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, 2005
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
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 3,144,044 shares of common stock outstanding as of July 29, 2005.
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [X]
1
AMISTAR CORPORATION
FORM 10-QSB
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated 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...............................................18
PART II OTHER INFORMATION
Item 1. Legal Proceedings.....................................................20
Item 4. Submission of Matters to a Vote of Security Holders...................20
Item 5. Other Information.....................................................21
Item 6. Exhibits and Reports..................................................21
2
Part I
ITEM 1. FINANCIAL STATEMENTS
AMISTAR CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited and in thousands, except share data)
June 30, Dec. 31,
2005 2004 (A)
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,678 $ 3,172
Restricted cash - 2,788
Trade accounts receivable, net of
reserves of $61 (2005) and $66 (2004) 1,585 1,727
Inventories, net of reserves of
$1,934 (2005) and $2,166 (2004) 2,592 4,619
Prepaid expenses 156 162
---------- ----------
Total current assets 6,011 12,468
Property and equipment, net 332 351
Other assets 468 469
---------- ----------
$ 6,811 $ 13,288
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 411 $ 1,964
Accrued liabilities 680 850
Industrial development bonds - 2,700
Current portion of deferred gain on sale lease-back of property 417 417
---------- ----------
Total current liabilities 1,508 5,931
Deferred gain on sale lease-back of property, net of current portion 3,523 3,731
Other long-term liabilities 74 44
---------- ----------
Total liabilities 5,105 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 June 30, 2005 and
Dec. 31, 2004, respectively 31 31
Additional paid-in capital 4,688 4,654
Retained deficit (3,013) (1,103)
---------- ----------
Total shareholders' equity 1,706 3,582
---------- ----------
$ 6,811 $ 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 Six months ended
June 30, June 30,
2005 2004 2005 2004
--------- --------- --------- ---------
Net sales $ 2,705 $ 2,260 $ 7,255 $ 5,316
Cost of sales 2,533 2,022 6,580 4,549
--------- --------- --------- ---------
Gross profit 172 238 675 767
--------- --------- --------- ---------
Operating expenses:
Selling 391 424 841 791
General and administrative 715 361 1,360 756
Engineering, research and development 438 193 616 310
--------- --------- --------- ---------
1,544 978 2,817 1,857
--------- --------- --------- ---------
Loss from operations (1,372) (740) (2,142) (1,090)
Other income (expense) 118 (3) 235 (3)
--------- --------- --------- ---------
Loss before income taxes (1,254) (743) (1,907) (1,093)
Income taxes 2 - 3 1
--------- --------- --------- ---------
Net loss $ (1,256) $ (743) $ (1,910) $ (1,094)
========= ========= ========= =========
Loss per common share-
basic and diluted $ (0.40) $ (0.24) $ (0.61) $ (0.36)
========= ========= ========= =========
Weighted average shares
outstanding, basic and diluted 3,143 3,082 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)
Six months ended June 30, 2005 2004
- ----------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (1,910) $ (1,094)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 76 188
Amortization of deferred gain on sale lease-back of property (208) 16
Non-cash compensation expense 33 -
Changes in assets and liabilities:
Trade accounts receivable, net 142 111
Inventories, net 2,027 (124)
Prepaid expenses and other assets 7 225
Accounts payable, accrued and other liabilities (1,693) 398
--------- ---------
Net cash used in operating activities (1,526) (280)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment (57) (251)
--------- ---------
Cash flows from financing activities:
Redemption of Industrial Development Bonds (2,700) (100)
Decrease in restricted cash, net 2,788 40
Exercise of stock options 1 1
--------- ---------
Net cash provided by (used in) financing activities 89 (59)
--------- ---------
Net decrease in cash and cash equivalents (1,494) (590)
Cash and cash equivalents, beginning of period 3,172 2,439
--------- ---------
Cash and cash equivalents, end of period $ 1,678 $ 1,849
========= =========
Supplemental disclosure of cash flow information-
Cash paid during the period for:
Interest $ 4 $ 15
========= =========
Income taxes $ 28 $ 5
========= =========
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 secrets, 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 defend
vigorously against the allegations including seeking dismissal in a summary
judgment hearing expected to be scheduled for August 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 first quarter of 2005, which contributed to an inventory
reduction of approximately $1,233,000. As of the end of July 2005, the Company
has collected its receivable from the defense-industry customer related to
shipments in the first quarter of 2005. The Company has made inventory
reductions primarily in the AMS segment totaling approximately $2,027,000 during
the six months ended June 30, 2005, through completion of the order to a
defense-industry customer and through inventory reduction initiatives. The
Company expects to further improve its cash position in the third and fourth
quarters by further reduction of non-cash working capital.
The Company projects that ddn will exhaust its funds during the 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. To remain
viable for the long-term, the Company must return to profitability and/or raise
debt or equity capital. There can be no assurances that the Company will be
successful in achieving these objectives.
6
AMISTAR CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Exchange Listing Requirements
- -----------------------------
The Company is subject to certain continuing listing requirements of NASDAQ,
which include the maintenance of minimum equity of $2,500,000. As of June 30,
2005, the Company's equity was approximately $1,706,000, and accordingly does
not meet the continuing listing requirements of NASDAQ. The Company anticipates
it may receive notice from NASDAQ following the filing of this report that it no
longer meets the continuing listing requirements and will have ten business days
to submit a plan of compliance. If the Company is unable to comply or deliver a
plan of compliance that is approved by NASDAQ, its shares will be subject to
de-listing. If de-listed, the Company would consider listing its shares on the
OTC Bulletin Board or the shares would be traded on the Pink Sheets. The
Company's stock price may be adversely affected by the de-listing of its stock
from the NASDAQ market.
(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, 2005, its results of operations for the three
and six months ended June 30, 2005 and 2004, and its cash flows for the six
months ended June 30, 2005 and 2004, respectively. The results of operations of
the Company for the three and six month periods ended June 30, 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 $1,934 and $2,166 at
June 30, 2005 and December 31, 2004, respectively:
June 30, Dec. 31,
2005 (In thousands) 2004 (In thousands)
----------------------------- -----------------------------
AIA AMS Total AIA AMS Total
--- --- ----- --- --- -----
Raw Material $ 340 $ 799 $ 1,139 $ 331 $ 2,001 $ 2,332
Work In Process 690 345 1,035 642 691 1,333
Finished Goods 318 100 418 553 401 954
----------------------------- -----------------------------
Total $ 1,348 $ 1,244 $ 2,592 $ 1,526 $ 3,093 $ 4,619
============================= =============================
7
AMISTAR CORPORATION
Notes to Condensed Consolidated Financial Statements, continued
(Unaudited)
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 Six months ended
June 30, June 30,
2005 2004 2005 2004
--------- --------- --------- ---------
Weighted-average shares, basic 3,143 3,082 3,143 3,081
Dilutive effect of stock options - - - -
--------- --------- --------- ---------
Weighted-average shares, diluted 3,143 3,082 3,143 3,081
========= ========= ========= =========
Options to purchase approximately 141,000 and 240,000 shares of potentially
dilutive common stock were excluded from the calculation of diluted net loss per
share for the three and six months ended June 30, 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 $208,000 of
the deferred gain on sale lease-back of property during the six months ended
June 30, 2005. 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 were removed. During the
first quarter of 2005, the bonds were redeemed in full and the letter of credit
terminated. The balance of the restricted cash account totaling $79,489 was
returned to the Company's unrestricted cash account during the second quarter
ended June 30, 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 JUNE 30, 2005
Net sales $ 977 $ 111 $ 1,088 $ 1,617 $ - $ - $ 2,705
======== ======== ======== ======== ======== ======== ========
Depreciation and amortization 12 - 12 24 2 (3) 35
======== ======== ======== ======== ======== ======== ========
Loss from operations (755) (88) (843) (317) (212) - (1,372)
======== ======== ======== ======== ======== ======== ========
Total assets 2,024 - 2,024 2,473 79 2,235 6,811
======== ======== ======== ======== ======== ======== ========
Additions to long-lived assets 7 - 7 - - - 7
======== ======== ======== ======== ======== ======== ========
THREE MONTHS ENDED JUNE 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
======== ======== ======== ======== ======== ======== ========
SIX MONTHS ENDED JUNE 30, 2005
Net sales $ 1,984 $ 235 $ 2,219 $ 5,036 $ - $ - $ 7,255
======== ======== ======== ======== ======== ======== ========
Depreciation and amortization 14 - 14 53 2 7 76
======== ======== ======== ======== ======== ======== ========
Loss from operations (999) (118) (1,117) (565) (460) - (2,142)
======== ======== ======== ======== ======== ======== ========
Additions to long-lived assets 37 - 37 14 - 6 57
======== ======== ======== ======== ======== ======== ========
SIX MONTHS ENDED JUNE 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
======== ======== ======== ======== ======== ======== ========
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 and six
months ended June 30, 2005 and 2004:
Charged to
Beginning costs and Ending
Balance expense Deductions Balance
- ---------------------------------------------------------------------
Three months ended:
6/30/2005 $ 50,543 $ 23,767 $ (15,394) $ 58,916
========== ========== =========== ==========
6/30/2004 $ 46,323 $ 12,235 $ (10,167) $ 48,391
========== ========== =========== ==========
Six months ended:
6/30/2005 $ 35,547 $ 61,158 $ (37,789) $ 58,916
========== ========== =========== ==========
6/30/2004 $ 37,698 $ 21,022 $ (10,329) $ 48,391
========== ========== =========== ==========
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 and six months ended June 30, 2005 and 2004 as follows ($ in
thousands, except per share amounts):
Three months ended Six months ended
June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
Net loss - as reported $ (1,256) $ (743) $ (1,910) $ (1,094)
Total stock-based employee compensation
expense included in reported net income, net of tax (A) 16 - 33 -
Total stock-based employee compensation
expense determined under fair-value-based method
for all rewards, net of tax (25) (19) (52) (38)
------------- ------------ ------------- -------------
Pro forma net loss $ (1,265) $ (762) $ (1,929) $ (1,132)
============= ============ ============= =============
Loss per share:
Basic and diluted, as reported $ (0.40) $ (0.24) $ (0.61) $ (0.36)
Basic and diluted, pro forma $ (0.40) $ (0.25) $ (0.61) $ (0.37)
(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 six months ending June 30, 2005 was as follows:
WEIGHTED
AVE
NUMBER EXERCISE
OF SHARES PRICE
----------- -----------
Outstanding, Dec 31, 2004 155,000 $ 1.69
Granted - -
Exercised (250) 0.81
Expired (13,500) 2.39
----------- -----------
Outstanding, June 30, 2005 141,250 $ 1.62
=========== ===========
The range of exercise prices on options outstanding at June 30, 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 2.70 $ 0.81 25,250 $ 0.81
$1.76 - $2.21 85,000 3.80 2.16 21,250 2.16
- ---------------------------- ----------- ---------- ---------- -----------
$0.81 - $2.21 141,250 3.40 $ 1.62 46,500 $ 1.43
============================ =========== ========== ========== ===========
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, including statements
regarding market opportunities, customer acceptance of products, gross margin,
marketing expenses, probability of a successful defense in its suit with
Asteres, continued listing with NASDAQ and liquidity. 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 2005 COMPARED TO SECOND QUARTER 2004
Net Sales
- ---------
Net sales for the current quarter increased $445,000, or 20%, to $2,705,000
compared to $2,260,000 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 Amistar Industrial Automation ("AIA") division sales.
AIA sales increased $239,000, or 28%, in the current quarter to $1,088,000
from $847,000 in the comparable quarter of 2004. The increase is primarily due
to an increase in sales of custom factory automation machines. Following is a
discussion of AIA sales by product line:
DataPlace machine sales decreased $62,000, or 40%, to $92,000 from $154,000
during the current quarter compared to the first quarter of 2004 due to the sale
of one machine during the second quarter of 2005 compared to two machines during
the comparable period in 2004.
Through-hole assembly machines, spare parts and service sales decreased
$24,000, or 11%, to $186,000 in the second quarter of 2005 from $210,000 in the
same period of 2004, consistent with the trend of the declining number of
through-hole machines in production in the market.
Distributed circuit board assembly machine, accessory and spare parts sales
decreased $72,000, or 54%, in the current quarter from $134,000 in the second
quarter of 2004 to $62,000 in the current quarter. The decrease is primarily due
to fewer orders of machine component feeders in the current quarter of 2005
compared to the same quarter of 2004.
Custom factory automation sales increased $390,000, or 114%, to $748,000 in
the current quarter from $349,000 in the second quarter of 2004, due primarily
to sales in the current quarter of three machines related to a $859,000
four-machine contract compared to contracts received for fewer machines and less
extensive custom machine design and machine manufacturing in the same period of
2004.
13
AMISTAR CORPORATION
Results of Operations, Continued
AMS sales increased $204,000, or 14%, to $1,617,000 in the current quarter from
$1,413,000 for the comparable quarter in 2004 primarily due to increases in
orders from existing customers.
Gross Profit
- ------------
Gross profit decreased $66,000, or 28%, to $172,000 during the current
quarter compared to $238,000 in the same period in 2004. This decrease was due
primarily to an $116,000, or 153%, decline in gross profit on AMS sales and
partially offset by a $51,000, or 32%, increase in gross profit from AIA sales.
The gross profit for AMS declined $117,000 or 153% to a loss of $41,000 in
the current quarter from $76,000 in the comparable period in 2004, due to a
decline in labor efficiency related to newly hired production personnel during
the first quarter of 2005 and added overhead personnel and other costs to
support the anticipated but not yet materialized continued sales from a defense
industry customer added during the first quarter of 2005.
The gross profit for AIA increased $51,000, or 32%, in the current quarter
to $212,000 from $161,000 in the same period in 2004, and is due primarily to
increased profitability on custom factory automation sales in the current
quarter compared to the second quarter of 2004.
Selling Expenses
- ----------------
Selling expenses decreased $33,000, or 8%, to $391,000 in the current
quarter from $424,000 in the second quarter of 2004, due primarily to personnel
reductions made during 2004.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses increased $354,000, or 98%, to $715,000
in the current quarter from $361,000 in the second quarter of 2004, due
primarily to litigation defense costs of $299,000 related to the suit with
Asteres, Inc, increased general legal, public relations and ddn start-up
administrative costs.
Engineering, Research and Development Expenses
- ----------------------------------------------
Engineering, research and development expenses increased $245,000, or 127%,
to $438,000 in the current quarter compared to $193,000 the same period in 2004,
due primarily to development costs related to the APM(TM) machine for the retail
pharmacy market. During the current quarter, several APM machines from a pilot
production run were substantially completed, a field beta test was conducted and
several machines are ready for field trials with prospective customers.
The engineering staff has been used primarily 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
$79,000 to cost of sales related to design contracts and $1,000 in engineering
labor costs to work-in-process inventory, most of which is expected to be
completed in the third quarter of 2005. During the current quarter, costs of
$359,000 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 $975 provision represents the Company's minimum tax liability to
various states.
A 100% valuation allowance was recorded against deferred tax assets.
SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO SAME PERIOD IN 2004
Net Sales
- ---------
Net sales for the six months ended June 30, 2005 increased $1,939,000, or
36%, to $7,255,000 compared to $5,316,000 for the same period in the prior year.
The increase in net sales was due primarily to growth in AMS sales and to a
lesser extent, growth in AIA division sales.
AIA sales increased $162,000, or 8%, in the six months ended June 30, 2005
to $2,219,000 from $2,057,000 in the comparable period of 2004. The increase is
primarily due to an increase in sales of custom factory automation machines from
the fulfillment of a four-machine order during the current year. Following is a
discussion of AIA sales by product line:
DataPlace machine sales decreased $63,000, or 11%, to $526,000 from
$589,000 during the six months ended June 30, 2005 compared to the same period
of 2004 due to sales of one less machine during the six months ended June 30,
2005 compared to 2004.
Through-hole assembly machines, spare parts and service sales increased
$69,000, or 17%, to $475,000 in the six months ended June 30, 2005 from $406,000
in the same period of 2004, primarily due to the sale of the last remaining
axial insertion machine in the Company's inventory and partially offset by lower
spare parts sales in the current period.
Distributed circuit board assembly machine, accessory and spare parts sales
decreased $389,000, or 67%, in the six months ended June 30, 2005 from $582,000
in same period in 2004 to $193,000 in the current period. During the six months
ended June 30, 2004, the Company sold two distributed circuit board assembly
machines compared to none in the current period.
Custom factory automation sales increased $545,000, or 114%, to $1,025,000
in the six months ended June 30, 2005 from $480,000 in the same period of 2004,
due primarily to an $859,000 four-machine contract fulfilled during the current
period compared to contracts received for less extensive custom machine design
and machine manufacturing in the same period of 2004.
AMS sales increased $1,777,000, or 55%, to $5,036,000 during the six months
ended June 30, 2005 from $3,259,000 for the comparable quarter in 2004 primarily
due to shipments to a new defense-industry customer.
Gross Profit
- ------------
Gross profit decreased $92,000, or 12%, to $675,000 during the six months
ended June 30, 2005 compared to $767,000 in the same period in 2004. This
decrease was due primarily to a $171,000, or 71%, decline in gross profit on AMS
sales and partially offset by an $80,000, or 15%, increase in gross profit from
AIA sales.
The AMS gross profit decreased $171,000 or 71%, to $69,000 during the six
months ended June 30, 2005 from $240,000 in the comparable period in 2004, due
primarily to a decline in labor efficiency related to production of the products
supplied to the defense-industry customer
15
AMISTAR CORPORATION
Results of Operations, Continued
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 AIA gross profit increased $80,000, or 15%, in the six months ended
June 30, 2005 to $606,000 from $526,000 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 $50,000, or 6%, to $841,000 in the six months
ended June 30, 2005 from $791,000 in the same period of 2004, due primarily to
increased sales commission expense related to a higher portion of AIA sales
incurring a commission expense than in the comparable period in 2004.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses increased $603,000, or 80%, to
$1,360,000 in the six months ended June 30, 2005 from $756,000 in the comparable
period of 2004, due primarily to litigation defense costs of $595,000 related to
the suit with Asteres, Inc.
Engineering, Research and Development Expenses
- ----------------------------------------------
Engineering, research and development expenses increased $306,000, or 99%,
to $616,000 in the six months ended June 30, 2005 compared to $310,000 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
$154,000 to cost of sales related to design contracts and $1,000 in engineering
labor costs to work-in-process inventory, most of which is expected to be
completed in the third quarter of 2005. During the six months ended June 30,
2005, costs of $478,000 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.
Income Taxes
- ------------
The $2,000 provision represents the Company's minimum tax liability to
various states.
16
Amistar Corporation
LIQUIDITY
The Company's cash used in operating activities was $1,526,000 for the six
months ended June 30, 2005, a $1,246,000 increase over the cash used in
operating activities of $280,000 for the comparable period in 2004. The increase
in cash used in operating activities was due primarily to the increased loss,
which included $595,000 in litigation defense costs and $461,000 in start-up and
marketing costs for ddn, a decrease in accounts payable, accrued and other
liabilities, a smaller increase in accounts receivable and a partially
offsetting decrease in inventory. The reduction in accounts payable, accrued and
other liabilities during the current year was primarily due to satisfaction of
the obligations related to the inventory that was reduced.
Capital expenditures of $37,000 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 year.
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 first quarter of 2005, the bonds were redeemed in
full and the letter of credit terminated. The balance of the restricted cash
account totaling approximately $79,489 was returned to the Company's
unrestricted cash account during the current quarter.
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 first quarter of 2005, which contributed to an inventory
reduction of approximately $1,233,000. As of the end of July 2005, the Company
has collected its receivable from the defense-industry customer related to
shipments in the first quarter. The Company has made inventory reductions
primarily in the AMS segment totaling approximately $2,027,000 during the six
months ended June 30, 2005, through fulfillment of the order from a
defense-industry customer and through inventory reduction initiatives. The
Company expects to further improve its cash position in the third and fourth
quarters of 2005 by further reduction of non-cash working capital.
The Company projects that ddn will exhaust its funds during the 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 to fund operations for the next twelve months.
Management believes increased product sales will provide additional operating
funds. To remain viable for the long-term, the Company must return to
profitability and/or raise debt or equity capital. There can be no assurances
that the Company will be successful in achieving these objectives.
17
AMISTAR CORPORATION
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 incorrect 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.
The following steps have been completed:
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 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 following steps are being undertaken as of the date of this report:
o Update standard costs to reflect FIFO costing
o Continuation of inventory cycle counting to improve inventory count
accuracy
o Continuation of materials personnel training
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.
18
AMISTAR CORPORATION
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.
19
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
On August 26, 2004, Amistar Corporation, Distributed Delivery Networks,
Inc. ("ddn") 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 secrets,
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 defend vigorously against the allegations including seeking dismissal in a
summary judgment hearing expected to be scheduled for August 2005.
ITEMS 2-3 Non-Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our annual shareholders meeting was held on May 4, 2005. The following is a
summary of each matter voted on at the meeting and the votes cast.
Election of Directors:
Six directors were nominated for re-election to the Board of Directors and named
in proxies for the meeting, which proxies were solicited pursuant to Regulation
14A of the Securities Exchange Act of 1934.
- ------------------------------------------------------------------------
Votes For Withheld
- ------------------------------------------------------------------------
Stuart C. Baker 1,736,863 3,000
- ------------------------------------------------------------------------
Dr. Sanford B. Ehrlich 1,736,563 3,300
- ------------------------------------------------------------------------
William W. Holl 1,736,863 3,000
- ------------------------------------------------------------------------
Gordon S. Marshall 1,736,863 3,000
- ------------------------------------------------------------------------
Carl C. Roecks 1,736,863 3,000
- ------------------------------------------------------------------------
Howard C. White 1,736,863 3,000
- ------------------------------------------------------------------------
Approval of the Amistar Corporation 2005 Stock Option Plan:
Shareholders approved the Amistar Corporation 2005 Stock Option Plan.
For 314,018
Against 27,975
Abstain 0
Broker Non-Vote 0
20
Ratification of Grant of Stock Options to Certain Officers and Employees
Shareholders ratified the grant of 88,000 stock options to three officers and
nineteen current employees.
For 339,493
Against 2,500
Abstain 0
Broker Non-Vote 0
ITEM 5 OTHER INFORMATION
Exchange Listing Requirements
- -----------------------------
The Company is subject to certain continuing listing requirements of
NASDAQ, which include the maintenance of minimum equity of $2,500,000. As of
June 30, 2005, the Company's equity was approximately $1,706,000, and
accordingly does not meet the continuing listing requirements of NASDAQ. The
Company anticipates it may receive notice from NASDAQ following the filing of
this report that it no longer meets the continuing listing requirements and will
have ten business days to submit a plan of compliance. If the Company is unable
to comply or deliver a plan of compliance that is approved by NASDAQ, its shares
will be subject to de-listing. If de-listed, the Company would consider listing
its shares on the OTC Bulletin Board or the shares would be traded on the Pink
Sheets. The Company's stock price may be adversely affected by the de-listing of
its stock from the NASDAQ market.
ITEM 6 EXHIBITS
(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
21
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 9, 2005
AMISTAR CORPORATION
By /s/ Gregory D. Leiser
---------------------------------
Gregory D. Leiser
Vice President Finance and Chief
Financial Officer (Principal
Financial and Accounting Officer)
22