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 June 30, 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 92078
(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 3,093,294 shares of common stock outstanding as of July 30, 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
Consolidated Financial Statements..................................6
Item 2. Management's Discussion and Analysis
and Results of Operations..........................................14
Item 4. Controls and Procedures.............................................18
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................19
Part I
Item 1. Financial Statements
Amistar Corporation
Condensed Consolidated Balance Sheets
(Unaudited and in thousands, except share data)
Jun. 30, Dec. 31,
2004 2003
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 1,849 $ 2,439
Restricted cash 90 130
Trade accounts receivable, net of
reserves of $66 (2004) and $74 (2003) 1,198 1,309
Inventories, net of reserves of
$2,138 (2004) and $2,056 (2003) 2,489 2,313
Demonstration equipment 1 53
Prepaid expenses 127 339
-------- --------
Total current assets 5,754 6,583
Property and equipment, net 3,827 3,764
Other assets 53 66
-------- --------
$ 9,634 $10,413
======== ========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 284 $ 321
Accrued liabilities 797 362
Industrial development bonds 2,800 2,900
-------- --------
Total current liabilities 3,881 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; 3,082,044 and
3,080,544 shares issued and
outstanding at Jun. 30, 2004 and
Dec. 31, 2003, respectively 31 31
Additional paid-in capital 4,549 4,532
Retained earnings 1,173 2,267
-------- --------
Total shareholders' equity 5,753 6,830
-------- --------
$ 9,634 $10,413
======== ========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
AMISTAR CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited and in thousands, except per share data)
Three months ended Six months ended
Jun. 30 Jun. 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales $ 2,260 $ 2,652 $ 5,316 $ 5,421
Cost of sales 2,022 2,135 4,549 4,366
------------ ------------ ------------ ------------
Gross profit 238 517 767 1,055
------------ ------------ ------------ ------------
Operating expenses:
Selling 424 313 791 643
General and administrative 361 235 756 478
Engineering, research and development 193 43 310 150
------------ ------------ ------------ ------------
978 591 1,857 1,271
------------ ------------ ------------ ------------
Loss from Operations (740) (74) (1,090) (216)
Other income (expense), net (3) (4) (3) (7)
------------ ------------ ------------ ------------
Loss before income taxes (743) (78) (1,093) (223)
Income taxes -- 1 1 2
------------ ------------ ------------ ------------
Net loss $ (743) $ (79) $ (1,094) $ (225)
============ ============ ============ ============
Loss per common share-
basic and diluted $ (0.24) $ (0.03) $ (0.36) $ (0.07)
============ ============ ============ ============
Weighted average shares
outstanding, basic and diluted 3,082 3,081 3,081 3,082
============ ============ ============ ============
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
AMISTAR CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited and in thousands)
Six months ended Jun. 30, 2004 2003
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $(1,094) $ (225)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 188 183
Non-cash compensation expense 16 --
Changes in assets and liabilities:
Trade accounts receivable, net 111 380
Inventories (176) (105)
Demonstration equipment 52 --
Prepaid expenses and other assets 225 132
Accounts payable and accrued liabilities 398 161
-------- --------
Net cash provided by (used in) operating activities (280) 526
-------- --------
Cash flows from investing activities-
Purchase of property and equipment (251) (44)
-------- --------
Cash flows from financing activities:
Redemption of Industrial Development Bonds (100) (100)
Decrease in restricted cash, net 40 40
Exercise of stock options 1 --
Repurchase of common stock -- (5)
-------- --------
Net cash used in financing activities (59) (65)
-------- --------
Net increase (decrease) in cash and cash equivalents (590) 417
Cash and cash equivalents, beginning of period 2,439 2,383
-------- --------
Cash and cash equivalents, end of period $ 1,849 $ 2,800
======== ========
Supplemental disclosure of cash flow information-
Cash paid during the period for:
Interest $ 15 $ 15
======== ========
Income taxes $ 5 $ 3
======== ========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
AMISTAR CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) BUSINESS AND CURRENT EVENTS
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. The initial focus will be on retail pharmacy store automation.
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 for nominal consideration.
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 interest of ddn purchased by the ddn
Founders was valued at approximately $200,000 by the Company. The Company
accounts for the fair value of the ddn Founders interest as a charge to
compensation expense ratably over the thirty-six month restriction period. The
charge to compensation expense totaled $16,000 for the three and six-month
periods ended June 30, 2004.
The Company financed 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.
6
AMISTAR CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
The accompanying unaudited condensed consolidated 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
consolidated financial statements contain all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the Company's
financial position as of June 30, 2004, its results of operations for the three
and six-month periods ended June 30, 2004 and 2003, and its cash flows for the
six month periods ended June 30, 2004 and 2003, respectively. The results of
operations of the Company for the six-month period ended June 30, 2004 may not
be indicative of future results. These unaudited condensed consolidated
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.
7
AMISTAR CORPORATION
Notes to Condensed Consolidated 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 $2,138 and $2,056 at
June 30, 2004 and December 31, 2003, respectively:
Jun. 30, Dec. 31,
2004 2003
------------------------ -------------------------
AIA AMS Total AIA AMS Total
------- ------- ------- ------- ------- -------
Raw Material $ 287 $ 615 $ 902 $ 295 $ 817 $1,112
Work In Process 467 490 957 480 92 572
Finished Goods 494 136 630 550 79 629
------- ------- ------- ------- ------- -------
Total $1,248 $1,241 $2,489 $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 Six months ended
Jun. 30, Jun. 30,
2004 2003 2004 2003
------ ------ ------ ------
Weighted-average shares, basic 3,082 3,081 3,081 3,081
Dilutive effect of stock options -- -- -- --
------ ------ ------ ------
Weighted-average shares-
basic and diluted 3,082 3,081 3,081 3,081
====== ====== ====== ======
Options to purchase 240,000 and 83,000 shares of potentially dilutive
common stock were excluded from the calculation of diluted net loss per share
for the three months ended June 30, 2004 and 2003 respectively, because the
effects of these instruments were anti-dilutive.
8
AMISTAR CORPORATION
Notes to Condensed Consolidated 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 1.08% during
the quarter ending June 30, 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 June 30, 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 unaudited condensed
consolidated 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.
9
AMISTAR CORPORATION
Notes to Condensed Consolidated 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 the Company's subsidiary 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 JUN. 30, 2004
Net sales $ 815 $ 32 $ 847 $ 1,413 $ -- $ -- $ 2,260
======== ===== ======== ======== ===== ====== =========
Depreciation and amortization 25 -- 25 68 -- 7 100
======== ===== ======== ======== ===== ====== =========
Loss from operations (145) (6) (151) (215) (374) -- (740)
======== ===== ======== ======== ===== ====== =========
Total assets 4,108 35 4,143 2,194 840 2,457 9,634
======== ===== ======== ======== ===== ====== =========
Additions to long-lived assets 35 -- 35 19 16 -- 70
======== ===== ======== ======== ===== ====== =========
THREE MONTHS ENDED JUN. 30, 2003
Net sales $ 705 $ 31 $ 736 $ 1,916 $ -- $ -- $ 2,652
======== ===== ======== ======== ===== ====== =========
Depreciation and amortization 26 -- 26 55 -- 8 89
======== ===== ======== ======== ===== ====== =========
Loss from operations (60) (2) (62) (12) -- -- (74)
======== ===== ======== ======== ===== ====== =========
Total assets 4,558 52 4,610 2,039 -- 3,961 10,610
======== ===== ======== ======== ===== ====== =========
Additions to long-lived assets 9 -- 9 -- -- -- 9
======== ===== ======== ======== ===== ====== =========
SIX MONTHS ENDED JUN. 30, 2004
Net sales $ 1,988 $ 69 $ 2,057 $ 3,259 $ -- $ -- $ 5,316
======== ===== ======== ======== ===== ====== =========
Depreciation and amortization 47 -- 47 127 -- 14 188
======== ===== ======== ======== ===== ====== =========
Loss from operations (138) (6) (144) (362) (584) -- (1,090)
======== ===== ======== ======== ===== ====== =========
Additions to long-lived assets 56 -- 56 176 16 3 251
======== ===== ======== ======== ===== ====== =========
SIX MONTHS ENDED JUN. 30, 2003
Net sales $ 1,298 $ 67 $ 1,365 $ 4,056 $ -- $ -- $ 5,421
======== ===== ======== ======== ===== ====== =========
Depreciation and amortization 55 -- 55 113 -- 15 183
======== ===== ======== ======== ===== ====== =========
Loss from operations (256) (13) (269) 53 -- -- (216)
======== ===== ======== ======== ===== ====== =========
Additions to long-lived assets 44 -- 44 -- -- -- 44
======== ===== ======== ======== ===== ====== =========
10
AMISTAR CORPORATION
Notes to Condensed Consolidated Financial Statements, continued
(Unaudited)
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 and
six months ended Jun. 30, 2004 and June 30, 2003:
Charged to
Quarter Beginning costs and Ending
ended Balance expense Deductions Balance
- ----------------------------------------------------------------
6/30/2004 $ 46,323 $ 12,235 $(10,167) $ 48,391
========= ========= ========= =========
3/31/2004 $ 37,698 $ 8,787 $ (162) $ 46,323
========= ========= ========= =========
6/30/2003 $ 45,876 $(20,185) $ 91 $ 25,782
========= ========= ========= =========
3/31/2003 $ 45,876 $ 7,160 $ (7,160) $ 45,876
========= ========= ========= =========
11
AMISTAR CORPORATION
Notes to Condensed Consolidated 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 and six months ended June 30, 2004 and 2003 as follows ($
in thousands, except per share amounts):
Three months ended Six months ended
Jun. 30, Jun. 30,
2004 2003 2004 2003
------- ------- -------- --------
Net loss - as reported $ (743) $ (79) $(1,094) $ (225)
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 (19) (1) (38) (6)
------- ------- -------- --------
Pro forma net loss $ (762) $ (80) $(1,132) $ (231)
======= ======= ======== ========
Loss per share:
Basic, as reported $(0.24) $(0.03) $ (0.36) $(0.07)
Diluted, as reported $(0.24) $(0.03) $ (0.36) $(0.07)
Basic, pro forma $(0.25) $(0.03) $ (0.37) $(0.07)
Diluted, pro forma $(0.25) $(0.03) $ (0.37) $(0.07)
12
AMISTAR CORPORATION
Notes to Condensed Consolidated Financial Statements, continued
(Unaudited)
Stock option activity during the six months ending June 30, 2004 was as follows:
NUMBER WEIGHTED AVERAGE
(SHARES IN THOUSANDS) OF SHARES EXERCISE PRICE FAIR VALUE
- --------------------- --------- ---------------- ------------
Outstanding, Dec 31, 2003 232,750 $ 1.42
Granted 102,000 2.16 $ 1.06
Exercised 1,500 1.03
Expired (87,000) 1.98
--------- ---------
Outstanding, Jun. 30, 2004 246,250 $ 1.39
========= =========
The range of exercise prices on options outstanding at June 30, 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 75,250 3.70 $ 0.82 18,250 $ 0.82
$1.01 - $1.75 65,000 0.40 1.25 65,000 1.25
$1.76 - $2.50 100,000 4.80 2.17 8,000 2.31
$2.51 - $2.69 6,000 0.90 2.69 6,000 2.69
- -------------- ----------- ---------- ---------- ----------- ---------
$0.81 - $2.69 246,250 3.30 $ 1.39 97,250 $ 3.30
============== =========== ========== =========== =========== ==========
13
AMISTAR CORPORATION
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
SECOND QUARTER 2004 COMPARED TO SECOND QUARTER 2003
Net Sales
- ---------
Net sales for the three months ended June 30, 2004 were $2,260,000
compared to $2,652,000 for the same period in the prior year, a decrease of 15%.
The sales decline primarily was due to a decline in AMS sales.
The AIA division sales increased 15% to $848,000 for the three months
ended June 30, 2004, from $736,000 for the same period in 2003.
During the current quarter, the Amistar Industrial Automation ("AIA")
division shipped two of its DataPlace 1M machines, compared to one DataPlace
100LP machine and five DataPlace SBL machines sold during the second quarter of
2003.
Sales of distributed circuit board assembly machine accessories and
spare parts increased 25% over the second quarter of 2003, from $107,000 to
$134,000.
Sales of AIA custom factory automation and other products in the second
quarter of 2004 primarily included two major specialty machines for the medical
optics and eyeglass lens manufacturing industries and machine shop services
similar to the second quarter of 2003.
The Amistar Manufacturing Services division ("AMS") sales declined 26%
to $1,413,000 for the three months ended June 30, 2004, from $1,916,000 for the
same period in 2003 primarily due to reduced orders from a major customer that
moved a substantial portion of its outsourced production out of state. The
Company was unable to replace the decline in sales during the current quarter,
due to product design delays by a new major customer.
Gross Profit
- ------------
Gross profit decreased $279,000, or 54%, to $238,000 during the quarter
ended June 30, 2004 compared to $517,000 in the same period in 2003. This
decrease was due primarily to the decline in AMS sales and partially due to
lower margins on AIA custom automation sales.
14
AMISTAR CORPORATION
Results of Operations, Continued
Selling Expenses
- ----------------
Selling expenses increased 35% in the current quarter from the second
quarter of 2003, from $313,000 to $424,000 primarily due to start-up marketing
costs in the Company's new subsidiary Distributed Delivery Networks ("ddn").
General and Administrative Expenses
- -----------------------------------
The general and administrative expenses increased 48%, from $235,000 in
the second quarter of 2003 to $348,000 in the second quarter of 2004 primarily
due to ddn personnel costs.
Engineering, Research and Development Expenses
- ----------------------------------------------
Engineering, research and development expenses increased 348% in the
current quarter over the same period in 2003, from $43,000 to $193,000. 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 $43,000 in engineering labor costs to work-in-process inventory and
$110,000 to cost of sales related to design contracts, most of which is expected
to be complete in the third quarter of 2004. During the quarter, costs of
$158,000 were incurred related to development of the first ddn machine.
Income Taxes
- ------------
The $1,500 provision represents the Company's minimum tax liability to
various states.
A 100% valuation allowance was recorded against deferred tax assets.
FIRST SIX MONTHS OF 2004 COMPARED TO FIRST SIX MONTHS OF 2003
Net Sales
- ---------
Net sales for the six months ended June 30, 2004 were $5,316,000
compared to $5,421,000 for the same period in the prior year, a decrease of 2%.
The AIA division sales increased 51% to $2,057,000 for the six months
ended June 30, 2004, from $1,365,000 for the same period in 2003.
During the first six months of 2004, the Amistar Industrial Automation
("AIA") division shipped three of its 100LP DataPlace labeler machines, two of
its 1M DataPlace labeler machines, three of its DataPlace shaft band labeler
machines, and two of its distributed circuit board assembly machines, whereas
two of its 100LP DataPlace labeler machines, one of its 1M DataPlace labeler
machines, and five DataPlace shaft band labeler machines shipped during the
first six months of 2003.
The AIA division sales in the first six months included shipment of
custom factory automation machines to customers in the eyeglass lens
manufacturing, RF identification, and medical optics industries and specialty
equipment to customers in the veterinary products industry, garden products, and
the golf club assembly industry.
15
AMISTAR CORPORATION
Sales of distributed circuit board assembly machines, accessories and
spare parts grew 211% over the first six months of 2003, from $187,000 to
$582,000 due primarily to the shipments of two circuit board assembly machines
in the first six months of 2004.
The Amistar Manufacturing Services division ("AMS") sales declined 20%
to $3,259,000 for the six months ended June 30, 2004, from $4,056,000 for the
same period in 2003, due primarily to reduced orders from two major customers,
one of which choose to move a significant portion of their outsourced production
to an out-of-state manufacturing services provider and the other which delayed
shipments pending modifications to their product design.
Gross Profit
- ------------
Gross profit decreased $288,000, or 27%, to $767,000 during the six
months ended June 30, 2004 compared to $1,055,000 in the same period in 2003.
This decrease was due primarily to the decline in AMS sales, a 4% decline in
gross margin percent on AMS materials resulting from a change in mix of products
with lower margins and partially offset by the increase in AIA sales.
Selling Expenses
- ----------------
Selling expenses increased 23% in the first six months of 2004 from the
same period of 2003, from $643,000 to $791,000 primarily due to start-up
marketing costs in the Company's new subsidiary Distributed Delivery Networks
("ddn") and commission expense incurred on increased machine sales.
General and Administrative Expenses
- -----------------------------------
The general and administrative expenses increased 55%, from $478,000 in
the first six months of 2003 to $743,000 in the same period of 2004 primarily
due to ddn formation and personnel costs.
Engineering, Research and Development Expenses
- ----------------------------------------------
Engineering, research and development expenses increased 107% in the
first six months of 2004 over the same period in 2003, from $150,000 to
$310,000. 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 $169,000 in engineering labor costs to cost of sales related to
completed design contracts. During the six months ended 2004, costs of $239,000
were incurred related to development of the first ddn machine designed to
dispense finished prescriptions in retail pharmacy stores.
Income Taxes
- ------------
A 100% valuation allowance was recorded against deferred tax assets.
16
AMISTAR CORPORATION
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash used in operating activities was $280,000 for the
six months ended June 30, 2004, an $806,000 decrease over the cash provided from
operating activities of $526,000 for the six months ended June 30, 2003. The
increase in cash used in operating activities was due to the increased loss,
which included ddn formation, marketing and development costs, and partially
offset by a smaller decrease in accounts receivable, a larger increase in AMS
inventory, an greater increase in accounts payable and 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 1.03% during
the quarter ending June 30, 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 June 30, 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 unaudited condensed
consolidated 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.
17
AMISTAR CORPORATION
Liquidity and Capital Resources, continued
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 year over the same period in 2003, and
as a result of the Company's new strategic plan, the Company's believes its
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; ddn expended $476,000 of this amount through June 30, 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
point-of-sale 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 June 30, 2004 will be adequate 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 San
Marcos, California 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 payment of the Company's industrial bonds would be required in
2004 or 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 Bonds.
ITEM 4. 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 second fiscal quarter that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
18
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
19
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: August 4, 2004
AMISTAR CORPORATION
By /s/ Gregory D. Leiser
------------------------
Gregory D. Leiser
Vice President Finance and Chief
Financial Officer (Principal Financial
and Accounting Officer)
20