10-Q/A 1 asa10qa_063004.txt FORM 10-Q/A JUNE 30, 2004 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended: Commission File Number: June 30, 2004 O-14741 ------------- ------- 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: . ----- ----- Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes: No: X . ----- ----- As of June 30, 2004 there were 1,863,706 shares of Common Stock of the Registrant outstanding. PART I FINANCIAL INFORMATION Item 1. Financial Statements --------------------

See notes to condensed consolidated financial statements 2 ASA INTERNATIONAL LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, December 31, 2004 2003 ------------ ------------- LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited) CURRENT LIABILITIES: Current maturities of long-term obligations $ 75,430 $ 83,982 Accounts payable 513,153 418,946 Accrued expenses - other 1,080,569 1,215,529 Accrued income taxes 1,242,783 344,025 Accrued commissions 184,238 141,780 Customer deposits 177,058 278,747 Deferred revenue 735,234 838,464 ----------- ----------- TOTAL CURRENT LIABILITIES 4,008,465 3,321,473 ----------- ----------- LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES 3,272,665 3,210,434 ----------- ----------- DEFERRED INCOME TAXES 50,000 447,100 ----------- ----------- COMMON STOCK SUBJECT TO REPURCHASE 173,986 383,044 ----------- ----------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock, par value $.01 per share: Authorized and unissued, 1,000,000 shares, 60,000 shares of which are designated as Series A Junior Participating Preferred Stock -- -- Common stock, par value $.01 per share: Authorized, 8,000,000 shares; issued 2,485,477 and 2,485,477 shares; outstanding, 1,863,706 and 1,924,653 shares 24,864 24,855 Additional paid-in capital 7,275,159 7,101,709 Retained earnings 6,189,455 4,745,346 Accumulated other comprehensive income: Unrealized gain on marketable securities 3,289 595,650 ----------- ----------- 13,492,767 12,467,560 Less treasury stock, at cost 2,246,097 2,031,057 ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 11,246,670 10,436,503 ----------- ----------- $18,751,786 $17,798,554 =========== =========== See notes to condensed consolidated financial statements 3 ASA INTERNATIONAL LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS Three Months Ended June 30, --------------------------- 2004 2003 --------------------------- (Unaudited) REVENUES Services $ 3,004,240 $ 3,191,481 Product licenses 966,505 650,832 Computer and add-on hardware 233,586 253,882 ----------- ----------- NET REVENUE 4,204,331 4,096,195 ----------- ----------- COST OF REVENUE Services 1,502,355 1,623,495 Product licenses and development 815,758 886,488 Computer and add-on hardware 170,866 199,729 ----------- ----------- TOTAL COST OF REVENUE 2,488,979 2,709,712 ----------- ----------- EXPENSES Marketing and sales 864,766 818,785 General and administrative 751,492 950,252 ----------- ----------- TOTAL EXPENSES 1,616,258 1,769,037 ----------- ----------- EARNINGS (LOSS) FROM OPERATIONS 99,094 (382,554) INTEREST INCOME (EXPENSE) - NET 25,746 4,818 OTHER INCOME (EXPENSE) - NET -- 13,746 GAIN ON SALE OF MARKETABLE EQUITY SECURITIES 755,139 -- ----------- ----------- EARNINGS (LOSS) BEFORE INCOME TAXES 879,979 (363,990) INCOME TAXES 487,000 (114,000) ----------- ----------- NET EARNINGS (LOSS) $ 392,979 $ (249,990) =========== =========== BASIC EARNINGS (LOSS) PER COMMON SHARE NET EARNINGS (LOSS) $ 0.21 $ (0.12) =========== =========== DILUTED EARNINGS (LOSS) PER COMMON SHARE: NET EARNINGS (LOSS) $ 0.20 $ (0.12) =========== =========== See notes to condensed consolidated financial statements. 4 ASA INTERNATIONAL LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS Six Months Ended June 30, -------------------------- 2004 2003 -------------------------- (Unaudited) REVENUES Services $ 6,031,641 $ 6,410,470 Product licenses 1,979,935 1,477,233 Computer and add-on hardware 431,322 503,656 ----------- ----------- NET REVENUE 8,442,898 8,391,359 ----------- ----------- COST OF REVENUE Services 2,990,922 3,285,533 Product licenses and development 1,696,325 1,764,916 Computer and add-on hardware 320,354 391,756 ----------- ----------- TOTAL COST OF REVENUE 5,007,601 5,442,205 ----------- ----------- EXPENSES Marketing and sales 1,656,280 1,690,106 General and administrative 1,628,106 1,876,316 ----------- ----------- TOTAL EXPENSES 3,284,386 3,566,422 ----------- ----------- EARNINGS (LOSS) FROM OPERATIONS 150,911 (617,268) INTEREST INCOME (EXPENSE) - NET 38,087 36,140 GAIN ON SALE OR MARKETABLE EQUITY SECURITIES 2,218,111 -- OTHER INCOME (EXPENSE) - NET -- 62,363 ----------- ----------- EARNINGS (LOSS) BEFORE INCOME TAXES 2,407,109 (518,765) INCOME TAXES 963,000 (162,000) ----------- ----------- NET EARNINGS (LOSS) $ 1,444,109 $ (356,765) =========== =========== BASIC EARNINGS (LOSS) PER COMMON SHARE NET EARNINGS (LOSS) $ 0.76 $ (0.17) =========== =========== DILUTED EARNINGS (LOSS) PER COMMON SHARE NET EARNINGS (LOSS) $ 0.74 $ (0.17) =========== =========== See notes to condensed consolidated financial statements. 5

See notes to condensed consolidated financial statements. 6

See notes to condensed consolidated financial statements 7 Non Cash Investing and Financing Activities: During the six months ended June 30, 2004, the Company was released from its obligation to buy 65,000 shares under the provisions of the Repurchase Agreement described below in Note 11. As a result, $171,560 of the liability for Common Stock Subject to Repurchase was reduced, with this amount recorded as an adjustment to Additional Paid in Capital. In June 2004, upon the sale of an aircraft, the Company paid-off the outstanding debt on the aircraft of approximately $415,000 with a portion of the proceeds from a loan used to finance the purchase of a new aircraft. 8 ASA INTERNATIONAL LTD. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1. Basis of Presentation --------------------- As permitted by the rules of the Securities and Exchange Commission applicable to quarterly reports on Form 10-Q, these notes are condensed and do not contain all disclosures required by accounting principles generally accepted in the United States. Reference should be made to the financial statements and related notes included in the Company's Annual Report on Form 10-K. In the opinion of management, the accompanying financial statements reflect all adjustments, all of which were of a normal recurring nature necessary for a fair presentation of the Company's results of operations for the three and six month periods ended June 30, 2004 and June 30, 2003, respectively. The results disclosed in the Condensed Consolidated Statement of Operations for the three and six month periods ended June 30, 2004 are not necessarily indicative of the results expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2003. Note 2. Marketable Securities --------------------- The Company has restated below its policy for Marketable Securities that it had previously provided for the fiscal periods ended June 30, 2004 and 2003. The Company accounts for its investments under Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS No. 115). This standard requires the following: o Securities that a company has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. o Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. o Securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders' equity. Management determines the appropriate classification of its investments in marketable securities at the time of purchase and re-evaluates such determination at each balance sheet date. As of June 30, 2004, marketable securities consisted of mutual funds. As of June 30, 2004, such mutual fund investments are considered as available-for-sale securities under the provisions of SFAS No. 115 and are reported at fair value with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders' equity. 9 Note 3. Sale of Marketable Equity Securities ------------------------------------ The Company purchased 451,250 shares of common stock of Omtool Ltd. in a transaction completed in May 2003. In June 2004, the Company sold 101,250 shares of common stock of Omtool Ltd. in public resales at a price of approximately $9.01 per share, net of broker's commissions, for a total of approximately $912,000 in cash, excluding costs related to the sale. In March 2004, the Company had sold 350,000 shares of common stock of Omtool Ltd. to Omtool in a private transaction at a price of $5.75 per share for a total of $2,012,500 in cash, excluding costs related to the sale. The foregoing share amounts have been adjusted to reflect Omtool Ltd.'s April 27, 2004 two-for-one stock split. These sales resulted in a pretax gain of approximately $2,218,000. The Company has now sold all of its shares of Omtool Ltd. Note 4. Sale and Purchase of Aircraft ----------------------------- In June 2004, the Company sold its 50% interest in an aircraft it had purchased in January 2003. The Company, along with the owner of the other 50% interest in the aircraft, each sold their respective interests in the aircraft for an aggregate sales price of approximately $874,000 with the proceeds used to pay in full each party's proportionate share of the Promissory Note co-signed and co-guaranteed at the time of the aircraft's purchase. The Company's guarantee on the Note ended upon payoff. The total balance on the Note at the time of pay-off was approximately $830,000, with the Company's proportionate share approximating $415,000. No gain or loss was recorded on the sale as the cash proceeds from the sale approximated the net book value of the aircraft. Concurrent with the foregoing aircraft sale, the Company purchased a 33% interest in another aircraft for $600,000 through its 100% owned subsidiary, ASA Aircraft, LLC for a total purchase price of $1,800,000. A note for $1,530,000 was signed under a Demand Loan and Security Agreement with a bank for the purchase of the 33% interest in the aircraft. The other two 1/3 owners of the aircraft are unrelated parties. The 5-year note with interest at prime (4.00% at June 30, 2004) plus .25% calls for monthly principal and interest payments of $11,521 through December 2007 with a final payment of approximately $1,142,206 plus interest due in July 2009. The Company funded its 33% share of the $270,000 down payment on the aircraft or $90,000 along with the 33% share of the down payment or $90,000 of one of the co-borrowers. The co-borrower has agreed to repay the $90,000 to the Company by December 31, 2004. The Company is obligated for 33% of the $1,530,000 note or $510,000, and is a guarantor on the remaining 67% or $1,020,000. The two other co-borrowers on the note are each liable for 33% of the note or $510,000 each and are also guarantors of the Company's and each other's liability. The Promissory Note is collateralized by the aircraft with cross guarantees by each of the three borrowers. The term of the guarantee is identical to that of the Note. The Company would be required to perform under the guarantee in the event that either or both of the co-borrowers failed to make their principal and interest payments on the 33% (or a combined total of 67% for both entities) of the debt for which it is obligated. The maximum potential amount of future payments (undiscounted) that the Company could be required to make under the guarantee is approximately $1,822,000, which consists of $1,530,000 in principal and approximately $292,000 in interest. The Company did not record any liability for the guarantee based upon its calculation of the estimated fair value of the guarantee, which was determined to be nominal. The expected net present value calculation, based on FASB Concepts Statement No. 7, which was used to derive the estimated fair value of the guarantee incorporated relevant factors such as an estimate of the appraised value of the aircraft at purchase date, estimated annual depreciation of the aircraft, and the estimated proceeds that would be received if the aircraft were sold. In the event that the Company was required to make payments on behalf of either or both other entities under the guarantee agreement, the Company would likely sell the aircraft and use the proceeds to pay off the entire amount of the debt outstanding to the bank owed by the parties under the guarantee agreement. Based on the amount of debt outstanding and the estimated fair market value of the aircraft, management believes that the sale of the aircraft would yield proceeds approximately equal to the total amount of debt outstanding under the Note. 10 Note 5. License Agreement ----------------- In June 2004 the Company entered into a license agreement to become a reseller of an enterprise software product for smaller-sized independent tire dealers. Under the terms of the agreement, which extends through December 31, 2005, the Company paid a one-time license fee of $200,000 for the exclusive right to market the software along with a total of $200,000 prepaid license fees which are earned by the licensor as the product is sublicensed by the Company. Any unearned prepaid license fees remaining at the end of the license term would be retained by the licensor. The agreement can be terminated at will by either party subject to the refund to the Company or by the licensor of the one-time license fee and any unearned prepaid license fees if the licensor terminates the agreement without cause before the end of the term. The one-time license fee is being amortized over the term of the license agreement and is recorded as software in the Company's June 30, 2004 Consolidated Balance Sheet. The prepaid license fees will be expensed by the Company when earned by the licensor according to the provisions of the agreement and are included in other current assets in the Company's June 30, 2004 Consolidated Balance Sheet. Note 6. Earnings (Loss) per Share -------------------------

11 The following table summarizes securities which were outstanding as of June 30, 2004 and 2003 but not included in the calculation of diluted loss per share because such shares are antidilutive: ========== ========== 2004 2003 ========== ========== Employee Stock Options 47,650 186,265 ========== ========== Note 7. Stock Options ------------- At June 30, 2004, the Company has four stock based compensation plans. The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost for the Company's four stock option plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FASB Statement No. 123, "Accounting for Stock-Based Compensation," the Company's net earnings (loss) and earnings (loss) per share would have been adjusted to the pro forma amounts indicated below:

Note 8. Reverse/Forward Stock Splits and Going Private Transaction ---------------------------------------------------------- In April 2004, the Company announced that its Board of Directors had unanimously approved a reverse 1-for-600 split of the Company's common stock to be followed immediately by a forward 600-for-1 split. If the transaction is approved by the Company's stockholders and implemented, the Company expects to have fewer than 300 stockholders of record, which would enable the Company to voluntarily terminate the registration of its common stock under the Securities Exchange Act of 1934 and go private. As a private company, the Company would no longer be required to file periodic reports and other information with the Securities and Exchange Commission ("SEC"). Pursuant to the transaction, stockholders holding fewer than 600 shares of the Company common stock immediately before the transaction will receive from the Company cash payment for fractional shares equal to $5.00 per pre-split share. Stockholders holding 600 or more shares of the Company common stock immediately before the transaction will continue to hold the same number of shares after completion of the transaction and will not receive any cash payment. The Board of Directors received an opinion from its financial advisor, vFinance Investments, Inc., that the cash consideration to be paid in the proposed transaction is fair, from a financial point of view, to the Company's stockholders. 12 The proposed transaction is subject to approval by the holders of a majority of the issued and outstanding shares of the Company common stock. Stockholders will be asked to approve the transaction at the Company's next annual meeting of stockholders, currently expected to be held in September of this year. In April 2004, the Company also filed a preliminary proxy statement and Schedule 13E-3 with the SEC which outlined the transaction. Amendments to the preliminary proxy statement and Schedule 13E-3 filed with the SEC in June and July 2004. Note 9. Notes Payable - Bank -------------------- In May 2004, the Company renewed through June 30, 2005, its revolving demand loan agreement with a bank for up to $1,500,000 which bears interest at prime plus 1/2%. Note 10. Employee Stock Ownership Plan ----------------------------- In June 2003, the Company established an Employee Stock Ownership Plan ("ESOP") effective January 1, 2003. The ESOP is designed to enable Company employees to accumulate ownership of Company stock. All employees on the payroll of the Company over the age of 21 and with at least 1,000 hours of Company service during a plan year are eligible to participate in the ESOP. The ESOP has a five-year cliff vesting, with credit given for service prior to the ESOP effective date. Benefits may be paid in a lump sum or installments, in Company stock, cash or a combination of both. The Company may, but is not required to, make contributions to the ESOP in cash or Company stock. The ESOP may borrow money to purchase Company stock. Employee contributions are not permitted. Company contributions may be used by the ESOP to repay any current loan obligation incurred to purchase Company stock, to purchase Company stock from existing shareholders, or to purchase Company stock directly from the Company. The ESOP may also invest in assets other than Company stock, or may hold ESOP assets in cash. As of June 30, 2004, no contributions have been made to the ESOP. Note 11. Common Stock Subject to Repurchase ---------------------------------- In connection with the Company's merger with CompuTrac, Inc. the Company entered into a Repurchase Stock Agreement (the Repurchase Agreement) with Harry W. Margolis and certain members of this family. During the six months ended June 30, 2004, the Company was released from its obligation to buy 65,000 shares under the provisions of the Repurchase Agreement. Therefore, the Company reduced its liability for common stock subject to repurchase related to these shares. As of June 30, 2004, the remaining liability consists of 64,439 shares of common stock subject to repurchase at $2.70 per share. Note 12. Segment Reporting and Geographic Information: --------------------------------------------- The Company has four principal operating and reportable segments engaged in the design, development and servicing of its proprietary enterprise software for (1) tire dealers, (2) law firms, (3) project-based services companies, and (4) manufacturing and distribution companies. The Company also has a fifth reportable segment comprised of its corporate services group which provides centralized administrative support for its operating businesses, in areas such as human resources, legal, tax, audit, insurance, and budgeting and planning. The corporate services group also includes the assets and operating costs of the Company's real estate and aircraft which are not reportable separately. The operating segments were determined based on the nature of the products and services offered. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. The Company's chief executive officer has been identified as the chief operating decision maker. The Company's chief operating decision maker directs the allocation of resources to operating segments based on the profitability and cash flows of each respective segment prior to the allocation to the business segment of the costs associated with the corporate services group. 13 The Company evaluates performance based on several factors, of which the primary financial measure is business segment operating income before taxes. The accounting policies of the business segments are the same as those described in "Note A: Summary of Significant Accounting Policies" of the Company's Annual Report on Form 10-K. The measurements used in reporting segment information compared to those used in the company's financial statements are the same. There is typically no intersegment sales activity. The following tables show the operations of the Company's reportable segments:

(1) Earnings (loss) before taxes of the principal businesses exclude the effects of net other income, interest income/expense, and a gain on the sale of marketable equity securities. (2) Total business assets are the owned or allocated assets used by each business. Corporate assets consist of cash and cash equivalents, marketable securities, notes receivable, certain land and buildings, vehicles and aircraft, and certain other assets. Note 13. Subsequent Events ----------------- Split-dollar life insurance programs are not specifically exempted by the Sarbanes-Oxley Act of 2002, which prohibits loans to executive officers. In July 2004, ASA terminated the Company's Chief Executive Officer's split-dollar life insurance program, which had not been modified since the adoption of Sarbanes-Oxley, and replaced it with a new executive benefit package that includes an executive life plan and a supplemental retirement plan. The replacement was based on a comparison of the costs and benefits of the old split-dollar plan and the new benefit plan. The new executive life plan is a $2,000,000 policy that will be owned by a trust of which the Officer or his designees are the beneficiaries. The Company will pay the annual premiums of approximately $53,921 for the plan, which will be reported as income to the Officer and will be deductible to the Company as paid, and will continue to pay such premiums through the Officer's retirement as a retirement benefit. The new supplemental retirement plan is a $2,670,313 policy that will be owned by the Company. The Company will fund the first year premium of approximately $560,000 and pay annual premiums of approximately $60,000 for the following nine years. The cash surrender value to the Company of the terminated split-dollar life insurance policy of approximately $540,572, will be used to fund the first year premium. The new policy will be used to reimburse the Company for its funding of post-retirement income of the Officer of $200,000 for ten years, which will be reported as income to the Officer and will be deductible to the Company as paid. In the event that the Officer dies prior to retirement, his beneficiary will receive a lump sum payment of $2,100,000, which would be reported as income to the beneficiary and deductible by the Company. Upon his death subsequent to retirement, any unpaid post retirement income due under the plan will be paid by the Company to the Officer's beneficiary. 15 The benefits of the replacement to the Company include termination of a split-dollar life insurance program that the Company could not modify since the adoption of Sarbanes-Oxley Act and use of more highly rated insurance carriers. On a cost basis, the costs of the old split-dollar plan (approximately $115,000 on an annual basis) and the new benefit plan are similar. The new insurance coverage was effective on June 1, 2004 upon payment of an initial deposit of approximately $37,000. In July 2004, Company entered into an agreement to guarantee $500,000 in payment obligations to a bank under a letter of credit on behalf of CommercialWare, Inc. The guarantee extends from July 19, 2004 until March 2, 2005 and is secured by a subordinated security interest in the tangible assets of CommercialWare, Inc. Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations --------------------- This Quarterly report on Form 10-Q contains forward-looking information about the Company. In addition to the historical information contained herein, the discussions in this document include statements that constitute forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including with respect to the Company's revenues, gross margins, acquisitions and expected cash flow. The Company is hereby setting forth statements identifying important factors that may cause the Company's actual results to differ materially from those set forth in any forward-looking statements made by the Company. Some of the most significant factors include: the risks associated with acquisitions; the ability of the Company to adapt to the rapid changes in the software industry and compete with companies with significantly greater financial and technical resources; the loss of executive officers and key personnel who are critical to the Company's business; the volume and timing of orders received during the period, which are difficult to forecast; the successful completion and sale of new products and enhancements to existing products; the availability of additional capital in the future and financial market volatility; and general economic and business conditions. Management believes these forward-looking statements are reasonable. However, caution should be taken not to place undue reliance on any such forward-looking statements since such statements speak only as of the date when made. Accordingly, there can be no assurances that any anticipated future results will be achieved and the forward-looking statements contained herein should not be relied upon as predictions of future results. Furthermore, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Management Overview The Company designs and develops proprietary enterprise software for the tire dealer, legal, project-based services, and manufacturing and distribution software markets. The Company's revenues are derived from the licensing of the Company's software products, from client service and support, and from the sale of third party computer and add-on hardware. Business Environment The software industry is subject to economic cycles, and has in the past experienced and is likely in the future to experience, recessionary periods. During the two year period ending June 30, 2004, many sectors of the software industry experienced the effects of a downturn in economic conditions. This downturn lead to reduced demand for the products and services provided by software companies like ASA. These changes in demand and in economic conditions have limited, and may continue to limit, sales of licenses to new and existing customers. These conditions have also resulted in longer customer sales cycles, and delays in or rescheduling of orders. Such conditions have and could continue to affect ASA's results of operations, since a significant portion of the Company's operating costs (such as personnel, rent and depreciation) are fixed in advance of a particular quarter. During these downturns, the Company carefully monitors and often adjusts the number of its employees in an effort to control its personnel costs which is its largest variable and controllable operating expense. Since the Company operates in highly competitive markets, it is required to make ongoing investments in sales and marketing activities and continue to produce new and enhanced software products. 16 Overview of Company Operations The Company's ability to increase its overall revenues is dependent on its ability to generate sales of its proprietary enterprise software or add-on modules to new and/or existing customers. Such software sales are typically accompanied by professional services revenue associated with customer requirements for implementation and training. Proprietary enterprise software sales, along with its ability to retain its existing customers, allow the Company to maintain or increase its core of ongoing revenues from maintenance and support. The Company's ability to attain profitability is largely dependent upon its ability to properly match its operating costs, primarily its personnel costs, to its existing revenue level on a timely basis. The Company forecasts annually the level of revenue anticipated for the upcoming year and plans staffing levels and its cost structure accordingly to produce profitable operations. Each month the Company monitors its progress against its forecast, and should the Company determine that the required level of revenue is not likely to be attained, its expenditures are adjusted to the existing revenue level. In order to minimize the likelihood for frequent and disruptive cost and personnel reductions, the Company has traditionally targeted modest revenue growth (10% or less) from year to year. Staffing and other expenditures are matched to existing, predictable revenue rather than a level of revenue growth that may be too optimistic. In an effort to improve its prospects for growth in a historically volatile industry, the Company has also pursued a strategy of growth through acquisitions. These acquisitions have primarily involved the purchase of entire companies, although software products complementary to the Company's existing product lines have also been acquired. The Company has successfully consummated and integrated a number of acquisitions in the past which have contributed to an increase in the Company's revenue and earnings. However, the timing of identifying and completing the acquisition of suitable and affordable companies is highly unpredictable. In addition, these acquisitions involve many risks associated with successfully integrating the acquired operations, products, technologies, personnel and businesses and realizing anticipated synergies, and economies of scale. Results of Operations Second Quarter of 2004 compared to Second Quarter of 2003 (000's omitted) ------------------------------------------------- Revenue Increase / (Decrease) ---------------------- ------------------------ 2004 2003 Amount Percentage --------- --------- ---------- ---------- Services $ 3,004 $ 3,191 $ (187) (6%) Product licenses 966 651 315 48% Computer and add-on hardware 234 254 (20) (8%) --------- --------- ---------- Net revenue $ 4,204 $ 4,096 $ 108 3% ========= ========= ========== 17 REVENUE The Company's total revenues increased by approximately $108,000 for the quarter ended June 30, 2004, compared to the quarter ended June 30, 2003. The changes in the components of the Company's revenue are explained as follows: Product license revenue ----------------------- Three Months Ended June 30, 2004 compared to Three Months Ended June 30, 2003 ----------------------------------------------- (000's omitted) Revenue Increase / (Decrease) ---------------------- ---------------------- 2004 2003 Amount Percentage ---------- ---------- --------- ---------- Tire $ 519 $ 395 $ 124 31% Legal 394 141 253 179% Project-based Services 28 73 (45) (62%) Manufacturing and Distribution 25 42 (17) (40%) ---------- ---------- --------- Total product license revenue $ 966 $ 651 $ 315 48% ========== ========== ========== ========== The Company's software license revenues are derived primarily from the licensing of the Company's enterprise products. Product license revenues increased by approximately $315,000, or 48%, for the quarter ended June 30, 2004, compared to the the quarter ended June 30, 2003. During the quarter ended June 30, 2004, the Company sold approximately $344,000 in enterprise software, comprising approximately 21 enterprise software systems at an average price of approximately $16,000 per system, compared to approximately $300,000 in enterprise software, comprising approximately 9 systems, averaging approximately $33,000, in the prior year's quarter ended June 30, 2003. In addition, the Company sold approximately $623,000 of additional software modules, primarily to existing customers during the quarter ended June 30, 2004, compared to approximately $351,000 in add-on software module sales during the prior year's comparable period. Product license revenues increases for the tire and legal systems segments of approximately $124,000 and $253,000, respectively were partially offset by decreases in product license revenues of approximately $45,000 and $17,000 for the project-based services and the manufacturing and distribution systems from the quarter ended June 30, 2004 when compared to the quarter ended June 30, 2003. The increase in product license revenue for tire and legal systems is due to improving demand in those market segments and also reflects , for legal systems, the impact of broadening its product offerings through the integration of the software products acquired from CompuTrac. Services Revenue ---------------- Three Months Ended June 30, 2004 compared to Three Months Ended June 30, 2003 ---------------------------------------------- (000's omitted) Revenue Increase / (Decrease) --------------------- --------------------- 2004 2003 Amount Percentage ---------- --------- -------- ---------- Tire $ 1,134 $ 1,125 $ 9 1% Legal 1,097 1,229 (132) (11%) Project-based Services 350 402 (52) (13%) Manufacturing and Distribution 423 435 (12) (3%) ---------- --------- -------- Total service revenue $ 3,004 $ 3,191 $ (187) (6%) ========== ========= ======== ========== 18 The Company's services are comprised of fees generated from training, consulting, software modifications, and ongoing client support provided under maintenance agreements that renew automatically unless either party gives prior notice as specified in the agreements. Service revenues decreased by approximately $187,000, or 6%, for the quarter ended June 30, 2004 compared to the quarter ended June 30, 2003. Service revenue decreased for all Company's segments except service revenues for tire sytems which remained approximately unchanged from the prior year's quarter. The decrease in service revenues was due primarily to the smaller number of enterprise software systems sold during the prior year period which reduced client requirements for training and consulting services. As noted above, software sales lead to additional service revenues including ongoing support revenue, and are typically accompanied by professional services revenue associated with customer requirements for implementation and training. Computer and add-on hardware ---------------------------- The Company's hardware revenues are derived from the resale of third-party hardware products to the Company's clients in conjunction with the licensing of the Company's software. Hardware revenues decreased by approximately $20,000, or 8%, for the quarter ended June 30, 2004, compared to the quarter ended June 30, 2003. The decrease in hardware revenues from existing businesses was due to decreased hardware sales by the tire systems segment. Clients are electing to use third party sources for their hardware needs as price competition continues to increase. COST OF REVENUE Product licenses and development. The Company's cost of software license revenues consists of the costs of amortization of capitalized software costs, and the costs of sublicensing third-party software products. The amount also includes the expenses associated with the development of new products and the enhancement of existing products (net of capitalized software costs), which consist primarily of employee salaries, benefits, and associated overhead costs. Cost of software license revenues and development decreased by approximately $71,000, or 8%, for the quarter ended June 30, 2004, compared to the quarter ended June 30, 2003. The project-based services and legal systems segments accounted for approximately $86,000 and $45,000, respectively of this decrease. The decrease in costs for the project-based services segment was largely the result of a decrease in software amortization costs. The decrease in such costs for the legal systems segment was a result of a decrease of 5 in the number of employees involved in product development for the period ending June 30, 2004 compared to the same period in 2003. The costs of product license and development also decreased slightly ($5,000) for the manufacturing and distribution systems. These decreases were partially offset by an increase in development expenses for the tire systems segment of approximately $65,000 related to new product development activities. The cost of product licenses as a percentage of product license revenue may fluctuate from period to period due to the mix of sales of third-party software products in each period contrasted with certain fixed expenses such as the amortization of capitalized software. Services. The Company's cost of services consists of the costs incurred in providing client training, consulting, and ongoing support as well as other client service-related expenses. Cost of services decreased by approximately $121,000, or 7%, for the quarter ended June 30, 2004, compared to the quarter ended June 30, 2003. The decrease the cost of services for the period was primarily the result of a reduction of approximately 2 in the number of employees providing services for the project-based services systems segment for the period ending June 30, 2004 compared to the same period in 2003. The cost of services for the project-based services segment decreased by approximately $131,000 for the period. Small decreases in the cost of services also occurred in the legal ($10,000) and the manufacturing and distribution systems ($12,000) segments are a result of decreased revenue from services noted above for these segments. The tire segment's cost of services increased by approximately $32,000 as a result of the increase in revenue from services noted above. The gross margin percentage for services for the period increased to approximately 50% from 49% for the same period in 2003. The Company's margin from services fluctuates from period to period due to changes in the mix of contracts and projects. 19 Computer and Add-on Hardware. Cost of hardware revenues consists primarily of the costs of third-party hardware products. Cost of hardware revenues decreased by approximately $29,000, or 14%, for the quarter ended June 30, 2004, compared to quarter ended June 30, 2003. The decrease was due to decreased sales of hardware products by the Company's tire systems segment. The gross margin percentage for hardware sales increased to 27% for the quarter ended June 30, 2004, from 21% for the quarter ended June 30, 2003. Margins on computer and add-on hardware can fluctuate based on the mix of computer and ancillary hardware products sold. EXPENSES Marketing and Sales. Marketing and sales expenses consist primarily of employee salaries, benefits, commissions and associated overhead costs, and the cost of marketing programs such as direct mailings, trade shows, seminars, and related communication costs. Marketing and sales expenses increased by approximately $46,000, or 6%, for the quarter ended June 30, 2004, compared to the the quarter ended June 30, 2003. The change resulted from an increase in sales and marketing expenses for the tire and legal systems segments of approximately $81,000 and $68,000. Costs increased as a result of the addition of sales personnel by tire (3) and legal systems (2), and as a result of increased license revenue, additional commission expenses were incurred. The manufacturing and distribution and the project-based services segments sales and marketing expenses decreased by approximately $60,000 and $43,000, respectively due to a reduction in sales personnel of approximately 1 and 2 personnel, respectively, during the quarter ended June 30, 2004 compared to the similar period ended June 30, 2003. The decreases reflect actions taken to eliminate the costs of personnel performing below targeted quota. General and Administrative. General and administrative expenses consist primarily of employee salaries and benefits for administrative, executive, and finance personnel and associated overhead costs, as well as consulting, accounting, and legal expenses. General and administrative expenses decreased approximately $199,000, or 21%, for the quarter ended June 30, 2004, compared to the quarter ended June 30, 2003. The decrease in general and administrative expenses for the tire systems segment of approximately $20,000 for the period is due primarily to reduced payroll costs related to a manager transferred to client services. General and administrative expenses for the project-based services and the manufacturing and distribution segments decreased by approximately $37,000 and $52,000, respectively. The majority of the decrease in costs for both segments resulted from the payroll cost savings achieved by combining the accounting and administrative functions, ($28,000 and $23,000, respectively), and the closing of the project-based services group's separate office space in Clearwater, Florida, ($9,000 and $29,000, respectively). The operations of both of these segments are now housed in the same offices in Tampa, Florida. The decrease in general and administrative expenses for the legal systems segment of approximately $15,000 for the period is due to reduced outside service and occupancy costs. General and administrative expenses for corporate overhead decreased by approximately $75,000 due to a reduction in bonus expense. OTHER INCOME Gain on Sale of Marketable Equity Securities. In June 2004, the Company sold 101,250 shares of common stock of Omtool Ltd. at an average price of approximately $9.01 per share, net of broker's commissions, for a total of approximately $912,000 in cash. The sale resulted in a pretax gain of approximately $755,000. Net earnings for the quarter ended June 30, 2004 were approximately $393,000, as compared to a net loss of approximately $249,000 for the quarter ended June 30, 2003. The change results from an increase in earnings from operations of approximately $482,000, the gain on the sale of marketable equity securities of approximately $755,000, and an increase in interest income-net of approximately $20,000, partially offset by a decrease in other income-net of approximately $14,000 and an increase in income tax expense of approximately $601,000. 20 Results of Operations Six Months Ended June 30, 2004 compared to Six Months Ended June 30, 2003 ------------------------------------------------- (000's omitted) Revenue Increase / (Decrease) ---------------------- ------------------------ 2004 2003 Amount Percentage --------- --------- ---------- ---------- Services $ 6,032 $ 6,410 $ (378) (6%) Product licenses 1,980 1,477 503 34% Computer and add-on hardware 431 504 (73) (14%) --------- --------- ---------- Net revenue $ 8,443 $ 8,391 $ 52 1% ========= ========= ========== REVENUE The Company's total revenues increased by approximately $52,000 for the six months ended June 30, 2004, compared to the six months ended June 30, 2003. The changes in the components of the Company's revenue are explained as follows: Product licenses. ----------------- Six Months Ended June 30, 2004 compared to Six Months Ended June 30, 2003 ---------------------------------------------- (000's omitted) Revenue Increase / (Decrease) --------------------- --------------------- 2004 2003 Amount Percentage --------- -------- --------- ---------- Tire $ 1,009 $ 769 $ 240 31% Legal 581 276 305 111% Project-based Services 264 270 (6) (2%) Manufacturing and Distribution 126 162 (36) (22%) --------- -------- --------- Total product license revenue $ 1,980 $ 1,477 $ 503 34% ========= ======== ========= ========== Product license revenues increased by approximately $503,000, or 34%, for the six months ended June 30, 2004, compared to the the six months ended June 30, 2003. Product license revenues increased for tire and legal systems segments by approximately $240,000 and $305,000, respectively, for the six months ended June 30, 2004 when compared to the six months ended June 30, 2003. Product license revenues decreased for the project-based services and the manufacturing and distribution systems segments by approximately $6,000 and $36,000, respectively, for the six months ended June 30, 2004 when compared to the six months ended June 30, 2003. During the six months ended June 30, 2004, the Company sold approximately $873,000 in enterprise software comprising approximately 31 systems at an average price of approximately $28,000 per system compared to the sale of approximately $799,000 in enterprise software comprising approximately 25 systems averaging $32,000 in the prior year's six months ended June 30, 2003. In addition, the Company sold approximately $1,107,000 of additional software modules, primarily to existing customers during the six months ended June 30, 2004 compared to approximately $678,000 in add-on software module sales during the prior year's comparable period. 21 Services Revenue ----------------

Service revenues decreased by approximately $378,000, or 6%, for the the six months ended June 30, 2004 compared to the six months ended June 30, 2003. Service revenue decreased for the Company's tire and project-based services systems segments. Service revenue decreased for all the Company's segments except tire sytems services revenues which increased slightly from the prior year's quarter. The decrease in service revenues was due primarily to the smaller number of enterprise software systems sold during the prior year period which reduced client requirements for training and consulting services. As noted above, software sales lead to additional service revenues including ongoing support revenue, and are typically accompanied by professional services revenue associated with customer requirements for implementation and training. Computer and add-on hardware ---------------------------- Hardware revenues decreased by approximately $73,000, or 14%, for the six months ended June 30, 2004, compared to the six months ended June 30, 2003. The decrease in hardware revenues from existing businesses was due to decreased hardware sales by the tire systems segment. Clients are electing to use third party sources for their hardware needs as price competition continues to increase. COST OF REVENUE Services. Cost of services decreased by approximately $295,000, or 9%, for the six months ended June 30, 2004, compared to the six months ended June 30, 2003. The cost of services for the tire segment increased approximately $105,000 during the period due to a lower gross margin on projects for the period compared to the prior year and the effect of a slight increase in service revenue. The cost of services for the legal, project-based services and manufacturing and distribution systems segments all decreased by approximately $88,000, $274,000 and $38,000, respectively during the period. The cost of services for the project-based services and manufacturing and distribution systems segments decreased due to the service personnel reductions made throughout the year ended December 31, 2003 and the deferral of the replacement of personnel lost to attrition. A decrease in the cost of services for the legal systems segments related to the effect of lower service revenues was partially offset by an increase in such costs related to lower gross margin on projects for the period compared to the prior year. The overall gross margin percentage for services for the period increased to approximately 50% from 49% of revenue from services for the same period in 2003. The Company's revenue and margin from services fluctuate from period to period due to changes in the mix of contracts and projects. 22 Product licenses and development. Cost of software license revenues and development decreased by approximately $69,000, or 4%, for the six months ended June 30, 2004, compared to the six months ended June 30, 2003. The project-based services and legal systems segments accounted for approximately $164,000 and $59,000, respectively of this decrease. The decrease in costs for the project-based services segment was largely the result of a decrease in software amortization costs ($154,000). The decrease in such costs for the legal systems segment was a result of a decrease of 5 in the number of employees involved in product development for the period ending June 30, 2004 compared to the same period in 2003. The costs of product license and development also decreased slightly ($15,000) for the manufacturing and distribution systems. These decreases were partially offset by an increase in development expenses for the tire systems segment of approximately $169,000 related to new product development activities. The cost of product licenses as a percentage of product license revenue may fluctuate from period to period due to the mix of sales of third-party software products in each period contrasted with certain fixed expenses such as the amortization of capitalized software. Computer and Add-on Hardware. Cost of hardware revenues decreased by approximately $71,000, or 18%, for the six months ended June 30, 2004, compared to six months ended June 30, 2003. The decrease was due to decreased sales of hardware products by the Company's tire systems segment. The gross margin percentage for hardware sales increased to 26% for the six months ended June 30, 2004, from 22% for the six months ended June 30, 2003. Margins on computer and add-on hardware can fluctuate based on the mix of computer and ancillary hardware products sold. Accordingly, the Company expects hardware gross margins to continue to fluctuate in the future. EXPENSES Marketing and Sales. Marketing and sales expenses decreased by approximately $34,000, or 2%, for the six months ended June 30, 2004, compared to the the six months ended June 30, 2003. The change resulted from an increase in sales and marketing expenses for the tire and legal systems segments of approximately $115,000 and $56,000. This increase was the result of the addition of sales personnel by tire (3) and legal systems (2), and an increase in commission expenses associated with higher license revenues. In the manufacturing and distribution and the project-based services segments, sales and marketing expenses decreased by approximately $143,000 and $62,000, respectively due to a reduction in sales personnel of approximately 1 and 2 personnel, respectively, during the quarter ended June 30, 2004, compared to the similar period ended June 30, 2003. The change reflects actions taken to eliminate the costs of personnel performing below targeted quota.The decrease for the manufacturing and distribution segment also reflects the elimination of the allocated costs for the sales and marketing activities of an executive who was terminated. General and Administrative. General and administrative expenses decreased approximately $248,000, or 13%, for the six months ended June 30, 2004, compared to the six months ended June 30, 2003. The change includes decreases in general and administrative expenses from all Company segments as well as corporate overhead. The decrease in general and administrative expenses for the tire systems segment of approximately $17,000 for the period is due primarily to reduced payroll costs related to a manager transferred to client services. General and administrative expenses for the project-based services and the manufacturing and distribution segments decreased by approximately $58,000 and $76,000, respectively. The majority of the decrease in costs for both segments resulted from the payroll cost savings achieved by combining the accounting and administrative functions, ($36,000 and $27,000, respectively), and the closing of the project-based services group's separate office space in Clearwater, Florida ($22,000 and $49,000, respectively). The operations of both of these segments are now housed in the same offices in Tampa, Florida. The decrease in general and administrative expenses for the legal systems segment of approximately $35,000 for the period is due to reduced outside service and occupancy costs. General and administrative expenses decreased by approximately $62,000 for corporate overhead due to a reduction in bonus expense of approximately $75,000 which was partially offset by small increases in overhead expenses. 23 Bad Debt Expense. During the six months ended June 30, 2004, the Company's balance in the allowance for doubtful accounts decreased from approximately $123,000 at December 31, 2003 to approximately $111,000 at June 30, 2004. During the six months ended June 30, 2004, the project-based services segment wrote-off approximately $9,000 for a customer for a disputed amount, and also wrote-off a number of customer balances or invoices, each of which was individually less than $5,000, which totaled approximately $12,000, and which were also for disputed amounts or amounts deemed uncollectible. The tire, legal and manufacturing and distribution systems segments also wrote-off a number of customer balances on invoices, each of which was individually less than $5,000, and which totaled approximately $3,000, $4,000, and $6,000, respectively, related to disputed amounts or amounts deemed uncollectible. Approximately $22,000 was added to the allowance for doubtful accounts during the six months ended June 30, 2004. OTHER INCOME Gain on Sale of Marketable Equity Securities. The Company purchased 451,250 shares of common stock of Omtool Ltd. in a transaction completed in May 2003. In June 2004, the Company sold 101,250 shares of common stock of Omtool Ltd. in public resales at a price of approximately $9.01 per share, net of broker's commissions, for a total of approximately $912,000 in cash, excluding costs related to the sale. In March 2004, the Company had sold 350,000 shares of common stock of Omtool Ltd. to Omtool in a private transaction at a price of $11.50 per share for a total of $2,012,500 in cash, excluding costs related to the sale. The foregoing share amounts have been adjusted to reflect Omtool Ltd.'s April 27, 2004 two-for-one stock split. These sales resulted in a pretax gain of approximately $2,218,000. The Company has now sold all of its shares of Omtool Ltd. Net earnings for the six months ended June 30, 2004 were approximately $1,444,000, as compared to a net loss of approximately $357,000 for the six months ended June 30, 2003. The change results from an increase in earnings from operations of approximately $768,000, the gain on the sale of marketable equity securities of approximately $2,218,000, and an increase in interest income-net of approximately $2,000, partially offset by a decrease in other income-net of approximately $62,000 and an increase in income tax expense of approximately $1,125,000. LIQUIDITY AND CAPITAL RESOURCES The Company had total cash and cash equivalents at June 30, 2004 of approximately $4,280,000, a decrease of approximately $466,000 from December 31, 2003. The Company and its subsidiaries had a maximum line of credit totaling $1,500,000, subject to a formula, which was available at June 30, 2004. At June 30, 2004, the Company had approximately $2,522,000 invested in marketable securities in a mutual fund, and had no such investments at December 31, 2003. The Company purchased 451,250 shares of common stock of Omtool Ltd. in a transaction completed in May 2003. In June 2004, the Company sold 101,250 shares of common stock of Omtool Ltd. in public resales at a price of approximately $9.01 per share, net of broker's commissions, for a total of approximately $912,000 in cash, excluding costs related to the sale. In March 2004, the Company had sold 350,000 shares of common stock of Omtool Ltd. to Omtool in a private transaction at a price of $5.75 per share for a total of $2,012,500 in cash, excluding costs related to the sale. The foregoing share amounts have been adjusted to reflect Omtool Ltd.'s April 27, 2004 two-for-one stock split. These sales resulted in a pretax gain of approximately $2,218,000. The Company has now sold all of its shares of Omtool Ltd. In June 2004, the Company sold its 50% interest in an aircraft it had purchased in January 2003. The Company, along with the owner of the other 50% interest in the aircraft, each sold their respective interests in the aircraft for approximately $874,000 with the proceeds used to pay in full, each party's proportionate share of the Promissory Note co-signed and co-guaranteed at the time of the aircraft's purchase. The Company's guarantee on the Note ended upon payoff. The total balance on the Note at the time of pay-off was approximately $830,000, with the Company's proportionate share approximating $415,000. No gain or loss was recorded on the sale as the cash proceeds from the sale approximated the net book value of the aircraft. Concurrent with the foregoing aircraft sale, the Company purchased a 33% interest in another aircraft through its 100% owned subsidiary, ASA Aircraft, LLC for a total purchase price of $1,800,000. A note for $1,530,000 was signed under a Demand Loan and Security Agreement with a bank for the purchase of the 33% interest in the aircraft. The Company is obligated for 33% of the $1,530,000 note, and is a guarantor on the remaining 67%. The two other co-borrowers on the note are unrelated parties that are each liable for 33% of the note and are also guarantors of the Company's liability. The 5-year note with interest at prime (4.00% at June 30, 2004) plus .25% calls for monthly principal and interest payments of $11,521 through December 2007 with a final payment of approximately $1,142,206 plus interest due in July 2009. The Promissory Note is collateralized by the aircraft with cross guarantees by each of the three borrowers. 24 In July 2004, ASA terminated the Company's Chief Executive Officer's split-dollar life insurance program, which had not been modified since the adoption of Sarbanes-Oxley, and replaced it with a new executive benefit package that includes an executive life plan and a supplemental retirement plan. The replacement was based on a comparison of the costs and benefits of the old split-dollar plan and the new benefit plan. The new executive life plan is a $2,000,000 policy that will be owned by a trust of which the Officer or his designees are the beneficiaries. The Company will pay the annual premiums of approximately $53,921 for the plan, which will be reported as income to the Officer and will be deductible to the Company as paid, and will continue to pay such premiums through the Officer's retirement as a retirement benefit. The new supplemental retirement plan is a $2,670,313 policy that will be owned by the Company. The Company will fund the first year premium of approximately $560,000 and pay annual premiums of approximately $60,000 for the following nine years. The cash surrender value to the Company of the terminated split-dollar life insurance policy of approximately $540,572, will be used to fund the first year premium. The new policy will be used to reimburse the Company for its funding of post-retirement income of the Officer of $200,000 for ten years, which will reported as income to the Officer and will be deductible to the Company as paid. In the event that the Officer dies prior to retirement, his beneficiary will receive a lump sum payment of $2,100,000, which would be reported as income to the beneficiary and deductible by the Company. Upon his death subsequent to retirement, any unpaid post retirement income due under the plan will be paid by the Company to the Officer's beneficiary. In July 2004, Company entered into an agreement to guarantee $500,000 in payment obligations to a bank under a letter of credit on behalf of CommercialWare, Inc. The guarantee extends from July 19, 2004 until March 2, 2005 and is secured by a subordinated security interest in the tangible assets of CommercialWare, Inc. In April 2004, the Company announced that its Board of Directors had unanimously approved a reverse 1-for-600 split of the Company's common stock to be followed immediately by a forward 600-for-1 split. If the transaction is approved by the Company's stockholders and implemented, the Company expects to have fewer than 300 stockholders of record, which would enable the Company to voluntarily terminate the registration of its common stock under the Securities Exchange Act of 1934 and go private. As a private company, the Company would no longer be required to file periodic reports and other information with the Securities and Exchange Commission ("SEC"). Pursuant to the transaction, stockholders holding fewer than 600 shares of the Company common stock immediately before the transaction will receive from the Company cash payment for fractional shares equal to $5.00 per pre-split share. Stockholders holding 600 or more shares of the Company common stock immediately before the transaction will continue to hold the same number of shares after completion of the transaction and will not receive any cash payment. The Board of Directors received an opinion from its financial advisor, vFinance Investments, Inc., that the cash consideration to be paid in the proposed transaction is fair, from a financial point of view, to the Company's stockholders. The total cash to be paid for fractional shares is estimated to be approximately $1,630,000, based on an estimate of approximately 326,000 shares of Common Stock held by the record and beneficial stockholders holding fewer than 600 shares. The expenses of the transaction, all of which will be paid by the Company and which include professional fees and other expenses related to the transaction, are expected to total approximately $260,000. 25 The Company has experienced significant fluctuations in its quarterly operating results and anticipates such fluctuations in the future. Quarterly revenues and operating results depend on the volume and timing of orders received during the quarter which are difficult to forecast. Large orders for the Company's products often have a lengthy sales cycle while the customer evaluates and receives approvals for the purchase of the products. Accurately predicting the sales cycle of any large order may be difficult. If one or more large orders fail to close as forecasted in a fiscal quarter, the Company's revenues and operating results could be materially adversely affected. In addition, the Company typically receives a substantial portion of its product orders in the last month of the quarter. Orders are shipped as received and, as a result, the Company often has little or no backlog except for support and service revenue. The Company acknowledges the potential adverse impact that such fluctuations and general economic uncertainty could have on its ability to maintain liquidity and raise additional capital. The Company's future financial performance is also dependent in large part on the successful development, introduction, and customer acceptance of new and enhanced versions of its software products. Due to the rapid change in vendor hardware platforms, operating systems, and updated versions, the complexity and expense of developing, testing, and maintaining the Company's products has increased. The Company intends, as it has in the past, to fund this development primarily from its cash from operations and bank debt. There can be no assurance that these efforts will be successful or result in significant product enhancements. Subject to the foregoing, the Company believes that based on the level of operating revenue, cash on hand, and available bank debt, it has sufficient capital to finance its ongoing business. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's discussion and analysis of the Company's financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, management evaluates estimates, including those related to the allowance for doubtful accounts, software, acquired software and other acquired intangibles, the likelihood of the utilization of certain tax loss carry-backs and carry-forwards for certain of the transactions completed by the Company, and the valuation allowance on deferred tax assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. For a detailed discussion on the application of these and other accounting policies, see Note A in the notes to the consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2003. Accounts Receivable. Accounts receivable balances are evaluated on a continual basis and allowances are provided for potentially uncollectible accounts based on management's estimate of the collectibility of customer accounts. If the financial condition of a customer were to deteriorate, resulting in an impairment of their ability to make payments, an additional allowance may be required. Allowance adjustments are charged to operations in the period in which the facts that give rise to the adjustments become known. The accounts receivable balance at June 30, 2004 was $1,673,401, net of an allowance of $111,161, and at December 31, 2003 was $1,466,719, net of an allowance for doubtful accounts of $122,646. Revenue Recognition. The Company recognizes revenue in accordance with the American Institute of Certified Public Accountants (AICPA) Statement of Position ("SOP") 97-2, "Software Revenue Recognition," and SOP 98-9 "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions." Revenue is recognized when all of the following are met: pervasive evidence of an arrangement exists; delivery has occurred; the vendor's fee is fixed and determinable; and collectibility is probable. For multiple-element license arrangements, the license fee is allocated to the various elements based on fair value. When a multiple-element arrangement includes rights to a post-contract customer support, the portion of the license fee allocated to such support is recognized ratably over the term of the arrangement. For arrangements to deliver software that requires significant modification or customization, revenue is recognized on the percentage-of-completion method. 26 Computer hardware revenue is recognized upon shipment of product to the client. Service revenues include post-contract client support, consulting, and training support. Post-contract client support is generally provided under self-renewing maintenance agreements. Revenue on these maintenance agreements is recognized ratably over the contract term. Consulting and training services revenue is recognized in the period the service is rendered. Based on the Company's reading and interpretation of these SOPs, the Company believes that its current sales contract terms and business arrangements have been properly reported. However, the AICPA and its Software Revenue Recognition Task Force continue to issue interpretations and guidance for applying the relevant standards to a wide range of sales contract terms and business arrangements that are prevalent in the software industry. Also, the Securities and Exchange Commission (SEC) has issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," which provides guidance related to revenue recognition based on interpretations and practices followed by the SEC. Future interpretations of existing accounting standards or changes in the Company's business practices could result in future changes in its revenue accounting policies that could have a material adverse effect on its business, financial condition and results of operations. The Company's revenue recognition policy is significant because the Company's revenue is a key component of its results of operations. In addition, the Company's revenue recognition determines the timing of certain expenses, such as commissions and license costs. The Company follows very specific and detailed guidelines in measuring revenue; however, certain judgments affect the application of the Company's revenue policy. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause the Company's operating results to vary significantly from quarter to quarter and could result in future operating losses. Software. The Company accounts for the costs of computer software developed in accordance with Statement of Financial Accounting Standard No. 86. Accordingly, the costs of purchased software, and of that software developed internally (once technological feasibility is established) associated with coding new applications or modules and enhancing and porting existing applications software, are capitalized. Amortization of these costs is based on the greater of the charge resulting from the application of either the straight-line method over five years or the proportion of current sales to estimated future revenues of each product. The Company periodically reviews the carrying value of its software to determine whether an impairment exists. Relevant cash flow and profitability information, including estimated future operating results, trends, and other available information are considered in assessing whether the carrying value of the software can be recovered. If it is determined that the carrying value of the software will not be recovered from the undiscounted cash flows, the carrying value of the software would be considered impaired and reduced by a charge to operations in the amount of the impairment. An impairment charge is measured as any deficiency in the amount of undiscounted future cash flows available to recover the carrying value related to the software. Future adverse changes in market conditions could result in an inability of the Company to recover the carrying value of the software, thereby possibly requiring an impairment charge in the future. Goodwill and other acquired intangibles. The determination of the value of such intangible assets requires management to make estimates and assumptions that affect the Company's consolidated financial statements. As a result of the adoption of Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"), the Company annually reviews goodwill and other intangible assets that have indefinite lives for impairment and when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. Fair value is determined using discounted cash flow analysis, which requires the Company to make certain assumptions and estimates regarding industry economic factors and future profitability of acquired businesses. If actual results are not consistent with these assumptions and judgments, the Company could be exposed to a material impairment charge. 27 Long-Lived Assets. The Company accounts for long-lived assets in accordance with SFAS 144, and accordingly, reviews its long-lived assets and identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. In performing the review for recoverability, the Company estimates the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the undiscounted expected future cash flows is less than the carrying amount of the asset, an impairment loss is recognized. Otherwise, an impairment loss is not recognized. Measurement of an impairment loss for long-lived assets and identifiable intangibles would be based on the fair value of the asset. The Company has identified the policies above as critical to the Company's business operations and the understanding of the Company's results of operations. The impact and any associated risks related to these policies on the Company's business operations is discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect the Company's reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note A in the Notes to the Consolidated Financial Statements in Item 14 of the Company's Annual Report on Form 10-K. Note that the Company's preparation of the Annual Report on Form 10-K requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the Company's financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS ASA is heavily dependent on the software industry and changes in the industry could harm ASA's business and operating results. The software industry is subject to economic cycles and has in the past experienced, and is likely in the future to experience, recessionary periods. In particular, many sectors of the software industry are currently experiencing the effects of a downturn in economic conditions. This downturn is leading to reduced demand for the services provided by software companies like ASA. These changes in demand and in economic conditions have resulted and may continue to result in customer cancellation or rescheduling of orders, which could affect ASA's results of operations. In addition, a protracted general recession in the software industry could have a material adverse effect on ASA's business, financial condition and results of operations. ASA's operating results may fluctuate substantially, which may cause its stock price to fall. ASA's quarterly and annual results of operations have varied in the past, and ASA's operating results may vary significantly in the future due to a number of factors including, but not limited to, the following: o timing of orders from major customers; o mix of products and services; o pricing and other competitive pressures; o delays in new product development, which could cause ASA to be unable to meet customer delivery schedules; o economic conditions in the software industry; and o ASA's ability to time expenditures in anticipation of future revenues. ASA is subject to risks associated with acquisitions, and these risks could harm ASA's operating results and cause its stock price to decline. 28 ASA has historically pursued a strategy of growth through acquisitions. These acquisitions have primarily involved acquisitions of entire companies. Acquisitions of companies and businesses and expansion of operations involve certain risks, including the following: o the potential inability to successfully integrate acquired operations, product lines, technologies, personnel and businesses or to realize anticipated synergies, economies of scale or other value; o diversion of management's attention; o difficulties in coordinating management of operations at new sites; o difficulties associated with managing and integrating operations in distant geographic locations; o the possible need to restructure, modify or terminate customer relationships of the acquired company; and o loss of key employees of acquired operations. ASA may experience problems in integrating operations previously acquired by ASA or operations associated with any future acquisition. ASA cannot assure you that any recent or future acquisition will result in a positive contribution to ASA's results of operations. In particular, the successful combination of ASA with any business ASA acquires in the future will require substantial effort for each company, including the integration and coordination of marketing and sales efforts. The diversion of the attention of management and any difficulties encountered in the transition process, including the interruption of, or a loss of momentum in, the activities of any future acquisition, problems associated with integration of management information and reporting systems, and delays in implementation of consolidation plans, could harm ASA's ability to realize the anticipated benefits of any future acquisition. Any failure by ASA to realize the anticipated benefits of its acquisitions could harm its business, financial condition and operating results, and could cause the price of ASA's common stock to decline. In addition, future acquisitions may result in significantly dilutive issuances of equity securities, the incurrence of additional debt, large one-time write-offs and the creation of goodwill or other intangible assets that could result in amortization expense or impairment charges. These factors could harm ASA's business, financial condition and operating results and cause the price of ASA's common stock to decline. Some executive officers and key personnel are critical to ASA's business and these officers and key personnel may not remain with ASA in the future. ASA's success depends upon the continued service of some executive officers and other key personnel. Generally, ASA's employees are not bound by employment or non-competition agreements, and there can be no assurance that ASA will retain its officers and key employees. If ASA loses the services of Alfred C. Angelone, chairman and chief executive officer of ASA, or one or more of its other executive officers or key employees, or if one or more of these individuals decides to join a competitor or otherwise compete with ASA, ASA's business, operating results and financial condition could be seriously harmed. ASA may need additional capital in the future, which may not be available. ASA has entered into a revolving demand loan agreement with a bank for up to $1,500,000 (which cannot exceed 80% of qualified accounts receivables), bearing interest at a rate approximating prime plus .5%, which extends through June 30, 2005. The revolving demand loan is subject to certain terms and conditions, including maintenance of a stated tangible net worth, stated debt service coverage and debt to tangible net worth ratios. Payment of dividends is prohibited under the terms of the agreement. Borrowings are secured by the personal property of ASA. Although ASA has no indebtedness under the revolving demand loan agreement, ASA may need to borrow money in the future. If ASA is unable to borrow under the agreement, ASA may be unable to raise sufficient additional capital when needed, on favorable terms, or at all. If ASA's borrowings under the agreement are insufficient, the agreement includes provisions and covenants that would restrict ASA's ability to incur further indebtedness. If ASA's capital resources are insufficient to meet future capital requirements, ASA will have to raise additional funds. The sale of equity or convertible debt securities in the future may be dilutive to ASA's stockholders. If ASA is unable to obtain adequate funds on reasonable terms, ASA may be required to curtail operations significantly or to obtain funds by entering into financing agreements on unattractive terms. 29 ASA may need to refinance its headquarters in the future, which may not be possible. ASA has a mortgage related to its corporate headquarters in Framingham, Massachusetts. The mortgage note, in the original amount of $3,000,000 with interest at 7.24% for 10 years, provides for monthly principal and interest payments of $20,445 through October 2008 with a final payment of approximately $2,638,000 plus interest. If ASA's capital resources are insufficient to meet the monthly or final payment obligations, ASA will have to raise additional funds or relocate its headquarters, which may not be possible on attractive or reasonable terms. ASA's operating results are subject to fluctuations. ASA has historically experienced significant fluctuations in its quarterly operating results and anticipates such fluctuations in the future. ASA's quarterly revenues and operating results depend on the volume and timing of orders received during the quarter, which are difficult to forecast. Large orders for ASA's products often have a lengthy sales cycle while the customer evaluates and receives approvals for the purchase of the products. Accurately predicting the sales cycle of any large order may be difficult. If one or more large orders fail to close as forecasted in a fiscal quarter, ASA's revenues and operating results could be materially adversely affected. In addition, ASA typically receives a substantial portion of its product orders in the last month of a quarter. Orders are shipped as received and, as a result, ASA often has little or no backlog except for support and service revenue. Such fluctuations and general economic uncertainty could have a material adverse impact on ASA's ability to maintain liquidity and raise additional capital. Failure to manage ASA's growth may seriously harm its business. ASA's business has grown in recent years through both internal expansion and acquisitions, and continued growth may cause a significant strain on ASA's infrastructure and internal systems. To manage ASA's growth effectively, ASA must continue to improve and expand its management information systems. Future acquisitions could place additional strains on ASA's management infrastructure. If ASA is unable to manage growth effectively, its results of operations could be harmed. The trading price of ASA's common stock may be volatile. The trading prices of ASA's common stock has been and could in the future be subject to significant fluctuations in response to variations in quarterly operating results, developments in the software industry, changes in general economic conditions and economic conditions in the software industry changes, in securities analysts' recommendations regarding ASA's securities, and other factors. In addition, the stock market in recent years has experienced significant price and volume fluctuations which have affected the market prices of technology companies and which have been unrelated to or disproportionately impacted by the operating performance of those companies. These broad market fluctuations may cause the market price of ASA's common stock to decline. Item 3. Quantitative And Qualitative Disclosure About Market Risk --------------------------------------------------------- The Company is exposed to the impact of interest rate changes and investment changes. Interest Rate Risk. The Company's exposure to market rate risk for changes in interest rates relates primarily to the Company's cash equivalent investments. The Company has not used derivative financial instruments. The Company invests certain of its excess cash in short-term floating rate instruments and senior secured floating rate loan funds which carry a degree of interest rate risk. These instruments may produce less income than expected if interest rates fall. Investment Risk. The Company has invested, and may invest in the future, in equity instruments of privately held companies for business and strategic purposes. These investments are included in other long-term assets and are accounted for under the cost method when ownership is less than 20%. For these non-quoted investments, the Company's policy is to regularly review the assumptions underlying the operating performance and cash flow forecasts in assessing the carrying values. The Company identifies and records impairment losses on long-lived assets when events or circumstances indicate that such assets might be impaired. 30 Item 4. Controls and Procedures ----------------------- Within the 90 days prior to the date of this report, the company carried out an evaluation, under the supervision and with the participation of the company's management, including the company's chief executive officer and chief financial officer, of the effectiveness of the design and operation of the company's disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based upon that evaluation, the chief executive officer and chief financial officer concluded that the company's disclosure controls and procedures are effective in timely alerting them to material information relating to the company (including its consolidated subsidiaries) required to be included in the company's periodic SEC filings. There have been no significant changes in the company's internal controls or in other factors that could significantly affect internal controls subsequent to the date the company carried out its evaluation. PART II OTHER INFORMATION Item 5. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits THIRD AMENDED AND RESTATED SECURITY AGREEMENT 10.1+ Promissory Note made payable to Regions Bank by ASA Aircraft LLC, RSR Aircraft LLC, and Cosmed Aviation LLC executed on June 25, 2004 filed with the SEC on August 13, 2004. 10.2+ Business Loan Agreement by and between Regions Bank, ASA Aircraft LLC, RSR Aircraft LLC, and Cosmed Aviation LLC executed on June 25, 2004 filed with the SEC on August 13, 2004. 10.3+ Aircraft Security Agreement between Regions Bank, ASA Aircraft LLC, RSR Aircraft LLC, and Cosmed Aviation LLC executed on June 25, 2004 filed with the SEC on August 13, 2004. 10.4+ Commercial Guaranty between Regions Bank, ASA Aircraft LLC, RSR Aircraft LLC, and Cosmed Aviation LLC executed on June 25, 2004 filed with the SEC on August 13, 2004. 10.5+ Third Amended and Restated Security Agreement by and among CommercialWare, Inc., Transaction Smartware, Inc., ASA International Ltd. and Capital Resource Partners IV, L.P., dated dated July 19, 2004 filed with the SEC on August 13, 2004. 10.6+ Letter Agreement by and among CommercialWare, Inc., ASA International Ltd. and Capital Resource Partners IV, L.P., dated July 19, 2004 filed with the SEC on August 13, 2004. 10.7+ License Agreement between ASA International Ltd and Quality Design Systems, Inc. dated June 1, 2004 filed with the SEC on August 13, 2004. 31.1 Section 302 Certification of Chief Executive Officer. 31.2 Section 302 Certification of Chief Financial Officer. 32.1 Section 906 Certification of Chief Executive Officer. 32.2 Section 906 Certification of Chief Financial Officer. + Previously filed. (b) Reports on Form 8-K The Registrant filed three Current Reports on Form 8-K during the quarter ended June 30, 2004. On April 16, 2004, the Registrant filed a Form 8-K reporting under Item 5 that the Registrant had issued a press release announcing that ASA's Board of Directors had unanimously approved a reverse 1-for-600 split of ASA's common stock to be followed immediately by a forward 600-for-1 split. 31 On May 14, 2004, the Registrant filed a Form 8-K reporting under Item 12 that the Registrant had issued a press release announcing results of operations for the first fiscal quarter ended March 31, 2004. On June 29, 2004, the Registrant filed a Form 8-K reporting under Item 5 that the Registrant had sold its remaining 101,250 shares of Omtool common stock in the public market. 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) 10/01/04 /s/ Alfred C. Angelone -------- ---------------------- (Date) (Signature) Alfred C. Angelone Chief Executive Officer 10/01/04 /s/ Terrence C. McCarthy -------- ------------------------ (Date) (Signature) Terrence C. McCarthy Vice President, Secretary, and Treasurer 32

ASA INTERNATIONAL LTD 10-Q/A