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 March 31, 1998
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)
(781) 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 3,370,169 shares of common stock
outstanding at April 30, 1998.
Asahi/America, Inc. and Subsidiaries
Form 10-Q
Index
Page No.
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Part I Financial Information
Item 1 - Condensed Consolidated Financial Statements
Consolidated Balance Sheets- December 31, 1997 and
March 31, 1998 2
Consolidated Statements of Operations - Three Months
Ended March 31, 1997 and 1998 3
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 1997 and 1998 4
Notes to Consolidated Financial Statements 5
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II Other Information
Item 6 12
Signatures 13
1
Asahi/America, Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
(dollars in thousands)
December 31, March 31,
1997 1998
--------------- -------------
ASSETS
Current Assets
Cash and cash equivalents $ 916 $ 878
Accounts receivable, less reserves of $263 at December 31, 1997
and $260 at March 31, 1998 4,213 3,805
Inventories 9,336 9,917
Prepaid expenses and other current assets 611 619
------- -------
Total current assets 15,076 15,219
Property and Equipment, net 11,754 12,845
Other Assets
Goodwill, net of accumulated amortization of $1,654 at
December 31, 1997 and $1,742 at March 31, 1998 2,470 2,382
Other, net 2,749 2,886
------- -------
Total other assets 5,219 5,268
------- -------
$32,049 $33,332
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Demand note payable to bank $ 1,000 $ 1,000
Current portion of MIFA obligations 145 150
Current portion of GECPF obligations 430 430
Current portion of capital lease obligations 149 250
Accounts payable 4,857 5,125
Accrued expenses 992 699
Deferred income taxes 734 734
------- -------
Total current liabilities 8,307 8,388
------- -------
MIFA Obligations, less current portion 3,615 3,465
------- -------
GECPF Obligations, less current portion 1,047 2,074
------- -------
Capital Lease Obligations, less current portion 302 541
------- -------
Deferred Income Taxes 177 177
------- -------
Commitments -- --
Stockholders' Equity
Common Stock 13,603 13,662
Additional paid-in capital 579 579
Retained Earnings 4,646 4,656
------- -------
18,828 18,897
------- -------
Less-Note receivable from stockholder/officer 227 210
------- -------
Total stockholders' equity 18,601 18,687
------- -------
$32,049 $33,332
======= =======
See accompanying notes to consolidated financial statements.
2
Asahi/America, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
(dollars in thousands, except per share data)
Three months ended
March 31,
----------------------------
1997 1998
----------- -----------
Net sales $9,123 $8,096
Cost of sales 5,761 5,114
------- -------
Gross Profit 3,362 2,982
Selling, general and administrative expenses 2,691 2,820
Research and development -- 62
------- -------
Income from operations 671 100
Interest expense, net 19 80
------- -------
Income before provision for income taxes 652 20
Provision for income taxes 274 10
------- -------
Net Income $ 378 $ 10
======= =======
Basic earnings per share $ .11 $ .00
======= =======
Diluted earnings per share $ .11 $ .00
======= =======
Weighted average number of shares outstanding 3,340 3,370
======= =======
Weighted average number of common shares
outstanding, assuming dilution 3,356 3,371
======= =======
See accompanying notes to consolidated financial statements.
3
Asahi/America, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
(dollars in thousands)
Three months ended
March 31,
------------------------------------
1997 1998
------------------ ----------------
Cash flows from operating activities
Net Income $ 378 $ 10
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 332 394
Changes in assets and liabilities
Accounts receivable (370) 408
Inventories (765) (581)
Prepaid expenses and other current assets (100) (8)
Accounts payable 907 268
Accrued expenses (68) (293)
------ -----
Net cash provided by operating activities 314 198
Cash flows from investing activities
Purchase of property and equipment (345) (432)
Increase in others assets (20) (138)
------ -----
Net cash used in investing activities (365) (571)
Cash flows from financing activities
Payments on MIFA obligations -- (145)
Payments on GECPF obligations -- (108)
Payments on capital lease obligations (26) (67)
Payments of note receivable from stockholder/officer 18 18
Proceeds from sale-leaseback financing -- 267
Proceeds from reimbursement of amounts financed under GECPF -- 311
Proceeds from stock issued under ESPP -- 59
------ -----
Net cash (used in) provided by financing activities (8) 335
------ -----
Net decrease in cash and cash equivalents (59) (38)
Cash and cash equivalents, beginning of period 3,028 916
------ -----
Cash and cash equivalents, end of period
$2,969 $ 878
====== =====
Supplemental cash flow disclosures:
Cash paid during the year for:
Interest $ 7 $ 122
====== =====
Income taxes
$ 191 $ 136
====== =====
Supplemental schedule of noncash investing and financing activities:
Acquisition of assets under capital lease obligations -- 141
====== =====
Acquisition of equipment under GECPF bond financing -- 824
====== =====
See accompanying notes to consolidated financial statements.
4
Asahi/America, Inc. and Subsidiaries
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 subsidiaries, Asahi Engineered Products, Inc. and
Quail Piping Products, Inc. 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, March 31,
1997 1998
---- ----
Raw materials $ 514 $ 761
Finished goods 8,644 8,850
------ ------
9,158 9,611
LIFO surplus 178 306
------ ------
Total $9,336 $9,917
====== ======
5
5. Earnings per Share
In March 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. This
statement established standards for computing and presenting earnings per share
and applies to all entities with publicly traded common stock or potential
common stock. This statement is effective for fiscal years ending after December
15, 1997. This statement has been adopted as of December 31, 1997. Accordingly,
the prior year's earnings per share have been retroactively restated to reflect
the adoption of SFAS No. 128.
Basic net income per share and basic pro forma net income per share were
computed by dividing net income or pro forma net income by the weighted average
number of common shares outstanding during the period. Diluted net income per
share and diluted pro forma net income per share were computed by dividing net
income or pro forma net income by diluted weighted average number of common and
common equivalent shares outstanding during the period. The weighted average
number of common equivalent shares outstanding has been determined in accordance
with the treasury-stock method. Common stock equivalents consist of common stock
issuable on the exercise of outstanding options.
Basic and diluted earnings per share, as of March 31, were calculated as
follows:
1997 1998
Basic-
Net income $ 378,100 $ 10,073
========== ==========
Weighted average common shares
outstanding 3,340,000 3,370,169
Diluted-
Effect of dilutive securities -- --
Stock options 16,005 352
---------- ----------
Weighted average common shares
outstanding, assuming dilution 3,356,005 3,370,521
---------- ----------
Basic earnings per share $ .11 $ .00
========== ==========
Diluted earnings per share $ .11 $ .00
========== ==========
As of March 31, 1997 and 1998, 23,111 and 329,167 options, respectively, were
outstanding but not included in the diluted weighted average common share
calculation as the effect would have been antidilutive.
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 (the
Committed Line) and a $5,000,000 discretionary unsecured revolving credit line
(the Discretionary 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
6
working capital and tangible net worth, as defined in the agreements. The
Discretionary Line expired on September 30, 1997. The Committed Line extends
through September 30, 1998. As of March 31, 1997, the Company had $1,000,000
outstanding under the line of credit.
In January 1998, the Company and its bank signed a term sheet for an $11,000,000
secured, committed revolving line of credit. This line of credit is secured by
substantially all assets of the Company and extends through January 31, 2000.
Interest on this credit line is based on the prime rate or LIBOR plus 1.55% to
2.30%. There is an unused fee ranging from .15% to .25%, based on the
performance levels of certain financial ratios. The Company will be required to
maintain certain financial ratios, including, among others, minimum working
capital and tangible net worth. The credit line is for working capital and
merger and acquisition purposes.
7. Concentration of Credit Risk
Sales to the Company's major domestic customer during the first quarter of 1998
were approximately 26.8% of total sales as compared to 28.7% for the 1997 first
quarter. Export sales as a percent of total sales during the first quarter were
approximately 6.9% and 10.0% in 1998 and 1997, respectively.
8. New Accounting Standards
In May 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-5, Reporting on the Costs of Start-up Activities.
SOP 98-5, which is effective for fiscal years beginning after December 15, 1998,
requires that the costs of start-up activities, including organization costs, be
expensed as incurred. Initial adoption of SOP 98-5 should be as of the beginning
of the fiscal year in which it is first adopted and should be reported as a
cumulative effect of a change in accounting principle. As of March 31, 1998, the
Company had approximately $168,000 of capitalized start-up costs included in
other assets in the accompanying consolidated balance sheet. As of January 1,
1999 the net book value of these start-up costs will be approximately $136,000.
7
Asahi/America, Inc. and Subsidiaries
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,
piping systems, flow meter devices, filtration equipment and components
manufactured by the Company and others for use in a wide variety of
environmental and industrial applications. Manufactured products include valve
actuators and controls, specialized valve assemblies, double containment piping
systems, thermoplastic flow meter devices and filtration equipment. 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 user customers 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. Purchases from the Company's Austrian supplier are denominated in
United States dollars.
In July, 1997, the Company established a wholly owned subsidiary, Quail Piping
Products, Inc. ("Quail") to manufacture and market corrugated polyethylene
piping systems for use in water, sewer and drain applications. The facility and
manufacturing equipment are located in Magnolia, Arkansas. Production of the
piping systems commenced according to plan in March 1998. This new product line
increases the manufacturing component of the Company's business, further
diversifies the Company's product offerings and distribution base and positions
the Company to penetrate new markets providing additional opportunity to
increase sales of the Company's distributed products.
8
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
March 31,
1997 1998
------------- ---------------
Net sales 100.0% 100.0%
Cost of sales 63.1% 63.2%
Gross Profit 36.9% 36.8%
Selling, general and administrative expenses 29.5% 34.8%
Research and development 0.0% 0.8%
Income from operations 7.4% 1.2%
Interest expense, net .2% 1.0%
Income before provision for income taxes 7.2% 0.2%
Provision for income taxes 3.0% 0.1%
Net income 4.2% 0.1%
Net Sales
Net sales for the quarter ended March 31, 1998 were $8.1 million as compared to
the $9.1 million in the first quarter of 1997. The shortfall was attributed to
the continued slowdown of sales of dual containment pipe and high purity
products to the semiconductor markets coupled with a related decrease in welding
equipment revenues. Additionally, the decline in the price of copper and the
difficult weather conditions, particularly on the west coast of the United
States, led to the overall decline in revenues between periods, evidenced by the
decline in both export sales and in sales to the Company's largest customer.
Export sales for the three month period ended March 31, 1998 were $568,000
compared to $931,000 for the corresponding period of 1997. Sales to the
Company's largest single customer were approximately 26.8% of total sales for
the three month period ended March 31, 1998 compared to 28.7% for the three
month period ended March 31, 1997.
Gross Profit
Gross profit as a percentage of sales (gross margin) was 36.8% in the 1998 first
quarter, relatively unchanged from the 1997 period. Aggressive pricing to
increase sales volume was offset by a slight increase in the Company's sales of
manufactured products coupled with lower average product costs for certain of
the Company's distributed products, associated with the continued favorable
exchange level of the US dollar against the Japanese yen and the related impact
due to the Company's LIFO method of costing inventory.
9
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $2.8 million for the first
quarter of 1998. Included in this amount were approximately $215,000 of expenses
related both to the start-up of the Company's wholly owned subsidiary, Quail
Piping Products, Inc., which began limited scale production in late March of
1998 and to the Company's patent infringement lawsuit. The final decision from
the December 1997 patent infringement lawsuit, whereby the Company is enforcing
its U.S. patent rights against a major competitor, has yet to be rendered.
Selling, general and administrative expenses, excluding the above mentioned
charges, were $2.6 million in 1998 as compared to $2.7 million in the 1997 first
quarter. The overall decrease is reflective of increased amortization and
commission expenses as a result of the Company's May 1997 acquisition of the
plastic flow meter division coupled with an overall increase in payroll and
travel related expenses to support the Company's sales effort being more than
offset by the decrease in performance related accrued expenses and the absence
of a one time charge expensed in the 1997 first quarter related to an unrealized
acquisition.
Interest Expense and Income Taxes
Interest expense was $30,000 higher in the three month period ended March 31,
1998 as compared to the corresponding period of 1997, reflective of the $1
million of outstanding borrowings on the Company's line of credit and an
increase in lease interest expense. Interest income was also $30,000 lower in
the 1998 first quarter as compared to the 1997 first quarter as a result of a
decrease in invested cash reserves.
Income taxes decreased $264,000 in the first quarter of 1998 as compared to
1997. The decrease was due to lower income before income taxes.
Liquidity and Capital Resources
The Company has financed its operations through cash generated from operations,
the sale of equity securities, borrowings under lines of credit and Industrial
Revenue Bond financings. In addition, the Company has benefited from favorable
payment terms under a $6 million open account arrangement for the purchase of
Japanese valve products, as to which the majority of its purchases are at
payment terms of 180 days after the bill of lading date.
In January, 1997, the Company and its bank executed a loan agreement providing
for up to $10 million of borrowings. The loan agreement consisted of two
facilities including a $5 million committed revolving credit line (the Committed
Line) and a $5 million discretionary revolving credit line (the Discretionary
Line). Interest under both facilities is payable monthly and is based on either
LIBOR plus 1.65% or Prime, 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. The Discretionary Line
expired September 30, 1997. As of March 31, 1998, the Company had $1,000,000
outstanding under the line of credit.
In January, 1998, the Company and its bank agreed on a term sheet for an $11
million secured, committed revolving line of credit, and are currently in the
process of finalizing the loan agreement.
10
The lines of credit are secured by substantially all assets of the Company and
the $11million line extends through January 31, 2000. Interest on this credit
line is based on the prime rate or LIBOR plus 1.55% to 2.30%. There is an unused
line fee ranging from .15% to .25%. The credit line is for working capital and
merger and acquisition purposes.
On May 1, 1997, the Company acquired the plastic flow meter division and related
assets of Universal Flow Monitors, Inc. and The Rosaen Company including, two
product lines with related inventory, equipment, patents and patent application
rights. 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.
In July, 1997, the Company established a wholly-owned subsidiary, Quail Piping
Products, Inc. to manufacture and market corrugated polyethylene piping systems
for use in water, sewer and drain applications. The facility and manufacturing
equipment, which are located in Magnolia, Arkansas, are being financed by
Arkansas Industrial Revenue Bonds totaling $4.3 million. As of March 31, 1998,
the Company had expended approximately $2.6 million in connection with the
purchase of the facility and equipment for use in Quail's operations. Quail
commenced production according to schedule in March 1998. Payments on the bonds
began in January 1998, with equal monthly principal payments and extend until
December 2007. The bonds bear interest at 5.89%.
At March 31, 1998 cash and cash equivalents were $878,000.
The Company generated $198,000 of cash flow from operations during the three
months ended March 31, 1998 as compared to $314,000 for the comparable 1997
period. The decrease is due to the lower net income level in the 1998 first
quarter as compared to the 1997 period coupled with the operating cash flow
impact associated with changes in accounts receivable and accounts payable from
December 31, 1996 to March 31, 1997 as compared to December 31, 1997 to March
31, 1998. Accounts receivable at March 31, 1998 decreased $408,000 from December
31, 1997, mainly due to the shortfall in sales for the quarter. Accounts
payable, at March 31, 1998, increased $268,000 from December 31, 1997, primarily
due to the increase in inventory. For the comparative 1997 period, accounts
receivable increased $370,000 and accounts payable increased $907,000. The
increase in accounts payable resulted from an increase in inventory purchases
during the quarter to support the anticipated increase in sales volume.
Receivables at March 31, 1997 increased $370,000 from December 31, 1996 mainly
due to the timing of shipments at quarter end.
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.
The Company believes that its current funds, 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
Material Uncertainties
Year 2000 Issues. The Year 2000 issue exists because many computer systems and
applications currently use two-digit date fields to designate a year. As the
century date change occurs, many date sensitive systems will recognize the year
2000 as 1900, or not at all. This inability to recognize or properly treat the
Year 2000 may cause systems to process critical financial and operational
information incorrectly. The Company utilizes software and related technologies
throughout its business that will be affected by the date change in the Year
2000. An internal study continues to be performed to determine the full scope
and related costs to insure that the Company's internal systems and external
resources continue to meet its needs and those of its customers. The majority of
the Company's internal information systems are in the process of being replaced
with fully-compliant new systems. The Company began incurring expenses in 1997
to resolve this issue. All expenditures will be expensed as incurred and they
are not expected to have a significant impact on the Company's ongoing results
of operations.
Sources of Supply. The Company purchases substantially all of its requirements
for valves from Asahi Organic Chemicals Industry Co. Ltd. ("AOC"), and a large
percentage of the pipe and fittings sold by the Company are supplied by
Alois-Gruber GmbH ("Agru"). The Company has exclusive contracts of supply and
distribution in defined territories with both AOC and Agru that extend through
1999. Under the contract with AOC, the Company agreed to purchase $140 million
of product over the 10 year term of the contract. Through December 31, 1997, the
Company had purchased approximately $71.4 million of product. The Company's
contract with AOC may be terminated only for cause, including breach of the
contract or the bankruptcy of a party. The Company's contract with Agru renews
automatically for an additional five (5) year period unless either party gives
notice of termination no less than twelve (12) months prior to the end of the
term. Although alternative sources of supply are available, the loss of either
AOC or Agru as a source of supply would have a material adverse effect on the
Company. Representatives of the Company are currently negotiating an extension
of the contract with AOC, but there can be no assurance that the agreement will
be extended.
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27.1 Financial Data Schedule
27.2 Financial Data Schedules, (restated)
b) Reports on Form 8-K
The Company did not file any reports on Form 8-k during
the quarter ended March 31, 1998
12
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: May 14, 1998 By: /s/ Leslie B. Lewis
-------------------
Leslie B. Lewis, President and Principal
Executive Officer
By: /s/ Kozo Terada
---------------
Kozo Terada, Vice President, Principal
Financial Officer and Treasurer
This Form 10Q contains certain forward-looking statements. The phrase "typically
stronger", "anticipated", or other similar phrases are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
presently anticipated or projected. Asahi/America, Inc. cautions readers not to
place undo reliance on any forward looking statements, which speak only as to
management's expectations on the date hereof.
13