SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
X Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
____ Act of 1934
For the quarterly period ended June 30, 1997
OR
____ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______ to __________
Commission file number: 0-28322
Asahi/America, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2621836
(State or other Jurisdiction of (I.R.S. Employer identification No.)
Incorporation or Organization)
35 Green Street, Malden, Massachusetts 02148-0005
(Address of principal executive offices) (Zip Code)
(617) 321-5409
(registrant's telephone number, including area code)
Indicate by check 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 twelve months (or 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
--- ---
The registrant had 3,358,669 shares of common stock
outstanding at July 31, 1997.
Asahi/America, Inc. and Subsidiary
Form 10-Q
Index
Page No.
Part I Financial Information
Item 1 - Condensed Consolidated Financial Statements
Consolidated Balance Sheets- December 31, 1996 and
June 30, 1997 2
Consolidated Statements of Operations - Three and
Six Months ended June 30, 1996 and 1997 3
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 1996 and 1997 4
Notes to Consolidated Financial Statements 5
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II Other Information
Item 4 12
Item 6 13
Signatures 14
1
Asahi/America, Inc. and Subsidiary
Consolidated Balance Sheets
(unaudited)
(in thousands)
December 31, June 30,
1996 1997
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents $ 3,028 $ 1,070
Accounts receivable, less reserves of $283 at December 31, 1996
and $284 at June 30, 1997 5,291 5,324
Inventories 8,673 9,750
Prepaid expenses and other current assets 230 587
------------- ------------
Total current assets 17,222 16,731
Property and Equipment, net 9,869 9,884
Other Assets
Goodwill, net of accumulated amortization
of $1,380 at December 31, 1996 and $1,502 at 778 2,409
June 30, 1997
Other, net 574 1,914
------------- ------------
Total other assets 1,352 4,323
------------- ------------
$ 28,443 $ 30,938
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Demand note payable to bank $ - $ 1,000
Current portion of MIFA obligations 135 135
Current portion of capital lease obligations 108 110
Accounts payable 5,390 6,305
Accrued expenses 1,614 1,339
------------- ------------
Total current liabilities 7,247 8,889
MIFA Obligations, less current portion 3,760 3,625
Capital Lease Obligations, less current portion 206 151
Deferred Income Taxes 1,026 1,026
Commitments - -
Stockholders' Equity
Common Stock 13,638 13,638
Retained Earnings 2,864 3,871
------------- ------------
16,502 17,509
Less-Note receivable from stockholder/officer (298) (262)
------------- ------------
Total stockholders' equity 16,204 17,247
------------- ------------
$ 28,443 $ 30,938
============= ============
See accompanying notes to consolidated financial statements.
2
Asahi/America, Inc. and Subsidiary
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
----------------------------- ------------------------------
1996 1997 1996 1997
------------ ------------ -------------- -------------
Net sales $ 9,719 $ 10,133 $ 19,371 $ 19,256
Cost of sales 6,047 6,359 12,352 12,120
------------ ------------ ------------ -------------
Gross Profit 3,672 3,774 7,019 7,136
Selling, general and administrative expenses 2,595 2,635 4,961 5,326
------------ ------------ ------------ -------------
Income from operations 1,077 1,139 2,058 1,810
Interest expense, net (84) (54) (198) (73)
------------ ------------ ------------ -------------
Income before provision for income taxes 993 1.085 1,860 1,737
Provision for income taxes 417 456 776 729
------------ ------------ ------------ -------------
Net Income $ 576 $ 629 $ 1,084 $ 1,008
============ ============ ============ =============
Net income per common and
common equivalent share $ 0.20 $ 0.19 $ 0.42 $ .30
============ ============ ============ =============
Weighted average number of common and
common equivalent shares outstanding 2,881,387 3,340,000 2,610,694 3,340,281
============ ============ ============= =============
See accompanying notes to consolidated financial statements.
3
Asahi/America, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
Six months ended
June 30,
-----------------------------
1996 1997
------------- --------------
Cash flows from operating activities
Net Income $ 1,084 $ 1,008
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 612 684
Deferred income taxes - -
Changes in assets and liabilities
Accounts receivable 285 (33)
Inventories (83) (921)
Prepaid expenses and other current assets (106) (357)
Accounts payable (427) 915
Accrued expenses 602 (275)
------------- --------------
Net cash provided by operating activities 1,967 1,021
Cash flows from investing activities
Purchase of short-term investments (2,006) -
Purchase of property and equipment (1,698) (443)
Acquisition of certain assets of Universal Flow Monitors, Inc. - (3,000)
Decrease (increase) in others assets 138 (383)
------------- --------------
Net cash used in investing activities (3,566) (3,826)
Cash flows from financing activities
Borrowings under demand note payable to bank 3,650 2,000
Payments under demand note payable to bank (7,027) (1,000)
Payments on MIFA obligations (68) (135)
Payments on capital lease obligations (52) (53)
Payments of note receivable from stockholder/officer 17 35
Proceeds from issuance of common stock
net of issuance costs of $809 6,166 -
------------- --------------
Net cash provided by financing activities 2,686 847
------------- --------------
Net increase (decrease) in cash and cash equivalents 1,087 (1,958)
Cash and cash equivalents, beginning of period 224 3,028
------------- --------------
Cash and cash equivalents, end of period $ 1,311 $ 1,070
============= ==============
Supplemental cash flow disclosures:
Cash paid during the year for:
Interest $ 138 $ 126
============= ==============
Income taxes $ 475 $ 815
============= ==============
See accompanying notes to consolidated financial statements.
4
Asahi/America, Inc. and Subsidiary
Notes to Consolidated Financial Statements
1. Presentation of Interim Information
The unaudited interim financial statements included herein have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission and include, in the opinion of management, all adjustments which the
Company considers necessary for a fair presentation of such information. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. These statements
should be read in conjunction with the Company's audited consolidated financial
statements and notes thereto which are contained in the Company's Form 10-K.
Interim results are not necessarily indicative of the results for a full year.
2. Financial Statements
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. All significant intercompany balances
and transactions have been eliminated.
3. Cash Equivalents
Cash equivalents are short-term, highly liquid investments with original
maturities of less than three months and consist primarily of treasury notes.
4. Inventories
Inventories are stated at the lower of last-in, first-out (LIFO) cost or market.
The components of inventory are summarized as follows:
December 31, June 30,
1996 1997
---- ----
Raw materials $ 606 $ 602
Finished goods 8,104 9,060
------- -------
8,710 9,662
LIFO (reserve) surplus (37) 88
------ -------
Total $ 8,673 $ 9,750
======== =======
5
5. Net Income Per Share
Net income per common and common equivalent share is based upon the weighted
average number of common and common equivalent shares outstanding during each
period, computed in accordance with the treasury stock method. Fully diluted net
income per common and common equivalent share has not been presented as it is
not significantly different.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, which is
effective for interim and annual periods beginning after December 15, 1997. SFAS
No. 128 revises the calculation and presentation of earnings per share (EPS).
Basic EPS excludes the dilutive effect of stock options. Diluted EPS will
include the dilutive effect of stock options. The proforma amounts shown below
do not differ from the amounts shown in the Statement of Operations due to
rounding. Had SFAS No. 128 been effective for the periods currently presented,
basic and diluted earnings per share would have been as follows:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
1996 1997 1996 1997
---------------------- ---------------------
Basic earnings per share $.20 $.19 $.42 $.30
Diluted earnings per share $.20 $.19 $.42 $.30
6. Revolving Credit Lines
In January 1997, the Company and its bank executed a loan agreement that
provides for a $5,000,000 committed unsecured revolving credit line and a
$5,000,000 discretionary unsecured revolving credit line. Interest on the credit
lines is based on the Prime Rate or LIBOR plus 1.65%, as elected by the Company
at each borrowing date. The Company is required to maintain certain financial
ratios, including, among others, minimum working capital and tangible net worth,
as defined in the agreements. At June 30, 1997, the total amount outstanding
under the credit lines was $1,000,000.
7. Concentration of credit risk
Sales to the Company's major domestic customer during the second quarter of 1997
were approximately 23% of total sales as compared to 19% for the 1996 second
quarter. For the six month periods ended June 30, 1996 and 1997, sales to the
Company's major domestic customer were approximately 26% and 25% of total sales,
respectively. Export sales as a percent of total sales during the second quarter
were approximately 5% and 6% in 1996 and 1997, respectively.
8. Acquisition of Plastic Flow Meter Division
On May 1, 1997, the Company acquired the plastic flow meter division of
Universal Flow Monitors, Inc. Included in the purchase were the inventory, fixed
assets and intellectual property associated with the product line. The total
purchase price of $3.0 million was paid with cash and through borrowings on the
Company's revolving credit line. The Company accounted for the acquisition as a
purchase. Proforma information has not been presented due to immateriality.
6
Asahi/America, Inc. and Subsidiary
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
The Company is a manufacturer and master distributor of thermoplastic valves,
pipe, piping systems and components for use in a wide variety of applications
across numerous industries. Manufactured products include valve actuators and
controls, specialized valve assemblies, double containment piping systems and
flow meter devices. Distributed products consist principally of thermoplastic
valves, pipe and fittings which are purchased from two major foreign suppliers
under long term supply agreements. The Company also realizes revenue for the
rental and sale to contractors and end users of specialized welding equipment
that is used in connection with the installation of the Company's piping
systems.
The Company distributes its products through an extensive network of domestic
and foreign distributors which are supported by Company sales, marketing and
engineering personnel. Substantially all of the Company's purchases of valves
are made from its Japanese supplier and are transacted in Japanese yen. As a
result, the Company is exposed to fluctuations in foreign currency exchange
rates. The Company may use hedging procedures including foreign exchange forward
contracts and currency options in managing the fluctuations in foreign currency
exchange rates. The Company also purchases pipe and fittings from an Austrian
supplier. Since August 1995, purchases from the Company's Austrian supplier have
been denominated in United States dollars.
The Company completed its initial public offering on May 15, 1996.
Results of Operations
The following table sets forth, for the periods indicated, the Company's net
sales as well as certain income and expense items, expressed as a percentage of
sales:
Three months ended Six months ended
June 30, June 30,
------------------------------- ------------------------------
1996 1997 1996 1997
-------------- --------------- -------------- --------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 62.2% 62.8% 63.8% 62.9%
Gross Profit 37.8% 37.2% 36.2% 37.1%
Selling, general and administrative expenses 26.7% 26.0% 25.6% 27.7%
Income from operations 11.1% 11.2% 10.6% 9.4%
Interest expense, net -0.9% -0.5% -1.0% -0.4%
Income before provision for income taxes 10.2% 10.7% 9.6% 9.0%
Provision for income taxes 4.3% 4.5% 4.0% 3.8%
Net income 5.9% 6.2% 5.6% 5.2%
7
Net Sales
Net sales of $10.1 million for the quarter ended June 30, 1997 were $414,000, or
4.3%, higher than net sales for the second quarter of 1996. Net sales for the
six months ended June 30, 1997 were $19.3 million as compared to $19.4 million
for the comparable 1996 six month period. Quarterly sales of distributed
products increased by 9.4% over the 1996 second quarter mainly due to the
Company's successful promotional campaign aimed at strengthening sales
relationships with certain distributors, further enhancing the Company's
distribution channels. Sales of manufactured product, including revenues from
the Company's recently acquired plastic flow meter division, and revenues from
the sale and rental of welding equipment decreased by 5.4% in the 1997 second
quarter as compared to the same period in 1996. This decrease was mainly due to
a strong 1996 second quarter for sales of such products and due to the Company's
promotional efforts in the 1997 second quarter for the sale of distributed
products. Year to date sales remained relatively unchanged from 1996 to 1997 due
mainly to the shortfall in the 1997 first quarter in sales of piping products
and welding equipment revenues, as a result of a general slowdown in dual
containment pipe sales to the military and semiconductor markets.
Export sales for the three and six month periods ended June 30, 1997 were
$571,000 and $1,481,000 respectively compared to $488,000 and $847,00 for the
corresponding periods of 1996. Sales to the Company's largest single customer
were approximately 25% and 26% of total sales for the six month periods ended
June 30, 1997 and 1996, respectively.
Gross Profit
Gross profit for the second quarter of 1997 increased by $102,000 over the same
period of 1996, as a result of the increased sales volume. Gross profit as a
percentage of sales (gross margin) was 37.8% during the second quarter of 1996
as compared to 37.2% during the second quarter of 1997. The quarterly decrease
was due to lower sales of the Company's higher margin manufactured products and
welding equipment rentals coupled with foreign currency losses incurred during
the quarter. The 1996 second quarter included $63,000 of foreign currency gains
while the 1997 second quarter included $102,000 of foreign currency losses,
reflective in the movement of the Japanese yen versus the US dollar, which
declined approximately 9.0% during the 1997 second quarter. Gross profit as a
percentage of sales increased 2.5% for the six month period ended June 30, 1997,
from 36.2% in 1996 to 37.1% in 1997. This increase is due to the fact that the
Company's manufactured products, although lower in sales volume in 1997 over the
comparable 1996 period, have continued with strong margins coupled with lower
average product costs for the Company's distributed products, associated with
the overall year-to-date favorable movement of the Japanese yen versus the US
dollar,
8
which is reflected forthwith on cost of goods sold due to the Company's
LIFO method of costing inventory.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the second quarter of 1997 were
$2.6 million, unchanged from the second quarter of 1996. Lower selling,
advertising and commissions costs in the 1997 second quarter as compared to the
same period of 1996, offset increases in payroll and facility expenses in
support of the Company's overall growth, higher general and administrative
expenses associated being a public company for a full second quarter in 1997 as
compared to a partial second quarter in 1996, and an increase in expenses to
support the Company's 1997 second quarter promotional effort. Selling, general
and administrative expenses as a percentage of sales improved to 26.0% in the
1997 second quarter, from 26.7% in the 1996 second quarter, due mainly to an
increased sales volume with an only marginal increase in selling, general and
administrative expenses.
Despite the second quarter decrease, selling, general and administrative
expenses for the six months ended June 30, 1997 were 27.7% of net sales, an
increase of 2.1 percentage points from the same period of 1996. The increase is
due to higher operating costs to support the approximate 38,000 square foot
expansion in office, plant and warehouse capacity and higher general and
administrative expenses associated with being a public company. Selling, general
and administrative expenses were also negatively impacted in the 1997 first
quarter due to several one time expenses associated with due diligence costs
related to an unrealized acquisition and non-capitalizable costs incurred in
connection with the renovation and set-up of the Company's expanded office,
plant and warehouse.
Interest Expense and Income Taxes
Interest expense was $17,000 and $77,000 lower in the respective three and six
month periods ended June 30, 1997 as compared to the corresponding periods of
1996. The entire outstanding balance of the Company's line of credit was paid
down immediately following the initial public offering in May 1996 and there had
been no additional borrowings under the line since that time until the Company's
recent borrowings to acquire the new plastic flow meter division. Interest
income was $12,000 and $48,000 higher in the respective three and six month
periods ended June 30, 1997 as compared to the corresponding periods of 1996 as
a result of the Company's investing of the proceeds of its initial public
offering.
Income taxes increased $39,000 in the second quarter of 1997 and decreased
$47,000 for the six months ended June 30, 1997 as compared to 1996.
9
Liquidity and Capital Resources
Prior to 1996, the Company financed its operations through the sale of equity
securities, bank borrowings under a line of credit, an Industrial Revenue Bond
financing in March 1994 and cash generated from operations. In addition, the
Company has benefited from favorable payment terms under a $6 million open
account arrangement for the purchase of Japanese valve products, with the
majority of its purchases receiving 180 day payment terms.
The Company completed its initial public offering on May 15, 1996 through the
sale of one million shares of common stock generating net proceeds of
approximately $6.2 million. A portion of the proceeds, $2.3 million, was used to
pay down the entire balance of the Company's bank line of credit, which expired
on August 31, 1996.
In January, 1997, the Company and its bank executed a new loan agreement which
provides for up to $10 million of unsecured borrowing. The loan agreement
consists of two facilities including a $5 million committed unsecured revolving
credit line (the Committed Line) and a $5 million discretionary unsecured
revolving credit line (the Revolving Line). Interest under both facilities is
payable monthly and is based on either the Prime Rate or LIBOR plus 1.65%, as
elected by the Company at each borrowing date. The Committed Line includes a
1/4% facility fee on unused borrowings and requires principal repayment not
later than September 30, 1998. Borrowings under the Revolving Line are payable
upon demand. The Revolving Line extends through September 30, 1997. At June 30,
1997, the total amount outstanding under the credit lines was $1,000,000.
In July 1996, with additional funds made available through the Company's initial
public offering, the Company completed the purchase of the facility adjacent to
its original facility in Malden, Massachusetts for a purchase price of $1.25
million. During 1996, the Company also completed the construction of a warehouse
connecting its two facilities. Total expended funds to complete this project and
the related equipment and renovation costs approximated $2.9 million.
At June 30, 1997 cash and cash equivalents were $1.1 million.
The Company generated $1.0 million of cash flow from operations during the six
months ended June 30, 1997 as compared to $2.0 million for the comparable 1996
period. This decrease is primarily due to the operating cash flow impact
associated with changes in net income and asset and liability accounts from
December 31, 1995 to June 30, 1996 as compared to December 31, 1996 to June 30,
1997. Inventories at June 30, 1997 increased $1.1 million from December 31,
1996, mainly due to the timing of inventory receipts and additional on-hand
inventory as a result of the Company's May 1, 1997 acquisition of the plastic
flow meter division of Universal Flow Monitors, Inc. Accounts payable, at June
30, 1997, increased $915,000 from December 31, 1996, primarily due
10
to the increase in inventory. For the comparative 1996 period, inventory
increased $83,000 and accounts payable decreased $427,000. Receivables at June
30, 1997 increased $33,000 from December 31, 1996 mainly due to the increase in
sales for the quarter.
The Company's industrial revenue bonds funded through the Massachusetts
Industrial Finance Agency (MIFA) are secured by a letter of credit issued by a
bank which is secured by substantially all the assets of the Company. The bonds
consist of six separate series each with differing interest rates and
maturities. Interest rates range from 4.2% to 5.1% and are subject to adjustment
in 1999, 2004 and 2009. The maximum principal payable in any one year is
$320,000 payable in 2014.
On May 1, 1997, the Company acquired the plastic flow meter division of
Universal Flow Monitors, Inc. Included in the purchase were the inventory, fixed
assets and intellectual property associated with the product line. The total
purchase price of $3.0 million was paid with cash and through borrowings on the
Company's revolving credit line. The Company accounted for the acquisition as a
purchase.
The Company believes that its current resources, together with cash generated by
operations will be sufficient to fund the Company's operations, debt service and
capital requirements at least through the next 12 months.
11
Part II Other Information
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held an annual meeting of shareholders on May 28,
1997.
(b) Not required.
(c) Set forth below is a brief description of each matter voted upon at
the meeting, including the number of votes cast for, against or
withheld, as well as the number of abstentions and broker non-votes as
to each such matter and including a separate tabulation with respect to
each nominee for office:
Number of Shares
----------------
1. Election of Directors: For Withheld Authority
--- ------------------
Leslie B. Lewis 3,104,015 2,650
Jeffrey C. Bloomberg 3,104,515 2,150
Masashi Uesugi 3,102,915 3,750
2. To ratify the appointment of Arthur Andersen LLP as independent auditors
of the Company:
Number of Shares
----------------
For: 3,105,014
Against: 1,450
Abstain: 201
Broker Non-Vote: 0
3. To ratify the adoption of the Employee Stock Purchase Plan
Number of Shares
----------------
For: 2,843,229
Against: 20,751
Abstain: 1,885
Broker Non-Vote: 240,800
12
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
11.1 Computation of Weighted Average Number of Common
and Common Equivalent Shares Outstanding
27 Financial Data Schedule
b) Reports on Form 8-K
During the quarter ended June 30, 1997, the Company filed
a report on Form 8-K dated May 1, 1997 under Item 2,
Acquisition or Disposition of Assets, reporting the
Company's acquisition of certain assets, including
inventory, equipment, patents and patent application
rights from Universal Flow Monitors, Inc. and the Rosaen
Company.
13
Signatures
Pursuant to the requirements of the securities exchange act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ASAHI/AMERICA, INC.
Dated: August 11, 1997 By: /s/ Leslie B. Lewis
--------------------
Leslie B. Lewis, President and Principal
Executive Officer
By: /s/ Kozo Terada
--------------------
Kozo Terada, Vice President, Principal
Financial and Accounting Officer and Treasurer
14