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 September 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)
<TABLE>
<S> <C>
Massachusetts 04-2621836
(State or other Jurisdiction of (I.R.S. Employer identification No.)
Incorporation or Organization)
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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
October 31, 1998.
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Asahi/America, Inc. and Subsidiaries
Form 10-Q
Index
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<CAPTION>
Page No.
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Part I Financial Information
Item 1 - Condensed Consolidated Financial Statements
Consolidated Balance Sheets- December 31, 1997 and
September 30, 1998 2
Consolidated Statements of Operations - Three and
Nine Months ended September 30, 1997 and 1998 3
Consolidated Statements of Cash Flows - Nine Months
Ended September 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 6 14
Signatures 15
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1
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Asahi/America, Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
--------------- -------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 916 $ 48
Restricted Cash - 5,078
Accounts receivable, less reserves of $263 at December 31, 1997
and $265 at September 30, 1998 4,213 6,348
Inventories 9,336 11,213
Prepaid expenses and other current assets 611 616
--------------- -------------
Total current assets 15,076 23,303
Property and Equipment, net 11,754 18,266
Other Assets
Goodwill, net of accumulated amortization of $1,654 at
December 31, 1997 and $1,893 at September 30, 1998 2,470 2,232
Other, net 2,749 3,574
--------------- -------------
Total other assets 5,219 5,806
=============== =============
$ 32,049 $ 47,375
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Demand note payable to bank $ 1,000 $ 3,005
Current portion of MIFA obligations 145 150
Current portion of GECPF obligations 430 1,252
Current portion of capital lease obligations 149 320
Accounts payable 4,857 6,459
Accrued expenses 992 1,586
Deferred income taxes 734 734
--------------- -------------
Total current liabilities 8,307 13,506
--------------- -------------
MIFA Obligations, less current portion 3,615 3,465
--------------- -------------
GECPF Obligations, less current portion 1,047 10,600
--------------- -------------
Capital Lease Obligations, less current portion 302 587
--------------- -------------
Deferred Income Taxes 177 177
--------------- -------------
Commitments - -
Stockholders' Equity
Common Stock 13,603 13,721
Additional paid-in capital 579 579
Retained Earnings 4,646 4,915
--------------- -------------
18,828 19,215
--------------- -------------
Less-Note receivable from stockholder/officer 227 175
--------------- -------------
Total stockholders' equity 18,601 19,040
=============== =============
$ 32,049 $47,375
=============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
2
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Asahi/America, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------------- ------------------------------
1997 1998 1997 1998
------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $9,262 $10,605 $28,519 $27,773
Cost of sales 5,885 6,994 18,005 18,147
------------ ----------- ------------- -------------
Gross Profit 3,377 3,611 10,514 9,626
Selling, general and administrative expenses 2,359 3,144 7,686 8,809
Research and development expenses - 96 - 244
------------ ----------- ------------- -------------
Income from operations 1,018 371 2,828 573
Other income, net - 225 - 225
Interest expense, net (60) (152) (133) (326)
------------ ----------- ------------- -------------
Income before provision for income taxes 958 444 2,695 472
Provision for income taxes 402 187 1,132 203
------------ ----------- ------------- -------------
Net Income $ 556 $ 257 $ 1,563 $ 269
============ =========== ============= =============
Basic earnings per share $ 0.17 $ 0.08 $ 0.47 $ 0.08
============ =========== ============= =============
Diluted earnings per share $ 0.17 $ 0.08 $ 0.47 $ 0.08
============ =========== ============= =============
Weighted average number of shares outstanding 3,358,669 3,382,228 3,346,223 3,374,189
============ =========== ============= =============
Weighted average number of common shares
outstanding, assuming dilution 3,358,669 3,382,228 3,346,223 3,374,745
============ =========== ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
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Asahi/America, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
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<CAPTION>
Nine months ended
September 30,
------------------------
1997 1998
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<S> <C> <C>
Cash flows from operating activities
Net Income $ 1,563 $ 269
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 1,085 1,211
Changes in assets and liabilities
Accounts receivable 425 (2,135)
Inventories (338) (1,877)
Prepaid expenses and other current assets (121) (4)
Accounts payable (633) 1,602
Accrued expenses (544) 594
----------- ------------
Net cash provided by (used in) operating activities 1,437 (340)
----------- ------------
Cash flows from investing activities
Purchase of property and equipment (1,842) (1,615)
Acquisition of certain assets of Universal Flow Monitors, Inc. (3,000) -
Increase in others assets (804) (908)
----------- ------------
Net cash used in investing activities (5,646) (2,523)
----------- ------------
Cash flows from financing activities
Borrowings under demand note payable to bank 1,313 4,305
Payments under demand note payable to bank - (2,300)
Payments on MIFA obligations (135) (145)
Payments on GECPF obligations - (391)
Payments on capital lease obligations (84) (222)
Payments of note receivable from stockholder/officer 53 52
Proceeds from stock issued under ESPP 99 118
Proceeds from reimbursement of amounts financed under GECPF - 311
Proceeds from sales-leaseback financing - 267
----------- ------------
Net cash provided by financing activities 1,246 1,995
----------- ------------
Net decrease in cash and cash equivalents (2,963) (868)
Cash and cash equivalents, beginning of period 3,028 916
=========== ============
Cash and cash equivalents, end of period $ 65 $ 48
=========== ============
Supplemental cash flow disclosures:
Cash paid during the year for:
Interest $ 242 $ 485
=========== ============
Income taxes $ 1,064 $ 205
=========== ============
Supplemental schedule of noncash investing and financing activities:
Acquisition of assets under capital lease obligations $ 305 $ 411
=========== ============
Purchase of certain assets with stock options $ 445 $ -
=========== ============
Restricted cash held for equipment purchase under GECPF $ - $ 5,078
=========== ============
=========== ============
Acquisition of equipment under GECPF bond financing $ - $ 5,378
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
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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 for
the year ended December 31, 1997. 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, if any 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:
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<CAPTION>
December 31, September 30,
1997 1998
---- ----
<S> <C> <C>
Raw materials $ 514 $ 977
Finished goods 8,644 9,827
------- -------
9,158 10,804
LIFO surplus 178 409
------- -------
Total $ 9,336 $11,213
======= =======
</TABLE>
5
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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 nine month periods ended
as of September 30, 1997 and 1998, were calculated as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic-
Net income $ 555,829 $ 257,051 $1,563,148 $ 269,240
============ ============ ========== ===========
Weighted average common shares outstanding 3,358,669 3,382,228 3,346,223 3,374,189
Diluted-
Effect of dilutive securities - - - -
Stock options - -
- 556
----------- ------------ ----------- -----------
Weighted average common shares
outstanding, assuming dilution 3,358,669 3,382,228 3,346,223 3,374,745
----------- ------------ ---------- -----------
Basic earnings per share $ .17 $ .08 $ .47 $ .08
======== ======== ======= ========
Diluted earnings per share $ .17 $ .08 $ .47 $ .08
======== ======== ======= ========
</TABLE>
As of September 30, 1997 and 1998, 346,500 and 339,167 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 Line
In June 1998, the Company and its bank amended its existing 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 Asahi/America, Inc. and
extends through January 31, 2000. Interest on
6
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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. Currently, the Company is non-compliant with a financial
ratio and is in the process of obtaining a waiver from its bank. The credit line
is for working capital and merger and acquisition purposes. As of September 30,
1998, there was $3,005,321 outstanding under the line of credit.
7. Concentration of Credit Risk
Sales to the Company's major domestic customer during the three and nine month
periods ended September 30, 1998 were approximately 25.1% and 26.6% of total
sales, respectively as compared to 26.1% and 25.7%, respectively for the same
period of 1997. Export sales as a percent of total sales during the third
quarter were approximately 4.1% and 6.7% 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 September 30, 1998,
the Company had approximately $147,000 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 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 substantially
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
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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 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 the
purchase of a second manufacturing facility in Kingman, Arizona, which commenced
production in October, 1998. Both of Quail's plants are currently manufacturing
fiber optic cable duct to satisfy existing orders. Quail's Arkansas facility is
currently working with the manufacturer of the corrugating equipment to resolve
certain production issues, which to date are being resolved in a manner
satisfactory to the Company, so as to allow the equipment to function
continuously and properly. 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
<PAGE>
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:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------ -----------------------------
1997 1998 1997 1998
------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 63.5% 66.0% 63.1% 65.3%
Gross Profit 36.5% 34.0% 36.9% 34.7%
Selling, general and administrative expenses 25.5% 29.6% 27.0% 31.7%
Research and development expenses 0.0% 0.9% 0.0% 0.9%
Income from operations 11.0% 3.5% 9.9% 2.1%
Other income, net 0.0% 2.1% 0.0% 0.8%
Interest expense, net -0.6% -1.4% -0.4% -1.2%
Income before provision for income taxes 10.4% 4.2% 9.5% 1.7%
Provision for income taxes 4.4% 1.8% 4.0% 0.7%
Net income 6.0% 2.4% 5.5% 1.0%
</TABLE>
Net Sales
Net sales were $10.6 million and $27.8 million for the three and nine month
periods ended September 30, 1998, respectively, as compared to $9.3 million and
$28.5 million for the same periods of 1997. Quarterly sales of manufactured
products, including the sale and rental of welding equipment, increased by 24%
over the 1997 third quarter. This increase was mainly due to the Company's
wholly owned subsidiary, Quail Piping Products, Inc., which experienced its
first full quarter of production and sales of its fiber optic cable duct pipe
coupled with limited sales volume of its corrugated polyethylene pipe. Sales of
corrugated polyethylene pipe were below the Company's anticipated levels as of
this point, due to delays in the shipping of the related equipment and certain
performance issues experienced with the set-up and start-up of the equipment.
The Company and the equipment manufacturer are currently working to resolve the
manufacturing issues, which to date are being resolved in a manner satisfactory
to the Company. Third quarter sales of manufactured product in 1998 also
benefited from increasing demand for sales of the Company's actuation products
coupled with project related sales increases of piping and flow meter products.
Distributed product sales in the third quarter of 1998 increased 9% over sales
of such products in the 1997 third quarter as a result of new distributor
business and increased project related business in the quarter.
Year to date sales of manufactured products increased 18% in 1998 as compared to
1997 as a result of increased sales of actuation and filtration products, a full
nine months sales of the Company's May 1997 acquisition of the vortex flow meter
product line and the commencement
9
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of sales from Quail, offsetting the decline in sales of dual containment pipe
products and welding equipment revenues. Distributed product sales decreased by
14% for the nine months ended September 30, 1998 as compared to 1997 due mainly
to a decline in demand as a result of the broad weaknesses across the industrial
manufacturing marketplace due in part to the continued slowdown within the
semiconductor manufacturing, mining and chemical processing industries 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 for the sale of such products.
Export sales for the three and nine month periods ended September 30, 1998 were
$409,000 and $1,598,000, respectively compared to $624,000 and $2,104,000 for
the corresponding periods of 1997. Sales to the Company's largest single
customer were approximately 27% and 26% of total sales for the nine month
periods ended September 30, 1998 and 1997, respectively.
Gross Profit
Gross profit as a percentage of sales was 36.5% and 36.9% during the three and
nine months ended September 30, 1997, respectively as compared to 34.0% and
34.7% for the same periods of 1998. The quarterly and year to date decrease was
due to continued aggressive pricing to maintain and increase sales volume for
the Company's products, the inability to recognize economies of scale within the
production process due to lower than expected sales volume, a price increase
implemented by the Company's Japanese supplier, on its purchase of valves and an
approximate 20% downward turn in the value of the U.S. dollar as compared to the
Japanese yen in the third quarter of 1998. 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 and the equipment
functionality issues being experienced with the corrugating machines.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the third quarter of 1998 were
$3.1 million as compared to $2.4 million in the third quarter of 1997. Selling,
general and administrative expenses as a percentage of sales were 29.6% in the
1998 third quarter compared to 25.5% in the 1997 third quarter. The net
quarterly increase, in terms of whole dollars and percentage of net sales, is a
result of increased commission expenses due to the nature of the Company's
quarterly sales, increased amortization and travel and related expenses relative
to sales and administration functions and the timing of the reduction of certain
performance related accrued expenses more than offsetting decreases in other
corporate overhead expenses. Additionally, operating costs associated with the
operations of Quail's Arkansas facility and start-up costs related to Quail's
Arizona facility, increased overall selling, general and administrative expenses
for the quarter with a greater impact as a percentage of sales given Quail's
overall limited sales and production capacity at this time..
Selling, general and administrative expenses were $8.8 million for the nine
months ended September 30, 1998, as compared to $7.7 million for the same period
of 1997. Included in selling, general and administrative expenses for the 1998
nine month period were approximately $586,000 of expenses related to the
start-up, administration and initial sales process of Quail's Arkansas and
Arizona facilities, and approximately $132,000 related 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
10
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rendered. Selling, general and administrative expenses, excluding the above
mentioned charges increased by approximately $400,000 over the nine months ended
September 30, 1998 as compared to the 1997 period. The increase is reflective of
increased amortization expenses as a result of the Company's May 1997
acquisition of the plastic flow meter division, increased commission expenses
related to flow meter sales and to the attainment of other recurring business,
coupled with an overall increase in sales related travel and entertainment
expenses. The Company is currently in the process of initiating certain efforts
within its organization to reduce overall overhead and labor expenses for the
balance of 1998 and into 1999.
In connection with the Company's May, 1997 acquisition of the flow meter
division of Universal Flow Monitors, Inc., the Company established a dedicated
Research and Development department. This department is focusing its efforts on
finalizing the development of a full range of sizes for ultrasonic flow meter,
developing continued product and purity enhancements of the vortex shedding
product line and working to develop digital communications between the Company's
flow meters and actuators with the customers computer systems.
Other Income, Interest Expense and Income Taxes
Included in other income for the three and nine month periods ended September
30, 1998 is a gain of $225,000 received as a result of a settlement related to
performance issues, received from the manufacturer of Quail's corrugated pipe
manufacturing equipment. The settlement was in the form of credits to be taken
on future purchases.
Interest expense increased $92,000 and $144,000 in the three and nine month
periods ended September 30, 1998, respectively, as compared to the corresponding
periods of 1997. The overall increase was due to interest expense incurred on
additional Industrial Revenue Bond debt and to operational borrowings due to
lower than expected sales levels for the Company and start up issues for Quail.
Interest income was $1,000 and $48,000 lower in the respective three and nine
month periods ended September 30, 1998 as compared to the corresponding periods
of 1997 as a result of lower overall investable cash.
Income taxes decreased $215,000 in the third quarter of 1998 and decreased
$929,000 for the nine months ended September 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 financing. 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 bills
of lading dates.
In June 1998, the Company and its bank amended its then existing line of credit
agreement 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 Asahi/America, Inc. 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.
11
<PAGE>
Currently, the Company is non-compliant with a financial ratio and is in the
process of obtaining a waiver from its bank. The credit line is for working
capital and merger and acquisition purposes. As of September 30, 1998, there was
$3,005,321 outstanding under the line of credit.
On May 1, 1997, the Company acquired the related assets of the plastic flow
meter division 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 drainage 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
September 30, 1998, the Company had expended approximately $4.2 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 purchased a
second manufacturing facility in Kingman, Arizona, commencing production of
fiber optic cable duct in October, 1998 and anticipating to commence production
of corrugated polyethylene piping in Q'1, 1999. Total project costs for the
Arkansas facility and equipment, which are estimated to be $8 million, are being
financed through the County of Mohave Industrial Development Bonds which were
finalized in August 1998, at which time the Company was reimbursed for the cash
utilized as deposits or payments. These bonds, which total $8 million, bear
interest at 5.65% and are payable in equal monthly installment over 10 years,
beginning in September, 1998.
At September 30, 1998 cash and cash equivalents were $48,000.
The Company used $340,000 of cash flow from operations during the nine months
ended September 30, 1998 as compared to $1,437,000 of cash flow generated from
operations for the comparable 1997 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
certain balance sheet accounts from December 31, 1996 to September 30, 1997 as
compared to December 31, 1997 to September 30, 1998. Accounts receivable at
September 30, 1998 increased $2.1 million from December 31, 1997, mainly due to
the timing of the Company's sales and payments between periods and the first
full quarter of production and sales from Quail. Inventory at September 30,
1998, increased $1.9 million from December 31, 1997, primarily due to lower than
expected sales levels for the Company and the addition of Quail's production
process. For the comparative 1997 period, accounts receivable decreased $425,000
and inventory increased $338,000. The accounts receivable decrease was a result
of concerted collection efforts while 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. Furthermore, accounts payable and accrued expenses
at September 30, 1998 increased $2.2 million from December 31, 1997 as a result
of increased inventory levels and the addition of Quail.
12
<PAGE>
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 cross-collateralized and cross-defaulted with the Company's line
of credit. 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 its line of credit
facility and 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 Compliance. The Year 2000 (Y2K) 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 Y2K may cause systems to process critical financial and
operational information incorrectly. The Company utilizes software and related
technologies throughout its business that could be affected by the date change
in Y2K. The Company has established an internal task force which has developed a
testing and compliance program to ascertain whether and to what extent there may
be a need to update its computer systems to become Y2K compliant. Additionally,
the Company is in the process of communicating with key third party vendors and
customers to ascertain their ability to become compliant. To manage its Y2K
program, the Company has divided its efforts into four program areas:
1)Information Technology (computer hardware, software, and other data exchange
sources); 2)Physical Plant (manufacturing equipment and facilities); 3)Products
(including product development); and 4)Extended Enterprise (suppliers and
customers). For each of these program areas, the Company is using a four-step
approach: 1)Ownership (creating awareness, assigning tasks); 2)Inventory
(listing items to be assessed for Y2K readiness); 3)Assessment (prioritizing the
inventoried items, assessing their Y2K readiness, planning corrective actions,
making initial contingency plans); and 4)Corrective Action Deployment
(implementing corrective actions, verifying implementation, developing,
finalizing and executing contingency plans). As of September 30, 1998, the
Ownership and Inventory steps were essentially complete for all program areas.
The target completion dates for priority items by remaining steps are as
follows: Assessment -- December 1998; Corrective Action Deployment -- September
1999. To date, the Company has achieved approximately forty percent of its
Assessment goals for its four program areas. The Assessment status for each
program area is as follows: 1)Information Technology: Substantially all of the
Company's business information systems (manufacturing, distribution, sales,
financial, and human resources) have been assessed, corrected and verified, and
corrected systems have been/have been identified, to be deployed. Hardware
assessment is in process and on schedule for completion. There can be no
assurance that the Company will complete in a timely manner the testing of such
software/hardware products or the development/installation of any updates
necessary to render such products Y2K compliant. Likewise, there can be no
assurance that the Company will not encounter Y2K problems arising from these
technologies or any other technologies that the Company may acquire in the
future. 2)Physical Plant: Manufacturing equipment assessment is substantially
completed with corrective actions, if necessary, scheduled. Facilities
assessment is in process with continued assessments being made. These efforts
are expected to be completed on schedule. 3)Products: the Company continues to
assess the readiness of its current products. Product assessments are expected
to be completed on time. 4)Extended Enterprise: the Company has begun contacting
its suppliers regarding their Y2K
13
<PAGE>
readiness. The Company's Y2K supplier program includes assessing the readiness
of its suppliers with a particular focus on those considered essential for
prevention of a material disruption of the Company's business operations. The
assessment is ongoing. The Company is also discussing Y2K status with selected
strategic customers. The ability of vendors to supply and customers to purchase
may be affected by Y2K issues, as vendors may be unable to supply and/or
customers unable to purchase. There can be no assurance that the Company will
not experience a disruption in its business as a result of third party
noncompliance, the occurrence of which may have a material adverse effect on the
Company's business, operating results and financial condition. Costs to Address
Y2K Issues: Although the Company does not expect the non-capitalized costs
associated with its Y2K project plan to be material, outside of labor time
incurred by existing employees, there can be no assurance that unidentified Y2K
problems will not cause the Company to incur material expenses in responding to
such problems or otherwise have a material adverse effect on the Company's
business, operating results and financial performance. Capitalizable costs,
including costs of new hardware and software and the related costs of
implementation and installation will approximate $1.6 million. Risks of Y2K
Issues and Contingency Plans: The Company continues to assess the Y2K issues
relating to its physical plant, products, suppliers and customers, as well as
legal risks that may be associated with noncompliance. The Company's contingency
planning process, although currently in the initial discussion stage, will be
intended to mitigate worst-case business disruptions, such as delays in product
delivery, which could potentially result from events such as supply chain
disruptions. As noted above, the company expects its contingency plans to be
complete by September 1999. If there are unidentified dependencies on internal
systems or on key third parties to operate the business, or if any required
modifications are not completed in a timely basis or are more costly to
implement than currently anticipated, the Company's business, financial
condition or results of operations could be materially adversely affected.
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.
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27 Financial Data Schedule
14
<PAGE>
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: November 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 and Accounting Officer and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of Asahi/America, Inc. contained elsewhere in
this quarterly report and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
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<NAME> ASAHI/AMERICA, INC. & SUBSIDIARIES
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