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, 2006
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)
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........................17
Item 3. Controls and Procedures...............................................................23
PART II OTHER INFORMATION
Item 1. Legal Proceedings......................................................................24
Item 4. Submission of Matters to a Vote of Security Holders....................................24
Item 5. Other Information......................................................................24
Item 6. Exhibits and Reports...................................................................24
Part I
ITEM 1. FINANCIAL STATEMENTS
AMISTAR CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited and in thousands, except share data)
June 30, Dec. 31,
2006 2005 (A)
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 665 $ 1,482
Trade accounts receivable, net of
reserves of $7 (2006) and $10 (2005) 438 373
Inventories, net of reserves of
$1,515 (2006) and $1,789 (2005) 2,259 2,079
Assets of discontinued operation 29 673
Demonstration equipment 107 61
Prepaid expenses 137 174
--------- ---------
Total current assets 3,635 4,842
Property and equipment, net 79 98
Other assets 457 457
--------- ---------
$ 4,171 $ 5,397
========= =========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 534 $ 805
Customer deposits and accrued liabilities 1,610 1,178
Liabilities of discontinued operation -- 61
Current portion of deferred gain on sale lease-back of property 417 417
--------- ---------
Total current liabilities 2,561 2,461
Deferred gain on sale lease-back of property, net of current portion 3,107 3,315
Other long-term liabilities 134 104
--------- ---------
Total liabilities 5,802 5,880
--------- ---------
Common stock subject to registration 500 --
Shareholders' equity:
Preferred stock,$.01 par value. Authorized
2,000,000 shares; none outstanding -- --
Common stock, $.01 par value. Authorized
20,000,000 shares; 3,306,544 and
3,169,544 shares issued and
outstanding at June 30, 2006 and
Dec. 31, 2005, respectively 33 32
Additional paid-in capital 4,831 4,746
Retained deficit (6,995) (5,261)
--------- ---------
Total shareholders' deficit (2,131) (483)
--------- ---------
$ 4,171 $ 5,397
========= =========
(A) Derived from the audited consolidated financial statements as of December 31, 2005.
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,
2006 2005 2006 2005
------- ------- ------- -------
Net sales $ 1,186 $ 1,087 $ 1,907 $ 2,219
Cost of sales 985 870 1,613 1,612
------- ------- ------- -------
Gross profit 201 217 294 607
------- ------- ------- -------
Operating expenses:
Selling 341 310 719 604
General and administrative 475 718 1,042 1,360
Engineering, research and development 235 438 514 616
------- ------- ------- -------
1,051 1,466 2,275 2,580
------- ------- ------- -------
Loss from continuing operations (850) (1,249) (1,981) (1,973)
Other income 111 117 238 234
------- ------- ------- -------
Loss from continuing operations before --
income taxes (739) (1,132) (1,743) (1,739)
Income tax expense 1 2 2 3
------- ------- ------- -------
Net loss from continuing operations (740) (1,134) (1,745) (1,742)
Income (loss) from discontinued operations
net of income taxes (76) (122) 11 (168)
------- ------- ------- -------
Net loss $ (816) $(1,256) $(1,734) $(1,910)
======= ======= ======= =======
Loss per common share on continuing
operations-basic and diluted $ (0.23) $ (0.36) $ (0.54) $ (0.56)
======= ======= ======= =======
Income (loss) per common share on
discontinued operations-basic and diluted $ (0.02) $ (0.04) $ 0.00 $ (0.05)
======= ======= ======= =======
Weighted-average shares
outstanding, basic and diluted 3,270 3,143 3,227 3,143
======= ======= ======= =======
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, 2006 2005
- ------------------------------------------------------------------------------------------
(Revised)
Cash flows from operating activities:
Net loss $(1,734) $(1,910)
Net cash provided by operating activities of
discontinued operation 567 677
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 20 25
Amortization of deferred gain on sale lease-back of property (208) (208)
Share-based compensation expense 66 33
Changes in assets and liabilities:
Trade accounts receivable, net (65) (45)
Inventories, net (180) 175
Demonstration equipment (46) 3
Prepaid expenses and other assets 37 6
Accounts payable, customer deposits, accrued and
other liabilities 191 (282)
------- -------
Net cash used in operating activities (1,352) (1,526)
------- -------
Cash flows from investing activities:
Purchase of property and equipment (1) (43)
Purchase of property and equipment of discontinued operations -- (14)
Proceeds from sale of property and equipment of
discontinued operation 16 --
------- -------
Net cash used in investing activities 15 (57)
------- -------
Cash flows from financing activities:
Redemption of Industrial Development Bonds -- (2,700)
Decrease in restricted cash, net -- 2,788
Issuance of common stock 500 --
Exercise of stock options 20 1
------- -------
Net cash provided by financing activities 520 89
------- -------
Net decrease in cash and cash equivalents (817) (1,494)
Cash and cash equivalents, beginning of period 1,482 3,172
------- -------
Cash and cash equivalents, end of period $ 665 $ 1,678
======= =======
Supplemental disclosure of cash flow information-
Cash paid during the period for:
Interest $ -- $ 4
======= =======
Income taxes $ 4 $ 28
======= =======
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
- -----------------------
In September 2005, the Company discontinued 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.
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.
We have separately disclosed the operating, investing and financing
portion of cash flows attributable to discontinued operations, which in previous
reports, were reported on a combined basis as a single amount.
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 Six months ended
June 30, June 30,
2006 2005 2006 2005
------- ------- ------- -------
Net sales $ 71 $ 1,617 $ 242 $ 5,036
Income from discontinued operations (76) (122) 11 (168)
Income taxes -- -- -- --
------- ------- ------- -------
Net income (loss) from discontinued operations $ (76) $ (122) $ 11 $ (168)
======= ======= ======= =======
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:
June 30, Dec. 31,
2006 2005
---------- ----------
Accounts receivable,net $ 23 $ 506
Inventory, net of reserves 6 165
Equipment held for sale - 2
---------- ----------
Assets of discontinued operation $ 29 $ 673
========== ==========
Accounts payable - 1
Accrued liabilities - 60
---------- ----------
Liabilities of discountinued operation $ - $ 61
========== ==========
Litigation
- ----------
On August 26, 2004, Amistar Corporation, Distributed Delivery Networks
Corporation, and William Holmes (the CEO of Distributed Delivery Networks) were
sued by Asteres, Inc. in the California Superior Court for the County of San
Diego, California. The complaint alleged causes of action for misappropriation
of trade secret, breach of a confidential disclosure agreement, unfair
competition and breach of the covenant of good faith and fair dealing.
Subsequently the Company filed a counter-claim for fraud, anti-trust violation
and other wrongful actions. On February 2, 2006, the Company and affiliates
settled the litigation with Asteres, Inc. and affiliates. According to the terms
of the settlement agreement, all parties dismissed their complaints with
prejudice. The terms of the settlement agreement did not have a financial impact
on the Company, other than its obligation for legal defense fees and costs.
Liquidity and Management's Plan
- -------------------------------
The Company's cash used in operating activities decreased $105,000 from
$2,035,000 in the six months ended June 30, 2005 to $1,930,000 in the six months
ended June 30, 2006, primarily due to the decrease in accounts payable and an
increase in inventory in the six months ended June 30, 2006, compared to the
same period in 2005. Working capital decreased $1,307,000 to $1,074,000 in the
six months ended 2006, compared to $2,381,000 in the comparable period of 2005,
primarily due to the loss in the six months ended June 30, 2006.
Cash provided from discontinued operations increased $99,000 to
$594,000 in the six months ended 2006, compared to $495,000 in the comparable
period of 2005, primarily due to collection of accounts receivable, reduction of
inventory and sale of fixed assets of the discontinued operation during the six
months ended June 30, 2006, compared to when the division was still operating in
the same period of 2005.
The Company used cash during the six months ended June 30, 2006,
primarily as a result of a $1,745,000 loss from continuing operations, an
increase in inventory and partially offset by 1) $191,000 provided primarily
from an increase in customer deposits related to new
7
AMISTAR CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
purchase orders, 2) a $594,000 reduction in net assets of the discontinued
operation and 3) issuance of unregistered stock.
The Company incurred litigation expenses, included in General and
Administrative expense of $83,000 during the six months ended June 30, 2006,
related to the case that was settled with Asteres. The Company used cash of
approximately $260,000 and issued 62,500 unregistered shares of common stock to
its law firm to satisfy its accounts payable obligation for legal fees during
the six months ended June 30, 2006.
Inter-company loans totaling $221,000 were made to Distributed Delivery
Networks, its majority-owned subsidiary, during the six months ended of 2006 to
fund its operations.
On March 30, 2006, the Company and Mr. Marshall (a director of the
Company), along with certain members of management, entered into a $1,500,000
revolving credit line facility, secured by accounts receivable, having a term of
two years, with interest on advances accruing at prime plus two percentage
points, to provide working capital for the company. The credit line facility has
no financial covenants. As of the filing date of this report, no advances have
been made on the credit line.
On March 30, 2006, the Company and Mr. Marshall (a director with the
Company) and its law firm entered into separate Stock Purchase and Registration
Rights Agreements by which the Company issued 62,500 unregistered shares of
common stock in April 2006 in return for $250,000 or $4.00 per share. The
proceeds from the sale of shares to Mr. Marshall were used for working capital.
The shares issued to the Company's law firm were to satisfy $250,000 of the
payable owed for legal fees. The Registration Rights Agreements required the
Company, using its best efforts, to file a Registration Statement to effect a
shelf registration. The Company currently plans to register the shares along
with a new registration, if it is successful in raising funds through an equity
offering.
Based on the Company's cash position, and assuming currently planned
expenditures and level of operations, management believes the Company will not
have sufficient capital resources for the twelve months ending June 30, 2007,
and has an approximately six-month supply of cash and available borrowings on
its line of credit. To remain viable beyond the six month period ended December
31, 2006, the Company must return to profitability, which will be largely
dependent on its success in generating sales of its Rx-APM-448, reduce its
facility costs and/or raise debt or equity capital. The Company believes it will
be able to reduce its facility costs during the fourth quarter of 2006, and is
in the process of seeking to raise equity capital. Management believes it will
be required to obtain sufficient purchase orders for its Rx-APM(TM)-448
demonstrating that 1) the product has moved beyond the trial stage of
development and 2) that market demand exists for the product, in order to be
successful in its efforts to raise equity capital. There can be no assurances
that the Company will be successful in achieving these objectives or the extent
to which the Company will be able to achieve a profitable level of operations or
sufficient liquidity to sustain operations. If the Company is not successful in
executing the aforementioned plan, there will be substantial doubt about its
ability to continue as a going concern.
8
AMISTAR CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
The accompanying unaudited condensed consolidated financial statements
of the Company have been prepared in accordance with Rule 10-01 of Regulation
S-X promulgated by the Securities and Exchange Commission and, therefore, do not
include all information and footnotes necessary for a fair presentation of
financial position, results of operations and cash flows in conformity with
accounting principles generally accepted in the United States of America. In the
opinion of the Company, however, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the Company's
financial position as of June 30, 2006, its results of operations for the three
and six months ended June 30, 2006 and 2005, and its cash flows for the six
months ended June 30, 2006 and 2005, respectively. The results of operations of
the Company for the three and six month periods ended June 30, 2006 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, 2005 as filed with the Securities and Exchange Commission on
March 30, 2006.
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 $1,515 and $1,789 at
June 30, 2006 and December 31, 2005, respectively:
June 30, Dec. 31,
2006 (In thousands) 2005 (In thousands)
--------------------------- --------------------------
AIA ddn Total AIA ddn Total
------ ------ ------ ------ ------ ------
Raw Material $ 230 $ -- $ 230 $ 196 $ -- $ 196
Work In Process 896 -- 896 680 -- 680
Finished Goods 1,087 46 1,133 1,185 18 1,203
------ ------ ------ ------ ------ ------
Total $2,213 $ 46 $2,259 $2,061 $ 18 $2,079
====== ====== ====== ====== ====== ======
9
AMISTAR CORPORATION
Notes to Condensed Consolidated Financial Statements
(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,
2006 2005 2006 2005
------- ------- ------- -------
Weighted-average shares, basic 3,270 3,143 3,227 3,143
Dilutive effect of stock options - - - -
------- ------- ------- -------
Weighted-average shares, diluted 3,270 3,143 3,227 3,143
======= ======= ======= =======
Options to purchase approximately 204,000 and 141,000 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, 2006 and 2005,
respectively, because the effects of these instruments were anti-dilutive.
10
AMISTAR CORPORATION
Notes to Condensed Consolidated Financial Statements
(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 Distributed
Delivery Networks, 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
-------------------------------------- DISTRIBUTED
UNITED DELIVERY CONTINUING DISCONTIN.
STATES FOREIGN TOTAL NETWORKS CORPORATE TOTAL SEGMENT
- --------------------------------------------------------------------------------------------------- -----------------------------
Three months ended June 30, 2006
Net sales $ 1,137 $ 49 $ 1,186 $ -- $ -- $ 1,186 $ 71
========= ========= ========= ========= ======== ======= =======
Depreciation and amortization 6 -- 6 -- 4 10 --
========= ========= ========= ========= ======== ======= =======
Income (Loss) from operations (602) (61) (663) (187) -- (850) (76)
========= ========= ========= ========= ======== ======= =======
Total assets 2,621 101 2,722 187 1,233 4,142 29
========= ========= ========= ========= ======== ======= =======
Additions to long-lived assets 1 -- 1 -- -- 1 --
========= ========= ========= ========= ======== ======= =======
THREE MONTHS ENDED JUNE 30, 2005
Net sales $ 977 $ 110 $ 1,087 $ -- $ -- $ 1,087 $ 1,617
========= ========= ========= ========= ======== ======= =======
Depreciation and amortization 12 -- 12 2 (3) 11 24
========= ========= ========= ========= ======== ======= =======
Loss from operations (933) (105) (1,038) (211) -- (1,249) (122)
========= ========= ========= ========= ======== ======= =======
Total assets 2,024 -- 2,024 79 2,235 4,338 2,473
========= ========= ========= ========= ======== ======= =======
Additions to long-lived assets 7 -- 7 -- -- 7 --
========= ========= ========= ========= ======== ======= =======
SIX MONTHS ENDED JUNE 30, 2006
Net sales $ 1,806 $ 89 $ 1,895 $ 12 $ -- $ 1,907 $ 242
========= ========= ========= ========= ======== ======= =======
Depreciation and amortization 13 -- 13 2 5 20 --
========= ========= ========= ========= ======== ======= =======
Loss from operations (1,533) (82) (1,615) (366) -- (1,981) 11
========= ========= ========= ========= ======== ======= =======
Additions to long-lived assets 1 -- 1 -- -- 1 --
========= ========= ========= ========= ======== ======= =======
SIX MONTHS ENDED JUNE 30, 2005
Net sales $ 1,984 $ 235 $ 2,219 $ -- $ -- $ 2,219 $ 5,036
========= ========= ========= ========= ======== ======= =======
Depreciation and amortization 16 -- 16 2 7 25 53
========= ========= ========= ========= ======== ======= =======
Loss from operations (1,353) (160) (1,513) (460) -- (1,973) (168)
========= ========= ========= ========= ======== ======= =======
Additions to long-lived assets 37 -- 37 -- 6 43 14
========= ========= ========= ========= ======== ======= =======
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 six
months ended June 30, 2006 and 2005 (in thousands):
Charged to
Beginning costs and Ending
Balance expense Deductions Balance
- --------------------------------------------------------------------
Three months ended:
6/30/2006 $ 36 $ 31 $ (5) $ 62
========== =========== ========== ==========
6/30/2005 $ 45 $ 22 $ (14) $ 53
========== =========== ========== ==========
Six months ended:
6/30/2006 $ 41 $ 44 $ (23) $ 62
========== =========== ========== ==========
6/30/2005 $ 31 $ 57 $ (35) $ 53
========== =========== ========== ==========
12
AMISTAR CORPORATION
Notes to Condensed Consolidated Financial Statements, continued
(Unaudited)
Stock-Based Compensation
- ------------------------
In December 2004, the Financial Accounting Standards Board (FASB) revised
Statement of Financial Accounting Standards No. 123 (FAS 123R), "Share-Based
Payment," which establishes accounting for share-based awards exchanged for
employee services and requires companies to expense the estimated fair value of
these awards over the requisite employee service period. On April 14, 2005, the
U.S. Securities and Exchange Commission adopted a new rule amending the
effective dates for FAS 123R. In accordance with the new rule, the Company
adopted the accounting provisions of FAS 123R beginning in the first quarter of
2006.
Under FAS 123R, share-based compensation cost is measured at the grant
date, based on the estimated fair value of the award, and is recognized as
expense over the employee's requisite service period. The Company has no awards
with market or performance conditions. The Company adopted the provisions of FAS
123R on January 1, 2006, the first day of the 2006, using a modified prospective
application, which provides for certain changes to the method for valuing
share-based compensation. Under the modified prospective application, prior
periods are not revised for comparative purposes. The valuation provisions of
FAS 123R apply to new awards and to awards that are outstanding on the effective
date and subsequently modified or cancelled. Estimated compensation expense for
awards outstanding at the effective date will be recognized over the remaining
service period of four years using the compensation cost calculated for pro
forma disclosure purposes under FASB Statement No. 123, "Accounting for
Stock-Based Compensation" (FAS 123).
On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3,
"Transition Election Related to Accounting for Tax Effects of Share-Based
Payment Awards."
The Company has elected to adopt the alternative transition method provided
in this FASB Staff Position for calculating the tax effects of share-based
compensation pursuant to FAS 123R. The alternative transition method includes a
simplified method to establish the beginning balance of the additional paid-in
capital pool (APIC pool) related to the tax effects of employee share-based
compensation, which is available to absorb tax deficiencies recognized
subsequent to the adoption of FAS 123R.
The Company has elected to continue utilizing the Black-Scholes valuation
model to measure fair value of future grants. FAS 123R requires forfeitures on
grants issued subsequent to January 1, 2006, to be estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates.
Stock option grants of 81,500 shares at a weighted average fair value of
$1.75 per share using the Black-Scholes valuation model were made in the
three-months ended June 30, 2006, with the following weighted average
assumptions:
- -----------------------------------------------------------------------------
Volatility 66.71%
- -----------------------------------------------------------------------------
Risk-free interest rate 5.13%
- -----------------------------------------------------------------------------
Forfeiture rate 14.60%
- -----------------------------------------------------------------------------
13
AMISTAR CORPORATION
Notes to Condensed Consolidated Financial Statements, continued
(Unaudited)
The volatility assumption was based on historical closing stock prices of
the Company's stock over the past five years consistent with the option term.
The risk-free interest rate assumption was based on the observed interest
rates consistent with the option term.
The forfeiture rate assumption was based on the Company's historical option
cancellation information.
The Company has adopted the safe-harbor, mid-point of term, estimated
option life of 3.75 years for any grants made in 2006 and 2007.
The Company recorded estimated share-based compensation expense of $13,000
during the three and six-months ended June 30, 2006, related to the 2006 grants.
The Company recorded estimated share-based compensation expense of $27,000 and
$53,000 during the three and six-months ended June 30, 2006, respectively,
related to grants and awards made prior to 2006.
Total share-based compensation expense for all awards was recognized for
the three and six months ended June 30, 2006, as follows (in thousands, except
per share data).
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2006 2006
------------ ----------
Cost of sales $ 2 $ 2
Selling 20 38
General and Administrative 10 15
Engineering, research and development 8 11
------------ ----------
Share-based compensation expense, before of taxes 40 66
Related income tax benefits - --
------------ ----------
Share-based compensation expense, net of taxes $ 40 $ 66
============ ==========
Net share-based compensation expense, per common share:
Basis and Diluted $ 0.01 $ 0.02
============ ==========
Pro Forma Information under FAS 123 for Periods Prior to Fiscal 2006
- --------------------------------------------------------------------
Prior to adopting the provisions of FAS 123R, the Company recorded
estimated compensation expense for employee stock options based upon their
intrinsic value on the date of grant pursuant to Accounting Principles Board
Opinion 25 (APB 25), "Accounting for Stock Issued to Employees" and provided the
required pro forma disclosures of FAS 123.
14
AMISTAR CORPORATION
Notes to Condensed Consolidated Financial Statements, continued
(Unaudited)
Because the Company established the exercise price based on the fair market
value of the Company's stock at the date of grant, the stock options had no
intrinsic value upon grant, and therefore no estimated expense was recorded
prior to adopting FAS 123R. Each accounting period, the Company reported the
potential dilutive impact of stock options in its diluted earnings per common
share using the treasury-stock method. Out-of-the-money stock options (i.e., the
average stock price during the period was below the strike price of the stock
option) were not included in diluted earnings per common share as their effect
was anti-dilutive.
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 prior
to January 1, 2006, 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, 2006 and 2005
as follows (in thousands, except per share amounts):
Period ended June 30, 2005
- ------------------------------------------------------------ Three Months Six Months
Ended Ended
------------ -----------
Net loss - as reported $ (1,256) (1,910)
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) (52)
------------ -----------
Pro forma net loss $ (1,265) (1,929)
============ ===========
Loss per share:
Basic and diluted, as reported $ (0.40) (0.61)
Basic and diluted, pro forma $ (0.40) (0.61)
(A) In addition to compensation expense, this amount is also recorded as an
increase to Additional Paid-In Capital.
There were 30,000 shares granted during the three and six months ended June
30, 2005 to directors from the 2005 plan. The estimated share-based compensation
expense related to the grants for the three and six months ended June 30, 2005,
was recorded at a weighted-average fair value of $1.81, on the date of grant
using the Black-Scholes fair value option-pricing model with the following
weighted-average assumptions: expected life of 4.8 years, expected volatility of
60%, no dividends, and risk-free interest rate of 3.78%.
15
AMISTAR CORPORATION
Notes to Condensed Consolidated Financial Statements, continued
(Unaudited)
Stock option activity during the six months ending June 30, 2006 was as follows:
WEIGHTED AGGREGATE
NUMBER AVE EXERCISE INTRINSIC
OF SHARES PRICE VALUE
--------- ------------ ----------
Outstanding, Dec. 31, 2005 134,250 $ 2.14
Granted 81,500 3.40
Exercised (12,000) 1.65
Expired -- --
-------- ---------
Outstanding, June 30, 2006 203,750 $ 2.63 $ 180,000
======== ========= =========
The range of exercise prices on options outstanding at June 30, 2006 are as
follows:
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Number Life (In Exercise Number Exercise
Exercise Price Outstanding Years) Price Exercisable Price
- --------------------------------------------------------------------------------
$0.81 - $1.00 25,250 1.70 $ 0.81 11,250 $ 0.81
$1.76 - $2.21 67,000 2.80 2.16 29,500 2.16
$3.30 - $3.40 111,500 4.90 3.32 30,000 3.40
- --------------------------------------------------------------------------------
$0.81 - $3.40 203,750 3.50 $ 2.63 48,250 $ 2.04
================================================================================
16
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, 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, fluctuations in the price of the Company's stock, ability to
continue as a going concern as described in the Liquidity section and other
factors.
RESULTS OF OPERATIONS
SECOND QUARTER 2006 COMPARED TO SECOND QUARTER 2005
Net Sales
- ---------
Net sales for the second quarter of 2006 increased $99,000, or 9%, to
$1,186,000 compared to $1,087,000 for the same period in the prior year. The
increase in net sales was primarily due to the increase in Amistar Industrial
Automation ("AIA") distributed product line sales and partially offset by a
decrease in AIA custom factory automation machine and specialty product sales.
Following is a discussion of AIA sales by product line:
DataPlace machine sales increased $67,000, or 74%, to $158,000 from
$91,000 during the second quarter of 2006 compared to the second quarter of
2005, primarily due to the sale of a DataPlace 100LP during the second quarter
of 2006 compared to the sale of a lower priced DataPlace 1M model during the
same period of 2005. Demand for the Company's DataPlace machines has been uneven
with no clear trend over the past several years.
Through-hole assembly machines, spare parts and service sales decreased
$47,000, or 25%, to $140,000 in the second quarter of 2006 from $187,000 in the
same period of 2005, primarily due to the trend of a declining number of
through-hole machines in production out in the market, that require spare parts.
Distributed circuit board assembly machine, accessory and spare parts
sales increased $388,000, or 625%, in the second quarter of 2006 from $62,000 in
the second quarter of 2005 to $450,000 in the current quarter. The increase is
primarily due to two circuit-board assembly machine sales in the three months
ended June 30, 2006 vs. only spare parts and accessories sold in the comparable
quarter of 2005.
Custom factory automation sales decreased $309,000, or 41%, to $438,000
in the second quarter of 2005 from $747,000 in the comparable quarter of 2005,
due primarily to shipments of machine and engineering services having a lower
contract price than in the comparable quarter of 2005.
17
AMISTAR CORPORATION
Results of Operations, Continued
Distributed Delivery Networks has not generated sales of its Rx-APM-448
machine as of June 30, 2006. The Company is in the process of marketing the
machine and has received orders for two machines in the period subsequent to the
second quarter of 2006. The timing and extent of market acceptance for the
Rx-APM-448 is uncertain, as the market is in an early stage and the technology
is new.
Gross Profit
- ------------
Gross profit decreased $16,000, or 7%, to $201,000 during the second
quarter of 2006 compared to $217,000 in the same period in 2005. This decrease
was due primarily to increased manufacturing variances resulting from a lower
production volume and less overhead absorbed in manufactured products than in
the comparable quarter of 2005.
Selling Expenses
- ----------------
Selling expenses increased $31,000, or 10%, to $341,000 in the second
quarter of 2006 from $310,000 in the comparable quarter of 2005, due primarily
to increased field machine demonstration costs in Distributed Delivery Networks
in the second quarter of 2006 compared to the same quarter in 2005. The
increased field demonstration costs during the second quarter of 2006 was due to
support costs related to an increased number of Rx-APM machines in the field on
trial, compared to the same period in 2005.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses decreased $243,000, or 34%, to
$475,000 in the second quarter of 2006 from $718,000 in the second quarter of
2005, due primarily to $299,000 in litigation defense costs in the second
quarter of 2005, compared to none in the second quarter of 2006.
Engineering, Research and Development Expenses
- ----------------------------------------------
Engineering, research and development expenses decreased $203,000, or
46%, to $235,000 in the second quarter of 2006, compared to $438,000 the same
period in 2005, due primarily to decreased development costs related to the
Rx-APM(TM)-448 machine for the retail and other pharmacy markets. During the
second quarter of 2006, development continued a lower level than during the same
period in 2005, as the Rx- APM(TM) machine neared completion of the primary
development stage.
The engineering staff has been used primarily in support of custom
factory engineering design activities and development of the Rx-APM(TM)-448
machine. During the second quarter of 2006, costs of $126,000 were incurred
related to the development of the Rx-APM(TM)-448 machine, compared to $359,000
during the same quarter of 2005.
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 for
the second quarters of 2006 and 2005.
Income Taxes
- ------------
The $1,000 and $2,000 provision represents the Company's minimum tax
liability to various states for the second quarters of 2006 and 2005,
respectively. A 100% valuation allowance was recorded against deferred tax
assets.
18
AMISTAR CORPORATION
Results of Operations, Continued
Discontinued operations
- -----------------------
The loss from discontinued operations decreased $46,000 in the second
quarter of 2006 to $76,000 compared to a loss of $122,000, due primarily to a
higher gross margin on commission sales, lower operating costs and partially
offset by an increase in the allowance for doubtful accounts, compared to the
same period in 2005.
AMS sales decreased $1,546,000, or 96%, to $71,000 in the second
quarter of 2006 from $1,617,000 for the comparable quarter in 2005, primarily
due to the discontinuance of operations in 2005.
Gross profit increased $94,000 or 235% to $54,000 in the second quarter
of 2006 from $40,000 in the comparable period of 2005, due primarily to the
discontinuance of operations, higher margin commission sales and the resulting
elimination of factory overhead costs. During the second quarter of 2006, sales
consisted of commission sales and sales of component inventory at cost per the
terms of a transition agreement.
General and administrative expense included a $127,000 increase in the
allowance for doubtful accounts during the second quarter of 2006 compared to
none in the same period of 2005.
SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO THE SAME PERIOD IN 2005
Net Sales
- ---------
Net sales for the six months ended June 30, 2006 decreased $312,000, or
14%, from $2,219,000 in the six months ended June 30, 2005, to $1,907,000. The
decrease in net sales was primarily due to the decrease in AIA custom factory
automation sales.
Following is a discussion of AIA sales by product line:
DataPlace machine sales decreased $167,000, or 32%, to $358,000 from
$525,000 during the six months ended June 30, 2006 compared to the same period
of 2005, primarily due to fewer machines sold in the six months ended June 30,
2006 compared to the same period of 2005. The Company sold two DataPlace 100LP
and one DataPlace 1M machines in the six months ended June 30, 2006 compared to
three DataPlace 100LP, two DataPlace 1M, three DataPlace LCL and one DataPlace
Laser machines in the comparable period of 2005. Demand for the Company's
DataPlace machines has been uneven with no clear trend over the past several
years.
Through-hole assembly machines, spare parts and service sales decreased
$175,000, or 36%, to $300,000 in the six months ended June 30, 2006 from
$475,000 in the same period of 2005, primarily due to a sale of the last
remaining through-hole assembly machine during the six months ended June 30,
2005 and to a lesser extent due to the trend of the declining number of
through-hole machines in production in the market requiring spare parts.
Distributed circuit board assembly machine, accessory and spare parts
sales increased $524,000, or 271%, in the six months ended June 30, 2006, to
$717,000 from $193,000 in the same period of 2005. The increase is primarily due
to two circuit-board assembly machine sales in the six months ended June 30,
2006 vs. only spare parts and accessories sold in the comparable period of 2005.
Custom factory automation sales decreased $441,000, or 43%, from
$1,025,000 in the six months ended June 30, 2005 to $583,000 in the six months
ended June 30, 2006, due primarily from shipments of machine and engineering
services having a lower contract price than in the comparable period. Sales in
the six months ended June 30, 2005, included a four-machine shipment to a single
customer.
19
AMISTAR CORPORATION
Results of Operations, Continued
Distributed Delivery Networks, (the Company's majority-owned
subsidiary) sales were $12,000 in the six months ended June 30, 2006, compared
to none in the same period of 2005 and consisted of installation services and
rental revenue. Distributed Delivery Networks has not generated sales of its
Rx-APM-448 machine as of June 30, 2006. The Company is in the process of
marketing the machine and has received orders for two machines in the period
subsequent to the second quarter of 2006. The timing and extent of market
acceptance for the Rx-APM-448 is uncertain, as the market is in an early stage
and the technology is new.
Gross Profit
- ------------
Gross profit decreased $313,000, or 51%, from $607,000 during the six
months ended June 30, 2005, compared to $294,000 in the six months ended June
30, 2006. This decrease was due primarily to lower sales in the six months ended
June 30, 2006, lower DataPlace product line selling prices and increased
unabsorbed manufacturing overhead variances.
Selling Expenses
- ----------------
Selling expenses increased $115,000, or 19%, to $719,000 in the six
months ended June 30, 2006 from $604,000 in the comparable period of 2005, due
primarily to increased personnel costs resulting from the relocation of
personnel from the discontinued operation to the AIA division and to increased
Distributed Delivery Networks field demonstration personnel costs in the six
months ended June 30, 2006, compared to the comparable period in 2005. The
increased field demonstration personnel costs in Distributed Delivery Networks
during the six months ended June 30, 2006 was due to support costs related to an
increased number of Rx-APM machines in the field on trial.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses decreased $318,000, or 23%, from
$1,360,000 six months ended June 30, 2005 to $1,042,000 in the six months ended
June 30, 2006, compared, due primarily to an $512,000 decrease in litigation
defense costs in the six months ended June 30, 2006, and partially offset by
increased occupancy, audit and general legal costs compared to the comparable
period in 2005.
Engineering, Research and Development Expenses
- ----------------------------------------------
Engineering, research and development expenses decreased $102,000, or
16%, from $616,000 six months ended June 30, 2005, to $514,000 in the six months
ended June 30, 2006, due primarily to decreased development costs related to the
Rx-APM(TM)-448 machine for the retail and other pharmacy markets. During the
second quarter of 2006, development continued a lower level than during the same
period in 2005, as the Rx- APM(TM) machine neared completion of the primary
development stage.
The engineering staff has been used primarily in support of custom
factory engineering design activities and development of the Rx-APM(TM)-448
machine. During the six months ended June 30, 2006, costs of $304,000 were
incurred related to the development of the Rx-APM(TM)-448 machine compared to
$478,000 during the comparable period of 2005.
20
AMISTAR CORPORATION
Results of Operations, Continued
Other Income
- ------------
Other income primarily consists of $208,000 for amortization of the
deferred gain on the sale-leaseback of the Company's headquarters facility for
the six-month periods ended June 30, 2006 and 2005.
Income Taxes
- ------------
The $2,000 and $3,000 provision represents the Company's minimum tax
liability to various states for the six-month periods ended June 30, 2006, and
2005, respectively. A 100% valuation allowance was recorded against deferred tax
assets.
Discontinued operations
- -----------------------
The income from discontinued operations increased $179,000 in the six
months ended June 30, 2006, to $11,000 compared to a loss of $168,000 in the
same period of 2005, due primarily to increased gross profit and from the gain
on sale of equipment.
AMS sales decreased $4,795,000, or 95%, from $5,036,000 six months
ended June 30, 2005, to $241,000 in the six months ended June 30, 2006,
primarily due to the discontinuance of operations in 2005.
Gross profit increased $52,000 or 76% to $121,000 in the six months
ended June 30, 2006, from $69,000 in the comparable period of 2005, due
primarily to the discontinuance of operations, the resulting elimination of
factory overhead costs, and higher margin commission income in the six months
ended June 30, 2006. During the six months ended June 30, 2006, sales consisted
of products shipped out of finished goods inventory and commission income earned
from the successor contract manufacturer.
The cash flows provided from discontinued operations of $593,000 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 AND MANAGEMENT'S PLAN
Liquidity
- ---------
The Company's cash used in operating activities decreased $105,000 to
$1,930,000 in the six months ended June 30, 2006 from $2,035,000 in the same
period of 2005, primarily due to the increased loss in the six months ended June
30, 2006, compared to the same period in 2005. Working capital decreased
$1,307,000 to $1,074,000 in the six months ended 2006, compared to $2,381,000 in
the comparable period of 2005, primarily due to the loss in the six months ended
June 30, 2006.
Cash provided from discontinued operations increased $99,000 to
$594,000 in the six months ended 2006 compared to $495,000, primarily due to
collection of accounts receivable, reduction of inventory and sales of fixed
assets of the discontinued operation during the six months ended June 30, 2006,
compared to the prior period, when the division was still operating.
The Company used cash in the six months ended June 30, 2006, primarily
as a result of its $1,745,000 loss from continuing operations, an increase in
inventory and partially offset by 1) $191,000 provided primarily from an
increase in customer deposits related to new purchase orders, 2) a $594,000
reduction in net assets of the discontinued operation and 3) issuance of
unregistered stock.
21
AMISTAR CORPORATION
Results of Operations, Continued
The Company incurred litigation expenses, included in General and
Administrative expense of $83,000 during the six months ended June 30, 2006,
related to the case that was settled with Asteres. The Company used cash of
approximately $260,000 and issued 62,500 unregistered shares of common stock to
its law firm to satisfy its accounts payable obligation for legal fees during
the six months ended June 30, 2006.
Inter-company loans totaling $221,000 were made to Distributed Delivery
Networks, its majority-owned subsidiary, during the six months ended June 30,
2006 to fund its operations.
On March 30, 2006, the Company and Mr. Marshall (a director of the
Company), along with certain members of management, entered into a $1,500,000
revolving credit line facility, secured by accounts receivable, having a term of
two years, with interest on advances accruing at prime plus two percentage
points, to provide working capital for the company. The credit line facility has
no financial covenants. As of the filing date of this report, no advances have
been made on the credit line.
On March 30, 2006, the Company and Mr. Marshall (a director with the
Company) and its law firm entered into separate Stock Purchase and Registration
Rights Agreements by which the Company issued 62,500 unregistered shares of
common stock in April 2006 in return for $250,000 or $4.00 per share. The
proceeds from the sale of shares to Mr. Marshall were used for working capital.
The shares issued to the Company's law firm were to satisfy $250,000 of the
payable owed for legal fees. The Registration Rights Agreements required the
Company, using its best efforts, to file a Registration Statement to effect a
shelf registration. The Company currently plans to register the shares along
with a registration if it is successful in raising funds through an equity
offering.
Based on the Company's cash position, and assuming currently planned
expenditures and level of operations, management believes the Company will not
have sufficient capital resources for the twelve months ending June 30, 2007 and
has an approximately six-month supply of cash and available borrowings on its
line of credit. To remain viable for the period beyond the six-month period
ended December 31, 2006, the Company must return to profitability, which will be
largely dependent on its success in generating sales of its Rx-APM-448, reduce
its facility costs and/or raise debt or equity capital. The Company believes it
will reduce its facility costs in the fourth quarter of 2006 and is in the
process of seeking to raise equity capital. Management believes it will be
required to obtain sufficient purchase orders for its Rx-APM(TM)-448
demonstrating that 1) the product has moved beyond the trial stage of
development and 2) that market demand exists for the product, in order to be
successful in its efforts to raise equity capital. There can be no assurances
that the Company will be successful in achieving these objectives or the extent
to which the Company will be able to achieve a profitable level of operations or
sufficient liquidity to sustain operations. If the Company is not successful in
executing the aforementioned plan, there will be substantial doubt about its
ability to continue as a going concern.
22
AMISTAR CORPORATION
Results of Operations, Continued
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was
performed, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to the Securities Exchange Act of 1934, as amended. Based
upon that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were effective.
23
PART II. OTHER INFORMATION
ITEM 1-3. Non-Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 17, 2006 the annual shareholders meeting was held and the
shareholders voted on the following proposal:
Proposal #1 Elected the Board 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 2,955,449 20,010
- ---------------------------------------------------------------------
Dr. Sanford B. Ehrlich 2,968,759 6,700
- ---------------------------------------------------------------------
D. Mark Fowler 2,968,759 6,700
- ---------------------------------------------------------------------
William W. Holl 2,766,049 209,410
- ---------------------------------------------------------------------
Gordon S. Marshall 2,956,059 19,400
- ---------------------------------------------------------------------
Howard C. White 2,956,059 19,400
- ---------------------------------------------------------------------
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
(a) Exhibits:
10.15 Loan and Security Agreement dated March 30, 2006.
Incorporated by reference of the Company's Form 8-K filed
April 3, 2006.
10.16 Registration rights agreements dated March 30, 2006.
Filed with this report.
31.1 Certifications of the Company's President and Chief
Financial Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act
32.1 Certifications of the Company's President and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act
(b) Reports on Form 8-K
Form 8-k filed on February 1, 2006, reporting under items 8
Form 8-K filed on April 3, 2006, reporting under items 2 and
9.
Form 8-K filed on April 4, 2006, reporting under items 7 and
12.
Form 8-K filed on May 24, 2006, reporting under items 2 and 9.
24
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 18, 2006
AMISTAR CORPORATION
By /s/ Gregory D. Leiser
-------------------------------------------
Gregory D. Leiser
Vice President Finance and Chief Financial
Officer (Principal Financial and Accounting
Officer)
25