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, 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 3,382,228 shares of common stock outstanding at
July 31, 1998.
Asahi/America, Inc. and Subsidiaries
Form 10-Q
Index
Page No.
--------
Part I Financial Information
Item 1 - Condensed Consolidated Financial Statements
Consolidated Balance Sheets-December 31, 1997 and
June 30, 1998 2
Consolidated Statements of Operations - Three and
Six Months ended June 30, 1997 and 1998 3
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 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 4 14
Item 6 14
Signatures 15
1
Asahi/America, Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
(dollars in thousands)
December 31, June 30,
1997 1998
------------- -------------
ASSETS
Current Assets
Cash and cash equivalents $ 916 $ 95
Accounts receivable, less reserves of $263 at December 31, 1997
and $260 at June 30, 1998 4,213 5,162
Inventories 9,336 10,955
Prepaid expenses and other current assets 611 691
------------- -------------
Total current assets 15,076 16,903
Property and Equipment, net 11,754 15,143
Other Assets
Goodwill, net of accumulated amortization of $1,654 at
December 31, 1997 and $1,817 at June 30, 1998 2,470 2,307
Other, net 2,749 3,117
------------- -------------
Total other assets 5,219 5,424
------------- -------------
$32,049 $37,470
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Demand note payable to bank $ 1,000 $ 3,302
Current portion of MIFA obligations 145 150
Current portion of GECPF obligations 430 430
Current portion of capital lease obligations 149 277
Accounts payable 4,857 5,914
Accrued expenses 992 964
Deferred income taxes 734 734
------------- -------------
Total current liabilities 8,307 11,771
------------- -------------
MIFA Obligations, less current portion 3,615 3,465
------------- -------------
GECPF Obligations, less current portion 1,047 2,783
------------- -------------
Capital Lease Obligations, less current portion 302 585
------------- -------------
Deferred Income Taxes 177 177
------------- -------------
Commitments - -
Stockholders' Equity
Common Stock 13,603 13,662
Additional paid-in capital 579 579
Retained Earnings 4,646 4,658
------------- -------------
18,828 18,899
------------- -------------
Less-Note receivable from stockholder/officer 227 210
------------- -------------
Total stockholders' equity 18,601 18,689
------------- -------------
$32,049 $37,470
============= =============
ee accompanying notes to consolidated financial statements.
2
Asahi/America, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
----------------------------- ------------------------------
1997 1998 1997 1998
------------ ------------ -------------- -------------
Net sales $ 10,133 $ 9,072 $ 19,256 $ 17,168
Cost of sales 6,359 6,039 12,120 11,153
------------ ------------ -------------- -------------
Gross Profit 3,774 3,033 7,136 6,015
Selling, general and administrative expenses 2,635 2,846 5,326 5,665
Research and development expenses - 85 - 148
------------ ------------ -------------- -------------
Income from operations 1,139 102 1,810 202
Interest expense, net (54) (94) (73) (173)
------------ ------------ -------------- -------------
Income before provision for income taxes 1,085 8 1,737 29
Provision for income taxes 456 6 729 17
------------ ------------ -------------- -------------
Net Income $ 629 $ 2 $ 1,008 $ 12
============ ============ ============== =============
Basic earnings per share $ 0.19 $ 0.00 $ 0.30 $ 0.00
============ ============ ============== =============
Diluted earnings per share $ 0.19 $ 0.00 $ 0.30 $ 0.00
============ ============ ============== =============
Weighted average number of shares outstanding 3,340,000 3,370,169 3,340,000 3,370,169
============ ============ ============== =============
Weighted average number of common shares
outstanding, assuming dilution 3,340,000 3,376,000 3,340,281 3,372,444
============ ============ ============== =============
See accompanying notes to consolidated financial statements.
3
Asahi/America, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
Six months ended
June 30,
-------------------------
1997 1998
----------- ---------
Cash flows from operating activities
Net Income $1,008 $ 12
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 684 804
Changes in assets and liabilities
Accounts receivable (33) (949)
Inventories (921) (1,619)
Prepaid expenses and other current assets (357) (80)
Accounts payable 915 1,056
Accrued expenses (275) (28)
----------- ---------
Net cash provided by (used in) operating activities 1,021 (804)
----------- ---------
Cash flows from investing activities
Purchase of property and equipment (443) (2,048)
Acquisition of certain assets of Universal Flow Monitors, Inc. (3,000) -
Increase in others assets (383) (423)
----------- ---------
Net cash used in investing activities (3,826) (2,471)
----------- ---------
Cash flows from financing activities
Borrowings under demand note payable to bank 2,000 2,302
Payments under demand note payable to bank (1,000) -
Payments on MIFA obligations (135) (145)
Payments on GECPF obligations - (215)
Payments on capital lease obligations (53) (143)
Payments of note receivable from stockholder/officer 35 18
Proceeds from stock issued under ESPP - 59
Proceeds from reimbursement of amounts financed under GECPF - 311
Proceeds from sales-leaseback financing - 267
----------- ---------
Net cash provided by financing activities 847 2,454
----------- ---------
Net decrease in cash and cash equivalents (1,958) (821)
Cash and cash equivalents, beginning of period 3,028 916
----------- ---------
Cash and cash equivalents, end of period $1,070 $ 95
=========== =========
Supplemental cash flow disclosures: Cash paid during the year for:
Interest $ 126 $ 294
=========== =========
Income taxes $ 815 $ 162
=========== =========
Supplemental schedule of noncash investing and financing activities:
Acquisition of assets under capital lease obligations $ -- $ 288
=========== =========
Acquisition of equipment under GECPF bond financing $ -- $ 1,640
=========== =========
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, June 31,
1997 1998
--------- --------
Raw materials $ 514 $ 706
Finished goods 8,644 9,890
--------- --------
9,158 10,596
LIFO surplus 178 359
--------- --------
Total $9,336 $10,955
========= =======
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 for the three and six month periods ended
as of June 30, 1997 and 1998, were calculated as follows:
Three months ended June 30, Six months ended June 30,
1997 1998 1997 1998
Basic-
Net income $ 629,219 $ 1,996 $1,007,319 $ 12,189
=========== ========= ========== =========
Weighted average common shares outstanding 3,340,000 3,370,169 3,340,000 3,370,169
Diluted-
Effect of dilutive securities - - - -
Stock options - 5,831 - 2,275
---------- --------- ---------- ---------
Weighted average common shares
outstanding, assuming dilution 3,340,000 3,376,000 3,340,0000 3,372,444
---------- --------- ---------- ---------
Basic earnings per share $ .19 $ .00 $ .30 $ .00
====== ====== ====== ======
Diluted earnings per share $ .19 $ .00 $ .30 $ .00
====== ====== ====== ======
As of June 30, 1997 and 1998, 346,500 and 323,167 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.
6
The Company is required to maintain certain financial ratios, including, among
others, minimum 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.
In June 1998, the Company and its bank amended its loan agreement, entering into
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, debt
service, minimum working capital and tangible net worth. The credit line is for
working capital and merger and acquisition purposes. As of June 30, 1998, there
was $3,301,866 outstanding under the line of credit.
7. Concentration of Credit Risk
Sales to the Company's major domestic customer during the three and six month
periods ended June 30, 1998 were approximately 28.1% and 27.5% of total sales,
respectively as compared to 23.2% and 25.5%, respectively for the same period of
1997. Export sales as a percent of total sales during the second quarter were
approximately 7.3% and 5.6% 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 June 30, 1998, the
Company had approximately $158,000 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.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). Statement 133 cannot be applied retroactively. Statement 133 must
be applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the company's election, before January
1, 1998. The Company believes that the adoption of Statement 133 will not have
a material effect on its financial statements.
7
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,
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 and polyethylene
fiber optic cable duct for use by the telecommunications industry. Quail's first
manufacturing facility, for which limited production commenced in March 1998, is
located in Magnolia, Arkansas. In June 1998, the Company and Quail closed on a
second manufacturing facility in Kingman, Arizona, which is scheduled to begin
production in October, 1998. These new product lines increase the manufacturing
component of the Company's business, further diversify the Company's product
offerings and distribution base and positions the Company to penetrate new
markets providing additional opportunities 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 Six months ended
June 30, June 30,
------------------------------- ------------------------------
1997 1998 1997 1998
-------------- --------------- -------------- --------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 62.8% 66.6% 62.9% 65.0%
Gross Profit 37.2% 33.4% 37.1% 35.0%
Selling, general and administrative expenses 26.0% 31.4% 27.7% 33.0%
Research and development expenses 0.0% 0.9% 0.0% 0.8%
Income from operations 11.2% 1.1% 9.4% 1.2%
Interest expense, net -0.5% -1.0% -0.4% -1.0%
Income before provision for income taxes 10.7% 0.1% 9.0% 0.2%
Provision for income taxes 4.5% 0.1% 3.8% 0.1%
Net income 6.2% 0.0% 5.2% 0.1%
Net Sales
Net sales were $9.1 million for the quarter ended June 30, 1998 as compared to
$10.1 million for the second quarter of 1997. Net sales for the six months ended
June 30, 1998 were $17.2 million as compared to $19.3 million for the comparable
1997 six month period. Quarterly and year to date 1998 sales of distributed
products decreased by 30% and 24%, respectively over the same periods of 1997
due mainly to broad weaknesses across the industrial manufacturing marketplace
due in part to the continued slowdown within the semiconductor manufacturing
industry and heightened concern over the economic status in Asia. The decrease
in distributed product sales for the 1998 periods was also reflective of
promotional efforts, which increased sales in the 1997 second quarter for the
sale of such products. Sales of manufactured product including revenues from the
sale and rental of welding equipment increased by 32% in the 1998 second quarter
as compared to the same period in 1997. This increase was mainly due to a strong
1998 second quarter demand for sales of the Company's actuation products coupled
with the Company's wholly owned subsidiary, Quail Piping Products, Inc.,
increasing its production, and sales capacity throughout the quarter, of its
corrugated polyethylene pipe and fiber optic cable duct pipe. This subsidiary
should be approaching full production capacity in its Arkansas facility by
September, 1998. The 15% increase in year to date sales of manufactured products
in 1998 as compared to 1997 is a result of increased sales of actuation and
filtration products, a full six months sales of the Company's May 1997
acquisition of the vortex flow meter product line and the commencement of sales
from Quail, more than offsetting the sharp decline in sales of dual containment
pipe products and welding equipment revenues to the military, semiconductor and
other industrial markets.
Export sales for the three and six month periods ended June 30, 1998 were
$634,000 and $1,218,000, respectively compared to $571,000 and $1,481,00 for the
corresponding periods of
9
1997. Sales to the Company's largest single customer were approximately 27% and
25% of total sales for the six month periods ended June 30, 1998 and 1997,
respectively.
Gross Profit
Gross profit as a percentage of sales was 37.2% and 37.1% during the three and
six months ended June 30, 1997, respectively as compared to 33.4% and 35.0% for
the same periods of 1998. The quarterly and year to date decrease was due to
aggressive pricing to increase sales volume for the Company's products coupled
with the inability to recognize economies of scale within the production process
due to lower than expected sales volume, more than offsetting the gross profit
benefit from increased manufactured product sales and the strong U.S. dollar as
compared to the Japanese yen. Gross profit as a percentage of sales for both
periods was also impacted by the temporary manufacturing inefficiencies
associated with the start-up of Quail's production process. The gross margin on
certain of Quail's products will be lower than the overall gross margin of
certain of the Company's products. However, these sales will require only modest
incremental increases in operating expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the second quarter of 1998 were
$2.8 million, an increase of $211,000 from the second quarter of 1997. The
quarterly increase is a result of increased commission and freight expenses due
to the nature of the Company's quarterly sales and an overall increase in sales
related travel and entertainment expenses offsetting decreases resulting from
the adjustment of certain performance related expenses during the quarter.
Additionally, operating costs associated with the commencement of operations
with Quail increased overall selling, general and administrative expenses for
the quarter. Selling, general and administrative expenses as a percentage of
sales were 31.4% in the 1998 second quarter compared to 26.0% in the 1997 second
quarter, reflective of an increase in expenses due to the start-up of Quail with
only limited sales volume in the quarter together with the overall decrease in
the Company's sales with relatively no change in selling, general and
administrative expenses.
Selling, general and administrative expenses were $5.7 million for the six
months ended June 30, 1998, an increase of $338,000 from the same period of
1997. Included in selling, general and administrative expenses forth 1998 six
month period were approximately $421,000 of expenses related both to the
start-up of Quail, which began limited scale production in late March of 1998
and which is expected to be fully operational in August 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 $5.2
million for the six months ended June 30, 1998 as compared to $5.3 million in
the 1997 period. 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 sales related
travel and entertainment expenses to support the Company's sales effort being
offset by the decrease in performance related accrued expenses, the
capitalization of certain labor charges related to the Company's installation of
a new internal computer software system and the absence of a one time charge
expensed in the 1997 first quarter related to an unrealized acquisition.
10
Interest Expense and Income Taxes
Interest expense increased $22,000 and $53,000 in the three and six month
periods ended June 30, 1998, respectively, as compared to the corresponding
periods of 1997. The overall increase was due to interest expense incurred on
operational borrowings both for the Company and for Quail. Interest income was
$17,000 and $48,000 lower in the respective three and six month periods ended
June 30, 1998 as compared to the corresponding periods of 1997 as a result of
lower overall investable cash.
Income taxes decreased $449,000 in the second quarter of 1998 and decreased
$713,000 for the six months ended June 30, 1998 as compared to 1997.
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, increased to $8
million in May, 1998, 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.
In June 1998, the Company and its bank amended the above facilities and executed
a loan agreement 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, debt service, minimum working capital and tangible net worth. The credit
line is for working capital and merger and acquisition purposes. As of June 30,
1998, there was $3,301,866 outstanding under the line of credit.
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
11
drain applications and polyethylene fiber optic duct pipe for use in the
telecommunications industry. Quail's first manufacturing facility, for which
limited production commenced in March 1998, is located in Magnolia, Arkansas.
The facility and manufacturing equipment are being financed by Arkansas
Industrial Revenue Bonds totaling $4.3 million. As of June 30, 1998, the Company
had expended approximately $3.4 million in connection with the purchase of the
facility and equipment for use in Quail's Arkansas operations. 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%. In June 1998, for the
purchase price of $1,139,844 funded by borrowings under the Company's line of
credit, the Company and Quail closed on a second manufacturing facility in
Kingman, Arizona, which is scheduled to begin production in October, 1998. Total
project costs for the Arkansas facility and equipment, which are estimated to be
$8 million, will be financed through the County of Mohave Industrial Development
Bonds which will be finalized during the third quarter of 1998, at which time
the Company will be reimbursed for the cash utilized as deposits or payments.
At June 30, 1998 cash and cash equivalents were $95,000.
The Company used $804,000 of cash flow from operations during the six months
ended June 30, 1998 as compared to $1,021,000 of cash flow generated from
operations for the comparable 1998 period. The decrease is due to the
significantly lower net income level in the 1998 period as compared to the 1997
period coupled with the operating cash flow impact associated with changes in
accounts receivable and inventory from December 31, 1996 to June 30, 1997 as
compared to December 31, 1997 to June 30, 1998. Accounts receivable at June 30,
1998 increased $949,000 from December 31, 1997, mainly due to the timing of
sales and payments between periods and the commencement of production, and
sales, from Quail. Inventory at June 30, 1998, increased $1,619,000 from
December 31, 1997, primarily due to lower than expected sales levels and the
start up of Quail's production process. For the comparative 1997 period,
accounts receivable increased $33,000 and inventory increased $921,000. The
increase in inventory was 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.
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.
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
12
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, including
internal staff costs as well as consulting and other expenses, will be expensed
as incurred, in compliance with GAAP, and are not expected to have a material
impact on the Company's ongoing results of operations. The Company has begun the
process of identifying and initiating communications with its significant
suppliers and customers to determine the extent to which the Company is
vulnerable to the failure of such parties to remediate Year 2000 compliance
issues.
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 year period unless either party gives
notice of termination no less than twelve 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.
13
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 27, 1998.
(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
--- ------------------
Samuel J. Gerson 3,149,535 7,101
Nanette S. Lewis 3,146,590 10,046
Masashi Uesugi 3,148,635 8,001
2. To ratify the appointment of Arthur Andersen LLP as independent auditor
of the Company:
Number of Shares
----------------
For: 3,147,686
Against: 7,900
Abstain: 1,050
Broker Non-Vote: 0
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
10.1 Amended and Restated Credit and Security Agreement in
favor of Citizens Bank of Massachusetts dated as of
June 30, 1998.
27 Financial Data Schedule
14
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 13, 1998 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