earnings (Loss) per Share
- ---------------------------
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
NUMERATOR:
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $ (83,142) $ 73,249 $1,773,892 $ 242,457
=========== ========== ========== ==========
NUMERATOR FOR DILUTED EARNINGS
(LOSS) PER SHARE - INCOME
AVAILABLE TO COMMON SHAREHOLDERS $ (83,142) $ 73,249 $1,773,892 $ 242,457
=========== ========== ========== ==========
DENOMINATOR:
DENOMINATOR FOR BASIC EARNINGS
(LOSS) PER SHARE - WEIGHTED
AVERAGE SHARES 3,211,562 3,492,116 3,243,270 3,491,676
EFFECT OF DILUTIVE SECURITIES:
EMPLOYEE STOCK OPTIONS - 168,723 214,627 171,206
----------- ---------- ---------- ----------
DILUTIVE POTENTIAL COMMON SHARES
DENOMINATOR FOR DILUTED
EARNINGS PER SHARE -
ADJUSTED WEIGHTED
AVERAGE SHARES AND
ASSUMED CONVERSIONS 3,211,562 3,660,839 3,457,897 3,662,882
=========== ========== ========== ==========
BASIC EARNINGS (LOSS) PER SHARE ($.03) $.02 $.55 $.07
=========== ========== ========== ==========
DILUTED EARNINGS (LOSS) PER SHARE ($.03) $.02 $.51 $.07
=========== ========== ========== ==========
</TABLE>
<PAGE>
ASA INTERNATIONAL LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 4 - Investments
- --------------------
Included in the other assets at September 30, 1999 are the Company's holdings in
a mutual fund which invests in senior secured floating rate loans. The Company
accounts for this investment as available-for-sale in accordance with Statement
of Financial Accounting Standards No. 115 ("SFAS No. 115"), "Accounting for
Certain Investment in Debt and Equity Securities," which requires that debt and
marketable equity securities be classified as trading, available-for-sale, or
held-to-maturity. Available-for-sale securities are reported in the balance
sheet at fair value with unrealized gains or losses included in a separate
component of stockholders' equity.
At September 30, 1999, the fair market value of this investment of $6,196,000
approximated its cost.
Note 5 - Option to Purchase
- ---------------------------
In August 1999, the Company granted to a company ("Optionee") an option to
purchase the Company's SmartTime product line. As per the terms of the Option
Agreement, the Company transferred the assets and liabilities of its SmartTime
product line to a newly formed LLC, of which the Company is the sole member and
the Optionee is the manager.
The Agreement provides that the Optionee has the option to purchase the
SmartTime product line from the LLC at anytime from August 1, 2000 through
August 31, 2000 (the "Option Period"), or at such earlier date as agreed to by
the parties, for an aggregate purchase price of $7,020,000, less any option fee
paid to date (the "Purchase Price"). The terms and conditions of the acquisition
are set forth in an Asset Purchase Agreement dated as of August 2, 1999 (the
"Purchase Agreement"). The Purchase Agreement provides that the sale will occur,
if at all, within two days after exercise of the option and the satisfaction of
certain other conditions as specified in the Purchase Agreement. During the
Option Period, the Optionee will employ the employees of the SmartTime product
line and will bear the risk of its financial performance.
The Optionee paid an initial option fee in the amount of $1,660,000 upon
execution of the Agreement and is required to pay a second option fee on August
1, 2000 in the amount of $540,000, unless the Optionee exercises the option
prior to such date. The option fees are non-refundable to the Optionee in the
event that the Optionee does not exercise the option to purchase the SmartTime
product line, as to which there can be no assurance. Pursuant to the Agreement,
the Optionee has loaned to the Company the sum of $3,200,000 (with respect to
which the Company has prepaid $160,000 in interest). In addition, the LLC has
agreed to loan the Optionee an amount equal to the net cash of the LLC available
after collection of the LLC's accounts receivable and payment of the LLC's
accounts payable.
The Optionee has purchased exclusive licenses to use the customer intangibles
and intellectual property of the SmartTime product line during the Option Period
for $300,000 and $500,000, respectively. In the event that the Optionee does not
exercise the option to purchase the SmartTime product line prior to the
expiration of the Option Period, the Optionee's rights under the above-mentioned
license agreements would terminate and the Company, through the LLC, would
retain ownership of these assets.
The net assets of the SmartTime product line are included in current assets in
the Company's balance sheet at September 30, 1999. The results for the
operations of this product line are shown in the Condensed Consolidated
Statements of Operations for the three and nine months ended September 30, 1999
under the caption "Equity in Earnings (loss) from Affiliate."
Note 6 - Subsequent Event - Notes Payable - Bank and Debt
- ---------------------------------------------------------
In October 1999, the Company entered into (i) a revolving demand loan agreement
with a bank for up to $1,500,000, bearing interest at a rate approximating prime
minus 1/2%, which extends through June 30, 2000, and (ii) a $3,000,000
acquisition line of credit under which advances will bear interest at a rate
approximating prime minus 1/2% until a conversion date upon which the
outstanding principal balance of advances will be amortized on a straight-line
basis over five (5) years at a fixed interest rate equal to two and one-quarter
(2.25%) over the average yield on US Treasury securities. The acquisition line
of credit is available for use by the Company based upon the lesser of
$3,000,000 or the sum of 75% of the value (lower of purchase price or appraised
value) of any business acquired by the Company. The loans are secured by the
personal property of the Company along with a first priority perfected security
interest in all business assets acquired by the Company.
ASA INTERNATIONAL LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 7 - Subsequent Event Acquisitions
- --------------------------------------
On November 4, 1999 (the "Closing Date"), the Company acquired the business of
Design Data Systems Corporation, a Florida corporation ("Seller"), pursuant to
that certain Asset Purchase Agreement (the "Purchase Agreement") by and among
Company, Seller, Michael Meli, individually (only with respect to certain
sections of the Purchase Agreement), and Eastern Bank, as Escrow Agent (the
"Escrow Agent") (only with respect to certain sections of the Purchase
Agreement). The Purchase Agreement provides that the transaction is effective as
of September 30, 1999 (the "Effective Date").
Pursuant to and as more fully set forth in the Purchase Agreement, the Company
had the right and obligation to purchase certain of the assets and assumed
certain of the liabilities of Seller for a purchase price of $5,000,000 (the
"Purchase Price"). Of the Purchase Price, $4,750,000 was due and payable on the
Closing Date and $250,000 was to be deposited with the Escrow Agent to be held
pursuant to the terms of the Purchase Agreement.
Also on the Closing Date, the Company entered into a certain Asset Acquisition
and Exchange Cooperation Agreement (the "Exchange Agreement") with SQL
Acquisition LLC, a Delaware limited liability company ("SQL"), Fidelity National
1031 Exchange Services, Inc., a California corporation, and Pacific American
Property Exchange Corporation, a California corporation and sole member and
manager of SQL. The Company has entered into the Exchange Agreement for the
purpose of seeking the ability to effectuate a like-kind exchange pursuant to
Section 1031 of the Internal Revenue Code of 1986, as amended. Pursuant to and
as more fully set forth in the Exchange Agreement, the Company has reserved the
right to exchange certain software and related intellectual property of Seller
(the "Replacement Property") for certain other relinquished property of the
Company. In connection therewith, the Company assigned to SQL the Company's
right and obligation under the Purchase Agreement to acquire the Replacement
Property pursuant to a certain Assignment Agreement dated the Closing Date
between the Company, Seller and SQL (the "Assignment"). On the Closing Date, the
following actions were completed:
1. SQL acquired the Replacement Property from Seller in accordance with the
Purchase Agreement and the Assignment in exchange for a payment of $4,300,000.
ASA INTERNATIONAL LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
2. The Company acquired the remainder of Seller's assets in accordance with the
Purchase Agreement in exchange for (a) the payment of $700,000 (of which
$250,000 was deposited with the Escrow Agent) and (b) the assumption of certain
of Seller's liabilities.
3. The Company loaned SQL $4,300,000 pursuant to the Exchange Agreement and a
related promissory note due on November 3, 2000 and bearing interest at the rate
of 6.18% per annum. The funds were used by SQL to acquire the Replacement
Property.
4. SQL granted a license to the Company to use the Replacement Property until
November 3, 2000 pursuant to a License Agreement between the Company and SQL, in
exchange for a one-time license fee of $285,000.
The Company anticipates that it will seek to complete a like-kind exchange
involving the Replacement Property on or before November 3, 2000, although there
can be no assurance that such an exchange will be completed.
Item 2. 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
Third Quarter of 1999
compared to
Third Quarter of 1998
(000's omitted)
------------------ ----------------------
Revenue Increase/(Decrease)
------------------ ----------------------
1999 1998 Amount Percentage
---- ---- ------ ----------
Services $ 3,234 $ 4,563 $(1,329) (29%)
Product licenses 1,101 2,630 (1,529) (58%)
Computer and add-on
hardware 924 2,271 (1,347) (59%)
------- ------- --------
Net revenue $ 5,259 $ 9,464 $(4,205) (44%)
======= ======= ======== =====
REVENUE
Net revenue. The Company designs and develops proprietary enterprise and
point-solution software for the electronic time and labor recording market, and
for the automotive, legal, and ERP (enterprise resource planning) markets. The
Company's revenues are derived from the licensing of the Company's software
products, from client service and support, and from the sale of third party
computer and add-on hardware. The Company's total revenues decreased by
approximately $4,205,000, or 44%, for the quarter ended September 30, 1999,
compared to the quarter ended September 30, 1998. A part of the stated decrease
is the result of the sale of the Company's catalog direct marketing systems
product line in March 1999 and also from the grant of an option to purchase the
SmartTime product line in August 1999.
Item 2
- continued -
Revenue from existing businesses decreased by approximately $399,000, or 8%, for
the period, when approximately $369,000 and $4,175,000 in revenue from the
Company's catalog direct marketing systems and SmartTime product lines are
excluded from the third quarter 1999 and 1998 results, respectively.
Services. Services are comprised of fees generated from training, consulting,
software modifications, and ongoing client support provided under self-renewing
maintenance agreements. Service revenues decreased by approximately $1,329,000,
or 29%, for the three months ended September 30, 1999, compared to the three
months ended September 30, 1998. Service revenue from existing businesses
increased by approximately $135,000, or 5%, for the period, when compared to the
third quarter of 1998, and the service revenue from the catalog direct marketing
systems and SmartTime product lines of approximately $340,000 and $1,804,000 for
the 1999 and 1998 periods respectively, is excluded.
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 decreased by approximately $1,529,000, or 58%, for the
third quarter of 1999, compared to the same period in 1998. Product license
revenue from existing businesses decreased by approximately $95,000, or 8%, for
the period, when compared to the third quarter of 1998, and the product license
revenue from the catalog direct marketing systems and SmartTime product lines of
approximately $12,000 and $1,445,000 for the 1999 and 1998 periods respectively,
is excluded. The decrease in product license revenue results from decreased
revenue from the legal systems product line, partially offset by an increase in
product license revenues from the tire and ERP product lines.
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 decreased by
approximately $1,347,000, or 59%, for the three months ended September 30, 1999,
compared to the same period in 1998. Hardware revenue from existing businesses
decreased by approximately $439,000, or 33%, when compared to the third quarter
of 1998 and the hardware revenue from the catalog direct marketing systems and
SmartTime product lines of approximately $17,000 and $926,000 for the 1999 and
1998 periods respectively, is excluded. The decrease in hardware revenues from
existing businesses was due primarily to a decrease in hardware sales for the
automotive systems product line.
Item 2
- continued -
COST OF REVENUE
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 $774,000
for the three months ended September 30, 1999, compared to the third quarter of
1998. The gross margin percentage for services for the third quarter of 1999
decreased to approximately 27% from 32% of revenue from services in the third
quarter of 1998. The Company's revenue and margin from services fluctuate from
period to period due to changes in the mix of contracts and projects.
Product licenses and development. Cost of software license revenues consists of
the costs of amortization of capitalized software costs, and the costs of
sublicensing third-party software products. The amount also includes the
expenses associated with the development of new products and the enhancement of
existing products (net of capitalized software costs), which consist primarily
of employee salaries, benefits, and associated overhead costs. Cost of software
license revenues and development decreased by approximately $463,000 for the
quarter ended September 30, 1999, compared to the same period in 1998. The
change reflects the elimination of product license and development costs for the
catalog direct marketing systems and SmartTime 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.
Computer and add-on hardware. Cost of hardware revenues consists primarily of
the costs of third-party hardware products. Cost of hardware revenues decreased
by approximately $1,379,000 for the three months ended September 30, 1999,
compared to the prior period. The decrease in dollar amount for the cost of
hardware revenues for the three months ended September 30, 1999 was due
primarily to the decreased computer and add-on hardware costs for the catalog
direct marketing product line sold in March 1999 and by a decrease in these
costs for the automotive systems product line.
The gross margin percentage for hardware sales increased to 21% for the three
months ended September 30, 1999, from 7%, in the same period in 1998. 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 in hardware revenue and margins.
Item 2
- continued -
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 decreased by $846,000, or 50%,
for the quarter ended September 30, 1999, compared to the third quarter in 1998.
The change in marketing and sales expenses primarily reflects the elimination of
the marketing and sales expenses of the catalog direct marketing systems and
SmartTime product lines and reduced sales and marketing expenses for the
automotive and legal systems product lines.
General and administrative. General and administrative expenses consist
primarily of employee salaries and benefits for administrative, executive, and
finance personnel and associated overhead costs, as well as consulting,
accounting, and legal expenses. General and administrative expenses decreased by
approximately $77,000, or 9%, for the three months ended September 30, 1999,
compared to the same period in 1998. The change primarily reflects the
elimination of the expenses related to the catalog direct marketing systems and
SmartTime product lines, partially offset by increased general and
administrative expenses for the ERP and legal product lines.
The net loss for the third quarter of 1999 was approximately $83,000, as
compared to net earnings of approximately $73,000 for the third quarter of 1998.
The change results from a decrease in earnings from operations of $626,000, and
a loss from the equity in earnings from affiliate of approximately $17,000,
partially offset by a decrease in net interest expense of $250,000 and a
decrease in income tax expense of $236,000.
Item 2
- continued -
Nine Months Ended September 30, 1999
compared to
Nine Months Ended September 30, 1998
(000's omitted)
----------------- ---------------------
Revenue Increase/(Decrease)
----------------- ---------------------
1999 1998 Amount Percentage
---- ---- ------ ----------
Services $11,078 $13,231 $(2,153) (16%)
Product licenses 4,178 6,157 (1,979) (32%)
Computer and add-on
hardware 3,406 5,242 (1,836) (35%)
------- ------- --------
Net revenue $18,662 $24,630 $(5,968) (24%)
======= ======= ======== =====
REVENUE
Net revenue. The Company's total revenues decreased by approximately
$5,968,000, or 24%, for the period when compared to the first nine months of
1998. Revenue from existing businesses increased by approximately $2,010,000, or
15% for the period, when approximately $2,915,000 and $10,890,000 in revenue
from the Company's catalog direct marketing systems and SmartTime product lines
for the nine months ended September 30, 1999 and 1998, respectively, is
excluded.
Services. Service revenues decreased by approximately $2,153,000, or 16%,
for the nine months ended September 30, 1999, compared to the nine months ended
September 30, 1998. Service revenue from existing businesses increased by
approximately $671,000, or 8%, for the period, when compared to the first nine
months of 1998, and the service revenue from the catalog direct marketing
systems and SmartTime product lines of approximately $2,389,000 and $5,210,000
for the 1999 and 1998 periods respectively, are excluded.
Product licenses. Software license revenues decreased by approximately
$1,979,000, or 32%, for the first nine months of 1999, compared to the same
period in 1998. Product license revenue from existing businesses increased by
approximately $506,000, or 16%, for the period, when compared to the first nine
months of 1998, and the product license revenue from the catalog direct
marketing systems and SmartTime product lines of approximately $458,000 and
$2,944,000 for the 1999 and 1998 periods respectively, are excluded.
Item 2
- continued -
Computer and add-on hardware. Hardware revenues decreased by approximately
$1,836,000, or 35%, for the nine months ended September 30, 1999, compared to
the same period in 1998. Hardware revenue from existing businesses increased by
approximately $833,000, or 33% for the period, when approximately $68,000 and
$2,736,000 hardware revenues from the Company's catalog direct marketing systems
and SmartTime product lines for the 1999 and 1998 periods are excluded. The
increase in hardware revenues from existing businesses was due primarily to the
increase of hardware unit sales by the Company's automotive systems product
line.
COST OF REVENUE
Services. Cost of services decreased by approximately $1,495,000 for the
nine months ended September 30, 1999, compared to the first nine months of 1998.
The gross margin percentage for services for the nine months ended September 30,
1999 increased to approximately 38% from 36% of revenue from services in the
first nine months of 1998. The Company's revenue and margin from services
fluctuate from period to period due to changes in the mix of contracts and
projects.
Product licenses and development. Cost of software license revenues and
development decreased by approximately $601,000 for the nine months ended
September 30, 1999, compared to the same period in 1998. Cost of product license
and development increased by approximately $329,000 or 21% for the period when
compared to the first nine months of 1998, and the cost of product licenses and
development from the catalog direct marketing systems and SmartTime product
lines for the 1999 and 1998 periods are excluded. The cost of product licenses
as a percentage of product license revenue may fluctuate from period to period
due to the mix of sales of third-party software products in each period
contrasted with certain fixed expenses such as the amortization of capitalized
software.
Computer and add-on hardware. Cost of hardware revenues decreased by
approximately $2,110,000, or 45%, for the nine months ended September 30, 1999,
compared to the prior period. The cost of hardware revenue from existing
businesses increased by approximately $305,000, or 14%, when the cost of
hardware from the Company's catalog direct marketing systems and SmartTime
product lines is excluded from the results of the first nine months of 1998. The
increase in dollar amount for the cost of hardware revenues for the nine months
ended September 30, 1999 was due primarily to increased unit sales of hardware
products by the Company's automotive systems product line.
The gross margin percentage for hardware sales increased to 25% for the
nine months ended September 30, 1999, from 11% in the same period in 1998.
Margins on computer and add-on hardware can fluctuate based on the mix of
computer and ancillary hardware products sold. Accordingly, the Company expects
hardware gross margins to continue to fluctuate in the future. 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 decreased by $1,279,000,
or 29%, for the nine months ended September 30, 1999, compared to the first nine
months in 1998. The change in marketing and sales expenses reflects the
elimination of the marketing and sales expenses of the catalog direct marketing
systems and SmartTime product lines partially offset by increased sales and
marketing expenses from the automotive and ERP systems product lines.
General and administrative. General and administrative expenses decreased
by approximately $46,000, or 2%, for the nine months ended September 30, 1999,
compared to the same period in 1998. The change primarily reflects the
elimination of the expenses related to the catalog direct marketing systems and
SmartTime product lines, partially offset by increased general and
administrative expenses from the automotive, ERP and legal product lines.
Net earnings for the nine months ended September 30, 1999 were
approximately $1,774,000, as compared to net earnings of approximately $242,000
for the first nine months of 1998. The change results from the gain on the sale
of the catalog direct marketing systems product line of approximately $3,822,000
and a reduction in net interest expense of approximately $342,000, partially
offset by a decrease in earnings from operations of $307,000, a loss from the
equity in earnings from affiliate of approximately $17,000, and an increase in
income tax expense of approximately $2,308,000.
Liquidity and Capital Resources
The Company had total cash, and cash equivalents, at September 30, 1999 of
approximately $4,907,000, an increase of approximately $645,000 from December
31, 1998. At September 30, 1999, the Company had approximately $6,220,000
invested in a marketable security. The Company and its subsidiaries had a
maximum line of credit totaling $1,500,000, which expired in June. As described
in Note 6, in October 1999, the Company entered into a new revolving demand loan
agreement totaling $1,500,000 at prime minus 1/2%, which is due on June 30,
2000. In addition, the Company arranged a $3,000,000 acquisition line of credit
at prime minus 1/2% which is convertible on or before June 30, 2000 to a five
year term at a fixed rate equal to two and one-quarter (2.25%) over the average
yield on US Treasury securities.
In March 1999, the Company sold substantially all of the assets of its catalog
direct marketing systems product line to CommercialWare, Inc., a Delaware
Corporation (the Purchaser). Under the terms of the sale, the Company
transferred to the Purchaser certain of the liabilities of the product line. The
Company received (i) cash in the amount of $4,000,000, (ii) a promissory note
due in three years 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 August 1999, the Company granted to a company ("Optionee") an option to
purchase the Company's SmartTime product line. As per the terms of the Option
Agreement, the Company transferred the assets and liabilities of its SmartTime
product line to a newly formed LLC, of which the Company is the sole member and
the Optionee is the manager.
The terms of the Option Agreement provide that the Optionee has the option to
purchase the SmartTime product line from the LLC at anytime from August 1, 2000
through August 31, 2000 (the "Option Period"), or at such earlier date as agreed
to by the parties, for an aggregate purchase price of $7,020,000, less any
option fee paid to date (the "Purchase Price").
The Optionee paid an initial option fee in the amount of $1,660,000 upon
execution of the Option Agreement and is required to pay a second option fee on
August 1, 2000 in the amount of $540,000, unless the Optionee exercises the
option prior to such date. The option fees are non-refundable to the Optionee in
the event that the Optionee does not exercise the option to purchase the
SmartTime product line, as to which there can be no assurance. Also under the
terms of the Option Agreement, the Optionee has loaned to the Company the sum of
$3,200,000 (with respect to which the Company has prepaid $160,000 in interest).
In addition, the LLC has agreed to loan the Optionee an amount equal to the net
cash of the LLC available after collection of the LLC's accounts receivable and
payment of the LLC's accounts payable.
Liquidity and Capital Resources
- continued -
In addition, the Optionee has purchased exclusive licenses to use the customer
intangibles and intellectual property of the SmartTime product line during the
Option Period for $300,000 and $500,000, respectively. In the event that the
Optionee does not exercise the option to purchase the SmartTime product line
prior to the expiration of the Option Period, the Optionee's rights under the
above-mentioned license agreements would terminate and the Company, through the
LLC, would retain ownership of these assets.
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.
The Company has experienced significant fluctuations in its quarterly operating
results and anticipates such fluctuations in the future. Quarterly revenues and
operating results depend on the volume and timing of orders received during the
quarter which are difficult to forecast. Large orders for the Company's products
often have a lengthy sales cycle while the customer evaluates and receives
approvals for the purchase of the products. It may be difficult to accurately
predict the sales cycle of any large order. If one or more large orders fail to
close as forecasted in a fiscal quarter, the Company's revenues and operating
results could be materially adversely affected. In addition, the Company
typically receives a substantial portion of its product orders in the last month
of the quarter. Orders are shipped as received and, as a result, the Company
often has little or no backlog except for support and service revenue. The
Company acknowledges the potential adverse impact that such fluctuations and
general economic uncertainty could have on its ability to maintain liquidity and
raise additional capital.
The Company's future financial performance is also dependent in large part on
the successful development, introduction, and customer acceptance of new and
enhanced versions of its software products. Due to the rapid change in vendor
hardware platforms, operating systems, and updated versions, the complexity and
expense of developing, testing, and maintaining the Company's products has
increased. The Company intends, as it has in the past, to fund this development
primarily from its cash from operations and bank debt. There can be no assurance
that these efforts will be successful or result in significant product
enhancements.
Subject to the foregoing, the Company believes that based on the level of
operating revenue, cash on hand, and available bank debt, it has sufficient
capital to finance its ongoing business.
Year 2000 Implications
The Company has continued to evaluate the potential impact of the Year 2000
issue, which concerns the inability of some computer hardware and software
programs to properly recognize and process date sensitive information related 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 non-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 3. 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 and
senior secured floating rate loan funds which carry a degree of interest rate
risk. These instruments may produce less income than expected if interest rates
fall.
Foreign Currency Risk. International revenues from the Company's foreign
subsidiary and other foreign sources were approximately 15% 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 year-to-date in 1999 was not
material.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits -
The following exhibits are filed with this report:
27 Financial Data Schedule.
(b) Reports on Form 8-K - On August 13, 1999, the Company announced
that it granted to InterPro Expense Systems, Inc. an option to purchase the
Company's SmartTime product line.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ASA International Ltd.
------------------------------
(Registrant)
11/15/99 /s/ Alfred C. Angelone
- ------------ ------------------------------
(Date) (Signature)
Alfred C. Angelone
Chief Executive Officer
11/15/99 /s/ Terrence C. McCarthy
- ------------ ------------------------------
(Date) (Signature)
Terrence C. McCarthy
Vice President and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1999, CONDENSED
CONSOLIDATED INCOME STATEMENT FOR NINE MONTHS ENDED SEPTEMBER 30, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B)
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 4,907,311
<SECURITIES> 6,220,455
<RECEIVABLES> 4,030,483
<ALLOWANCES> 140,395
<INVENTORY> 210,178
<CURRENT-ASSETS> 16,682,570
<PP&E> 7,808,182
<DEPRECIATION> 2,942,098
<TOTAL-ASSETS> 25,345,252
<CURRENT-LIABILITIES> 10,669,397
<BONDS> 3,970,188
0
0
<COMMON> 43,844
<OTHER-SE> 9,952,809
<TOTAL-LIABILITY-AND-EQUITY> 25,345,252
<SALES> 18,661,544
<TOTAL-REVENUES> 18,661,544
<CGS> 2,566,531
<TOTAL-COSTS> 12,204,187
<OTHER-EXPENSES> 5,735,676
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (80,066)
<INCOME-PRETAX> 4,446,892
<INCOME-TAX> 2,673,000
<INCOME-CONTINUING> 1,773,892
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,773,892
<EPS-BASIC> 0.55
<EPS-DILUTED> 0.51
</TABLE>
