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, 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 [ ]
Indicate by check mark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act)
Yes [ ] No [X]
There were 3,167,794 shares of common stock outstanding as of October 31, 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........15
Item 3. Controls and Procedures...............................................21
PART II OTHER INFORMATION
Item 1. Legal Proceedings.....................................................22
Item 4. Submission of Matters to a Vote of Security Holders...................22
Item 5. Other Information.....................................................22
Item 6. Exhibits and Reports..................................................22
2
Part I
ITEM 1. FINANCIAL STATEMENTS
AMISTAR CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited and in thousands, except share data)
Sept. 30, Dec. 31,
2005 2004 (A)
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,572 $ 3,172
Restricted cash - 2,788
Trade accounts receivable, net of
reserves of $10 (2005) and $47 (2004) 321 535
Inventories, net of reserves of
$1,796 (2005) and $1,761 (2004) 1,284 1,526
Assets of discontinued operation 1,692 4,548
Demonstration equipment 58 -
Prepaid expenses 140 162
---------- ----------
Total current assets 5,067 12,731
Property and equipment, net 98 88
Other assets 468 469
---------- ----------
$ 5,633 $ 13,288
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 299 $ 473
Accrued liabilities 682 785
Liabilities of discontinued operation 156 1,556
Industrial development bonds - 2,700
Current portion of deferred gain on sale lease-back of property 417 417
---------- ----------
Total current liabilities 1,554 5,931
Deferred gain on sale lease-back of property, net of current portion 3,419 3,731
Other long-term liabilities 89 44
---------- ----------
Total liabilities 5,062 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; 3,167,794 and
3,142,544 shares issued and
outstanding at September 30, 2005 and
Dec. 31, 2004, respectively 32 31
Additional paid-in capital 4,727 4,654
Retained deficit (4,188) (1,103)
---------- ----------
Total shareholders' equity 571 3,582
---------- ----------
$ 5,633 $ 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 Nine months ended
Sept. 30, Sept. 30,
2005 2004 2005 2004
--------- --------- --------- ---------
Net sales $ 545 $ 553 $ 2,764 $ 2,610
Cost of sales 502 403 2,114 1,932
--------- --------- --------- ---------
Gross profit 43 150 650 678
--------- --------- --------- ---------
Operating expenses:
Selling 315 325 919 860
General and administrative 863 448 2,223 1,204
Engineering, research and development 267 239 883 549
--------- --------- --------- ---------
1,445 1,012 4,025 2,613
--------- --------- --------- ---------
Loss from continuing operations (1,402) (862) (3,375) (1,935)
Other income (expense) 118 (3) 353 (6)
--------- --------- --------- ---------
Loss from continuing operations before
income taxes (1,284) (865) (3,022) (1,941)
Income taxes 1 1 4 2
--------- --------- --------- ---------
Net loss from continuing operations (1,285) (866) (3,026) (1,943)
Income (loss) from discontinued operations
net of income taxes 110 (64) (59) (81)
--------- --------- --------- ---------
Net loss $ (1,175) $ (930) $ (3,085) $ (2,024)
========= ========= ========= =========
Loss per common share on continuing
operations-basic and diluted $ (0.40) $ (0.28) $ (0.96) $ (0.63)
========= ========= ========= =========
Income (loss) per common share on
discontinued operations-basic and diluted $ 0.03 $ (0.02) $ (0.02) $ (0.03)
========= ========= ========= =========
Weighted average shares
outstanding, basic and diluted 3,155 3,091 3,147 3,085
========= ========= ========= =========
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, 2005 2004
- ------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss from continuing operations $ (3,026) $ (1,943)
Adjustments to reconcile net loss from continuing operations to
net cash used in operating activities:
Depreciation and amortization 32 91
Amortization of deferred gain on sale lease-back of property (312) -
Non-cash compensation expense 50 32
Changes in assets and liabilities:
Trade accounts receivable, net 214 (28)
Inventories, net 242 (264)
Demonstration equipment (58) 49
Prepaid expenses and other assets 23 276
Accounts payable, accrued and other liabilities (232) 369
---------- ----------
Net cash used in operating activities (3,067) (1,418)
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (43) (79)
---------- ----------
Net cash used in investing activities (43) (79)
Cash flows from financing activities:
Redemption of Industrial Development Bonds (2,700) (100)
Proceeds from Related Party Note Payable - 500
Decrease in restricted cash, net 2,788 10
Exercise of stock options 24 16
---------- ----------
Net cash provided by financing activities 112 426
---------- ----------
Net cash provided by discontinued operations 1,398 378
Net decrease in cash and cash equivalents (1,600) (693)
Cash and cash equivalents, beginning of period 3,172 2,439
---------- ----------
Cash and cash equivalents, end of period $ 1,572 $ 1,746
========== ==========
Supplemental disclosure of cash flow information-
Cash paid during the period for:
Interest $ 4 $ 23
========== ==========
Income taxes $ 8 $ 6
========== ==========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
AMISTAR CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) BUSINESS AND CURRENT EVENTS
Discontinued Operations
- -----------------------
The Company plans to exit the electronic manufacturing services market
subject to certain continuing obligations during the fourth quarter of 2005 as
part of its strategy to convert assets to cash in order to improve liquidity and
to support the entry into the retail pharmacy market with its APM(TM) automated
prescription delivery machine and system marketed by Distributed Delivery
Networks, Inc. ("ddn"), its majority-owned subsidiary.
In August 2005, the Company decided to discontinue its Amistar
Manufacturing Services division ("AMS") segment. As of September 30, 2005, the
AMS Segment met all of the criteria in Statement of Financial Standards ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," to be
presented as discontinued operations. Accordingly, all current and prior period
financial information related to the AMS segment has been presented as
discontinued operations in the accompanying condensed consolidated financial
statements.
The Company entered into an agreement on August 16, 2005, to sell certain
AMS inventory, equipment and other assets and provide support services to SMS
Technologies, Inc. ("SMS"), an electronic manufacturing services provider. The
agreement has a term of three years, provides for the Company to receive a
commission based on sales made by SMS to certain customers that have agreed to
transfer and has a non-compete provision.
The Company incurred employee separation costs of $89,000, a write-down of
equipment held for sale of $36,000, and recognized a gain on sale of equipment
of $81,000 during the current quarter. In addition, the Company sold certain
component inventory back to customers that elected to not transfer their orders
to SMS. As of September 30, 2005, equipment that is expected to be sold during
the fourth quarter of 2005 totaling $120,000 was reclassified as Assets of
Discontinued Operations.
Income (loss) from discontinued operations consists of direct revenues and
direct expenses of the AMS segment, including cost of revenues, as well as other
fixed and allocated costs to the extent that such costs will be eliminated as a
result of the transaction. General corporate overhead costs have not been
allocated to discontinued operations.
A summary of the operating results of the AMS segment included in
discontinued operations in the accompanying condensed consolidated statements of
operations are as follows:
Three months ended Nine months ended
Sept. 30, Sept. 30,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net sales $ 2,169 $ 1,857 $ 7,206 $ 5,116
Income from discontinued operations 110 (64) (59) (81)
Income taxes - - - -
---------- ---------- ---------- ----------
Net income (loss) from discontinued operations $ 110 $ (64) $ (59) $ (81)
========== ========== ========== ==========
6
AMISTAR CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A summary of the major components of assets and liabilities of the
discontinued operation are as follows:
Sept. 30, Dec. 31,
2005 2004
---------- ----------
Accounts receivable,net $ 1,063 $ 1,193
Inventory, net of reserves 509 3,093
Equipment held for sale 120 263
---------- ----------
Assets of discontinued operation $ 1,692 $ 4,548
========== ==========
Accounts payable 40 1,456
Accrued liabilities 117 100
---------- ----------
Liabilities of discountinued operation $ 157 $ 1,556
========== ==========
Litigation
- ----------
On August 26, 2004, the Company, its subsidiary 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, 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
April 2006. 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 scheduled for January 2006. In addition, the Company,
on August 25, 2005, filed a cross complaint, alleging fraud, anti-trust
violation, and other wrongful actions and is seeking damages. There can be no
assurance of a favorable outcome if the cases proceed to trial.
Liquidity and Management's Plan
- -------------------------------
The Company generated cash to partially offset its loss from continuing
operations and reduction of accounts payable of $177,000 primarily from cash
flows provided from discontinued operations of $1,398,000, and to a lesser
extent by reducing its accounts receivable $214,000 and inventory by $242,000,
during the nine months ended September 30, 2005. The cash flows provided from
discontinued operations of $1,398,000 was primarily due to a reduction of
inventory and accounts receivable, proceeds from the sale of equipment and
partially offset by a reduction in accounts payable. The Company expects to
further generate additional cash in the fourth quarter resulting from the sale
of assets of the discontinued operation.
ddn exhausted its funds during the third quarter of 2005 and the Company is
funding ddn's cash shortfall by making loans on a month-by-month basis as
required. Management expects to incur additional operating losses in fiscal 2005
primarily as a result of funding the operating requirements of ddn and
litigation costs. The timing and amounts of these
7
AMISTAR CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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.
The Company incurred litigation expenses of $1,026,000 during the nine
months ended September 30, 2005, which has had an adverse effect on its cash
balances. In August 2005, the law firm representing the Company in the
litigation, agreed to defer the payment of legal fees exceeding a certain fixed
amount per month until the litigation is concluded. The Company will continue to
reimburse its law firm for any out-of-pocket costs as incurred.
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 the
sale of AMS assets and reductions of AMS non-cash working capital along with
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.
Exchange Listing Requirements
- -----------------------------
The Company was formerly traded on the NASDAQ Small Cap market and subject
to certain continuing listing requirements, which included the maintenance of
minimum equity of $2,500,000. As of June 30, 2005, the Company's equity was
$1,706,000, and accordingly, did not meet the continuing listing requirements of
NASDAQ. As a result, the Company's stock was de-listed by NASDAQ on September
12, 2005 and the Company's stock is currently quoted on the Over the Counter
("OTC") Pink Sheet 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 September 30, 2005, its results of operations for the
three and nine months ended September 30, 2005 and 2004, and its cash flows for
the nine months ended September 30, 2005 and 2004, respectively. The results of
operations of the Company for the three and nine month periods ended September
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.
In August 2005, the Company decided to discontinue its AMS segment. As of
September 30, 2005, the AMS Segment met all of the criteria in SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," to be
presented as discontinued
8
AMISTAR CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
operations. Accordingly, all current and prior period financial information
related to the AMS segment has been presented as discontinued operations in the
accompanying condensed consolidated financial statements.
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 $1,796 and $1,761 at
September 30, 2005 and December 31, 2004, respectively:
September 30, Dec. 31,
2005 (In thousands) 2004 (In thousands)
------------------------------ -------------------
AIA ddn Total AIA Total
--- --- ----- --- -----
Raw Material $ 163 $ - $ 163 $ 331 $ 331
Work In Process 705 - 705 642 642
Finished Goods 397 19 416 553 553
------------------------------ -------------------
Total $ 1,265 $ 19 $ 1,284 $ 1,526 $ 1,526
============================== ===================
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 Nine months ended
Sept. 30, Sept. 30,
2005 2004 2005 2004
-------- -------- -------- --------
Weighted-average shares, basic 3,155 3,091 3,147 3,085
Dilutive effect of stock options - - - -
-------- -------- -------- --------
Weighted-average shares, diluted 3,155 3,091 3,147 3,085
======== ======== ======== ========
Options to purchase approximately 146,000 and 223,000 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, 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
9
AMISTAR CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
ten-year term of the loan. The Company amortized $312,000 of the deferred gain
on sale-leaseback of property during the nine months ended September 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.
10
AMISTAR CORPORATION
Notes to Condensed Consolidated Financial Statements, continued
(Unaudited)
Industry Segments and Geographic Information
- --------------------------------------------
The following table summarizes the Company's two continuing operating
segments: Amistar Industrial Automation ("AIA"), which encompasses the
manufacture and distribution of manufacturing machinery, specialty products, and
related accessories and the Company's majority-owned subsidiary ddn, which
encompasses prototype development, manufacturing, start-up operating costs, and
marketing of automation equipment primarily to the retail pharmacy 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). Total assets are reflected
for the discontinued segment.
AIA
------------------------------------
UNITED DISCONTINUED
STATES FOREIGN TOTAL SEGMENT DDN CORPORATE TOTAL
- -------------------------------------------------------------------------------------------------------------- ----------
THREE MONTHS ENDED SEPTEMBER 30, 2005
Net sales $ 624 $ (90) $ 534 $ 2,170 $ 11 $ - $ 2,715
========== ========== ========== ========== ========== ========== ==========
Depreciation and amortization 7 - 7 60 1 1 69
========== ========== ========== ========== ========== ========== ==========
Loss from operations (1,201) - (1,201) 110 (201) - (1,292)
========== ========== ========== ========== ========== ========== ==========
Total assets 1,648 25 1,673 1,692 166 2,102 5,633
========== ========== ========== ========== ========== ========== ==========
Additions to long-lived assets - - - - - - -
========== ========== ========== ========== ========== ========== ==========
THREE MONTHS ENDED SEPTEMBER 30, 2004
Net sales $ 516 $ 37 $ 553 $ 1,857 $ - $ - $ 2,410
========== ========== ========== ========== ========== ========== ==========
Depreciation and amortization 23 - 23 58 - 6 87
========== ========== ========== ========== ========== ========== ==========
Loss from operations (442) (31) (473) (64) (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
========== ========== ========== ========== ========== ========== ==========
NINE MONTHS ENDED SEPTEMBER 30, 2005
Net sales $ 2,608 $ 145 $ 2,753 $ 7,206 $ 11 $ - $ 9,970
========== ========== ========== ========== ========== ========== ==========
Depreciation and amortization 21 - 21 113 3 8 145
========== ========== ========== ========== ========== ========== ==========
Loss from operations (2,571) (143) (2,714) (59) (661) - (3,434)
========== ========== ========== ========== ========== ========== ==========
Additions to long-lived assets 37 - 37 14 - 6 57
========== ========== ========== ========== ========== ========== ==========
NINE MONTHS ENDED SEPTEMBER 30, 2004
Net sales $ 2,504 $ 106 $ 2,610 $ 5,116 $ - $ - $ 7,726
========== ========== ========== ========== ========== ========== ==========
Depreciation and amortization 70 - 70 185 - 20 275
========== ========== ========== ========== ========== ========== ==========
Loss from operations (923) (39) (962) (81) (973) - (2,016)
========== ========== ========== ========== ========== ========== ==========
Additions to long-lived assets 57 - 57 185 16 6 264
========== ========== ========== ========== ========== ========== ==========
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, 2005 and 2004 (in thousands):
Charged to
Beginning costs and Ending
Balance expense Deductions Balance
- -------------------------------------------------------------------------------
Three months ended:
9/30/2005 $ 53 $ 12 $ (18) $ 47
============ ============ ============ ============
9/30/2004 $ 43 $ 7 $ (16) $ 34
============ ============ ============ ============
Nine months ended:
9/30/2005 $ 31 $ 70 $ (54) $ 47
============ ============ ============ ============
9/30/2004 $ 33 $ 39 $ (38) $ 34
============ ============ ============ ============
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, 2005 and 2004 as follows (in
thousands, except per share amounts):
Three months ended Nine months ended
Sept. 30, Sept. 30,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net loss - as reported $ (1,175) $ (930) $ (3,085) $ (2,024)
Total stock-based employee compensation
expense included in reported net income, net of tax (A) 16 16 50 33
Total stock-based employee compensation
expense determined under fair-value-based method
for all rewards, net of tax (33) (39) (101) (94)
---------- ---------- ---------- ----------
Pro forma net loss $ (1,192) $ (953) $ (3,136) $ (2,085)
========== ========== ========== ==========
Loss per share:
Basic and diluted, as reported $ (0.37) $ (0.30) $ (0.98) $ (0.66)
Basic and diluted, pro forma $ (0.37) $ (0.31) $ (0.98) $ (0.68)
(A) In addition to compensation expense, this amount is also recorded as an
increase to Additional Paid-In Capital.
13
AMISTAR CORPORATION
Notes to Condensed Consolidated Financial Statements, continued
(Unaudited)
Stock option activity during the nine months ending September 30, 2005 was as
follows:
WEIGHTED
AVE
NUMBER EXERCISE
OF SHARES PRICE
---------- ----------
Outstanding, Dec. 31, 2004 155,000 $ 1.69
Granted 30,000 3.40
Exercised (25,250) 0.92
Expired (13,500) 2.39
---------- ----------
Outstanding, Sept. 30, 2005 146,250 $ 2.11
========== ==========
The range of exercise prices on options outstanding at September 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 33,250 2.40 $ 0.81 2,250 $ 0.81
$1.76 - $2.21 83,000 3.60 2.16 19,250 2.16
$3.40 30,000 4.80 3.40 - -
- --------------- ------------ ------------ ------------ ------------ ------------
$0.81 - $3.40 146,250 3.30 $ 2.11 21,500 $ 2.02
=============== ============ ============ ============ ============ ============
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, including statements
regarding market opportunities, customer acceptance of products, gross margin,
marketing expenses, probability of a successful defense in its suit and
successful outcome of its counter-suit with Asteres, 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, continuing defense costs and or unfavorable outcome in the pending
litigation with Asteres, 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,
fluctuations in the price of the Company's stock and other factors.
RESULTS OF OPERATIONS
THIRD QUARTER 2005 COMPARED TO THIRD QUARTER 2004
Net Sales
- ---------
Net sales for the current quarter decreased $8,000, or 1%, to $545,000
compared to $553,000 for the same period in the prior year. The decrease in net
sales was primarily due to the decrease in Amistar Industrial Automation sales
("AIA") sales.
AIA sales decreased $19,000, or 3%, in the current quarter to $534,000 from
$553,000 in the comparable quarter of 2004. The decrease is primarily due to a
reduction in sales of distributed circuit board assembly machine products.
Following is a discussion of AIA sales by product line:
DataPlace machine sales increased $113,000, or 68%, to $280,000 from
$167,000 during the current quarter compared to the third quarter of 2004
primarily due to the sale of two customized DataPlace LCL machines, which sold
for a higher price than the two standard DataPlace 1M machines sold in the
comparable quarter of 2004.
Through-hole assembly machines, spare parts and service sales decreased
$20,000, or 12%, to $147,000 in the third quarter of 2005 from $167,000 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 $74,000, or 47%, in the current quarter from $157,000 in the third
quarter of 2004 to $83,000 in the current quarter. The decrease is primarily due
to fewer shipments of machine component feeders in the current quarter of 2005
compared to the same quarter of 2004.
Custom factory automation sales decreased $37,000, or 61%, to $24,000 in
the current quarter from $61,000 in the third quarter of 2004, due primarily to
fewer shipments of machine shop services in the current quarter compared to the
third quarter of 2004.
15
AMISTAR CORPORATION
Results of Operations, Continued
ddn initial sales were $11,000 in the current quarter and consisted of
installation services and rental revenue.
Gross Profit
- ------------
Gross profit decreased $107,000, or 71%, to $43,000 during the current
quarter compared to $150,000 in the same period in 2004. This decrease was due
primarily to an $110,000, or 73%, decrease in AIA gross profit from $150,000 to
$40,000 in the current quarter due primarily to a $116,000 increase in the
reserve for inventory obsolescence related to excess DataPlace 100LP machine and
component inventory.
The remaining gross profit of $3,000 was related to ddn's initial sales.
Selling Expenses
- ----------------
Selling expenses decreased $10,000, or 3%, to $315,000 in the current
quarter from $325,000 in the second quarter of 2004, due primarily to lower ddn
trade show exhibition expenses during the third quarter of 2005 compared to the
same period of 2004, ddn's initial year of operations.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses increased $415,000, or 93%, to $863,000
in the current quarter from $448,000 in the third quarter of 2004, due primarily
to an $315,000 increase in litigation defense costs to $431,000 related to the
suit with Asteres, Inc. compared to $106,000 in the third quarter of 2004.
Engineering, Research and Development Expenses
- ----------------------------------------------
Engineering, research and development expenses increased $28,000, or 12%,
to $267,000 in the current quarter compared to $239,000 the same period in 2004,
due primarily to increased development costs related to the APM(TM) machine for
the retail pharmacy market. During the current quarter, development continued on
APM(TM) machines produced in a pilot production run, in a field beta test
conducted in a community pharmacy and in the test lab of a mass merchant.
The engineering staff has been used primarily in support of custom factory
engineering design activities and development of the APM(TM) machine. The
engineering group provided billable engineering design services and allocated
$29,000 to cost of sales related to design contracts and $66,000 in engineering
labor costs to work-in-process inventory, most of which is expected to be
completed in the fourth quarter of 2005. During the current quarter, costs of
$148,000 were incurred related to the development of the APM(TM) machine.
Other Income
- ------------
Other income primarily consists of $104,000 for amortization of the
deferred gain on the sale-leaseback of the Company's headquarters facility.
Income Taxes
- ------------
The $1,000 provision represents the Company's minimum tax liability to
various states. A 100% valuation allowance was recorded against deferred tax
assets.
16
AMISTAR CORPORATION
Results of Operations, Continued
Discontinued operations
- -----------------------
The income from discontinued operations increased $174,000 in the current
quarter to $110,000 compared to a loss of $64,000, due primarily to increased
gross profit and from the gain on sale of equipment.
AMS sales increased $313,000, or 17%, to $2,170,000 in the current quarter
from $1,857,000 for the comparable quarter in 2004, primarily due to the sale of
components to customers related to the planned exit from the electronic
manufacturing services market.
Gross profit increased $75,000 or 221% to $109,000 in the current quarter
from $34,000 in the comparable period of 2004,due to increased sales and
increased labor efficiency and partially offset by manufacturing employee
separation costs of $83,000.
The income from discontinued operations also reflects a gain of $81,000
from the sale of equipment.
NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO SAME PERIOD IN 2004
Net Sales
- ---------
Net sales for the nine months ended September 30, 2005 increased $154,000,
or 6%, to $2,764,000 compared to $2,610,000 for the same period in the prior
year. The increase in net sales was due primarily to growth in AIA division
sales.
AIA sales increased $143,000, or 5%, in the nine months ended September 30,
2005 to $2,753,000 from $2,610,000 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
and partially offset by a reduction in distributed machine sales.
Following is a discussion of AIA sales by product line:
DataPlace machine sales decreased $50,000, or 7%, to $806,000 from $756,000
during the nine months ended September 30, 2005 compared to the same period of
2004 due to sales of one more machine during the nine months ended September 30,
2005 compared to 2004.
Through-hole assembly machines, spare parts and service sales increased
$47,000, or 8%, to $621,000 in the nine months ended September 30, 2005 from
$574,000 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 $462,000, or 63%, in the nine months ended September 30, 2005 from
$739,000 in same period in 2004 to $277,000 in the current period. During the
nine months ended September 30, 2004, the Company sold two distributed circuit
board assembly machines compared to none in the current period.
Custom factory automation sales increased $509,000, or 94%, to $1,049,000
in the nine months ended September 30, 2005 from $540,000 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.
ddn initial sales were $11,000 during the nine months ended September 30,
2005 and consisted of installation services and rental revenue.
17
AMISTAR CORPORATION
Results of Operations, Continued
Gross Profit
- ------------
Gross profit decreased $28,000, or 7%, to $650,000 during the nine months
ended September 30, 2005 compared to $678,000 in the same period in 2004 due
primarily to a $31,000, or 5%, decrease in gross profit from AIA sales and
slightly offset by a $3,000 increase in ddn gross profit on its initial sales.
The AIA gross profit decreased $31,000, or 5%, in the nine months ended
September 30, 2005 to $647,000 from $678,000 in the same period in 2004, due to
decreased distributed sales, a $116,000 increase in the reserve for inventory
obsolescence related to excess DataPlace 100LP machine and component inventory,
and partially offset by increased gross profit on higher industrial automation
sales.
The remaining gross profit of $3,000 was related to ddn's initial sales.
Selling Expenses
- ----------------
Selling expenses increased $59,000, or 7%, to $919,000 in the nine months
ended September 30, 2005 from $860,000 in the same period of 2004, due primarily
to additions of field service personnel, and increased 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 $1,019,000, or 85%, to
$2,223,000 in the nine months ended September 30, 2005 from $1,204,000 in the
comparable period of 2004, due primarily to an $920,000 increase in litigation
defense costs related to the suit with Asteres, Inc.
Engineering, Research and Development Expenses
- ----------------------------------------------
Engineering, research and development expenses increased $334,000, or 61%,
to $883,000 in the nine months ended September 30, 2005 compared to $549,000 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 APM(TM) machine. The
engineering group provided billable engineering design services and allocated
$183,000 to cost of sales related to design contracts and $66,000 in engineering
labor costs to work-in-process inventory, most of which is expected to be
completed in the fourth quarter of 2005. During the nine months ended September
30, 2005, costs of $625,000 were incurred related to the development of the
APM(TM) machine.
Other Income
- ------------
Other income primarily consists of $312,000 for amortization of the
deferred gain on the sale-leaseback of the Company's headquarters facility and
an $83,000 gain on sale of primarily AMS equipment.
Income Taxes
- ------------
The $4,000 provision represents the Company's minimum tax liability to
various states.
18
AMISTAR CORPORATION
Results of Operations, Continued
Discontinued operations
- -----------------------
The loss from discontinued operations decreased $22,000 in the nine months
ended September 30, 2005 to $59,000 compared to a loss of $81,000 in the same
period of 2004, due primarily to the gain on disposal of equipment and partially
offset by a decrease in gross profit during the current period.
AMS sales increased $2,090,000, or 41%, to $7,206,000 during the nine
months ended September 30, 2005 from $5,116,000 from the comparable period in
2004, primarily due to shipments to a new defense-industry customer and sales of
components to customers related to the planned exit from the electronic
manufacturing services market.
The AMS gross profit decrease was due primarily to $83,000 of manufacturing
employee separation costs related to the planned exit from the manufacturing
services market, increased overhead to support the higher sales level and
partially offset by higher margins related to increased sales of component
material.
The cash flows provided from discontinued operations of $1,345,000 was
primarily due to a reduction of inventory and accounts receivable, proceeds from
the sale of equipment and partially offset by a reduction in accounts payable.
LIQUIDITY
The Company's cash used in operating activities was $3,067,000 for the nine
months ended September 30, 2005, a $1,649,000 increase over the cash used in
operating activities of $1,418,000 for the comparable period in 2004. The
increase in cash used in operating activities was due primarily to the increased
loss, which included $1,026,000 in litigation defense costs and $662,000 in
start-up, marketing and development costs for ddn, a decrease in accounts
payable, accrued and other liabilities and partially offset by a decrease in
accounts receivable, and 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.
The Company generated cash to partially offset its loss from continuing
operations and reduction of accounts payable, accrued and other liabilities of
$232,000 primarily from cash flows provided from discontinued operations of
$1,398,000, and to a lesser extent by reducing its accounts receivable $214,000
and inventory by $242,000, during the nine months ended September 30, 2005. The
Company expects to further generate additional cash in the fourth quarter
resulting from the sale of assets of the discontinued operation.
Capital expenditures of $37,000 were made for production equipment to
improve capabilities in AIA 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 its 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
19
AMISTAR CORPORATION
Liquidity, Continued
account totaling approximately $79,489 was returned to the Company's
unrestricted cash account during the current quarter.
The Company plans to exit the electronic manufacturing services market
subject to certain continuing obligations during the fourth quarter of 2005 as
part of its strategy to convert assets to cash in order to improve liquidity and
to support its entry into the retail pharmacy market with its APM(TM) automated
prescription delivery machine and system. The Company incurred employee
separation costs of $89,000, a write-down of equipment held for sale of $36,000,
and recognized a gain on sale of equipment of $81,000 during the current
quarter. In addition, the Company sold certain component inventory back to
customers that elected to not transfer their orders to SMS. As of September 30,
2005, equipment that is expected to be sold during the fourth quarter of 2005
totaling $119,000 was reclassified as Assets from Discontinued Operations.
ddn exhausted its funds during the third quarter of 2005 and the Company is
funding ddn's cash shortfall on a month-by-month basis as required by making
loans.
Management expects to incur additional operating losses in fiscal 2005
primarily as a result of expenditures to support ddn's operations 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.
The Company incurred litigation expenses of $1,026,000 during the nine
months ended September 30, 2005, which has had an adverse effect on its cash
balances. In August 2005, the Company's law firm representing it in its
litigation defense, agreed to defer the payment of legal fees exceeding a
certain fixed amount per month until the litigation is concluded. The Company
will continue to reimburse its law firm for any out-of-pocket costs as incurred.
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 the
sale of AMS assets and reductions of AMS non-cash working capital along with
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.
20
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 was 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" related to incorrect costing of our AMS inventory based on
incorrect raw material standards and incorrect AMS work-in-process inventory
quantities recorded.
The material weakness did not result in the restatement of any previously
reported financial statements, results of operations or any other related
financial disclosures.
The following required remediation steps were fully implemented as of
September 30, 2005:
o Implemented modifications to our physical inventory software system to
more accurately report work-in-process physical inventory count
adjustments and final balances.
o Trained materials management personnel and replaced certain personnel
to achieve a higher level of competency.
o Increased cost accounting personnel resources to monitor, evaluate and
maintain standard costs. In addition, expanded the scope of internal
testing of standard costs and procedures were enhanced.
o Updated standard costs to reflect FIFO costing.
Based on testing that we have performed, management has concluded that the
material weakness no longer exists.
There has been no other 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 effective.
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 26, 2004, the Company, its subsidiary 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, 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
April 2006. 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 scheduled for January 2006. In addition, the Company,
on August 25, 2005, filed a cross complaint, alleging fraud, anti-trust
violation, and other wrongful actions and is seeking damages. There can be no
assurance of a favorable outcome if the cases proceed to trial.
ITEMS 2-3. Non-Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
NASDAQ Delisting
- ----------------
The Company was formerly traded on the NASDAQ Small Cap market and subject
to certain continuing listing requirements, which included the maintenance of
minimum equity of $2,500,000. As of June 30, 2005, the Company's equity was
$1,706,000, and accordingly did not meet the continuing listing requirements of
NASDAQ. As a result, the Company's stock was de-listed by NASDAQ on September
12, 2005 and the Company's stock is currently quoted on the Over the Counter
Pink Sheet 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
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 18, 2005
AMISTAR CORPORATION
By /s/ Gregory D. Leiser
-----------------------------
Gregory D. Leiser
Vice President Finance and
Chief Financial Officer (Principal
Financial and Accounting Officer)
23