UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT 7
For the transition period from __________ to __________.
COMMISSION FILE NUMBER: 0-13403
AMISTAR CORPORATION
-------------------
(Exact name of small business issuer as specified in its charter)
CALIFORNIA 95-2747332
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
237 Via Vera Cruz
San Marcos, California 92069
---------------------- -----
(Address of principal executive offices) (Zip code)
(760) 471-1700
---------------
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for 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 [ ]
There were 3,080,794 shares of common stock outstanding as of April 27, 2004.
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [X]
AMISTAR CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements..................................................3
Notes to the Unaudited Condensed Financial Statements ................6
Item 2. Management's Discussion and Analysis and Results of Operations.......14
Item 3. Controls and Procedures..............................................17
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.....................................17
2
Part I
ITEM 1. FINANCIAL STATEMENTS
AMISTAR CORPORATION
Condensed Balance Sheets
(In thousands, except share data)
Mar. 31, Dec. 31,
2004 2003
---------- ----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,456 $ 2,439
Restricted cash 60 130
Trade accounts receivable, net of
reserves of $66 (2004) and $76 (2003) 1,391 1,309
Inventories, net of reserves of
$2,192 (2004) and $2,056 (2003) 2,294 2,313
Demonstration equipment 1 53
Prepaid expenses 185 339
---------- ----------
Total current assets 6,387 6,583
Property and equipment, net 3,857 3,764
Other assets 58 66
---------- ----------
$ 10,302 $ 10,413
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 384 $ 321
Accrued liabilities 639 362
Industrial development bonds 2,800 2,900
---------- ----------
Total current liabilities 3,823 3,583
---------- ----------
Shareholders' equity:
Preferred stock, $.01 par value. Authorized
2,000,000 shares; none outstanding -- --
Common stock, $.01 par value. Authorized
20,000,000 shares; 3,080,794 and
3,080,544 shares issued and
outstanding at Mar. 31, 2004 and
Dec. 31, 2003, respectively 31 31
Additional paid-in capital 4,532 4,532
Retained earnings 1,916 2,267
---------- ----------
Total shareholders' equity 6,479 6,830
---------- ----------
$ 10,302 $ 10,413
========== ==========
See accompanying notes to unaudited condensed financial statements.
3
AMISTAR CORPORATION
Condensed Statements of Operations
(Unaudited and in thousands, except per share data)
Three months ended
Mar. 31,
2004 2003
------------ ------------
Net sales $ 3,056 $ 2,769
Cost of sales 2,527 2,221
------------ ------------
Gross profit 529 548
------------ ------------
Operating expenses:
Selling 367 331
General and administrative 395 252
Engineering, research and development 117 107
------------ ------------
879 690
------------ ------------
Loss from Operations (350) (142)
Other income (expense), net -- (3)
------------ ------------
Loss before income taxes (350) (145)
Income taxes 1 1
------------ ------------
Net loss $ (351) $ (146)
============ ============
Loss per common share-
basic and diluted $ (0.11) $ (0.05)
============ ============
Weighted average shares
outstanding, basic and diluted 3,081 3,083
============ ============
See accompanying notes to unaudited condensed financial statements.
4
AMISTAR CORPORATION
Statements of Cash Flows
(Unaudited and in thousands)
Three months ended Mar. 31, 2004 2003
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (351) $ (146)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 88 94
Changes in assets and liabilities:
Trade accounts receivable, net (82) 236
Inventories 19 85
Demonstration equipment 52 --
Prepaid expenses and other assets 162 74
Accounts payable and accrued liabilities 340 101
------------ ------------
Net cash provided by operating activities 228 444
------------ ------------
Cash flows from investing activities-
Purchase of property and equipment (181) (35)
------------ ------------
Cash flows from financing activities:
Redemption of Industrial Development Bonds (100) (100)
Decrease in restricted cash, net 70 70
Repurchase of common stock -- (1)
------------ ------------
Net cash used in financing activities (30) (31)
------------ ------------
Net increase in cash and cash equivalents 17 378
Cash and cash equivalents, beginning of period 2,439 2,383
------------ ------------
Cash and cash equivalents, end of period $ 2,456 $ 2,761
============ ============
Supplemental disclosure of cash flow information-
Cash paid during the period for:
Interest $ 7 $ 7
============ ============
Income taxes $ 4 $ 3
============ ============
See accompanying notes to unaudited condensed financial statements.
5
AMISTAR CORPORATION
Notes to Condensed Financial Statements
(Unaudited)
(1) BUSINESS AND CURRENT EVENTS
As described in more detail in note 3 of the financial statements, the
Company has decided to enter into the retail market as a provider of newly
developed, innovative equipment. The Company began development of the equipment
and incurred formation costs during the current quarter in anticipation of the
transaction, which closed on April 7, 2004.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
The accompanying unaudited condensed financial statements of the Company
have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated
by the Securities and Exchange Commission and, therefore, do not include all
information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with accounting
principles generally accepted in the United States of America. In the opinion of
the Company, however, the accompanying unaudited condensed financial statements
contain all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the Company's financial position as of March 31,
2004, its results of operations for the three-month periods ended March 31, 2004
and 2003, and its cash flows for the three month periods ended March 31, 2004
and 2003, respectively. The results of operations of the Company for the
three-month period ended March 31, 2004 may not be indicative of future results.
These condensed unaudited financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 2003 as filed with the
Securities and Exchange Commission on March 30, 2004.
6
AMISTAR CORPORATION
Notes to Condensed Financial Statements, continued
(Unaudited)
Inventories
- -----------
Inventories are stated at the lower of cost (first-in, first-out) or market
and include material, labor and manufacturing overhead costs. Inventories
consist of the following (in thousands), net of reserves of $2,192 and $2,056 at
March 31, 2004 and December 31, 2003, respectively:
Mar. 31 Dec. 31,
2004 2003
------------------------------- -----------------------------
AIA AMS Total AIA AMS Total
Raw Material $ 295 $ 829 $ 1,124 $ 295 $ 817 $1,112
Work In Process 513 83 596 480 92 572
Finished Goods 498 76 574 550 79 629
------------------------------- -----------------------------
Total $ 1,306 $ 988 $ 2,294 $1,325 $ 988 $2,313
=============================== =============================
Earnings Per Common Share
- -------------------------
The Company calculates net loss per share in accordance with SFAS No. 128,
Earnings Per Share. Under SFAS No. 128, basic net earnings (loss) per common
share is calculated by dividing net earnings (loss) by the weighted-average
number of common shares outstanding during the reporting period. Diluted net
earnings (loss) per common share reflects the effects of potentially dilutive
securities where the effect of inclusion of such securities would not be
anti-dilutive. Weighted average shares used to compute net loss per share are
presented below (in thousands):
Three months ended
Mar. 31,
2004 2003
--------------- ---------------
Weighted-average shares, basic 3,081 3,083
Dilutive effect of stock options - -
--------------- ---------------
Weighted-average shares-
basic and diluted 3,081 3,083
=============== ===============
Options to purchase 166,000 and 233,000 shares of potentially dilutive
common stock were excluded from the calculation of diluted net loss per share
for the three months ended March 31, 2004 and 2003 respectively, because the
effects of these instruments were anti-dilutive.
7
AMISTAR CORPORATION
Notes to Condensed Financial Statements, continued
(Unaudited)
Industrial Development Bonds
- ----------------------------
The Company maintains a letter of credit from its bank in support of the
$2,800,000 industrial development bonds, which are secured by substantially all
the assets of the Company. The bonds accrue interest at a variable monthly rate,
and interest was paid at a weighted-average variable rate of 1.05% during the
quarter ending March 31, 2004. On February 1, 2002, the Company paid $1,500,000
to redeem a portion of the industrial development bonds utilizing the restricted
cash balance of $1,452,000 plus an additional $48,000 of unrestricted cash.
Effective March 1, 2002, the Company began making required monthly payments of
$10,000 per month into a sinking fund (restricted cash) for redemption of the
bonds. Redemption will occur in minimum increments of $100,000 as the funds
accrete to the minimum redemption level. The terms of the Reimbursement
Agreement require the Company to make annual payments of $100,000 during 2003
and 2004, and the balance of $2,700,000 in 2005. The first payment of $100,000
was made on January 21, 2003, and the second payment of $100,000 was made on
January 13, 2004.
The Company's stand-by letter of credit reimbursement agreement with its
bank contains certain affirmative financial covenants. At March 31, 2004, the
Company was not in compliance with the tangible net worth and debt service
covenants. The Company received waivers relating to these covenants through
September 30, 2004. The Company has made all required debt service payments on
the bonds. However, based on the uncertainty concerning the Company's ability to
meet the covenant after the waiver expires, and considering that a covenant
violation would constitute an event of default and allow the bank to call the
debt prior to maturity, the entire industrial development bonds balance has been
classified as a current liability in the accompanying balance sheets.
The inability of the Company to return to profitability could result in a
default under the terms of the Union Bank of California Reimbursement Agreement,
which supports the stand-by letter of credit guaranteeing the Company's
performance on the industrial development bonds. In the event the Company
defaults and is unable to present a viable turn-around plan satisfactory to its
bank, such event could cause the bank to require the Company to seek a
substitute guarantor, re-finance the building with alternative financing or sell
the San Marcos, California facility. The inability of the Company to
successfully substitute a guarantor or to re-finance the building could have a
materially adverse effect on the Company's business. The Company will continue
to seek waivers for any covenant violations in the future until a modification
of the covenants can be negotiated.
In the event the bank chooses to no longer forbear, management would
consider several options which include utilizing some portion of cash,
refinancing the building with alternative financing, a sale-leaseback or sale of
the San Marcos, California facility and relocation to a leased facility.
Management believes that it has the ability to execute its alternate plans in
the event that repayment of the Company's industrial development bonds would be
required in the next 12 months, and the Company would have adequate finances to
fund its operating, investing and financing activities during the next 12 months
under either scenario for repayment of its industrial development bonds.
8
AMISTAR CORPORATION
Notes to Condensed Financial Statements, continued
(Unaudited)
Industry Segments and Geographic Information
- --------------------------------------------
The following table summarizes the Company's three operating segments:
Amistar Industrial Automation ("AIA"), which encompasses the manufacture and
distribution of manufacturing machinery, specialty products, and related
accessories, Amistar Manufacturing Services ("AMS"), which encompasses
electronics manufacturing services, and Distributed Delivery Networks ("ddn"),
which encompasses prototype development and start-up operating costs and
anticipated manufacturing and marketing of automation equipment primarily to the
retail market. The Company identifies reportable segments based on the unique
nature of operating activities, customer base and marketing channels.
Information is also provided by major geographical area (dollars in thousands).
AIA
-------------------------------------
United
States Foreign Total AMS ddn Corporate Total
- --------------------------------------------------------------------------------------------------------------- ------------
Three months ended Mar. 31, 2004
Net sales $ 1,174 $ 36 $ 1,210 $ 1,846 $ - $ - $3,056
============ =========== ============ ============ =========== =========== ============
Depreciation and amortization 22 - 22 58 - 8 88
============ =========== ============ ============ =========== =========== ============
Loss from operations 7 - 7 (147) (210) - (350)
============ =========== ============ ============ =========== =========== ============
Total assets 4,462 22 4,484 2,077 - 3,741 10,302
============ =========== ============ ============ =========== =========== ============
Additions to long-lived assets 21 - 21 157 - 3 181
============ =========== ============ ============ =========== =========== ============
Three months ended Mar. 31, 2003
--------------------------------
Net sales $ 593 $ 36 $ 629 $ 2,140 $ - $ - $2,769
============ =========== ============ ============ =========== =========== ============
Depreciation and amortization 29 - 29 58 - 7 94
============ =========== ============ ============ =========== =========== ============
Loss from operations (196) (11) (207) 65 - - (142)
============ =========== ============ ============ =========== =========== ============
Total assets 4,456 70 4,526 2,157 - 3,950 10,633
============ =========== ============ ============ =========== =========== ============
Additions to long-lived assets 35 - 35 - - - 35
============ =========== ============ ============ =========== =========== ============
9
AMISTAR CORPORATION
Notes to Condensed Financial Statements, continued
(Unaudited)
w
Product Warranty Information
The Company provides for the estimated cost of product warranties at the
time revenue is recognized. While the Company engages in extensive product
quality programs and processes, including actively monitoring and evaluating the
quality of its component suppliers, the Company's warranty obligation is
affected by product failure rates and the related material usage, field service
and delivery costs incurred in correcting a product failure. Should actual
product failure rates, material usage, or service delivery costs differ from the
Company's estimates, revisions to the estimated warranty liability would be
required.
Warranty cost and accrual information is as follows for the three months
ended Mar. 31, 2004 and 2003:
Charged to
Period Beginning costs and Ending
Beginning Balance expense Deductions Balance
- --------------------------------------------------------------------------------
2004 $ 37,698 $ 8,787 $ (162) $ 46,323
============ ========== =========== =============
2003 $ 45,876 $ 7,160 $ (7,160) $ 45,876
============ ========== =========== =============
10
AMISTAR CORPORATION
Notes to Condensed Financial Statements, continued
(Unaudited)
Stock-Based Compensation
- ------------------------
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure", which amended SFAS No. 123,
"Accounting for Stock-Based Compensation." The new standard provides alternative
methods of transition for a voluntary change to the fair market value based
method for accounting for stock-based employee compensation. Additionally, the
standard amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. This standard was effective for financial statements
for the year ended December 31, 2002. In compliance with SFAS No. 148, the
Company has elected to continue to follow the intrinsic value method in
accounting for its stock-based employee compensation plan as defined by APB No.
25 and has made the applicable disclosures below.
Had the Company determined employee stock based compensation cost based on
a fair value model at the grant date for its stock options under SFAS 123, the
Company's net loss per share would have been adjusted to the pro forma amounts
for the three months ended March 31, 2004 and 2003 as follows ($ in thousands,
except per share amounts):
Three months ended
Mar. 31,
2004 2003
---- ----
Net loss - as reported $ (351) $ (146)
Stock-Based employee compensation
expense included in reported net
income, net of tax -- --
Total stock-based employee
compensation expense determined
under fair-value-based method for all
rewards, net of tax (3) (5)
------- -------
Pro forma net loss $ (354) $ (151)
======= =======
Loss per share:
Basic, as reported $(0.11) $(0.05)
Diluted, as reported $(0.11) $(0.05)
Basic, pro forma $(0.11) $(0.05)
Diluted, pro forma $(0.11) $(0.05)
11
AMISTAR CORPORATION
Notes to Condensed Financial Statements, continued
(Unaudited)
Stock option activity during the three months ending March 31, 2004 was as
follows:
NUMBER WEIGHTED AVERAGE
(SHARES IN THOUSANDS) OF SHARES EXERCISE PRICE
- --------------------- --------- --------------
Outstanding, Dec 31, 2003 232,750 $ 1.42
Granted -- --
Exercised 250 0.81
Expired
(67,000) 2.13
----------- ---------
Outstanding, Mar. 31, 2004
165,500 $ 1.13
=========== =========
The range of exercise prices on options outstanding at March 31, 2004 are as
follows:
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life (in Exercise Number Exercise
Price Outstanding Years) Price Exercisable Price
- -------------- ----------- ----------- -------- ----------- --------
$0.81 - $1.00 85,750 4.00 $ 0.82 21,250 $ 1.42
$1.01 - $1.75 65,750 0.70 1.25 65,750 0.99
$1.76 - $2.50 8,000 0.60 2.31 8,000 2.31
$2.51 - $2.69 6,000 1.10 2.69 4,500 3.58
- -------------- ----------- ----------- -------- ----------- --------
$0.81 - $2.69 165,500 2.40 $ 1.13 99,500 $ 1.87
============== =========== =========== ======== =========== ========
12
AMISTAR CORPORATION
Notes to Condensed Financial Statements, continued
(Unaudited)
(3) SUBSEQUENT EVENT
The Company incorporated a new subsidiary, Distributed Delivery Networks
Corporation ("ddn") on February 3, 2004, through which it plans to market and
install newly developed, innovative equipment for use by retail stores.
ddn was capitalized with $255 from the Company and the two third parties
(one is now an employee of ddn and the other retained as a consultant -
hereafter called "ddn Founders") in exchange for common stock. On April 7, 2004,
the Company and the ddn Founders entered into definitive agreements related to
the ownership and management of ddn, and commenced business on that day. The ddn
Founders purchased a 49% restricted interest in ddn. The restrictions lapse
ratably over a thirty-six month period. The Company retains a repurchase right,
in the event of termination of the ddn Founders as employees or as consultants,
under certain conditions, which also lapses ratably over the thirty-six month
period. The Company plans to retain an appraisal firm during the second quarter
of 2004 for the purpose of obtaining a valuation of ddn as of April 7, 2004 to
determine compensation expense, if any, to the ddn Founders for any excess of
value received over the purchase price of their shares.
The Company will finance the subsidiary's operations with a $1,300,000
loan. The loan is unsecured, with a term of ten years, at an interest rate of
4.61% with payments beginning on April 7, 2008. On such date, all accrued
interest will be added to the principal amount outstanding. That balance shall
be repaid in seventy-two (72) substantially equal monthly installments beginning
on April 7, 2008 and continuing until April 7, 2014, when the entire outstanding
balance will be due and payable in full.
Due to the lack of substantial capitalization by the ddn Founders, the
Company will bear 100% of the losses of ddn and as a result bears significant
risk of loss of the principal and accrued interest related to the aforementioned
loan.
The loan agreement provides for a bonus to the ddn Founders equal to the
interest accrued on the note and a redemption option exercisable by the Company
during the six-month period beginning April 7, 2004 by which the Company has a
right to redeem its shares and require repayment of the note if certain
performance conditions are not met.
The Company has also entered into a manufacturing and development agreement
with ddn to develop and manufacture the equipment.
ddn is a newly formed start up company and is subject to the general risks
and uncertainties associated with a start-up enterprise, including the
substantial risk of business failure.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward Looking Statements
- --------------------------
This Quarterly Report contains forward-looking statements within the
meaning of the Private Securities Reform Act of 1995, particularly statements
regarding market opportunities, customer acceptance of products, gross margin
and marketing expenses. These forward-looking statements involve risks and
uncertainties, and the cautionary statements set forth below identify important
factors that could cause actual results to differ materially from those in any
such forward-looking statements. Such factors include, but are not limited to,
adverse changes in general economic conditions, including changes in the
specific markets for the Company's products, product availability, decreased or
lack of growth in the electronics industry, adverse changes in customer order
patterns, increased competition, lack of acceptance of new products, pricing
pressures, lack of success in technological advancements, risks associated with
foreign trade and other factors.
RESULTS OF OPERATIONS
FIRST QUARTER 2004 COMPARED TO FIRST QUARTER 2003
Net Sales
- ---------
Net sales for the three months ended March 31, 2004 were $3,056,000
compared to $2,769,000 for the same period in the prior year, an increase of
10.4%. The sales growth primarily was from an increase in AIA sales.
During the current quarter, the Amistar Industrial Automation ("AIA")
division shipped three of its DataPlace 100LP machines, three of its DataPlace
SBL machines, and two of its distributed circuit board assembly machines,
compared to one DataPlace 1M machine and one DataPlace SBL machine sold during
the first quarter of 2003.
Sales of distributed circuit board assembly machine accessories and spare
parts grew 460% over the first quarter of 2003, from $80,000 to $448,000, as the
Company sold two machines during the first quarter of 2004 compared to no sales
during the first quarter of 2003.
Sales of AIA custom factory automation and other products in the first
quarter of 2004 primarily included two minor specialty machines and machine shop
services similar to the first quarter of 2003. The AIA division has in
production four custom engineered machines to fulfill contracts received from
customers doing business in the eyeglass lens, RF identification, landscaping
products, and medical optical manufacturing industries.
The Amistar Manufacturing Services division ("AMS") sales declined 13.7% to
$1,846,000 for the three months ended March 31, 2004, from $2,140,000 for the
same period in 2003 primarily due to reduced orders from two major customers,
one of which, the Company expects to lose to an out-of-state manufacturing
services provider.
Gross Profit
- ------------
Gross profit decreased $19,000, or 3%, to $529,000 during the quarter ended
March 31, 2004 compared to $548,000 in the same period in 2003. This decrease
was due primarily to the decline in AMS sales and partially offset by the
increase in AIA sales.
14
AMISTAR CORPORATION
Results of Operations, Continued
Selling Expenses
- ----------------
Selling expenses increased 11% in the current quarter from the first
quarter of 2003, from $331,000 to $367,000 primarily due to commissions accrued
on increased machine sales.
General and Administrative Expenses
- -----------------------------------
The general and administrative expenses increased 57%, from $252,000 in the
first quarter of 2003 to $395,000 in the first quarter of 2004 primarily due to
ddn formation costs.
Engineering, Research and Development Expenses
- ----------------------------------------------
Engineering, research and development expenses increased 9% in the current
quarter over the same period in 2003, from $107,000 to $117,000. The primary
utilization of the engineering staff has been in support of custom factory
engineering design activities and development of the new ddn machine. The
engineering group provided billable engineering design services and allocated
$30,000 in engineering labor costs to work-in-process inventory and $43,000 to
cost of sales related to design contracts, most of which is expected to be
complete in the second quarter of 2004. During the quarter, costs of $82,000
were incurred related to development of the first ddn machine.
Income Taxes
- ------------
The $1,000 provision represents the Company's minimum tax liability to
various states.
A 100% valuation allowance was recorded against deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash provided from operating activities was $228,000 for the
three months ended March 31, 2004, a $216,000 decrease over the cash provided
from operating activities of $444,000 for the three months ended March 31, 2003.
The decline was due to the increased loss, which included ddn formation and
development costs, increased investments in AMS assembly equipment and partially
offset by a greater increase in accounts payable and a greater decrease in
prepaid expenses.
The Company maintains a letter of credit from its bank in support of the
$2,800,000 industrial development bonds, which are secured by substantially all
the assets of the Company. The bonds accrue interest at a variable monthly rate,
and interest was paid at a weighted-average variable rate of 1.05% during the
quarter ending March 31, 2004. On February 1, 2002, the Company paid $1,500,000
to redeem a portion of the industrial development bonds utilizing the restricted
cash balance of $1,452,000 plus an additional $48,000 of unrestricted cash.
Effective March 1, 2002, the Company began making required monthly payments of
$10,000 per month into a sinking fund (restricted cash) for redemption of the
bonds. Redemption will occur in minimum increments of $100,000 as the funds
accrete to the minimum redemption level. The terms of the Reimbursement
Agreement require the Company to make annual payments of $100,000 during 2003
and 2004, and the balance of $2,700,000 in 2005. The first payment of $100,000
was made on January 21, 2003, and the second payment of $100,000 was made on
15
AMISTAR CORPORATION
Liquidity and Capital Resources, continued
January 13, 2004. The Company's stand-by letter of credit reimbursement
agreement with its bank contains certain affirmative financial covenants. At
March 31, 2004, the Company was not in compliance with the tangible net worth
and debt service covenants. The Company received waivers relating to these
covenants through September 30, 2004. The Company has made all required debt
service payments on the bonds. However, based on the uncertainty concerning the
Company's ability to meet the covenant after the waiver expires, and considering
that a covenant violation would constitute an event of default and allow the
bank to call the debt prior to maturity, the entire industrial development bonds
balance has been classified as a current liability in the accompanying balance
sheets.
The inability of the Company to return to profitability could result in a
default under the terms of the Union Bank of California Reimbursement Agreement,
which supports the stand-by letter of credit guaranteeing the Company's
performance on the industrial development bonds. In the event the Company
defaults and is unable to present a viable turn-around plan satisfactory to its
bank, such event could cause the bank to require the Company to seek a
substitute guarantor, re-finance the building with alternative financing or sell
the San Marcos, California facility. The inability of the Company to
successfully substitute a guarantor or to re-finance the building could have a
materially adverse effect on the Company's business. The Company will continue
to seek waivers for any covenant violations in the future until the Company
returns to profitability and a modification of the covenants can be negotiated.
In the event the bank chooses to no longer forbear, management would
consider several options which include utilizing some portion of cash,
refinancing the building with alternative financing, a sale-leaseback or sale of
the San Marcos, California facility and relocation to a leased facility.
Management believes that it has the ability to execute its alternate plans in
the event that repayment of the Company's industrial development bonds would be
required in 2004 or in 2005 prior to December 1, 2005, and the Company would
have adequate finances to fund its operating, investing and financing activities
through 2004 and 2005 under either scenario for repayment of its industrial
development bonds.
Management believes that as a result of the reduction in the loss in 2003
compared to 2002 and the achievement of positive operating cash flow (defined as
net loss plus depreciation and amortization) for 2003, although the Company
increased its loss in the current quarter over the same quarter in 2003, the
bank's comfort in the Company's ability to continue as a viable company and
service its debt has improved greatly and that the bank more than likely will
continue to forbear until December 1, 2005 when the bond term expires. The
Company expects to refinance the building when the bonds come due in December
2005, with a conventional fully amortized loan from a new lender at rates in
line with the current market for such a loan.
During April 2004, the Company made a $1,300,000 loan from existing cash on
hand to ddn to fund machine development and start-up operations. The Company
expects ddn to expend approximately $1,200,000 of this amount during 2004. While
the Company's cash position will decrease significantly as a result of
utilization of the loan proceeds, the Company believes it will have sufficient
remaining cash on hand to fund its operations. The Company's $1,300,000 loan to
ddn to fund the new venture is subject to significant risks and uncertainties of
success while ddn executes its plan to market newly developed, innovative
equipment for use by retail stores.
The Company's primary sources of liquidity consist of cash and cash
equivalents and working capital. If the bank continues to grant waivers on the
irrevocable letter of credit reimbursement agreement, the Company believes that
its cash and cash equivalents provided from operations and cash and cash
equivalents balances at March 31, 2004 will be adequate
16
AMISTAR CORPORATION
Liquidity and Capital Resources, continued
to support its operating, investing and financing requirements for the next
twelve month period. In the event the bank chooses to forebear no longer,
management would consider several options which include utilizing some portion
of cash, re-financing the SanMarcos, California building with alternative
financing, a sale-leaseback or saleof the San Marcos, California facility and
relocation to a leased facility.Management believes that it has the ability to
execute its alternate plans in the event that payment of the Company's
industrial bonds would be required in 2004, and the Company would have adequate
finances to fund its operating,investing and financing activities during the
next twelve month period under either scenario for repayment of its Industrial
Bonds.
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was
performed, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to the Securities Exchange Act of 1934, as amended. Based
upon that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were effective. There have been no changes in
our internal controls over financial reporting identified in connection with the
evaluation referred to above that occurred during our fourth fiscal quarter that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART II. OTHER INFORMATION
ITEMS 1-5 Non-Applicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Certifications of the Company's President and Chief
Financial Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act
32.1 Certifications of the Company's President and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act
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AMISTAR CORPORATION
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.
Dated: May 5, 2004
AMISTAR CORPORATION
By /s/ Gregory D. Leiser
---------------------------------
Gregory D. Leiser
Vice President Finance and Chief
Financial Officer (Principal
Financial and Accounting Officer)
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