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, 2005
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE
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 3,142,794 shares of common stock outstanding as of April 29, 2005.
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [X]
AMISTAR CORPORATION
FORM 10-QSB
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........13
Item 3. Controls and Procedures...............................................17
PART II OTHER INFORMATION
Item 1. Legal Proceedings.....................................................18
Item 6. Exhibits and Reports on Form 8-K......................................18
Part I
ITEM 1. FINANCIAL STATEMENTS
AMISTAR CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited and in thousands, except share data)
Mar. 31, Dec. 31,
2005 2004 (A)
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,496 $ 3,172
Restricted cash 79 2,788
Trade accounts receivable, net of
reserves of $59 (2005) and $66 (2004) 2,706 1,727
Inventories, net of reserves of
$2,066 (2005) and $2,166 (2004) 3,386 4,619
Prepaid expenses 187 162
----------- -----------
Total current assets 7,854 12,468
Property and equipment, net 360 351
Other assets 469 469
----------- -----------
$ 8,683 $ 13,288
=========== ===========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 522 $ 1,964
Accrued liabilities 1,113 850
Industrial development bonds -- 2,700
Current portion of deferred gain on sale lease-back of property 417 417
----------- -----------
Total current liabilities 2,052 5,931
Deferred gain on sale of property, net of current portion 3,627 3,731
Other long-term liabilities 59 44
----------- -----------
Total liabilities 5,738 9,706
----------- -----------
Shareholders' equity:
Preferred stock,$.01 par value. Authorized
2,000,000 shares; none outstanding -- --
Common stock, $.01 par value. Authorized
20,000,000 shares; 3,142,794 and
3,142,544 shares issued and
outstanding at Mar. 31, 2005 and
Dec. 31, 2004, respectively 32 31
Additional paid-in capital 4,670 4,654
Retained deficit (1,757) (1,103)
----------- -----------
Total shareholders' equity 2,945 3,582
----------- -----------
$ 8,683 $ 13,288
=========== ===========
(A) Derived from the audited consolidated financial statements as of December 31, 2004.
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
Mar. 31,
2005 2004
----------- -----------
Net sales $ 4,550 $ 3,056
Cost of sales 4,047 2,527
----------- -----------
Gross profit 503 529
----------- -----------
Operating expenses:
Selling 450 367
General and administrative 645 395
Engineering, research and development 178 117
----------- -----------
1,273 879
----------- -----------
Loss from Operations (770) (350)
Other income 117 --
----------- -----------
Loss before income taxes (653) (350)
Income taxes 1 1
----------- -----------
Net loss $ (654) $ (351)
=========== ===========
Loss per common share-
basic and diluted $ (0.21) $ (0.11)
=========== ===========
Weighted average shares
outstanding, basic and diluted 3,143 3,081
=========== ===========
See accompanying notes to unaudited condensed consolidated financial statements.
4
AMISTAR CORPORATION
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
Three months ended March 31, 2005 2004
- -------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (654) $ (351)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 41 88
Amortization of deferred gain on sale lease-back of property (104) --
Non-cash compensation expense 16 --
Changes in assets and liabilities:
Trade accounts receivable, net (979) (82)
Inventories, net 1,233 71
Prepaid expenses and other assets (25) 162
Accounts payable, accrued and other liabilities (1,164) 340
------- -------
Net cash provided by (used in) operating activities (1,636) 228
------- -------
Cash flows from investing activities:
Purchase of property and equipment (50) (181)
------- -------
Cash flows from financing activities:
Redemption of Industrial Development Bonds (2,700) (100)
Decrease in restricted cash, net 2,709 70
Exercise of stock options 1 --
------- -------
Net cash provided by (used in) financing activities 10 (30)
------- -------
Net increase (decrease) in cash and cash equivalents (1,676) 17
Cash and cash equivalents, beginning of period 3,172 2,439
------- -------
Cash and cash equivalents, end of period $ 1,496 $ 2,456
======= =======
Supplemental disclosure of cash flow information-
Cash paid during the period for:
Interest $ 4 $ 7
======= =======
Income taxes $ 26 $ 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
Litigation
- ----------
On August 26, 2004, Amistar Corporation, Distributed Delivery Networks,
Inc. ("ddn") and William Holmes (the CEO of ddn) 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. The case is
currently in the discovery phase with a trial date scheduled for September 2005.
The Company believes that the complaint has no merit and intends to vigorously
defend against the allegations including seeking dismissal in a summary judgment
hearing scheduled for July 2005.
Liquidity and Management's Plan
- -------------------------------
The Company, consistent with its plan described in its 10-KSB for 2004,
substantially completed the approximately $2,300,000 order to a defense-industry
customer during the current quarter, which contributed to an inventory reduction
of approximately $1,233,000. As of April 29, 2005, the Company has collected
approximately $833,000 of its receivable from the defense-industry customer
related to shipments in the current quarter. The Company expects to further
improve its cash position in the second quarter by further reduction of non-cash
working capital.
The Company projects that ddn will exhaust its funds during the second
or third quarter of 2005 and expects to continue to fund ddn's cash shortfall on
a month by month basis as required.
Management expects to incur additional operating losses in fiscal 2005
as a result of expenditures for marketing costs for ddn and litigation costs.
The timing and amounts of these expenditures and the extent of the Company's
operating losses will depend on future product sales levels and other factors,
some of which are beyond management's control.
Based on the Company's cash position, and assuming currently planned
expenditures and level of operations, management believes the Company will have
sufficient capital resources for the next twelve months. Management believes
increased product sales will provide additional operating funds. There can be no
assurances that the Company will be successful in achieving these objectives.
(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
6
AMISTAR CORPORATION
Notes to Condensed Consolidated Financial Statements, continued
(Unaudited)
consolidated financial statements contain all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the Company's
financial position as of March 31, 2005, its results of operations for the three
months ended March 31, 2005 and 2004, and its cash flows for the three months
ended March 31, 2005 and 2004, respectively. The results of operations of the
Company for the three-month period ended March 31, 2005 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-KSB for the year ended
December 31, 2004 as filed with the Securities and Exchange Commission on March
30, 2005.
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 $3,386 and $4,619 at
March 31, 2005 and December 31, 2004, respectively:
Mar. 31, Dec. 31,
2005 (In thousands) 2004 (In thousands)
---------------------------------------- --------------------------------------
AIA AMS Total AIA AMS Total
--- --- ----- --- --- -----
Raw Material $ 319 $1,357 $1,676 $ 331 $2,001 $ 2,332
Work In Process 903 91 994 642 691 1,333
Finished Goods 469 247 716 553 401 954
---------------------------------------- --------------------------------------
Total $1,691 $1,695 $3,386 $ 1,526 $3,093 $ 4,619
======================================== ======================================
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 per common share
is calculated by dividing net loss by the weighted-average number of common
shares outstanding during the reporting period. Diluted net loss per common
share reflects the effects of potentially dilutive securities. Weighted average
shares used to compute net loss per share are presented below (in thousands):
Three months ended
Mar. 31,
2005 2004
----------- -----------
Weighted-average shares, basic 3,143 3,081
Dilutive effect of stock options -- --
----------- -----------
Weighted-average shares, diluted 3,143 3,081
=========== ===========
7
AMISTAR CORPORATION
Notes to Condensed Consolidated Financial Statements, continued
(Unaudited)
Options to purchase approximately 150,000 and 166,000 shares of
potentially dilutive common stock were excluded from the calculation of diluted
net loss per share for the three months ended March 31, 2005 and 2004
respectively, because the effects of these instruments were anti-dilutive.
Industrial Development Bonds
- ----------------------------
On December 16, 2004, the Company consummated a sale-leaseback
transaction whereby the headquarters facility was sold. The Company recorded a
gain on the sale- leaseback of property of approximately $4,165,000 in 2004,
which is being amortized over the ten-year term of the loan. The Company
amortized $104,000 of the deferred gain on sale lease-back of property during
the current quarter. A substitution of collateral was made to support the letter
of credit with the Company's bank, which supported the industrial development
bonds at December 31, 2004. Substitute collateral in the form of approximately
$2,738,000 in cash proceeds from the sale was deposited in a restricted cash
account with the Company's bank and the liens held by the Company's bank against
the headquarters facility and other Company assets was removed. During the
current quarter, the bonds were redeemed in full and the letter of credit
terminated. The balance of the restricted cash account at March 31, 2005
totaling $79,489 was returned to the Company's unrestricted cash account
subsequent to March 31, 2005.
8
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,
manufacturing, start-up operating costs, 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, 2005
Net sales $ 1,007 $ 124 $ 1,131 $ 3,419 $ - $ - $ 4,550
============ =========== ============ ============ =========== =============== ============
Depreciation and amortization 2 - 2 29 - 10 41
============ =========== ============ ============ =========== =============== ============
Loss from operations (244) (30) (274) (248) (248) - (770)
============ =========== ============ ============ =========== =============== ============
Total assets 2,370 36 2,406 4,047 188 2,042 8,683
============ =========== ============ ============ =========== =============== ============
Additions to long-lived assets 30 - 30 14 - 6 50
============ =========== ============ ============ =========== =============== ============
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
============ =========== ============ ============ =========== =============== ============
9
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
months ended March 31, 2005 and 2004:
Charged to
Beginning Balance costs and expense Deductions Ending Balance
- --------------------------------------------------------------------------------------------------
Three months ended:
3/31/2005 $ 35,547 $ 21,222 $ (6,226) $ 50,543
================== ================== ================== ==================
3/31/2004 $ 37,698 $ 8,787 $ (162) $ 46,323
================== ================== ================== ==================
10
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 months ended March 31, 2005 and 2004 as follows ($ in
thousands, except per share amounts):
Three months ended
Mar. 31,
2005 2004
--------------- ---------------
Net loss - as reported $ (654) $ (351)
Total stock-based employee compensation
expense included in reported net income, net of tax (A) 16 -
Total stock-based employee compensation
expense determined under fair-value-based method
for all rewards, net of tax (25) (3)
--------------- ---------------
Pro forma net loss $ (663) $ (354)
=============== ===============
Loss per share:
Basic and diluted, as reported $ (0.21) $ (0.11)
Basic and diluted, pro forma $ (0.21) $ (0.11)
(A) In addition to compensation expense, this amount is also recorded
as an increase to Additional Paid-In Capital.
11
AMISTAR CORPORATION
Notes to Condensed Consolidated Financial Statements, continued
(Unaudited)
Stock option activity during the three months ending March 31, 2005 was
as follows:
WEIGHTED
NUMBER AVE EXERCISE
OF SHARES PRICE
--------- ------------
Outstanding, Dec 31, 2004 155,000 $ 1.69
Granted - -
Exercised (250) 0.81
Expired (4,500) 2.16
--------- ------------
Outstanding, Mar. 31, 2005 150,250 $ 1.68
========= ============
The range of exercise prices on options outstanding at March 31, 2005
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 56,250 3.00 $ 0.81 28,000 $ 0.81
$1.76 - $2.50 88,000 4.10 2.16 - -
$2.51 - $2.69 6,000 0.10 2.69 6,000 2.69
- --------------- ----------- ----------- ----------- ----------- -----------
$0.81 - $2.69 150,250 3.70 $ 1.68 34,000 $ 1.37
=============== =========== =========== =========== =========== ===========
12
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
FIRST QUARTER 2005 COMPARED TO FIRST QUARTER 2004
Net Sales
- ---------
Net sales for the current quarter increased $1,494,000, or 49%, to
$4,550,000 compared to $3,056,000 for the same period in the prior year. The
increase in net sales was primarily due to growth in Amistar Manufacturing
Services ("AMS") sales and was partially offset by a decline in Amistar
Industrial Automation ("AIA") division sales.
AIA sales declined $79,000, or 7%, in the current quarter to $1,131,000
from $1,210,000 in the comparable quarter of 2004. The decline is primarily due
to a decrease in distributed circuit board assembly machine sales and partially
offset by increases in sales of through-hole machines, spare parts and custom
factory automation machines. Following is a discussion of AIA sales by product
line:
DataPlace machine sales were flat during the current quarter compared
to the first quarter of 2004.
Through-hole assembly machines, spare parts and service sales increased
$93,000, or 48%, to $289,000 in the first quarter of 2005 from $196,000 in the
same period of 2004, primarily due to the sale of the last remaining axial
insertion machine in the Company's inventory.
Distributed circuit board assembly machine, accessory and spare parts
sales decreased $318,000, or 71%, in the current quarter from $448,000 in the
first quarter of 2004 to $130,000 in the current quarter. During the first
quarter of 2004, the Company sold two distributed circuit board assembly
machines compared to none in the current quarter.
Custom factory automation sales increased $146,000 or 111% to $277,000
in the current quarter from $131,000 in the first quarter of 2004, due primarily
to larger contracts received for more extensive custom machine design and
machine manufacturing.
AMS sales increased $1,573,000, or 85%, to $3,419,000 in the current
quarter from $1,846,000 for the comparable quarter in 2004 primarily due
shipments to a new defense-industry customer.
13
AMISTAR CORPORATION
Results of Operations, Continued
Gross Profit
- ------------
Gross profit decreased $26,000, or 5%, to $503,000 during the current
quarter compared to $529,000 in the same period in 2004. This decrease was due
primarily to a $54,000, or 33%, decline in gross profit on AMS sales and
partially offset by a $28,000, or 8%, increase in gross profit from AIA sales.
The decrease in AMS gross profit was due primarily to a decline in
labor efficiency related to production of the products supplied to the
defense-industry customer and added overhead personnel and costs to support the
increased sales. The rapid ramp up of production, which included the hiring and
training of personnel during a short time period, coupled with the costs of
operating a second shift, contributed to the labor inefficiencies. In addition,
the products sold to the defense-industry customer had a lower margin compared
to the products that AMS has historically sold, which resulted in a reduced
gross profit.
The gross profit for AIA increased $28,000, or 8%, in the current
quarter to $394,000 from $366,000 in the same period in 2004, due to higher
margins earned on DataPlace machine sales, reduced unabsorbed factory overhead,
increased sales of through-hole machines and spare parts and was partially
offset by the reduced distributed circuit board assembly machine sales.
Selling Expenses
- ----------------
Selling expenses increased $83,000, or 23%, to $450,000 in the current
quarter from $367,000 in the first quarter of 2004, due primarily to increased
start-up marketing costs in ddn and increased commission expense related to the
increased sales in AMS.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses increased $250,000, or 63%, to
$645,000 in the current quarter from $395,000 in the first quarter of 2004, due
primarily to litigation defense costs of $296,000 related to the suit with
Asteres, Inc, ddn personnel costs and was partially offset by $94,000 in ddn
one-time formation costs incurred in the first quarter of 2004.
Engineering, Research and Development Expenses
- ----------------------------------------------
Engineering, research and development expenses increased $61,000, or
52%, to $178,000 in the current quarter compared to $117,000 the same period in
2004, due primarily to development costs related to the APM(TM) machine for the
retail pharmacy market and a new DataPlace labeler machine. 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 $103,000 in
engineering labor costs to work-in-process inventory and $75,000 to cost of
sales related to design contracts, most of which is expected to be complete in
the second quarter of 2005. During the current quarter, costs of $118,000 were
incurred related to the development of the APM machine.
Other Income
- ------------
Other income primarily consists of amortization of the gain on
sale-leaseback of property.
14
AMISTAR CORPORATION
Results of Operations, Continued
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.
15
AMISTAR CORPORATION
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash used in operating activities was $1,636,000 for the
current quarter, a $1,864,000 increase over the cash provided from operating
activities of $228,000 for the first quarter of 2004. The increase in cash used
in operating activities was due primarily to the increased loss, which included
$296,000 in litigation defense costs and $248,000 in start-up and marketing
costs for ddn, an increase in accounts receivable and related offsetting
decrease in inventory related to the fulfillment of an order from a
defense-industry customer, and a decrease in accounts payable, accrued and other
liabilities.
Capital expenditures of $30,000 and $14,000 were made for production
equipment to improve capabilities in AIA and AMS, respectively, and $6,000 for
computer equipment for administrative purposes during the current quarter.
On December 16, 2004, the Company consummated a sale-leaseback
transaction whereby the headquarters facility was sold. A substitution of
collateral was made to support the letter of credit with the Company's bank,
which supported the industrial development bonds at December 31, 2004.
Substitute collateral in the form of approximately $2,738,000 in cash proceeds
from the sale was deposited in a restricted cash account with the Company's bank
and the liens held by the Company's bank against the headquarters facility and
other Company assets was removed. During the current quarter, the bonds were
redeemed in full and the letter of credit terminated. The balance of the
restricted cash account at March 31, 2005 totaling $79,489 was returned to the
Company's unrestricted cash account subsequent to March 31, 2005.
The Company, consistent with its plan described in its 10-KSB for 2004,
substantially completed the approximately $2,300,000 order to a defense-industry
customer during the current quarter, which contributed to an inventory reduction
of approximately $1,233,000. As of April 29, 2005, the Company has collected
approximately $833,000 of its receivable from the defense industry customer
related to shipments in the current quarter. The Company expects to further
improve its cash position in the second quarter by further reduction of non-cash
working capital.
The Company projects that ddn will exhaust its funds during the second
or third quarter of 2005 and expects to continue to fund ddn's cash shortfall on
a month by month basis as required.
Management expects to incur additional operating losses in fiscal 2005
as a result of expenditures for marketing costs for ddn and litigation costs.
The timing and amounts of these expenditures and the extent of the Company's
operating losses will depend on future product sales levels and other factors,
some of which are beyond management's control.
Based on the Company's cash position, and assuming currently planned
expenditures and level of operations, management believes the Company will have
sufficient capital resources for the next twelve months. Management believes
increased product sales will provide additional operating funds. There can be no
assurances that the Company will be successful in achieving these objectives.
16
AMISTAR CORPORATION
Liquidity and Capital Resources, Continued
ITEM 3. CONTROLS AND PROCEDURES
During the course of their audit of our consolidated financial
statements for the year ended December 31, 2004, our independent registered
public accounting firm, BDO Seidman, LLP, advised management and the Audit
Committee of our Board of Directors that they had identified a deficiency in the
Company's internal control over financial reporting. This deficiency is
considered to be a "material weakness" as defined under the standards
established by the Public Company Accounting Oversight Board. A material
weakness is a significant control deficiency or a combination of significant
control deficiencies that results in there being more than a remote likelihood
that a material misstatement of the annual or interim financial statements will
not be prevented or detected. This "material weakness" relates to incorrectly
costing of our AMS inventory based on incorrect raw material standards and
incorrect AMS work-in-process inventory quantities recorded.
We are in the process of undertaking steps to remedy this material
weakness, including:
o Implementation of modifications to our physical inventory
software system to more accurately report work-in-process
physical inventory count adjustments and final balances.
o Additional training of materials management personnel and
consideration of replacement of personnel to achieve a higher
level of competency.
o Increase cost accounting personnel resources to monitor,
evaluate and maintain standard costs. In addition, expansion
of the scope of internal testing of standard costs will be
performed and procedures enhanced.
The material weakness did not result in the restatement of any
previously reported financial statements, results of operations or any other
related financial disclosures.
We have discussed our corrective actions and future plans with our
Audit Committee and BDO Seidman, LLP and, as of the date of the Annual Report on
Form 10-KSB for 2004 and as of the date of this 10-QSB, we believe the actions
outlined above should correct the deficiency in our internal controls related to
inventory.
Other than the changes noted above, there has been no change in our
internal control over financial reporting that occurred during our last fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
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 not effective because of the
material weakness in inventory controls described above.
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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. The case is currently in
the discovery phase with a trial date scheduled for September 2005. The Company
believes that the complaint has no merit and intends to vigorously defend
against the allegations including seeking dismissal in a summary judgment
hearing scheduled for July 2005.
ITEMS 2-5 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, 2005
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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