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 September 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 3,094,044 shares of common stock outstanding as of October 29, 2004.
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [X]
1
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.......15
Item 4. Controls and Procedures..............................................21
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.....................................22
2
Part I
ITEM 1. FINANCIAL STATEMENTS
AMISTAR CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited and in thousands, except share data)
Sep. 30, Dec. 31,
2004 2003
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 1,746 $ 2,439
Restricted cash 120 130
Trade accounts receivable, net of
reserves of $66 (2004) and $74 (2003) 1,043 1,309
Inventories, net of reserves of
$1,989 (2004) and $2,056 (2003) 3,503 2,313
Demonstration equipment 3 53
Prepaid expenses 78 339
-------- --------
Total current assets 6,493 6,583
Property and equipment, net 3,753 3,764
Other assets 51 66
-------- --------
$10,297 $10,413
======== ========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,269 $ 321
Accrued liabilities 874 362
Industrial development bonds 2,800 2,900
Related party note payable 500 --
-------- --------
Total current liabilities 5,443 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; 3,094,044 and
3,080,544 shares issued and
outstanding at Sep. 30, 2004 and
Dec. 31, 2003, respectively 31 31
Additional paid-in capital 4,580 4,532
Retained earnings 243 2,267
-------- --------
Total shareholders' equity 4,854 6,830
-------- --------
$10,297 $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 Nine months ended
Sep. 30, Sep. 30,
2004 2003 2004 2003
-------- -------- -------- --------
Net sales $ 2,410 $ 3,125 $ 7,726 $ 8,546
Cost of sales 2,225 2,556 6,774 6,922
-------- -------- -------- --------
Gross profit 185 569 952 1,624
-------- -------- -------- --------
Operating expenses:
Selling 424 319 1,215 962
General and administrative 448 248 1,204 726
Engineering, research and development 239 35 549 185
-------- -------- -------- --------
1,111 602 2,968 1,873
-------- -------- -------- --------
Loss from Operations (926) (33) (2,016) (249)
Other income (expense), net (3) (2) (6) (9)
-------- -------- -------- --------
Loss before income taxes (929) (35) (2,022) (258)
Income taxes 1 1 2 3
-------- -------- -------- --------
Net loss $ (930) $ (36) $(2,024) $ (261)
======== ======== ======== ========
Loss per common share-
basic and diluted $ (0.30) $ (0.01) $ (0.66) $ (0.08)
======== ======== ======== ========
Weighted average shares
outstanding, basic and diluted 3,091 3,078 3,085 3,081
======== ======== ======== ========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
AMISTAR CORPORATION
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
Nine months ended September 30, 2004 2003
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $(2,024) $ (261)
Adjustments to reconcile net loss to
net cash provided by (used) by operating activities:
Depreciation and amortization 275 267
Non-cash compensation expense 32 --
Changes in assets and liabilities:
Trade accounts receivable, net 266 147
Inventories,net (1,190) (243)
Demonstration equipment 50 40
Prepaid expenses and other assets 276 91
Accounts payable and accrued liabilities 1,460 502
-------- --------
Net cash provided by (used in) by operating activities (855) 543
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (264) (100)
-------- --------
Cash flows from financing activities:
Redemption of Industrial Development Bonds (100) (100)
Proceeds from Related Party Note Payable 500 --
Decrease in restricted cash, net 10 10
Exercise of stock options 16 --
Repurchase of common stock -- (5)
-------- --------
Net cash provided by (used in) financing activities 426 (95)
-------- --------
Net increase in cash and cash equivalents (693) 348
Cash and cash equivalents, beginning of period 2,439 2,383
-------- --------
Cash and cash equivalents, end of period $ 1,746 $ 2,731
======== ========
Supplemental disclosure of cash flow information-
Cash paid during the period for:
Interest $ 23 $ 22
======== ========
Income taxes $ 6 $ 4
======== ========
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 providing 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 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 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 ratable over
the thirty-six month restriction period. The Company recorded compensation
expense of $16,000 and $33,000 during the three months and nine months ending
September 30, 2004 related to the vested portion of the appraised value of the
minority holder's interest as of April 8, 2004.
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. The Company, based on satisfactory performance of ddn, did not exercise
its rights to the redemption option prior to expiration on October 6, 2004. The
Company formerly had a right to redeem its shares and require repayment of the
note if certain performance conditions were 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, continued
(Unaudited)
Litigation
- ----------
On August 26, 2004, Amistar Corporation, Distributed Delivery Networks,
Inc. and William Holmes (the CEO of ddn corp.) were sued by Asteres, Inc. in the
California Superior Court for the County of San Diego, California. The complaint
alleges causes of action for misappropriation of trade secret, breach of a
confidential disclosure agreement, unfair competition and breach of the covenant
of good faith and fair dealing. The plaintiff is seeking damages and injunctive
relief. As of the filing date of this report, the Company is unable to estimate
the possible monetary award and based on its affirmative defenses, believes that
an unfavorable outcome to the Company is not probable. Amistar and the other
defendants filed their answers denying the allegations of the complaint and
asserting affirmative defenses on September 3, 2004. The Company believes that
the complaint has no merit and intends to vigorously defend against the
allegations.
(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 September 30, 2004, its results of operations for the
three and nine-month periods ended September 30, 2004 and 2003, and its cash
flows for the nine month periods ended September 30, 2004 and 2003,
respectively. The results of operations of the Company for the nine-month period
ended September 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 $1,989 and $2,056 at
September 30, 2004 and December 31, 2003, respectively:
Sep. 30, 2004 Dec. 31, 2003
--------------------------- ---------------------------
AIA AMS TOTAL AIA AMS TOTAL
------- ------- ------- ------- ------- -------
Raw Material $ 269 $1,779 $2,048 $ 295 $ 817 $1,112
Work In Process 731 142 873 480 92 572
Finished Goods 483 99 582 550 79 629
------- ------- ------- ------- ------- -------
Total $1,483 $2,020 $3,503 $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 Nine months ended
Sep. 30, Sep. 30,
2004 2003 2004 2003
------ ------ ------ ------
Weighted-average shares, basic 3,091 3,078 3,085 3,081
Dilutive effect of stock options -- -- -- --
------ ------ ------ ------
Weighted-average shares-
basic and diluted 3,091 3,078 3,085 3,081
====== ====== ====== ======
Options to purchase 223,000 and 81,000 shares of potentially dilutive
common stock were excluded from the calculation of diluted net loss per share
for the three and nine months ended September 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 1.20% during
the quarter ending September 30, 2004. 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 September 30,
2004, the Company was not in compliance with the debt ratio, tangible net worth
and debt service covenants. The Company received waivers relating to these
covenants through December 31, 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.
On November 9, 2004, the Company entered into a definitive purchase and
sale agreement and lease agreement by which it will consummate a sale-leaseback
of its
9
AMISTAR CORPORATION
Notes to Condensed Consolidated Financial Statements, continued
(Unaudited)
facility, redeem the balance of outstanding bonds, and pay off its related party
note payable. The Company expects the transaction to close during December 2004.
The terms include a selling price of $7,800,000, estimated net proceeds to be
realized of $7,517,000, and a hold back security deposit of approximately
$417,000, of which approximately $261,000 is refundable based on the attainment
of certain profitability measures. Upon the close, an amount equal to the
outstanding balance of the industrial bonds plus accrued interest and the
related party note payable of approximately $ 3,313,000 will be disbursed,
resulting in the termination of the standby letter of credit posted by the
Company's bank. The Company estimates a net increase in cash resulting from this
transaction of approximately $ 4,400,000. The lease agreement requires an
initial monthly rent payment of $52,167 (subject to certain inflation
adjustments as defined) with a term of 10 years. The expected gain of $4,300,000
will be deferred and amortized over the 10-year lease term.
Related Party Note Payable
- --------------------------
On September 27, 2004, the Company entered into an agreement with Gordon
Marshall, a director with the Company, by which Mr. Marshall loaned the Company
$500,000 on an unsecured basis for working capital purposes. The terms of the
promissory note provide for an interest rate of 7% per annum with principal and
interest due on December 31, 2004. During the nine months ended September 30,
2004, no amounts have been paid to Mr. Marshall.
10
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 SEP. 30, 2004
Net sales $ 516 $ 37 $ 553 $ 1,857 $ -- $ -- $ 2,410
========= ========== ========= ========= ========== ========== =========
Depreciation and amortization 23 -- 23 58 -- 6 87
========= ========== ========= ========= ========== ========== =========
Loss from operations (263) (11) (274) (263) (389) -- (926)
========= ========== ========= ========= ========== ========== =========
Total assets 4,576 44 4,620 2,684 596 2,397 10,297
========= ========== ========= ========= ========== ========== =========
Additions to long-lived assets 1 -- 1 9 -- 3 13
========= ========== ========= ========= ========== ========== =========
THREE MONTHS ENDED SEP. 30, 2003
Net sales $ 733 $ 77 $ 810 $ 2,315 $ -- $ -- $ 3,125
========= ========== ========= ========= ========== ========== =========
Depreciation and amortization 22 -- 22 55 -- 7 84
========= ========== ========= ========= ========== ========== =========
Loss from operations (27) (7) (34) 1 -- -- (33)
========= ========== ========= ========= ========== ========== =========
Total assets 4,775 41 4,816 2,135 -- 3,964 10,915
========= ========== ========= ========= ========== ========== =========
Additions to long-lived assets 10 -- 10 46 -- -- 56
========= ========== ========= ========= ========== ========== =========
NINE MONTHS ENDED SEP. 30, 2004
Net sales $ 2,504 $ 106 $ 2,610 $ 5,116 $ -- $ -- $ 7,726
========= ========== ========= ========= ========== ========== =========
Depreciation and amortization 70 -- 70 185 -- 20 275
========= ========== ========= ========= ========== ========== =========
Loss from operations (401) (17) (418) (625) (973) -- (2,016)
========= ========== ========= ========= ========== ========== =========
Additions to long-lived assets 57 -- 57 185 16 6 264
========= ========== ========= ========= ========== ========== =========
NINE MONTHS ENDED SEP. 30, 2003
Net sales $ 2,031 $ 144 $ 2,175 $ 6,371 $ -- $ -- $ 8,546
========= ========== ========= ========= ========== ========== =========
Depreciation and amortization 77 -- 77 168 -- 22 267
========= ========== ========= ========= ========== ========== =========
Loss from operations (283) (20) (303) 54 -- -- (249)
========= ========== ========= ========= ========== ========== =========
Additions to long-lived assets 54 -- 54 46 -- -- 100
========= ========== ========= ========= ========== ========== =========
11
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
nine months ended September 30, 2004 and 2003:
Charged to
Beginning costs and Ending
Balance expences Deductions Balance
- --------------------------------------------------------------------------------
Three months ended:
9/30/2004 $ 48,391 $ (3,373) $ (6,404) $ 38,614
========= ========= ========== =========
9/30/2003 $ 25,782 $ 6,485 $ -- $ 32,267
========= ========= ========== =========
Nine months ended:
9/30/2004 $ 37,698 $ 17,649 $ (16,733) $ 38,614
========= ========= ========== =========
9/30/2003 $ 45,876 $(13,700) $ 91 $ 32,267
========= ========= ========== =========
12
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 nine months ended September 30, 2004 and 2003 as
follows ($ in thousands, except per share amounts):
Three months ended Nine months ended
Sep. 30, Sep. 30,
2004 2003 2004 2003
---- ---- ---- ----
Net loss - as reported $ (930) $ (36) $ (2,024) $ (261)
Stock-Based employee compensation
expense included in reported net
income, net of tax 16 -- 33 --
Total stock-based employee
compensation expense determined
under fair-value-based method for all
rewards, net of tax (39) (1) (94) (7)
----------------------------------------------------
Pro forma net loss $ (953) $ (37) $ (2,085) $ (268)
====================================================
Loss per share:
Basic, as reported $ (0.30) $ (0.01) $ (0.66) $ (0.08)
Diluted, as reported $ (0.30) $ (0.01) $ (0.66) $ (0.08)
Basic, pro forma $ (0.31) $ (0.01) $ (0.68) $ (0.09)
Diluted, pro forma $ (0.31) $ (0.01) $ (0.68) $ (0.09)
13
AMISTAR CORPORATION
Notes to Condensed Consolidated Financial Statements, continued
(Unaudited)
Stock option activity during the nine months ending September 30, 2004 was as
follows:
NUMBER WEIGHTED AVERAGE
(SHARES IN THOUSANDS) OF SHARES EXERCISE PRICE
--------------------- --------- --------------
Outstanding, Dec 31, 2003 232,750 $ 1.07
Granted 102,500 2.16
Exercised (13,500) 1.17
Expired (93,000) 1.91
--------- ---------
Outstanding, Sep. 30, 2004 228,750 $ 1.56
========= =========
The range of exercise prices on options outstanding at September 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 67,250 3.50 $ 0.81 16,250 $ 0.81
$1.01 - $1.75 55,000 0.20 1.25 55,000 1.25
$1.76 - $2.50 97,500 4.60 2.17 8,000 2.31
$2.51 - $2.69 9,000 2.10 2.53 6,000 2.69
- ---------------- ---------------- --------------- ------------- ---------------- -------------
$0.81 - $2.69 228,750 3.00 $ 1.56 85,250 $ 1.37
================ ================ =============== ============= ================ =============
14
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
THIRD QUARTER 2004 COMPARED TO THIRD QUARTER 2003
Net Sales
- ---------
Net sales for the three months ended September 30, 2004 were $2,410,000
compared to $3,125,000 for the same period in the prior year, a decrease of 23%.
The sales decline primarily was due to a decline in Amistar Manufacturing
Services ("AMS") sales and to a lesser extent to a decline in the Amistar
Industrial Automation ("AIA") division sales.
AIA sales declined 32% from $810,000 to $553,000 in the current quarter
over the comparable period in 2003. The decline is primarily due to the
following:
During the current quarter, AIA shipped two of its DataPlace 1M
machines, compared to two of its higher-priced DataPlace 100LP machines and one
DataPlace 1M machine during the third quarter of 2003.
Sales of distributed circuit board assembly machine accessories and
spare parts increased 25% over the third quarter of 2003, from $126,000 to
$157,000.
Sales of AIA custom factory automation and other specialty products
declined 74% from $232,000 to $61,000 in the third quarter of 2004 compared the
comparable period in 2003. The decline is primarily due to the absence of sales
in the current quarter to a customer in the veterinary equipment business.
The Amistar Manufacturing Services division ("AMS") sales declined 20%
to $1,857,000 for the three months ended September 30, 2004, from $2,315,000 for
the same period in 2003 primarily due to reduced orders from several major
customers and 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 and
credit-related delays by a new major customer.
15
AMISTAR CORPORATION
Results of Operations, Continued
Gross Profit
- ------------
Gross profit decreased $384,000, or 68%, to $185,000 during the quarter
ended September 30, 2004 compared to $569,000 in the same period in 2003. This
decrease was due primarily to the decline in sales, and to a lesser extent to an
increase in the mix of lower margin AMS sales, a decline in labor efficiency
related to production of new products and added overhead personnel to support
increased orders received during the quarter.
Selling Expenses
- ----------------
Selling expenses increased 33% in the current quarter from the third
quarter of 2003, from $319,000 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 81%, from $248,000 in
the third quarter of 2003 to $448,000 in the third quarter of 2004 primarily due
to litigation defense costs of $106,000 related to the suit with Asteres, Inc.
and due to ddn personnel costs.
Engineering, Research and Development Expenses
- ----------------------------------------------
Engineering, research and development expenses increased 583% in the
current quarter over the same period in 2003, from $35,000 to $239,000. The
engineering staff has been primarily used 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
$23,000 in engineering labor costs to work-in-process inventory and $4,000 to
cost of sales related to design contracts, most of which is expected to be
complete in the fourth quarter of 2004. During the quarter, costs of $179,000
were incurred related to development of the first ddn machine.
Income Taxes
- ------------
The $750 provision represents the Company's minimum tax liability to
various states.
A 100% valuation allowance was recorded against deferred tax assets.
16
AMISTAR CORPORATION
Results of Operations, Continued
FIRST NINE MONTHS OF 2004 COMPARED TO FIRST NINE MONTHS OF 2003
Net Sales
- ---------
Net sales for the nine months ended September 30, 2004 were $7,726,000
compared to $8,546,000 for the same period in the prior year, a decrease of 10%.
The decrease is primarily due to a 20% decrease in AMS sales from $6,371,000 in
2003 to $5,116,000 in the current year and partially offset by a 20% increase in
AIA sales from $2,175,000 in 2003 to $2,610,000 in the current year.
The AIA sales increase in the period ending September 30, 2004 was
primarily due to the following:
During the current year, AIA propriety machines sales increased 3% from
$734,000 to $756,000 over the comparable period in 2003. AIA shipped three of
its higher-priced DataPlace 100LP machines, four DataPlace 1M machines, and
three of its DataPlace shaft-band-labeler machines, compared to two of its
DataPlace 100LP machines, two used DataPlace 100LP machines, and two DataPlace
1M machines during the same period of 2003.
Sales of distributed circuit board assembly machine accessories and
spare parts increased 136% from $313,000 to $739,000 for the same period in
2003. The increase was primarily due to the sale of two circuit board assembly
machines in 2004 compared to no machines sales for the comparable period in
2003.
Sales of AIA custom factory automation and other specialty products
declined 7% from $578,000 to $540,000 in 2004 compared the comparable period in
2003. The decrease is primarily due to a decline in sales to a customer in the
veterinary equipment business and partially offset by an increase in engineering
design services. The AIA division sales in 2004 included shipment of custom
factory automation machines and the providing of engineering services to
customers in the eyeglass lens manufacturing, RF identification, and medical
optics industries.
The AMS sales decline was primarily due to reduced orders from several
major customers and 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 2004, due to product design and credit-related delays by
a new major customer.
Gross Profit
- ------------
Gross profit decreased $672,000, or 41%, to $952,000 during the nine
months ended September 30, 2004 compared to $1,624,000 in the same period in
2003. The decrease was due primarily to the decline in AMS sales, and partially
offset by the increase in AIA sales and to a lesser extent, to a decline in
labor efficiency related to production of new products and added overhead
personnel to support increased orders received during the quarter.
17
AMISTAR CORPORATION
Results of Operations, Continued
Selling Expenses
- ----------------
Selling expenses increased 26% in the first nine months of 2004 from
the same period of 2003, from $962,000 to $1,215,000 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 65%, from $726,000 in
the first nine months of 2003 to $1,204,000 in the same period of 2004 primarily
due to ddn formation and personnel costs and litigation defense costs of
$106,000 related to the suit with Asteres, Inc.
Engineering, Research and Development Expenses
- ----------------------------------------------
Engineering, research and development expenses increased 197% in the
first nine months of 2004 over the same period in 2003, from $185,000 to
$549,000. The engineering staff has been primarily used 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 $192,000 in engineering labor costs to cost of sales related to
completed design contracts. During the nine months ended 2004, costs of $418,000
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.
18
AMISTAR CORPORATION
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash used in operating activities was $855,000 for the
nine months ended September 30, 2004, a $1,398,000 decrease over the cash
provided from operating activities of $543,000 for the nine months ended
September 30, 2003. The increase in cash used in operating activities was due
primarily to the increased loss, which included ddn formation, marketing and
development costs, an increase in AMS inventory to support orders due in the
fourth quarter of 2004, an increase in prepaid expenses and partially offset by
a decrease in accounts receivable and an increase in accounts payable.
The Company maintains a letter of credit from its bank in support of
the $2,800,000 principal balance of the industrial development bonds at
September 30, 2004, 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 1.20% during the quarter ending
September 30, 2004. 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 September 30,
2004, the Company was not in compliance with the tangible net worth, debt ratio
and debt service covenants. The Company received waivers relating to these
covenants through December 31, 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.
19
AMISTAR CORPORATION
Liquidity and Capital Resources, continued
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.
On November 9, 2004, the Company entered into a definitive purchase and
sale agreement and lease agreement by which it will consummate a sale-leaseback
of its facility, redeem the balance of outstanding bonds, and pay off its
related party note payable. The Company expects the transaction to close during
December 2004. The terms include a selling price of $7,800,000, estimated net
proceeds to be realized of $7,517,000, and a hold back security deposit of
approximately $417,000, of which approximately $261,000 is refundable based on
the attainment of certain profitability measures. Upon the close, an amount
equal to the outstanding balance of the industrial bonds plus accrued interest
and the related party note payable of approximately $ 3,313,000 will be
disbursed, resulting in the termination of the standby letter of credit posted
by the Company's bank. The Company estimates a net increase in cash resulting
from this transaction of approximately $ 4,400,000. The lease agreement requires
an initial monthly rent payment of $52,167 (subject to certain inflation
adjustments as defined) with a term of 10 years. The expected gain of $4,300,000
will be deferred and amortized over the 10-year lease term.
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. The Company's cash position will decrease significantly as a result of
utilization of the loan proceeds. 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.
Due to an increase in orders from new and current customers in the AMS
division, the Company needed to finance the increase in working capital. On
September 27, 2004, Gordon Marshall, a director with the Company, loaned the
Company $500,000 on an unsecured basis for working capital purposes. The terms
of the promissory note provide for an interest rate of 7% per annum with
principal and interest due on December 31, 2004.
The Company's current and anticipated liquidity has been negatively
impacted by the following: o Losses for the nine months ended September 30,
2004.
20
AMISTAR CORPORATION
Liquidity and Capital Resources, continued
o Substantial anticipated future litigation defense costs in the
event the litigation continues with Asteres, Inc..
o Working capital needs related to increased orders received
during the quarter from current and new AMS customers.
o Working capital needs related to anticipated orders for the
ddn APM Rx448 point of sale pharmacy machine.
o Requirement to repay the $500,000 loan from Mr. Marshall plus
accrued interest on December 31, 2004.
o Requirement to redeem the industrial development bonds on
December 31, 2005
The Company's primary sources of liquidity consist of cash and cash
equivalents, working capital and anticipated proceeds from the sale-leaseback
transaction. The Company believes that its cash and cash equivalents provided
from operations as projected by Management. cash and cash equivalents balances
at September 30, 2004 and anticipated proceeds from the sale-leaseback
transaction will be adequate to support its operating, investing and financing
requirements for the next twelve month period.
Litigation
- ----------
On August 26, 2004, Amistar Corporation, Distributed Delivery Networks,
Inc. and William Holmes (the CEO of ddn corp.) were sued by Asteres, Inc. in the
California Superior Court for the County of San Diego, California. The complaint
alleges causes of action for misappropriation of trade secret, breach of a
confidential disclosure agreement, unfair competition and breach of the covenant
of good faith and fair dealing. The plaintiff is seeking damages and injunctive
relief. As of the filing date of this report, the Company is unable to estimate
the possible monetary award and based on its affirmative defenses, believes that
an unfavorable outcome to the Company is not probable. Amistar and the other
defendants filed their answers denying the allegations of the complaint and
asserting affirmative defenses on September 3, 2004. The Company believes that
the complaint has no merit and intends to vigorously defend against the
allegations.
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 third fiscal quarter that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
21
PART II. OTHER INFORMATION
ITEMS 1 LEGAL PROCEEDINGS
On August 26, 2004, Amistar Corporation, Distributed Delivery Networks,
Inc. and William Holmes (the CEO of ddn corp.) were sued by Asteres, Inc. in the
California Superior Court for the County of San Diego, California. The complaint
alleges causes of action for misappropriation of trade secret, breach of a
confidential disclosure agreement, unfair competition and breach of the covenant
of good faith and fair dealing. The plaintiff is seeking damages and injunctive
relief. As of the filing date of this report, the Company is unable to estimate
the possible monetary award and based on its affirmative defenses, believes that
an unfavorable outcome to the Company is not probable. Amistar and the other
defendants filed their answers denying the allegations of the complaint and
asserting affirmative defenses on September 3, 2004. The Company believes that
the complaint has no merit and intends to vigorously defend against the
allegations.
ITEMS 2-5 Non-Applicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.13 ddn, Inc. Common Stock Purchase Agreement
10.14 ddn, Inc. Promissory Note
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
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on August 5,
2004, reporting its financial results for the second quarter of 2004.
22
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: November 10, 2004
AMISTAR CORPORATION
By /s/ Gregory D. Leiser
--------------------------------------
Gregory D. Leiser
Vice President Finance and Chief
Financial Officer (Principal Financial
and Accounting Officer)
23