<PAGE>
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, 1999
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 3,405,000 shares of common stock outstanding at May 1, 1999.
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
Consolidated Balance Sheets- December 31, 1998 and
March 31, 1999 2
Consolidated Statements of Operations - Three
Months ended March 31, 1998 and 1999 3
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 1998 and 1999 4
Notes to Consolidated Financial Statements 5
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3 - Quantitative and Qualitative Disclosure About
Marker Risk 14
PART II OTHER INFORMATION
Item 2 - Legal Proceedings 14
Item 6 14
SIGNATURES 15
</TABLE>
1
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,057 $ 2,130
Restricted Cash 2,855 1,183
Accounts receivable, less reserves of $257 at December 31, 1998
and $357 at March 31, 1999 6,155 5,474
Inventories 11,373 10,463
Prepaid expenses and other current assets 1,264 1,550
------- -------
Total current assets 22,704 20,800
PROPERTY AND EQUIPMENT, NET 20,200 21,777
OTHER ASSETS
Goodwill, net of accumulated amortization of $1,968 at
December 31, 1998 and $2,043 at March 31, 1999 2,156 2,081
Other, net 3,164 3,111
------- -------
Total other assets 5,320 5,192
------- -------
$48,224 $47,769
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Demand note payable to bank $ 4,640 $ 3,850
Current portion of MIFA obligations 150 160
Current portion of GECPF obligations 1,252 1,252
Current portion of capital lease obligations 331 326
Accounts payable 5,826 5,155
Accrued expenses 1,679 2,380
Deferred Revenue -- 67
Deferred income taxes 517 517
------- -------
Total current liabilities 14,395 13,707
------- -------
MIFA OBLIGATIONS, LESS CURRENT PORTION 3,465 3,305
------- -------
GECPF OBLIGATIONS, LESS CURRENT PORTION 10,328 10,072
------- -------
CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION 522 447
------- -------
DEFERRED REVENUE, LESS CURRENT PORTION -- 315
------- -------
DEFERRED INCOME TAXES 754 754
------- -------
COMMITMENTS -- --
STOCKHOLDERS' EQUITY
Common Stock 13,721 13,779
Additional paid-in capital 579 579
Retained Earnings 4,617 4,951
------- -------
18,917 19,309
------- -------
Less-Note receivable from stockholder/officer 157 140
------- -------
Total stockholders' equity 18,760 19,169
------- -------
$48,224 $47,769
------- -------
------- -------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
1998 1999
------------ -------------
<S> <C> <C>
Net sales $ 8,096 $ 10,723
Cost of sales 5,114 6,681
----------- -----------
Gross Profit 2,982 4,042
Selling, general and administrative expenses 2,840 3,554
Research and development expenses 62 67
Litigation settlement (Note 11) -- (400)
----------- -----------
Income from operations 80 821
Interest expense, net 80 259
----------- -----------
Income before provision for income taxes -- 562
Provision for income taxes 2 228
----------- -----------
Net Income(loss) before cumulative effect of a
change in accounting principle $ (2) $ 334
----------- -----------
----------- -----------
Cumulative effect of a change in
accounting principle, net of income taxes
of $59 $ (88) $ --
----------- -----------
----------- -----------
Net Income (Loss) $ (90) $ 334
----------- -----------
----------- -----------
Basic and diluted earnings per share before
cumulative effect of change in accounting
principle $ (0.00) $ 0.10
----------- -----------
----------- -----------
Basic and diluted (loss) per share effect of
cumulative effect of change in accounting
principle, net of income taxes $ (0.03) $ --
----------- -----------
----------- -----------
Basic and diluted earnings (loss) per share $ (0.03) $ 0.10
----------- -----------
----------- -----------
Weighted average number of shares outstanding 3,370,169 3,405,000
----------- -----------
----------- -----------
Weighted average number of shares outstanding,
assuming dilution 3,370,169 3,405,000
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1998 1999
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) $ (90) $ 334
Cumulative effect of change in accounting principle, net of income
taxes of $59 88 --
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 394 598
Changes in assets and liabilities
Accounts receivable 408 681
Inventories (581) 911
Prepaid expenses and other current assets (8) (286)
Accounts payable 268 (671)
Accrued expenses (361) 700
Deferred revenue -- 381
----------- ------------
Net cash provided by operating activities 118 2,648
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (432) (278)
Increase in others assets (59) (40)
----------- ------------
Net cash used in investing activities (491) (318)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments on demand note payable to bank -- (790)
Payments on MIFA obligations (145) (150)
Payments on GECPF obligations (108) (313)
Payments on capital lease obligations (67) (80)
Proceeds from note receivable from stockholder/officer 18 18
Proceeds from stock issued under ESPP 59 58
Proceeds from reimbursement of amounts financed under GECPF 311 --
Proceeds from sales-leaseback financing 267 --
----------- ------------
Net cash provided by (used in) financing activities 335 (1,257)
----------- ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (38) 1,073
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 916 1,057
----------- ------------
----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 878 $ 2,130
----------- ------------
----------- ------------
SUPPLEMENTAL CASH FLOW DISCLOSURES: Cash paid during the period for:
Interest $ 122 $ 392
----------- ------------
----------- ------------
Income taxes $ 136 $ 34
----------- ------------
----------- ------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of assets under capital lease obligations $ 141 $ --
----------- ------------
----------- ------------
Acquisition of equipment under GECPF bond financing $ 824 $ --
----------- ------------
----------- ------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
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 Asahi/America, Inc. and Subsidiaries (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, 1998. 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
Asahi/America, Inc. (AAI) and its wholly-owned subsidiaries, Asahi Engineered
Products, Inc.(AEP) and Quail Piping Products, Inc. (Quail). 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 bills.
4. INVENTORIES
AAI accounts for inventories using the lower of last-in, first-out (LIFO) cost
or market value. Quail accounts for inventories using the lower of first-in,
first-out (FIFO) cost or market value. The components of inventory are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
---- -----
<S> <C> <C>
Raw materials $ 909 $ 925
Finished goods 10,055 9,201
LIFO surplus 409 337
------- -------
Total $11,373 $10,463
------- -------
------- -------
</TABLE>
5. EARNINGS PER SHARE
In accordance with the Statement of Financial Accounting Standards (SFAS) No.
128, EARNINGS PER SHARE, 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.
5
<PAGE>
Basic and diluted earnings (loss) per share were calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
1998 1999
---- ----
<S> <C> <C>
Basic-
Net income (loss) $ (90,472) $ 334,102
----------- -------------
----------- -------------
Weighted average common shares outstanding 3,370,169 3,405,000
Diluted-
Effect of dilutive securities -- --
Stock options -- --
----------- -------------
Weighted average common shares
outstanding, assuming dilution 3,370,169 3,405,000
----------- -------------
Basic earnings (loss) per share $ (0.03) $ 0.10
----------- -------------
----------- -------------
Diluted earnings (loss) per share $ (0.03) $ 0.10
----------- -------------
----------- -------------
</TABLE>
As of March 31, 1998 and 1999, 394,331 and 412,461 options, respectively, were
outstanding but not included in the diluted weighted average common share
calculation as the effect would have been antidilutive.
6. ACCOUNTING FOR START-UP COSTS
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
but provides for early adoption, requires that the costs of start-up activities,
including organization costs, be expensed as incurred. Initial adoption of SOP
98-5 should be reported as a cumulative effect of a change in accounting
principle. During the quarter ended December 31, 1998 the Company adopted the
provisions of SOP 98-5. In accordance with the provisions of SFAS No. 16, PRIOR
PERIOD ADJUSTMENTS, prior year interim periods have been restated, adopting the
provisions of SOP 98-5 as of January 1, 1998, so as to include the portion of
the item that is directly related to the Company's business in the determination
of net income in the first interim period of that year. As such, the Company
restated 1998 first quarter results to record a net charge to income of $88,000
(net of income taxes of $59,000) for previously capitalized start-up costs,
reflected as a cumulative effect of a change in accounting principle.
Subsequently recorded amortization expense on these start-up costs has been
reversed and subsequent additions to start-up costs have been expensed.
7. REVOLVING CREDIT LINE
In June 1998, the Company and its bank executed a new loan agreement for an
$11,000,000 secured, committed revolving line of credit (the Committed Line).
The Committed Line is secured by substantially all assets of AAI 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%. The Company is required to maintain certain financial ratios, including,
among others, minimum working capital, debt service and tangible net worth. The
credit line is for working capital and merger and acquisition purposes.
6
<PAGE>
In February, 1999, the Committed Line was retroactively amended as of December
31, 1998. The amended agreement provided that the maximum amount of borrowings,
including issued letters of credit, which may at any time be outstanding, be the
lesser of $11 million or the sum of 80% of qualified accounts receivable and 50%
of eligible inventory, as defined. The interest on additional borrowings is at
the prime rate plus 1%. The Company is required to maintain certain financial
ratios, including, among others, minimum working capital, debt service and
tangible net worth, as defined in the amended agreement. The Company was in
compliance with these covenants as of March 31, 1999. As of March 31, 1999,
there was $3,850,000 outstanding under the line of credit.
8. CONCENTRATION OF CREDIT RISK
Sales to the Company's two major domestic customers during the three month
period ended March 31, 1999 were approximately 29% and 15% of total sales, as
compared to 27% for the Company's one major customer for the same period of
1998. Export sales as a percent of total sales during the first quarter were
approximately 3.9% and 6.9% in 1999 and 1998, respectively.
9. BUSINESS SEGMENTS
SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS No. 131 also establishes standards for related disclosures
about products and services and geographic areas. Operating segments are
identified as components of an enterprise about which separate discrete
financial information is available for evaluation by the chief operating
decision maker, or decision making group, in making decisions on how to allocate
resources and assess performance. The Company views its operations and manages
its business as two segments, AAI and Quail, as being strategic business units
that offer different products. The Company evaluates the performance of its
operating segments based on revenues from external customers, net income before
provision from income taxes, total assets and other balance sheet information.
Summarized financial information concerning the Company's reportable segments is
as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AAI QUAIL ELIMINATING CONSOLIDATED
<S> <C> <C> <C> <C>
Revenues from external customers $ 8,534,615 $ 2,216,148 $ (28,249) $ 10,722,514
Net income before provision for income taxes 163,020 398,968 -- 561,988
Net Income 94,722 239,380 -- 334,102
Accounts receivable, net 4,619,009 854,966 -- 5,473,975
Inventory, net 9,260,993 1,202,203 -- 10,463,196
Property & Equipment, net 9,112,748 12,663,753 -- 21,776,501
Total assets 35,585,776 16,418,080 (4,235,088) 47,768,768
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AAI QUAIL ELIMINATING CONSOLIDATED
Revenues from external customers $ 8,096,131 $ -- $ -- $ 8,096,131
Net income before provision for income taxes 104,010 (104,287) -- (277)
Net Income 20,036 (110,508) -- (90,472)
Accounts receivable, net 3,802,737 1,873 -- 3,804,610
Inventory, net 9,885,922 31,179 -- 9,917,101
Property & Equipment, net 9,894,329 2,950,251 -- 12,844,580
Total assets 30,657,269 3,064,167 (557,312) 33,164,124
</TABLE>
7
<PAGE>
10. NEW ACCOUNTING STANDARDS
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.
11. LITIGATION SETTLEMENT
In July 1997, the United States Patent and Trademark Office reconfirmed the
validity of a patent owned by the Company. In August 1997, the Company
instituted a patent infringement suit in the United States District Court in New
York against a competitor. In the fourth quarter of 1997 and first quarter of
1998, the Company incurred approximately $400,000 and $132,000, respectively, in
legal expenses related to this patent issue. These costs were included in
selling, general, and administrative expense. In February 1999, the Court ruled
in favor of the Company as it upheld the validity of the Company's patent. The
Court referred the case to a Magistrate Judge for an inquest hearing, scheduled
for March 5, 1999 and directed a determination as to damages to be completed
within three months of the hearing. On March 8, 1999, the Company and its
competitor reached an amicable settlement of this case. This settlement included
monetary consideration of $500,000 paid by the competitor to the Company, as
well as the granting by the Company to the competitor of a nonexclusive
eight-year license for this patent at $75,000 per year, discounted to $400,000
and paid to the Company in March 1999. Included in the accompanying statement of
operations is $400,000 related to monetary consideration paid to the Company
with the balance of $100,000 related to additional legal fees, included in
accrued expenses in the accompanying balance sheet. Included in deferred revenue
in the accompanying balance sheet is the license portion of the settlement, to
be recognized over the related term.
8
<PAGE>
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 variety of environmentally sensitive and
industrial applications including semiconductor manufacturing, chemical
processing, waste and water treatment processing and pharmaceutical
manufacturing, as well as for use in mining, aquarium and other industries.
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 and sales representatives 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
duct pipe for fiber optic cable for use by the telecommunications industry.
Quail's first manufacturing facility, for which limited production commenced in
the Spring of 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. Limited production of
corrugated pipe in the Arkansas facility commenced in the Spring of 1998, with
full production by November, 1998, while full production of fiber optic cable
duct in the Arizona facility commenced in October 1998. Production of corrugated
pipe began in April of 1999 at the Arizona facility. 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 opportunity to
increase sales of the Company's distributed products.
9
<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
MARCH 31,
-------------------------------
1998 1999
------------- ---------------
<S> <C> <C>
NET SALES 100.0% 100.0%
COST OF SALES 63.2% 62.3%
GROSS PROFIT 36.8% 37.7%
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 35.1% 33.2%
RESEARCH AND DEVELOPMENT EXPENSES 0.8% 0.6%
LITIGATION SETTLEMENT 0.0% -3.7%
INCOME FROM OPERATIONS 0.9% 7.6%
INTEREST EXPENSE, NET 0.9% 2.4%
INCOME BEFORE PROVISION FOR INCOME TAXES 0.0% 5.2%
PROVISION FOR INCOME TAXES 0.0% 2.1%
NET INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 0.0% 3.1%
NET INCOME -1.1% 3.1%
</TABLE>
NET SALES
Net sales were $10.7 million for the three months ended March 31, 1999 as
compared to $8.1 million for the three months ended March 31, 1998. This
increase was mainly due to sales of fiber optic cable duct pipe and corrugated
polyethylene pipe manufactured by the Company's wholly owned subsidiary, Quail
Piping Products, Inc. Sales of the AAI's core products increased by
approximately 0.5% in the first quarter of 1999 as compared to the first quarter
of 1998 due to a slight increase in daily business.
Export sales for the three months ended March 31, 1999 were $420,000 compared to
$568,000 for the corresponding period of 1998. For the three months ended March
31, 1999, one customer accounted for approximately 29% of sales while another
customer accounted for approximately 15% of sales.
GROSS PROFIT
Gross profit as a percentage of sales was 36.8% during the three months ended
March 31, 1998, as compared to 37.7% for the same period of 1999. The increase
was a result of efficient manufacturing processes with Quail and due to the fact
that Quail's sales of duct pipe are on a tolling basis, as much of the required
material is supplied by the end customer. This increase was offset by a decrease
in AAI's overall gross profit which was due to continued aggressive pricing to
maintain and increase sales volume, a price increase implemented by the
Company's Japanese supplier on its purchase of valves and the overall lower
value of the U.S. dollar as compared to the Japanese yen as compared to the year
ago period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the first quarter of 1999 were
$3.6 million as compared to $2.8 million in the first quarter of 1998. Selling,
general and administrative expenses as a percentage of
10
<PAGE>
sales were 33.2% in the 1999 first quarter, a decrease from 35.1% in the 1998
first quarter. The increase in overall expenses was primarily due to the selling
and administrative support for Quail's sales and operations.
In connection with the Company's 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 the ultrasonic flow meter and on
the development of other AAI products.
In February 1999, the Court ruled in favor of the Company with respect to its
previously filed patent infringement lawsuit, as it upheld the validity of the
Company's patent. In March, 1999, the Company and its competitor reached an
amicable settlement of this case. This settlement included monetary
consideration from the competitor to the Company, as well as the granting by the
Company of a nonexclusive license for this patent to the competitor, totaling
$900,000, which was paid to the Company in March 1999. Included in the statement
of operations is $400,000 related to the recovery of past damages. Further, the
Company has recorded deferred revenue related to the royalty agreement reached
as part of the settlement.
INTEREST EXPENSE AND INCOME TAXES
Interest expense increased $214,000 in the first quarter of 1999 as compared to
the corresponding period of 1998. The overall increase was due to interest
expense incurred on additional Industrial Revenue Bond debt and to operational
borrowings on the Company's line of credit. Interest income was $35,000 higher
in the first quarter of 1999 as compared to the first quarter of 1998 as a
result of increased level of cash held in the bank and restricted cash held for
the bond financing.
The provision for income taxes increased by $226,000 from the first quarter of
1998 to the first quarter of 1999.
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 $8 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 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 AAI 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 is 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
March 31, 1999, there was $3,850,000 outstanding under the line of credit. In
February, 1999, this loan agreement was retroactively amended. The amended
agreement provides for the maximum amount of borrowings, including issued
letters of credit, which may at any time be outstanding, be the lesser of $11
million or the sum of 80% of qualified accounts receivable and 50% of eligible
inventory, as defined. The interest on new borrowings is at the prime rate plus
1%. The Company is required to maintain certain financial ratios, including,
among others, minimum working capital, debt service and tangible net worth, as
defined in the amended agreement. The Company was in compliance with these
covenants as of March 31, 1999.
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
11
<PAGE>
applications and polyethylene fiber optic duct pipe for use in the
telecommunications industry. Quail's first manufacturing facility, for which
limited production commenced in the Spring, 1998, is located in Magnolia,
Arkansas. The facility and manufacturing equipment are being financed by
Arkansas Industrial Revenue Bonds (the "Arkansas Bonds") totaling $4.3 million.
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, the Company and Quail purchased
a second manufacturing facility in Kingman, Arizona, commencing production of
fiber optic cable duct in October, 1998 and corrugated polyethylene piping in
April,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 (the "Arizona Bonds") which were finalized in
August 1998. 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. As of March 31, 1999, the Company had expended approximately $6.7 million
in connection with the purchase of the facility and equipment for use in Quail's
Arizona operations. In accordance with both the Arkansas Bonds and the Arizona
Bonds, the Company is required to maintain certain financial ratios, including,
among others, minimum working capital, debt service and tangible net worth, as
defined. The Company was in compliance with these covenants as of March 31,
1999.
At March 31, 1999 cash and cash equivalents were $2.1 million.
The Company generated $2.6 million of cash flow from operations during the three
months ended March 31, 1999 as compared to $118,000 for the comparable 1998
period. The increase is due to the higher net income level in the 1999 period as
compared to the 1998 period coupled with lower overall working capital
requirements in 1999 as compared to 1998. Inventory at March 31, 1999, decreased
$911,000 from December 31, 1998, primarily due to a lower level of purchases to
support AAI's sales. Accounts receivable at March 31, 1999 decreased $681,00
from December 31, 1998 as a result of the timing of fourth quarter 1998 sales
and strong collections in the first quarter of 1999. From December 31, 1997 to
March 31, 1998, inventory increased $581,000 as a result of the timing of
inventory receipts, additional on-hand inventory as a result of the Company's
May 1, 1997 acquisition of the plastic flow meter division and lower than
expected first quarter 1998 sales level. Further, the Company has deferred
revenue of $381,000 recorded in the 1999 first quarter related to the royalty
agreement reached as part of the patent infringement lawsuit settlement. The
royalty license fee was paid in full in March 1999.
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, as amended. The bonds consist of six separate series each with
differing interest rates and maturities. Interest rates range from 4.2% to 4.3%
and are subject to adjustment in 2004 and 2009. The maximum principal payable in
any one year is $320,000 payable in 2014. The bonds are secured by an
irrevocable letter of credit issued by a bank, which expires in March 2004. This
letter of credit is secured by substantially all assets of AAI and does not
affect the availability under AAI's revolving credit line. As of March 31, 1999,
the Company had $3,465,000 outstanding related to the MIFA obligations.
The Company believes that its current funds together with its line of credit
facility and cash generated from 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
12
<PAGE>
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 December 31, 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 - May 1999; Corrective Action Deployment -- September 1999. To date,
the Company has achieved approximately fifty 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 or 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 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.
13
<PAGE>
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 an exclusive contract of supply and
distribution in defined territories with AOC that extends 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, 1998, the Company
had purchased approximately $81.8 million of product. 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. The contract currently extends through 2004. 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. Although the Company
has had negotiations with AOC regarding extension of the contract, there has
been no agreement reached and there can be no assurance that the agreement will
be extended.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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. In accordance
with Statement of Financial Accounting Standards (SFAS) No. 119, DISCLOSURE
ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS,
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 charges foreign currency transaction gains and
losses to operations in accordance with SFAS No. 52, FOREIGN CURRENCY
TRANSLATION.
PART II OTHER INFORMATION
Item 2. Legal Proceedings
In July 1997, the United States Patent and Trademark Office reconfirmed the
validity of a patent owned by the Company. In August 1997, the Company
instituted a patent infringement suit in the United States District Court in New
York against a competitor. In the fourth quarter of 1997 and first quarter of
1998, the Company incurred approximately $400,000 and $132,000, respectively, in
legal expenses related to this patent issue. These costs were included in
selling, general, and administrative expense. In February 1999, the Court ruled
in favor of the Company as it upheld the validity of the Company's patent. The
Court has referred the case to a Magistrate Judge for an inquest hearing,
scheduled for March 5, 1999 and directed a determination as to damages to be
completed within three months of the hearing. On March 8, 1999, the Company and
its competitor reached an amicable settlement of this case. This settlement
included monetary consideration from the competitor to the Company, as well as
the granting by the Company of a nonexclusive license for this patent to the
competitor, totaling $900,000, which was paid to the Company in March 1999.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27 Financial Data Schedule
27a Financial Data Schedule, restated
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: May 11, 1999 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
15
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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