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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 2003
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______ to _______
Commission file number 0-13403
- --------------------------------------------------------------------------------
AMISTAR CORPORATION
(Exact name of registrant as specified in its Charter)
- --------------------------------------------------------------------------------
CALIFORNIA 95-2747332
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
237 VIA VERA CRUZ 92069-2698
SAN MARCOS, CA (Zip Code)
(Address of Principal Executive Offices)
(760) 471-1700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None Securities
registered pursuant to Section 12(g) of the Act:
Title of each class
--------------------------------
COMMON STOCK, PAR VALUE
$.01 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined by Exchange Act Rule 12b-2).
YES __ NO |X|
Aggregate market value of voting stock held by non-affiliates of the
registrant as of the close of business on June 30, 2003: $1,697,000.
The number of shares outstanding of registrant's Common Stock as of March
4, 2004: 3,080,544 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are incorporated
by reference in Part III of this report:
Definitive Proxy Statement for Annual Meeting of Shareholders to be held
May 5, 2004 filed with the Securities and Exchange Commission.
1
AMISTAR CORPORATION
FORM 10-K
TABLE OF CONTENTS
PART I
1. Business...............................................................3
2. Properties.............................................................6
3. Legal Proceedings......................................................6
4. Submission of Matters to a Vote of Security Holders....................6
PART II
5. Market for Registrant's Common Stock and Related Stockholder Matters...8
6. Selected Financial Data................................................9
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................10
7a. Quantitative and Qualitative Disclosures About Market Risk ...........19
8. Financial Statements and Supplementary Data...........................20
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..............................................39
9a Controls and Procedures...............................................39
PART III
10. Directors and Executive Officers of the Registrant....................40
11. Executive Compensation................................................40
12. Security Ownership of Certain Beneficial Owners and Management........40
13. Certain Relationships and Related Transactions........................40
14. Principal Accountant Fees and Services................................40
PART IV
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......41
2
PART I
This Annual Report contains forward-looking statements within the meaning
of the Private Securities Reform Act of 1995, particularly statements regarding
market opportunities, customer acceptance of products, gross margin and
marketing expenses. Statements that are predictive, that depend upon or refer to
future events or conditions, or that include words such as "expects,"
"anticipates," "intends," "plans," "believes," "estimates," "hopes," and similar
expressions constitute forward-looking statements. In addition, any statements
concerning future financial performance (including future revenues, earnings or
growth rates), ongoing business strategies or prospects, and possible future
Company actions are also forward-looking statements. These forward-looking
statements involve risks and uncertainties, and the cautionary statements set
forth below identify important factors that could cause actual results to differ
materially from those in any such forward-looking statements. Such factors
include, but are not limited to, adverse changes in general economic conditions,
including changes in the specific markets for the Company's products, product
availability, decreased or lack of growth in the electronics industry, adverse
changes in customer order patterns, increased competition, lack of acceptance of
new products, pricing pressures, lack of success in technological advancements,
risks associated with foreign trade and other factors.
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission, or SEC. Our SEC filings
are available free of charge to the public over the Internet at the SEC's
website at http://www.sec.gov. Our SEC filings are also available on our website
at http://www.amistar.com as soon as reasonably practicable following the time
that they are filed with or furnished to the SEC. You may also read and copy any
document we file with the SEC at its public reference rooms in Washington D.C.,
New York, NY and Chicago, IL. Please call the SEC at (800) SEC-0330 for further
information on the public reference rooms. We meet the requirements of
Regulation S-B to file as a small business issuer and will file our annual and
quarterly reports for the 2004 fiscal year on Form 10-KSB and Form 10-QSB.
ITEM 1. BUSINESS
Amistar Corporation (the "Company") provides industrial automation
solutions primarily for manufacturers and contract-manufacturing services to
companies who outsource the manufacturing of their electronic products. The
Company designs, develops, manufactures, distributes, markets and services a
variety of automated equipment used to assemble electronic components and
product identification media to printed circuit boards and other assemblies. In
addition, the Company provides design and manufacturing resources to create
customized factory automation equipment according to customer's specification in
a broad range of industries.
Financial Information Relating to Industry Segments
- ---------------------------------------------------
The Company's operations include two business segments: Industrial
Automation ("AIA"), which encompasses the design, manufacture and distribution
of assembly machines, related accessories, other specialty equipment and
products, and Amistar Manufacturing Services ("AMS") which provides contract
manufacturing services. Prior to December 31, 2001, AIA was named the "machine
products division" with "AIA" formerly the title of the factory automation unit.
The Company decided that "AIA" is a more appropriate title for both the machine
products area and customized factory automation. Information concerning the
Company's operations for the two segments is found in note 9 to the financial
statements.
Amistar Industrial Automation (AIA)
- -----------------------------------
Amistar Industrial Automation, a division of Amistar, provides factory
automation solutions by offering its own proprietary machine products,
distributing circuit board assembly machine products, designing and
manufacturing specialty products, and by providing customized factory automation
design and manufacturing.
MACHINE PRODUCTS
- ----------------
The Company's label identification machines, the DataPlace(R) 100LP and
the DataPlace(R) 1M, are available in a standard configuration and can be
customized, through mechanical or software modifications, to meet the needs of a
specific application. In addition, the Company offers machine system integration
with the customer's ERP system. During 2002, the Company expanded its DataPlace
line by introducing the DataPlace SBL, a golf shaft-labeling machine, available
in standard and customized models.
The Company provides service and spare parts to customers of its installed
base of through-hole insertion equipment and surface mount assembly machines.
The Company distributes a line of surface mount assembly ("SMD") machines,
accessories and spare parts from its Japanese supplier, i-Pulse, on a
non-exclusive basis in North America.
3
During 2000, the Company's Japanese supplier of surface mount assembly
machines sold its operations to a competitor, leaving the Company without a
source of surface mount assembly machines until the fourth quarter of 2002.
During 2001 and most of 2002, the AIA Division focused its selling efforts as an
original manufacturer of automatic label application machines for the
electronics manufacturing industry. During the fourth quarter of 2002, i-Pulse,
a division of Yamaha Motor Company, Ltd. and the Company reached an informal
agreement, which was formalized on October 28, 2003, by which the Company agreed
to resume its role as distributor of Yamaha Motor's SMD products to North
America on a non-exclusive basis.
Customized Factory Automation and Specialty Products
- ----------------------------------------------------
During 2001, the Company launched a new business initiative to utilize its
core strengths more effectively in the design, manufacture, and service of
customized factory automation equipment and specialty products for other
companies. Sales in 2001 included an order to provide final engineering design
and manufacturing of automation equipment for a major golf sports equipment
manufacturer. During 2002, the Company expanded its technological capability by
providing customized design or equipment to customers in the eyeglass lens, golf
club assembly, veterinary, and luggage tagging industries. The Company now
provides customized design or equipment to customers in a wide range of
industries and applications.
Amistar Manufacturing Services (AMS)
- ------------------------------------
Amistar Manufacturing Services, a division of Amistar, provides contract
manufacturing services to OEMs in various industries, such as medical, computer
peripherals, instrumentation, audio/video, industrial test and controls, data
networking, telecommunications and security. The Company offers a broad range of
solutions by providing engineering services, materials procurement and
management, surface mount and through-hole board assembly, various levels of
testing, final product assembly, enclosure and systems build, distribution and
warranty depot support.
Product Development
- -------------------
The Company's products are marketed to industries that are subject to
rapid technological change and increasingly complex methods of manufacturing.
The Company's ability to compete and operate successfully depends upon its
ability to react to such change. Accordingly, the Company has been committed to
the continuing enhancement of its current products to allow their use in a wider
variety of applications, and the development of new products and services to
further reduce customer labor costs and increase manufacturing efficiencies.
During 2003, 2002 and 2001, the Company's engineering, research and
development expenses were approximately $235,000, $440,000 and $843,000,
respectively. During 2001, the engineering group focused on DataPlace 1M machine
cost reduction, customization orders for both models of the DataPlace machines,
and provided customized factory automation engineering services. During 2002,
the engineering group focused on development of a laser technology for product
identification, development of a golf shaft labeling machine (the DataPlace SBL)
and provided engineering services for customized factory automation equipment
and specialty products. During 2003, the engineering group focused primarily on
providing billable custom factory engineering design services and as a result,
had less activity in the proprietary product development area compared to prior
years. Management is currently conducting market studies and evaluating
additional research and development projects for 2004.
Customers and Marketing
- -----------------------
The Company's label identification and SMD machine products are sold
primarily to contract and OEM manufacturers of electronic products. The Company
manufactures custom automation and specialty products for customers in a wide
variety of industries. The Company's marketing strategy is to offer equipment
that fulfills a variety of customer needs and to emphasize the advanced
features, ease of use, price, performance, and reliability.
AIA markets its machine products in the United States through an internal
sales force that, in addition to direct selling efforts, also support
independent manufacturer's representatives. AIA markets its customized factory
automation services primarily through an internal sales force.
The Company's AMS division is marketed through a combination of Company
personnel, electronics component distributors and outside representatives.
Dependence on Significant Customers
- -----------------------------------
During 2003, sales of $2,666,000 (or 22% of total sales) were made to
Merit Medical Systems, Inc, $1,877,000 (or 16% of total sales) were made to
Signet Scientific, and $1,573,000 (or 13% of total sales) were made to Chad
Therapeutics. During 2002, sales of $2,015,000 (or 18% of total sales) were made
to Chad Therapeutics, $1,836,000 (or 17% of total sales) were made to Merit
Medical Systems, Inc. and $1,677,000 (or 15% of total sales) were made to Signet
Scientific. During 2001, sales of $2,291,000 (or 17% of total sales) were made
to Merit Medical Systems, Inc., $1,634,000 (or 12% of total sales) to Systech
Corporation, $1,579,000 (or 12% of total sales) to Chad Therapeutics and
$1,532,000 (or 11% of total sales) to Signet Scientific. Sales to all the above
customers were from the AMS division.
4
Foreign Sales
- -------------
A portion of the Company's machine sales has been traditionally to foreign
customers. Profitability and product mix of foreign machine sales generally are
comparable to domestic sales. During 2003, 2002, and 2001, the Company's sales
were primarily to domestic customers. The Company is subject to international
trade risks including unfavorable economic conditions, foreign currency risk,
restrictive trade policies, controls on funds and political uncertainties. The
following table illustrates the Company's sales, expressed in dollars and as a
percentage of total sales, in major geographic markets over the last three
years.
(Dollars in thousands) 2003 2002 2001
---------------- --------------- ---------------
United States $11,708 97% $10,682 96% $13,356 98%
Europe 179 2% 184 2% 211 2%
Asia 162 1% 183 2% 36 --
Other 34 -- 30 -- 56 --
--------- ----- -------- ----- -------- -----
TOTALS $12,083 100% $11,079 100% $13,659 100%
========= ===== ======== ===== ======== =====
The Company's products can be freely exported to most countries under a
general destination (G-Dest) export classification with the U.S. Department of
Commerce. Additional information regarding foreign operations can be found in
note 9 to the financial statements.
Service
- -------
The Company provides installation and service for all of its machines
other than those sold by certain distributors with qualified service personnel
who undertake the installation and service responsibility. The Company provides
service personnel for its customers out of the Company's San Marcos, California
office. In Europe, the Company's distributor, Assembly Service GmbH provides
service support.
Suppliers
- ---------
MACHINE MANUFACTURING
- ---------------------
The Company's machines are complex devices that combine a number of
electronic and electromechanical technologies, and must function in difficult
production environments with a high degree of precision and reliability. Product
designs typically call for a high percentage of specially designed machine
parts, many of which are fabricated in-house, as well as standard, commercially
available parts.
Those parts of the Company's products that are not manufactured directly
by the Company are purchased from outside vendors. Most parts are available from
more than one supplier. While certain parts presently are purchased from single
sources, the Company believes it would be able to locate additional sources for
such parts without a material adverse effect on its business. The Company has
never experienced a major production delay due to a materials shortage or the
loss of a single-source for its material.
CONTRACT MANUFACTURING
- ----------------------
The Company's ability to generate contract manufacturing service revenues
is dependent upon the availability of electronic components. Electronic
components are supplied by distributors (primary suppliers) and by brokers
(secondary suppliers). During 2003 and 2002, due to soft economic conditions,
electronic components generally were available from suppliers at acceptable
pricing. During portions of 2001, certain electronic components were available
from distributors on an allocated basis. Distributor allocations can cause
either interruption in supply to the Company or increased costs, or both. In the
event component supply is available only through secondary suppliers, the
Company also may experience limitations on availability in addition to increased
costs.
Competition
- -----------
The Company competes with a number of domestic and foreign manufacturers
of electronic component placement, label placement, or factory automation
equipment, many of whom have more diverse product lines and greater financial
and marketing resources than the Company. The Company's primary domestic label
placement machine competitors are Nortek Automation, Inc. and Computype, Inc.
The Company believes that the key factors affecting the choice of label
placement, circuit board assembly and custom factory automation machines are
reliability, placement speed, responsive service, ability to detect errors,
range of placement, ease of programming and operation, integration with ERP
systems, and price.
There are numerous companies, of various sizes and geographic reach, which
provide contract design, machine manufacturing or assembly services to companies
that sell electronic and other products, none of which the Company considers
being a prime competitor.
5
Backlog
- -------
Customer machine order lead times are usually short. Current customer
practice is to wait to place the purchase order until just before the equipment
is required or after an evaluation period while on loan. Therefore, backlog may
not necessarily be indicative of future sales. Order lead times for contract
manufacturing vary. The backlog at December 31, 2003 was $3,936,000 all of which
is expected to ship during the next 12 months. The AIA and AMS divisions had
backlog at December 31, 2003 of $433,000 and $3,503,000 respectively. Total
Company backlog was $3,042,000 at December 31, 2002. The AIA and AMS divisions
had backlog at December 31, 2002 of $112,000 and $2,930,000, respectively. In
the event the Company is unable to ship on the purchase order due date, the
Company would not incur any contractual damages other than the potential damage
to a customer relationship.
Intellectual Property
- ---------------------
Amistar relies on U.S. and foreign patents, copyrights, trademarks and
trade secrets to establish and maintain proprietary rights in its technology and
products. As of December 31, 2003, the Company has been issued and maintains
nine United States patents relating to mature products. Although the Company
believes that its patents have value, the Company also believes that responding
to the technological changes that characterize the electronics industry,
maintaining a strong marketing and service operation, and continuing to produce
quality products are of greater significance than patent protection. Moreover,
there can be no assurance that patents applied for will be granted or that any
patents presently held, or to be held, by the Company will afford it
commercially significant protection of its proprietary technology.
Employees
- ---------
As of February 6, 2004, the Company had 87 full-time employees. Of the
total employees, 65 were employed in manufacturing, 8 in sales, marketing, and
service, 4 in engineering and product development and 10 in information systems,
administration, and finance. None of the Company's employees are represented by
unions and the Company considers its employee relations to be good.
ITEM 2. PROPERTIES
The Company's headquarters, principal administration, automation machine
manufacturing, contract manufacturing services, and research and development
offices are located in an 80,000 square foot building completed in April of
1987. The Company owns the building and 5.6 acres of land on which the building
is located in San Marcos, California.
The Company leases, but no longer occupies, a 14,000 square foot facility
in Anaheim, California. On January 22, 2001, the Company entered into an
agreement extending the lease for an additional term of five years, expiring in
March 2006, at a current monthly rental rate of $8,911. In November 2001, the
Anaheim facility was subleased to a sub-tenant for a term beginning December
2001 and expiring March 2006, at an average monthly rental rate of $9,137 for 49
months, in addition to a three-month free rent period.
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any material pending legal proceedings
involving the Company or its property.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
6
EXECUTIVE OFFICERS AND DIRECTORS
Name Age Title
---- --- -----
Stuart C. Baker 72 Chairman of the Board and President
Dr. Sanford B. Ehrlich 52 Director, (audit and compensation committee)
William W. Holl 73 Secretary, Treasurer and Director
Gordon S. Marshall 84 Director, (audit and compensation (Chair) committee)
Carl C. Roecks 70 Director
Howard C. White 63 Director, (audit (Chair) and compensation committee)
Daniel C. Finn 47 Vice President and General Manager-AIA Division
Tod N. Kilgore 46 Vice President of Sales and Marketing-AMS Division
Gregory D. Leiser 47 Vice President of Finance and Chief Financial Officer
Harry A. Munn 53 Vice President and General Manager-AMS Division
Mr. Baker, a founder of the Company, has served the Company as a Director
and President since its inception in 1971 and as Chairman of the Board since
1993.
Dr. Ehrlich, appointed Director in 2000, has held the position of
Associate Professor of Management at the College of Business Administration at
San Diego State University, and as the Executive Director of the school's
Entrepreneurial Management Center since 1997. Dr. Ehrlich holds a Directorship
at Deep Sky Software, Inc. In addition, Dr. Ehrlich also provides management
consulting services.
Mr. Holl, a founder of the Company, has served the Company as a Director,
Secretary and Treasurer since its inception in 1971, and as Chief Financial
Officer from 1978 until 2001. In 2001, Mr. Holl retired and serves the Company
on a part-time basis.
Mr. Marshall, a director of the Company since 1974 has served the Company
as the Chairman of the Board from 1974 to 1993. Mr. Marshall was the founder and
former Chairman of the Board of Marshall Industries, an electronics distribution
company that was acquired by Avnet Electronics Marketing in 1999.
Mr. Roecks, a founder of the Company, has served the Company in various
engineering and management capacities since its inception in 1971. Since 1989,
Mr. Roecks has been retired and serves the Company on a part-time basis.
Mr. White, appointed Director in 2000, was employed at Andersen from 1964
until 1991. Mr. White was formerly a partner in charge of the Metropolitan
Southern California Region Accounting and Audit Practice and worldwide managing
director of finance with Andersen Worldwide. Mr. White has held the position of
President of White & White LLC, a financial and business consulting services
company, since 1997. Mr. White serves as an independent director and is the
designated "financial expert" on the Company's audit committee.
Mr. Finn has served the Company since 1979, as Vice-President Operations
from 1999 to 2001 and as Vice-President and General Manager - AIA Division since
2002.
Mr. Kilgore has served the Company as Vice-President Sales and
Marketing-AMS Division since 1999. Prior to joining the Company, Mr. Kilgore
held the position of General Manager-San Diego Region with Marshall Industries
since 1992.
Mr. Leiser has served the Company since 1995, as Vice-President Finance
since 1999 and as Chief Financial Officer since 2001.
Mr. Munn has served the Company since 1985, as Vice-President Marketing
and Sales from 1997 to 2001 and as Vice-President and General Manager - AMS
Division since 2002.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
From May 1984, when Amistar had its initial public offering, until June
1985, the Company's stock was traded on the NASDAQ over the counter market under
the symbol AMTA. From June 18, 1985 until January 1999, the Company's stock was
traded on the NASDAQ/NMS (National Market System); since January 1999, the stock
has traded on the NASDAQ/SC (Small Cap market system). The following table
reflects the closing prices per share during the last two years. The prices
shown reflect inter-dealer prices, without retail mark-up, mark-down, or
commissions and may not necessarily reflect actual transactions.
Quarter ended High* Low*
----------------- --------- --------
Mar. 31, 2003 $ 1.16 $ 0.68
Jun. 30, 2003 $ 1.20 $ 0.84
Sep. 30, 2003 $ 1.58 $ 0.88
Dec. 31, 2003 $ 2.41 $ 1.62
Mar. 31, 2002 $ 1.55 $ 1.05
Jun. 30, 2002 $ 1.49 $ 0.83
Sep. 30, 2002 $ 1.23 $ 0.65
Dec. 31, 2002 $ 0.90 $ 0.20
* The prices indicated are as reported by NASDAQ.
The Company had approximately 95 registered shareholders of record on
December 31, 2003. This number does not include beneficial owners of the
Company's common stock, which is held in nominee or "street" name accounts.
During the last two fiscal years, the Company has not paid cash dividends
on its common stock and does not expect to pay cash dividends on its common
stock to its shareholders in the foreseeable future.
Notice from Stock Exchange
- --------------------------
The Company received notice from NASDAQ on May 29, 2003 that it regained
compliance with the minimum closing bid price requirement after previously
receiving notice on October 4, 2002 that it was subject to de-listing from the
NASDAQ Small Cap Market for failure to meet the minimum closing bid price
requirement of $1.00 for the prior 30 days. The Company currently is in full
compliance with the listing requirements.
8
ITEM 6. SELECTED FINANCIAL DATA
Statements of Operations Data:
Year Ended December 31,
--------------------------------------------------------------------
(In thousands, except per share data)
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
Net sales $ 12,083 $ 11,079 $ 13,659 $ 18,519 $ 15,071
Cost of sales 9,856 9,903 12,998 13,784 13,647
--------- --------- --------- --------- ---------
Gross profit 2,227 1,176 661 4,735 1,424
--------- --------- --------- --------- ---------
Operating expenses:
Selling 1,315 1,243 1,674 2,093 2,764
General & administrative 1,013 1,012 1,400 752 2,067
Engineering, research & development 236 440 843 1,161 1,197
--------- --------- --------- --------- ---------
2,564 2,695 3,917 4,006 6,028
--------- --------- --------- --------- ---------
Income (loss) from operations (337) (1,519) (3,256) 729 (4,604)
Other income (expense):
Interest, net (8) 20 94 111 (43)
Other 0 6 6 8 6
--------- --------- --------- --------- ---------
Earnings (loss) before income taxes (345) (1,493) (3,156) 848 (4,641)
Income tax expense (benefit) 4 (394) (66) 9 196
--------- --------- --------- --------- ---------
Net earnings (loss) $ (349) $ (1,099) $ (3,090) $ 839 $ (4,837)
========= ========= ========= ========= =========
Earnings (loss) per common share:
Basic $ (0.11) $ (0.36) $ (0.99) $ 0.27 $ (1.54)
========= ========= ========= ========= =========
Diluted $ (0.11) $ (0.36) $ (0.99) $ 0.26 $ (1.54)
========= ========= ========= ========= =========
Weighted-average shares
outstanding:
Basic 3,080 3,085 3,127 3,137 3,137
========= ========= ========= ========= =========
Diluted 3,080 3,085 3,127 3,179 3,137
========= ========= ========= ========= =========
Selected Balance Sheet Data:
December 31,
--------------------------------------------------------------------
(In thousands)
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
Working capital $ 3,000 $ 3,134 $ 2,371 $ 9,625 $ 8,236
Total assets 10,413 10,795 13,666 17,135 16,285
Long-term obligations - - - 4,500 4,500
Retained earnings 2,267 2,616 3,715 6,805 5,967
Total shareholders' equity 6,829 7,181 8,283 11,426 10,587
9
ITEM 6. SELECTED FINANCIAL DATA
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarter Ended,
------------------------------------------------------ Year Ended
3/31 6/30 9/30 12/31 12/31
--------- --------- --------- --------- ---------
(In thousands, except per share data)
2003
- ----------------------------
Net sales $ 2,769 $ 2,652 $ 3,125 $ 3,537 $ 12,083
Gross profit 548 529 582 568 2,227
Net loss (146) (79) (36) (88) (349)
Loss per common share:
Basic and diluted (0.05) (0.03) (0.01) (0.03) (0.11)
2002
- ----------------------------
Net sales $ 2,641 $ 2,827 $ 2,844 $ 2,767 $ 11,079
Gross profit 177 182 348 469 1,176
Net loss (102) (454) (377) (166) (1,099)
Loss per common share:
Basic and diluted (0.03) (0.15) (0.12) (0.05) (0.36)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis of the Company's financial condition and results of
operation should be read in conjunction with the Company's financial statements
and the related notes included elsewhere in the report.
Critical Accounting Policies and Estimates
- ------------------------------------------
In response to the SEC's Release Numbers 33-8040 "Cautionary Advice
Regarding Disclosure About Critical Accounting Policies" and 33-8056,
"Commission Statement about Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Company has identified the following
critical accounting policies that affect its more significant judgments and
estimates used in the preparation of its financial statements. The preparation
of the Company's financial statements in conformity with accounting principles
generally accepted in the United States of America requires management of the
Company to make estimates and judgments that affect the reported amounts of
assets and liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities. On an on-going basis, the Company makes
judgments regarding revenue recognition and evaluates its estimates, including
those related to allowance for doubtful accounts, inventories, asset impairment
and warranty obligations. We describe these accounting policies in the notes to
the financial statements and at relevant sections in this discussion and
analysis. These estimates are based on the information that is currently
available and on various other assumptions that are believed to be reasonable
under the circumstances. Actual results could vary from those estimates under
different assumptions or conditions.
The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
financial statements.
The Company considers many factors in the evaluation of revenue
recognition, including customer acceptance criteria, complexity of installation
and integration into production lines. The Company generally recognizes revenue
for machine sales upon shipment and installation for the initial machine model
sold to a customer. Revenue is generally recognized for subsequent machine sales
to a same customer upon shipment, provided title and risk of loss have
transferred and the model, configuration, and application is substantially
similar to the original machine installed. At the time of shipment, the Company
accrues for any related de minimus and perfunctory installation costs to be
incurred. Revenue for manufacturing services, custom factory automation
services, engineering design bundled with a machine order, machine accessories,
and spare parts are recognized upon shipment of product or deliverable and
transfer of title and risk of loss. Revenue for engineering design services are
billed upon completion and delivery of design documentation. Billable field
service labor revenue is recognized upon completion. Overall revenue is
considered to be realized or realizable and earned when there is persuasive
evidence of a sales arrangement in the form of a contract or purchase order, the
product has been shipped and/or installed, the sales price is fixed or
determinable and collectability is reasonably assured.
The Company maintains an allowance for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments,
10
which results in bad debt expense. Management determines the adequacy of this
allowance by continually evaluating individual customer receivables considering
the customer's financial condition, security deposits, and current economic
conditions. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
The Company writes down its inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and
the estimated net realizable value based upon assumptions about future demand
and market conditions. If actual market conditions are less favorable than those
projected by management, additional inventory write-downs may be required.
Long-lived assets, such as property and equipment are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed
of would be separately presented in the balance sheet and reported at the lower
of the carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposed group classified as held
for sale would be presented separately in the appropriate asset and liability
sections of the balance sheet.
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.
The Company can be subject to various claims and legal actions in the
ordinary course of business. Some of these matters include professional
liability, employee-related matters, and investigations by governmental agencies
regarding our employment practices. Although we are currently not aware of any
such pending or threatened litigation that we believe is reasonably likely to
have a material adverse effect on us, if we become aware of such assessments
against the Company, we will evaluate the probability of an adverse outcome and
provide accruals for such contingencies as necessary.
FACTORS THAT MAY AFFECT FINANCIAL CONDITION AND FUTURE RESULTS
The Company operates in industries that are highly competitive. Industry
participants confront aggressive pricing practices by competitors, continually
changing customer demand patterns, and rapid technological developments. The
following are important factors that could cause actual results to differ
materially from the projected results contained in the forward-looking
statements in this report.
o Continued weak global economic conditions or lack of electronics industry
manufacturing capacity expansion could adversely impact the Company's
revenues and growth rate.
o The loss of a major customer listed in Business-"Dependence on Significant
Customers" and the inability to fill the void with sales to replacement
customers.
o The continued transfer of manufacturing offshore could contract the market
for labor-saving assembly equipment and adversely impact the Company's
DataPlace machine sales.
o The competitive environment in the electronics assembly machine, custom
factory automation equipment and contract manufacturing industries place
pressure on revenue, gross margins, and market share.
o Erosion of the financial condition of customers could adversely affect the
Company's business.
o The potential for technological obsolescence of the DataPlace label
identification line.
o The availability of electronic components may be limited due to changes in
demand or supply and could adversely affect the Company's material costs
or ability to fulfill customers' order requirements.
o The inability to invest in or acquire a new venture that can absorb excess
manufacturing capacity or contribute to the Company's return to
profitability could adversely affect the Company's business.
o The inability of the Company to execute management's plans to return to
profitability could result in default on the terms of the Union Bank of
California Reimbursement Agreement, which supports the stand-by letter of
credit guaranteeing the Company's performance on the industrial
development bonds. In the event the Company defaults, and is unable to
present a viable turn-around plan satisfactory to its Bank, such event
11
could cause the bank to require the Company to seek a substitute
guarantor, re-finance its manufacturing and office facility in San Marcos,
California with alternative financing or sell the San Marcos, California
facility. The inability of the Company to successfully substitute a
guarantor or to re-finance its building could have a material adverse
effect on the Company's business.
o The inability of the Company to sustain the NASDAQ minimum closing bid
price requirement would result in de-listing from the NASDAQ small cap
market and require the Company to seek listing on the OTC Bulletin Board
and could adversely affect the Company's per share market price.
o The effects of worldwide conflict and instability upon revenues and costs.
o Other-factors described in Item 7a. Qualitative and Quantitative Data
About Market Risk.
Off-Balance Sheet Arrangements
- ------------------------------
At December 31, 2003 and 2002, the Company did not have any relationships
with unconsolidated entities or financial partnerships, such entities often
referred to as structured finance or variable interest entities, which would
have been established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes. In addition, the
Company does not engage in trading activities involving non-exchange traded
contracts. As such, the Company is not materially exposed to any financing,
liquidity, market or credit risk that could arise if the Company had engaged in
such relationships.
12
The following table sets forth the statements of operations as a percentage of
net sales:
Percentage of Net Sales
------------------------------
2003 2002 2001
-------- -------- --------
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 81.6 89.4 95.2
-------- -------- --------
Gross profit 18.4 10.6 4.8
-------- -------- --------
Operating expenses:
Selling 10.9 11.2 12.2
General and administrative 8.4 9.1 10.3
Engineering, research and development 1.9 4.0 6.2
-------- -------- --------
21.2 24.3 28.7
-------- -------- --------
Loss from operations (2.8) (13.7) (23.8)
Other income (expense):
Interest, net (0.1) 0.2 0.7
-------- -------- --------
Loss before income taxes (2.9) (13.5) (23.1)
Income tax expense (benefit) 0.0 (3.6) (0.5)
-------- -------- --------
Net Loss (2.9)% (9.9)% (22.6)%
======== ======== ========
The following table sets forth sales (in thousands) by product classification:
2003 2002 2001
---------------- --------------- ----------------
Amistar machines,
parts and service $ 1,676 14% $ 1,348 12% $ 1,783 13%
Distributed products 616 5% 184 2% 294 2%
Custom factory autom 1,385 11% 389 3% 900 7%
Manufacturing services 8,406 70% 9,158 83% 10,682 78%
-------- ------ -------- ----- -------- ------
$12,083 100% $11,079 100% $13,659 100%
======== ====== ======== ===== ======== ======
13
Results of Operations 2003 Compared to 2002
- -------------------------------------------
Company overall
- ---------------
SALES
- -----
Overall sales increased to $12,083,000 in 2003 from $11,079,000 in 2002,
an increase of 9%. The increase was due primarily to sales growth in the AIA
division. The AIA division experienced sales growth in label placement and
distributed surface-mount machines and accessories and in custom factory
automation design and machine manufacturing services. No material portion of
sales was attributable to inflation for 2003 or 2002.
AIA Amistar-designed and manufactured machine and accessory sales were
$957,000 in 2003 compared to $490,000 in 2002, a growth of 95%.
AIA Through-hole circuit board assembly machine spare parts and service
sales declined to $719,000 in 2003 from $858,000 in 2002. As the population of
the Company's through-hole technology machines declines, demand for spare parts
and out-of-warranty field service is expected to continue to follow a parallel
trend.
AIA Distributed machine and accessory sales were $616,000 in 2003 compared
to $184,000 in 2002, an increase of 234%. The increase was the result of the
Company's resumption as the lead distributor to North America after formalizing
its relationship with I-Pulse.
AIA Customized factory automation engineering design and manufactured
product sales were $1,385,000 compared to $389,000 in 2002, an increase of 256%.
This increase was due primarily to the fulfillment of a $711,000 contract to
design and manufacture machines for a customer in the eyeglass industry.
AMS sales decreased to $8,406,000 or 8% from $9,158,000 in 2002 primarily
due to the loss of one customer who moved production overseas and due to
contraction in orders from certain customers. AMS sales represented 70% and 83%
of the overall sales for 2003 and 2002 respectively.
GROSS PROFIT
- ------------
Gross profit increased 89% to $2,227,000 in 2003, compared to $1,176,000
in 2002. The 2003 increase was due primarily to the increased sales of the AIA
label placement, distributed surface mount and the customized factory automation
machines shipped during 2003. Since AIA sales generate a higher gross profit
than AMS sales, the increased AIA sales in the sales mix have had a favorable
impact on overall gross profit. In addition, improvements in AMS labor
efficiency and increased overall factory utilization resulted in improved
margins during 2003.
SELLING EXPENSES
- ----------------
Selling expenses increased 6% to $1,315,000 in 2003 from $1,243,000 in
2002 primarily due to increased commissions and travel costs related to the
additional AIA machine sales.
GENERAL AND ADMINISTRATIVE EXPENSES
- -----------------------------------
General and administrative expense remained relatively flat in 2003
compared to 2002. During 2003, decreases in business development consulting fees
were offset by increased insurance costs and a decrease in the adjustment to the
allowance for doubtful accounts.
ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES
- ----------------------------------------------
Engineering efforts in 2003 were focused on providing custom factory
design and automation services. As a result, research and development expenses
declined 47% to $235,000 in 2003 from $440,000 in 2002. The increased services
resulted in a greater amount of billable engineering time that was allocated to
cost of goods sold.
OTHER INCOME (EXPENSE)
- ----------------------
Interest income decreased $39,000 in 2003, compared to 2002, due to
decreases in interest rates earned on money market funds. Interest expense
decreased $10,000 in 2003, compared to 2002, due to decreases in interest rates
on the bonds and the reduction of principal.
INCOME TAXES
- ------------
During 2003, only the minimum tax obligations to various states have been
recorded as expense.
On March 9, 2002, the "Job Creation and Worker Assistance Act of 2002"
(the "Act") was signed into law. The Act extended the period in which a net
operating loss may be carried back. As a result, the Company recognized and
collected a $400,000 carry back refund benefit during 2002, which is offset
partially by a $6,000 expense related to minimum tax obligations to various
states.
A 100% valuation allowance was recorded against the net deferred income
tax asset as of December 31, 2003, 2002, and 2001. No federal income tax carry
forward benefit has been recorded in 2003 due to the net loss.
14
Results of Operations 2003 Compared to 2002, cont'd
- ---------------------------------------------------
Amistar Industrial Automation segment
- -------------------------------------
AIA label identification machine demand increased during 2003 resulting in
the shipment of nine units in 2003 compared to four units in 2002. Of the units
sold in 2003, four of the machines represented the DataPlace 100LP model and
five the 1M model. During 2002, the Company sold four DataPlace machines, three
100LP models and one 1M model. Compared to the DataPlace 100LP machine, the 1M
is suitable for applications requiring less functionality and sells at a lower
price.
Beginning in 2001, continuing through 2002, and to a lesser extent in
2003, the Company had been severely affected by the overall economic slow down
and excess in domestic manufacturing capacity. The contraction in product
volumes compared to manufacturing capacity among the Company's label placement
machine customer base resulted in a lack of sales of the Company's DataPlace
machine for the first two quarters of 2002. During the quarter ended September
30, 2002, the Company was able to sell one DataPlace machine and the Company
rented another for a three-month evaluation term and, during the quarter ended
December 31, 2002, the Company sold three machines.
The Company took steps during 2002 to minimize costs in response to the
recession-driven decline in demand for its label identification automation
equipment. Those steps included the reduction of its sales and field service
support staff during the year and reductions in DataPlace 100LP production. At
December 31, 2003, the Company had, based on forecasts, an approximate 18 to 24
month supply of DataPlace machine inventory.
At December 31, 2003, the Company had ten completed DataPlace machines
included in finished goods inventory at a carrying value of $370,000. The
carrying value of DataPlace work in process was $231,000 at December 31, 2003.
The AIA work in process and raw material inventories consist primarily of the
DataPlace machine product line. The Company has considered the current and
projected state of the machine's technology, its expected future competitive
position, and has made estimates of anticipated DataPlace demand upon continued
economic recovery. Estimates of future demand are highly subjective and subject
to material change. During 2002, the Company recorded an inventory write-down of
DataPlace machines totaling $75,000.
The Company sold six of its new DataPlace golf shaft band labeler machines
to customers in the golf equipment industry during 2003. Sales for the six
machines totaled approximately $154,000.
During 2003, the Company sold one distributed surface-mount machine and
increased sales of accessories and spare parts compared to 2002. During 2002, no
surface-mount machines were sold. Sales have increased since the fourth quarter
of 2002, when the Company resumed its role as the leading North American
distributor for i-Pulse products.
During 2003, the Company entered into an increased number of contracts for
custom factory automation design and manufacturing services compared to 2002.
The Company served customers in the eye glass lens, luggage tagging, and
veterinary supply industries. Certain contracts for custom automation design
services have the potential to result in follow-on contracts for prototype
machine development and production machine manufacturing services.
Contract Manufacturing Services segment
- ---------------------------------------
2003 continued to exhibit the soft demand for US-based manufacturing
services experienced in 2002.
During 2003, sales were negatively impacted by migration of certain
customer's production off-shore, the effect of which more than offset the
increased sales to a new customer in the bank security industry added during the
later part of 2003.
During the period of soft demand, the division focused much of it efforts
during 2003 improving operations and manufacturing efficiencies, which resulted
in improved profitability compared to 2002. During 2003, the division reduced
its operating loss to $10,000 compared to an operating loss of $482,000 in 2002.
15
Results of Operations 2002 Compared to 2001
- -------------------------------------------
Company overall
- ---------------
SALES
- -----
Overall sales decreased to $11,079,000 from $13,659,000 in 2001, a
decrease of 19%. The decline in sales was related primarily to the decline in
AMS sales. No portion of sales was attributable to inflation for 2002.
The Manufacturing Services division (AMS) sales decreased to $9,158,000 or
14% from 2001 primarily due to decreased shipments to a customer who moved their
product manufacturing offshore and due to a customer that chose to produce
previously out-sourced products in-house. AMS sales represented 83% and 78% of
the overall sales for 2002 and 2001 respectively.
AIA label identification machine unit shipments were flat in 2002 compared
to 2001 at 4 units each. Of the units sold in 2002, three of the machines
represented the DataPlace 100LP model and one the 1M model, all of which were
sold during the last four months of 2002. During 2002, the Company shipped its
first golf shaft-labeling machine to a leading golf equipment manufacturer.
Machine sales were $490,000 in 2002 compared to $576,000 in 2001.
The Company's declining base of through-hole circuit board assembly
machines operating in the field generated most of the parts and service sales
which declined to $858,000 in 2002 from $1,207,000 in 2001.
The AIA division generated $389,000 in customized factory automation
engineering design and manufactured product sales compared to $900,000 in 2001,
its first year of operation which included $642,000 in shipments to a major golf
equipment manufacturer.
GROSS PROFIT
- ------------
Gross profit increased $515,000 to $1,176,000 in 2002, compared to
$661,000 in 2001. The 2002 increase was primarily due to a $463,000 charge taken
in 2001 to increase inventory reserves for the Company's assembly machine
products. In addition, improvements in labor efficiency and factory utilization
partially offset by a $175,000 charge taken to increase DataPlace and AMS
inventory reserves resulted in improved margins during 2002.
SELLING EXPENSES
- ----------------
Selling expenses decreased $430,000 to $1,243,000 in 2002 from $1,673,000
in 2001 due to AIA machine products sales and service staff reductions,
consolidation of sales and service offices, lower commission expense, and
reduced division marketing expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
- -----------------------------------
General and administrative expense decreased $388,000 in 2002 from 2001.
The decrease in 2002 was primarily due to a $121,000 restructuring charge
related to the closure of the Anaheim, California contract assembly facility, a
$60,000 increase in the allowance for doubtful accounts in 2001, a $61,000
decrease in the allowance for doubtful accounts in 2002 and a $126,000 decrease
in salary expense for certain executives and administrative staff during 2002.
ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES
- ----------------------------------------------
Engineering, research and development efforts in 2002 were focused on a
laser identification machine and a golf club shaft-labeling machine (DataPlace
SBL). Engineering expense was incurred in support of AIA custom factory
automation sales. Expenses declined 48% in 2002 from 2001 due to fewer
development projects and staff reductions.
OTHER INCOME (EXPENSE)
- ----------------------
Interest income decreased $159,000 in 2002, compared to 2001, due to lower
average cash balances during 2002 and decreases in interest rates earned on
money market funds. Interest expense decreased $85,000 in 2002, compared to
2001, due to decreases in interest rates on the bonds and the pay down of
$1,500,000 of principal in 2002.
INCOME TAXES
- ------------
On March 9, 2002, the "Job Creation and Worker Assistance Act of 2002"
(the Act) was signed into law. The Act extended the period in which a net
operating loss may be carried back. As a result, the Company recognized and
collected a $400,000 carry back refund benefit during 2002, which is partially
offset by a $6,000 expense related to minimum tax obligations to various states.
No federal income tax carry forward benefit was recorded in 2002 due to
the net loss and the uncertainty concerning the Company's ability to utilize the
net operating loss in the future. A 100% valuation allowance was recorded
against the net deferred income tax asset as of December 31, 2002.
16
Results of Operations 2002 Compared to 2001, cont'd
- ---------------------------------------------------
Amistar Industrial Automation segment
- -------------------------------------
During 2002, the Company sold four DataPlace machines, three 100LP models
and one 1M model. Compared to the DataPlace 100LP machine, the 1M is suitable
for applications requiring less functionality and sells at a lower price. An
expanded discussion of the segment's position in relation to DataPlace
marketability can be found in the analysis of sales for the Company overall.
At December 31, 2002, the Company had nine completed DataPlace machines
included in finished goods inventory at a carrying value of $585,500. The
carrying values of DataPlace work in process and component parts were $117,500
and $340,000, respectively at December 31, 2002. The AIA work in process and raw
material inventories consist primarily of the DataPlace machine product line.
The Company has considered the current and projected state of the machine's
technology, its expected future competitive position, and has made estimates of
anticipated DataPlace demand upon economic recovery. Estimates of future demand
are highly subjective and subject to material change. As a result, the Company
recorded an inventory write-down of DataPlace machines totaling $75,000 during
2002. Although the Company was able to resume shipments during the last four
months of 2002, insufficient demand in the future for the DataPlace label
identification machines could require additional charges for excess quantities
or obsolescence.
During 2002, the AIA division continued to expand its offering of
engineering and manufacturing services to customers having requirements beyond
custom factory automation. The engineering group provided design and prototype
services for a specialty product used in the veterinary industry.
Contract Manufacturing Services segment
- ---------------------------------------
During 2002, experiencing difficult economic conditions, one of the
Company's major customers moved their production offshore. The decline in sales
was partially offset by sales growth that came from the Company's base of
medical product customers who increased orders over 2001. In addition, a portion
of the AMS sales growth came from increased quick-turn prototype services to a
major test equipment customer.
Liquidity and Capital Resources
- -------------------------------
The Company's cash flows provided from operating activities were $261,000
during 2003, compared to a usage of cash of $951,000 in 2002 and a usage of cash
of $508,000 in 2001. The improvement during 2003 was primarily due to the
reduced loss and decrease in non-cash working capital. Working capital decreased
$134,000 in 2003, and increased $763,000 in 2002.
In 2003, 2002 and 2001, investing activities consisted primarily of
capital expenditures to increase the capabilities of the AMS division and to
improve efficiency.
The Company repurchased, as part of an on-going initiative, 4,757, 3,321
and 53,378 shares of its stock on the open market at values of $5,000, $3,000
and $57,000 during the years of 2003, 2002 and 2001, respectively.
The Company financed its 80,000 square foot manufacturing and office
facility located in San Marcos, California through $4,500,000 of bonds issued by
the Industrial Development Authority of the City of San Marcos in 1995. The
bonds carry a variable interest rate and mature in December 2005. Payments of
principal and interest are unconditionally guaranteed by a $3,100,000
irrevocable letter of credit issued by the Company's bank. The terms of the
irrevocable letter of credit required the Company in 1995 to establish a
$1,329,000 interest-bearing cash collateral account (restricted cash) in order
to meet a required loan to value ratio. In 2001, the amount of restricted cash
was revised to $1,452,000. On February 1, 2002, the Company paid $1,500,000 to
redeem a portion of the industrial development bonds utilizing the restricted
cash balance of $1,452,000 plus an additional $48,000 of unrestricted cash. The
Company's obligation under the irrevocable letter of credit was reduced
accordingly by $1,500,000 effective on February 1, 2002. Effective March 1,
2002, the Company began making monthly payments of $10,000 per month into a
sinking fund for redemption of the bonds. Redemption is scheduled to occur in
increments of $100,000 as the funds accrete to the minimum redemption level. On
February 1, 2003, $100,000 of the bonds were redeemed using restricted cash. The
terms of the Reimbursement Agreement require the Company to make annual payments
of $100,000 in January 2004 and 2005 and the balance of $2,700,000 in December
2005.
The Company's stand-by letter of credit reimbursement agreement with its
bank maintains certain affirmative financial covenants. At December 31, 2003,
the Company was not in compliance with the tangible net worth, debt service and
profitability covenants. The Company received waivers relating to these
covenants through March 31, 2004. The Company has made all required debt service
payments on the bonds. However, based on the uncertainty concerning the
Company's ability to meet the covenants after the waiver expires, and
considering that a covenant violation would constitute an event of default which
would allow the bank to call the debt prior to maturity, the entire Industrial
Development bonds balance of $2,900,000 has been classified as a current
liability in the accompanying balance sheet at December 31, 2003.
The inability of the Company to return to profitability could result in
default on the terms of the Union Bank of California Reimbursement Agreement,
which supports the stand-by letter of credit guaranteeing the Company's
performance on the industrial development bonds. In the event the Company
17
defaults, and is unable to present a viable turn-around plan satisfactory to its
Bank, such event could cause the Bank to require the Company to seek a
substitute guarantor, re-finance the San Marcos facility with alternative
financing or sell the facility. The Company believes it would be able to obtain
alternative financing, although at terms less favorable than present. The
inability of the Company to substitute successfully a guarantor or to re-finance
the building could have an adverse effect on the Company's business. The Company
will continue to seek waivers for any covenant violations in the future until a
modification of the covenants can be negotiated.
Management believes that as a result of the reduction in the loss in 2003
compared to 2002 and the achievement of positive operating cash flow (defined as
net loss plus depreciation and amortization) for 2003, the bank's comfort in the
Company's ability to continue as a viable company and service its debt has
improved greatly and that the bank more than likely will continue to forbear
until December 1, 2005 when the bond term expires. The Company expects to
refinance the building when the bonds come due in December 2005, with a
conventional fully amortized loan from a new lender at rates in line with the
current market for such a loan.
The Company's primary sources of liquidity consist of cash and cash
equivalents and working capital. If the bank continues to grant waivers on the
irrevocable letter of credit reimbursement agreement, the Company believes that
its cash and cash equivalents provided from operations and cash and cash
equivalents balances at December 31, 2003 will be adequate to support its
operating, investing and financing requirements through 2004. In the event the
bank chooses to forebear no longer, management would consider several options
which include utilizing some portion of cash, re-financing the San Marcos,
California building with alternative financing, a sale-leaseback or sale of the
San Marcos, California facility and relocation to a leased facility. Management
believes that it has the ability to execute its alternate plans in the event
that payment of the Company's industrial bonds would be required in 2004, and
the Company would have adequate finances to fund its operating, investing and
financing activities through 2004 under either scenario for repayment of its
Industrial Bonds.
Contractual Commitments and Commercial Commitments
- --------------------------------------------------
The following summarizes the Company's contractual obligations and other
commitments at December 31, 2003, and the effect such obligations could have on
its liquidity and cash flow in future periods:
Payments Due By Period
Less than
Contractual Obligations 1 Year 1-3 Years 4-5 Years After 5 Years
- --------------------------------------------------------------------------------
Minimum lease payments $ 109,000 $ 142,000 $ -- $ --
Sublease income (111,000) (143,000) -- --
------------ ------------ ------------ ------------
Net lease obligations (2,000) (1,000) -- --
Industrial Bonds Payments 100,000 2,800,000 -- --
------------ ------------ ------------ ------------
$ 98,000 $ 2,799,000 $ -- $ --
============ ============ ============ ============
The Company did not have any employee agreements or purchase commitments outside
of the Company's normal course of business at December 31, 2003.
18
New Accounting Pronouncements
- -----------------------------
In November 2002, FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. The
initial recognition and initial measurement provisions of FIN 45 are applicable
on a prospective basis to guarantees issued or modified after December 31, 2002.
The disclosure requirements of FIN 45 are applicable for financial statements of
interim periods ending after December 15, 2002. The Company adopted the
disclosure requirements of FIN 45 in the 1st quarter of 2003 and has included
the new disclosure requirements in the Notes to the Financial Statements.
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 is 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.
In April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" was issued. This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
is effective for contracts entered into or modified after June 30, 2003.
Adoption of this statement is not expected to have a significant effect on the
Company's financial position or results of operations.
In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
provides guidance on how an entity classifies and measures certain financial
instruments with characteristics of both liabilities and equity. Many of these
instruments were previously classified as equity. This statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The statement requires cumulative effect transition for
financial instruments existing at the adoption date. The adoption of this
statement did not have a material impact on the Company's financial statements.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DATA ABOUT MARKET RISK
The Company is exposed to a variety of risks, including changes in
interest rates affecting the cost of its debt. The Company does not have any
derivative financial instruments.
The Company's only term debt at December 31, 2003 is comprised of
industrial development bonds. The Company financed the construction of a
manufacturing and office facility in San Marcos, California through $4,500,000
of bonds issued by the Industrial Development Authority of City of San Marcos on
December 19, 1985. The bonds mature in December 2005, and interest is accrued at
a variable monthly rate. Interest was paid at a weighted-average variable rate
of 1.0% during 2003. A hypothetical 10% increase in the weighted-average
interest rate to 1.1% would not have a material impact on the Company's
financial position or results of operations.
19
ITEM 8. FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Shareholders
Amistar Corporation:
We have audited the accompanying balance sheet of Amistar Corporation as of
December 31, 2003, and the related statements of operations, shareholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Amistar Corporation as of
December 31, 2003, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Costa Mesa, California
January 30, 2004
20
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Shareholders
Amistar Corporation:
We have audited the accompanying balance sheet of Amistar Corporation as of
December 31, 2002, and the related statements of operations, shareholders'
equity, and cash flows for each of the years in the two-year period ended
December 31, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Amistar Corporation as of
December 31, 2002 and the results of its operations and its cash flows for each
of the years in the two-year period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
KPMG LLP
San Diego, California
February 19, 2003
21
AMISTAR CORPORATION
Balance Sheets
December 31, 2003 2002
- --------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,438,976 $ 2,383,237
Restricted cash 130,000 110,000
Trade accounts receivable, less allowance for doubtful
accounts of $75,772 in 2003 and $90,094 in 2002 1,308,587 1,572,602
Inventories, net of reserves of $2,055,879 in 2003 2,313,101 2,400,824
and $2,173,825 in 2002
Demonstration equipment 52,740 95,273
Prepaid expenses 339,567 185,604
------------- -------------
Total current assets 6,582,971 6,747,540
------------- -------------
Property and equipment:
Land 981,875 981,875
Building and building improvements 4,202,076 4,158,967
Machinery and equipment 6,737,963 6,742,812
Computer software and equipment 505,570 492,152
------------- -------------
12,427,484 12,375,806
Less accumulated depreciation and amortization (8,663,783) (8,384,644)
------------- -------------
Net property and equipment 3,763,701 3,991,162
------------- -------------
Other assets 66,272 56,122
------------- -------------
$ 10,412,944 $ 10,794,824
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 321,492 $ 220,441
Accrued payroll and related costs 127,330 108,431
Accrued liabilities 188,179 214,855
Accrued warranty costs 37,698 45,876
Accrued commissions 8,754 24,480
Industrial development bonds 2,900,000 3,000,000
------------- -------------
Total current liabilities 3,583,453 3,614,083
------------- -------------
Commitments
Shareholders' equity :
Preferred stock, $.01 par value. Authorized 2,000,000
shares; none outstanding -- --
Common stock, $.01 par value. Authorized 20,000,000
shares; 3,080,544 and 3,083,051 shares issued and
outstanding in 2003 and 2002, respectively 30,806 30,831
Additional paid-in capital 4,531,733 4,533,515
Retained earnings 2,266,952 2,616,395
------------- -------------
Total shareholders' equity 6,829,491 7,180,741
------------- -------------
$ 10,412,944 $ 10,794,824
============= =============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
22
AMISTAR CORPORATION
Statements of Operations
Years ended December 31, 2003 2002 2001
- -----------------------------------------------------------------------------------------
Net sales $ 12,083,092 $ 11,078,794 $ 13,658,922
Cost of sales 9,856,208 9,902,523 12,997,924
------------- ------------- -------------
Gross profit 2,226,884 1,176,271 660,998
------------- ------------- -------------
Operating expenses:
Selling 1,315,223 1,243,101 1,673,403
General and administrative 1,013,159 1,011,911 1,400,333
Engineering, research and development 235,480 440,435 842,892
------------- ------------- -------------
2,563,862 2,695,447 3,916,628
------------- ------------- -------------
Loss from operations (336,978) (1,519,176) (3,255,630)
Other income (expense):
Interest expense (29,543) (39,676) (124,804)
Interest income 20,278 59,535 218,706
Other 300 6,325 5,500
------------- ------------- -------------
Loss before income taxes (345,943) (1,492,992) (3,156,228)
Income tax expense (benefit) 3,500 (394,000) (66,187)
------------- ------------- -------------
Net Loss $ (349,443) $ (1,098,992) $ (3,090,041)
============= ============= =============
Loss per common share :
Basic $ (0.11) $ (0.36) $ (0.99)
============= ============= =============
Diluted $ (0.11) $ (0.36) $ (0.99)
============= ============= =============
Weighted-average shares outstanding:
Basic 3,080,401 3,085,375 3,127,196
============= ============= =============
Diluted 3,080,401 3,085,375 3,127,196
============= ============= =============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
23
AMISTAR CORPORATION
Statements of Shareholders' Equity
Years Ended December 31, 2003, 2002, and 2001
- -------------------------------------------------------------------------------------------------------------
Common Stock
----------------------------- Additional Total
Shares Paid-in Retained Shareholders'
(in 000's) Par value capital Earnings Equity
------------- ------------- ------------- ------------- -------------
Balances at December 31, 2000 3,137 $ 31,365 $ 4,589,043 $ 6,805,428 $ 11,425,836
Stock option exercise 3 33 4,030 -- 4,063
Repurchase of common shares (54) (534) (56,752) -- (57,286)
Net loss -- -- -- (3,090,041) (3,090,041)
------------- ------------- ------------- ------------- -------------
Balances at December 31, 2001 3,086 30,864 4,536,321 3,715,387 8,282,572
Repurchase of common shares (3) (33) (2,806) -- (2,839)
Net loss -- -- -- (1,098,992) (1,098,992)
------------- ------------- ------------- ------------- -------------
Balances at December 31, 2002 3,083 30,831 4,533,515 2,616,395 7,180,741
Stock option exercise 3 23 2,791 -- 2,814
Repurchase of common shares (5) (48) (4,573) -- (4,621)
Net loss -- -- -- (349,443) (349,443)
------------- ------------- ------------- ------------- -------------
Balances at December 31, 2003 3,081 $ 30,806 $ 4,531,733 $ 2,266,952 $ 6,829,491
============= ============= ============= ============= =============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
24
AMISTAR CORPORATION
Statements of Cash Flows
Years ended December 31, 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------
Cash flows provided by (used in) operating activities:
Net Loss $ (349,443) $(1,098,992) $(3,090,041)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 354,075 545,156 696,611
Provision for (recovery of) doubtful accounts (20,000) (60,379) 60,000
Provision for inventory obsolescense -- 174,524 463,367
Gain on sale of equipment -- -- (5,500)
Changes in assets and liabilities:
Trade accounts receivable, net 284,015 (447,752) 1,719,015
Inventories 87,723 129,766 (108,178)
Demonstration equipment (417) 57,386 (40,123)
Prepaid expenses (153,963) 1,781 7,213
Contracts receivable -- -- 55,871
Other assets (10,150) 17,437 29,595
Accounts payable 101,051 (64,552) (303,549)
Accrued payroll and related costs 18,899 (183,203) 138,812
Accrued liabilities (26,676) 12,312 (37,230)
Accrued warranty costs (8,178) (42,375) (16,749)
Accrued commissions (15,726) 8,062 (77,470)
------------ ------------ ------------
Net cash provided by (used in) operating activities 261,210 (950,829) (508,356)
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of equipment -- -- 5,500
Capital expenditures (83,664) (131,491) (214,019)
------------ ------------ ------------
Net cash used in investing activities (83,664) (131,491) (208,519)
------------ ------------ ------------
Cash flows from financing activities
Net decrease (increase) in restricted cash (20,000) 1,342,000 (123,000)
Redemption of Industrial Development Bonds (100,000) (1,500,000) --
Exercise of stock options 2,814 -- 4,063
Repurchase of common stock (4,621) (2,839) (57,286)
------------ ------------ ------------
Net cash used in financing activities (121,807) (160,839) (176,223)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 55,739 (1,243,159) (893,098)
Cash and cash equivalents at the beginning of the year 2,383,237 3,626,396 4,519,494
------------ ------------ ------------
Cash and cash equivalents at the end of the year $ 2,438,976 $ 2,383,237 $ 3,626,396
============ ============ ============
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest $ 29,302 $ 42,250 $ 137,517
============ ============ ============
Income taxes $ 3,484 $ 4,704 $ 9,153
============ ============ ============
Supplemental disclosure of non-cash investing activities:
Transfer from Demo Eq. to property and equipment $ 42,950 $ -- $ --
============ ============ ============
Transfer from inventory to property and equipment $ -- $ 18,547 $ --
============ ============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
25
AMISTAR CORPORATION
Notes to Financial Statements
Three years ended December 31, 2003
(1) BUSINESS AND CURRENT EVENTS
Business
--------
Amistar Corporation (the Company) operates two divisions, Amistar Industrial
Automation (AIA) and Amistar Manufacturing Services (AMS). The AIA division
manufactures and markets assembly machinery primarily for the electronics
industry and provides engineering design and manufacturing services to
customers seeking enhanced factory automation. AMS is a contract assembler
of electronic products, including printed circuit board assemblies. The
Company's customers are located predominately in the United States. The
Company's headquarters and primary manufacturing facility is located in San
Marcos, California. The Company's raw materials are readily available
subject to certain market conditions that may affect the allocation of
electronic components.
Current Events
--------------
The Company has been adversely affected by the economic downturn in the
electronics industry during the past three years and as a result has
incurred operating and net losses. The lack of profitability has caused the
Company to be in non-compliance on certain loan covenants in connection with
the Industrial Development Bonds (Note 4). The inability of the Company to
return to profitability could result in default on the terms of the Union
Bank of California Reimbursement Agreement, which supports the stand-by
letter of credit guaranteeing the Company's performance on the industrial
development bonds. In the event the Company defaults, and is unable to
present a viable turn-around plan satisfactory to its bank, such event could
cause the bank to require the Company to seek a substitute guarantor or
redeem the bonds prior to maturity. If such an event occurred, management
would consider several options which include utilizing some portion of
existing cash, re-financing the building with alternative financing, a
sale-leaseback or sale of the San Marcos, California facility and relocation
to a leased facility. The inability of the Company to successfully
substitute a guarantor or to re-finance the building could have a materially
adverse effect on the Company's business.
The Company will continue to seek waivers for any covenant violations in the
future until a modification of the covenants can be negotiated. Management
believes that it has the ability to execute its alternate plans in the event
that payment of the Company's industrial bonds would be required in 2004,
and the Company would have adequate finances to fund its operating,
investing and financing activities through 2004 under either scenario for
repayment of its Industrial Bonds.
Management believes that as a result of the reduction in the loss in 2003
compared to 2002 and the achievement of positive cash flows from operations
for 2003, the Company's ability to continue as a viable company able to
service its debt has improved greatly and that the bank will continue to
forbear more than likely until December 1, 2005 when the bond term expires.
Notice from Stock Exchange
--------------------------
The Company received notice on October 4, 2002 that it was subject to
de-listing from the NASDAQ Small Cap Market for failure to meet the minimum
closing bid price requirement of $1.00 for the prior 30 days.
The Company subsequently received notice from NASDAQ on May 29, 2003 that it
regained compliance with the minimum closing bid price requirement. Since
May 29, 2003 the Company has maintained full compliance with the listing
requirements.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
-------------------
The Company considers many factors in the evaluation of revenue recognition,
including customer acceptance criteria, complexity of installation and
integration into production lines. The Company generally recognizes revenue
for machine sales upon shipment and installation for the initial machine
model sold to a customer. Revenue is recognized generally for subsequent
machine sales to a same customer upon shipment, provided title and risk of
loss have transferred and the model, configuration, and application is
substantially similar to the original machine installed. At the time of
shipment, the Company accrues for any related de minimus and perfunctory
installation costs to be incurred. Revenue for manufacturing services,
factory automation services, machine accessories, and spare parts are
recognized upon shipment of product or deliverable and transfer of title and
risk of loss. Billable service labor revenue is recognized upon completion.
Overall revenue is considered to be realized or realizable and earned when
there is persuasive evidence of a sales arrangement in the form of a
contract or purchase order, the product has been shipped and/or installed,
the sales price is fixed or determinable and collectability is reasonably
assured.
The Company has one bill and hold arrangement. The inventory related to this
arrangement is segregated from the Company's inventory, is insured by the
customer, and the customer bears the market value risk. The Company
recognizes revenue based on a fixed written commitment by the customer, when
the risk of ownership has passed, and when there are no remaining
performance obligations on the part of the Company. The retail amount of
inventory held by the Company at December 31, 2003 was approximately
$170,000.
26
AMISTAR CORPORATION
Notes to Financial Statements, Continued
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cash and cash equivalents
-------------------------
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. As of December 31,
2003 and 2002, cash equivalents, primarily consisting of money market funds,
amounted to $2,285,000 and $2,023,000, respectively. Restricted cash
represents required amounts that are held to redeem the Industrial
Developments Bonds. (Note 4)
Inventories
-----------
Inventories are valued at the lower of cost (first-in, first-out) or market
(net realizable value) and are reviewed regularly for excess or
obsolescence.
Demonstration Equipment
-----------------------
Demonstration equipment represents short-term transfers of inventory for
purposes of participating in trade shows and demonstrations with customers.
This equipment typically is sold or returned to inventory within six months
and is not depreciated due to the limited hours of machine run time.
Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation is recorded using
the straight-line method over the estimated useful lives of the assets as
follows:
Building 40 years
Building improvements 10 years
Machinery and equipment 4-7 years
Computer software and equipment 3-5 years
Costs of improvements or betterments that substantially extend the useful
life of an asset are capitalized. Costs for repairs and maintenance are
expensed as incurred. Upon the disposition of property and equipment,
related costs and accumulated depreciation are removed from the Company's
books and related gains or losses are reflected in operations. Depreciation
expense is reflected in cost of sales totaling $301,000, $514,000 and
$659,000 for 2003, 2002 and 2001 and operating expenses totaling $53,000,
$31,000 and $38,000 for 2003, 2002 and 2001 in the accompanying financial
statements based on applicable asset use.
Deferred Bond Refinancing Costs
-------------------------------
Costs incurred in connection with refinancing the Industrial Development
Bonds are amortized using the effective interest method over the life of the
bonds. Deferred costs are included in other assets.
Accrued Warranty Costs
----------------------
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 years ended
December 31:
Charged to
Period Beginning costs and
Beginning Balance expense Deductions Ending Balance
----------------------------------------------------------------------------
2003 $ 45,876 $ (30,195) $ 22,017 $ 37,698
============= ============= ============= =============
2002 $ 88,251 $ (36,701) $ (5,674) $ 45,876
============= ============= ============= =============
2001 $ 105,000 $ (70,601) $ 53,852 $ 88,251
============= ============= ============= =============
Research and Development Costs
------------------------------
Research and development costs are expensed in the period incurred.
27
AMISTAR CORPORATION
Notes to Financial Statements, Continued
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
------------
Income taxes are accounted for under the asset and liability method.
Accordingly, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A
valuation allowance is provided for deferred tax assets if it is more likely
than not that the Company will not realize deferred tax assets usage in
future operations.
Advertising
-----------
Advertising costs are charged to expense as incurred. The Company expensed
$0, $4,000 and $7,000 for the years ended December 31, 2003, 2002 and 2001,
respectively.
Stock-Based Compensation
------------------------
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure", which amended SFAS No. 123,
"Accounting for Stock-Based Compensation." The new standard provides
alternative methods of transition for a voluntary change to the fair market
value based method for accounting for stock-based employee compensation.
Additionally, the standard amends the disclosure requirements of SFAS No.
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. This
standard was effective for financial statements for the year ended December
31, 2002. In compliance with SFAS No. 148, the Company has elected to
continue to follow the intrinsic value method in accounting for its
stock-based employee compensation plan as defined by APB No. 25 and has made
the applicable disclosures below.
Had the Company determined employee stock based compensation cost based on a
fair value model at the grant date for its stock options under SFAS 123, the
Company's net loss per share would have been adjusted to the pro forma
amounts for the years ended December 31, 2003, 2002 and 2001 as follows ($
in thousands, except per share amounts):
2003 2002 2001
-------- ---------- --------
Net loss - as reported $ (349) $ (1,099) $(3,090)
Total stock-based employee compensation
expense included in reported net
income, net of tax -- -- --
Total stock-based employee compensation
expense determined under fair-value-based
method for all rewards, net of tax (22) (10) (58)
-------- ---------- --------
Pro forma net loss $ (371) $ (1,109) $(3,148)
======== ========== ========
Earnings (loss) per share:
Basic, as reported (0.11) (0.36) (0.99)
Diluted, as reported (0.11) (0.36) (0.99)
Basic, pro forma (0.12) (0.36) (1.01)
Diluted, pro forma (0.12) (0.36) (1.01)
28
AMISTAR CORPORATION
Notes to Financial Statements, Continued
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Earnings per Common Share
-------------------------
The Company calculates net earnings 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):
Years ended December 31,
------------------------------
2003 2002 2001
------ ------ ------
Weighted-average shares basic 3,080 3,085 3,127
Dilutive effect of stock options -- -- --
------ ------ ------
Weighted-average shares, diluted 3,080 3,085 3,127
====== ====== ======
Options to purchase 233,000, 165,000 and 100,000 shares of common stock were
not included in the calculation of diluted net loss per share for the years
ended December 31, 2003, 2002 and 2001, respectively, because the effects of
these instruments were anti-dilutive.
Use of Estimates
----------------
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets, liabilities, revenues, and expenses,
and the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with accounting principles generally
accepted in the United States of America. Actual results could materially
differ from those estimates.
Fair Value of Financial Instruments
-----------------------------------
The carrying amount of cash and cash equivalents, trade receivables,
accounts payable and accrued expenses approximate fair value because of the
short maturity of those instruments. The carrying amount of the Company's
Industrial Development Bonds approximates fair value due to the variable
interest rate provision, which effectively re-prices the instruments to
market values on a monthly basis.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
-----------------------------------------------------------------------
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" provides a single accounting model for long-lived assets and
long-lived assets to be disposed of. SFAS No. 144 also changes the criteria
for classifying an asset as held for sale; and broadens the scope of
businesses to be disposed of that qualify for reporting as discontinued
operations and changes the timing of recognizing losses on such operations.
The Company adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS
No. 144 did not affect the Company's financial statements. In accordance
with SFAS No. 144, long-lived assets, such as property, plant, and equipment
are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized
by the amount by which the carrying amount of the asset exceeds the fair
value of the asset. Assets to be disposed of would be separately presented
in the balance sheet and reported at the lower of the carrying amount or
fair value less costs to sell, and are no longer depreciated. The assets and
liabilities of a disposed group classified as held for sale would be
presented separately in the appropriate asset and liability sections of the
balance sheet.
Prior to the adoption of SFAS No. 144, the Company accounted for long-lived
assets and long-lived assets to be disposed of in accordance with SFAS No.
121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of."
29
AMISTAR CORPORATION
Notes to Financial Statements, Continued
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Guarantees and indemnifications
-------------------------------
In November 2002, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation ("FIN") No. 45 "Guarantor's Accounting and Disclosure
Requirements for Guarantees, including Indirect Guarantees of Indebtedness
of Others -- an interpretation of FASB Statements No. 5, 57 and 107 and
rescission of FIN 34." The following is a summary of the Company's
agreements that the Company has determined are within the scope of FIN No.
45:
The Company provides a one year warranty for most of its products. See
"Warranty Liabilities."
Under its bylaws, the Company has agreed to indemnify its officers and
directors for certain events or occurrences arising as a result of the
officer or director's serving in such capacity. The term of the
indemnification period is for the officer's or director's lifetime. The
maximum potential amount of future payments the Company could be required to
make under these indemnification agreements is unlimited. However, the
Company has a directors and officers liability insurance policy that limits
its exposure and enables it to recover a portion of any future amounts paid.
As a result of its insurance policy coverage, the Company believes the
estimated fair value of these indemnification agreements is minimal and has
no liabilities recorded for these agreements as of December 31, 2003.
The Company enters into indemnification provisions under (i) its agreements
with other companies in its ordinary course of business, typically with
business partners, contractors, customers and landlords. Under these
provisions the Company generally indemnifies and holds harmless the
indemnified party for direct losses suffered or incurred by the indemnified
party as a result of the Company's activities or, in some cases, as a result
of the indemnified party's activities under the agreement. The maximum
potential amount of future payments the Company could be required to make
under these indemnification provisions is unlimited. The Company has not
incurred material costs to defend lawsuits or settle claims related to these
indemnification agreements. As a result, the Company believes the estimated
fair value of these agreements is minimal. Accordingly, the Company has no
liabilities recorded for these agreements as of December 31, 2003.
Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the current
year presentation.
New Accounting Pronouncements
-----------------------------
In November 2002, FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and initial measurement provisions of FIN
45 are applicable on a prospective basis to guarantees issued or modified
after December 31, 2002. The disclosure requirements of FIN 45 are
applicable for financial statements of interim periods ending after December
15, 2002. The Company adopted the disclosure requirements of FIN 45 in the
1st quarter of 2003 and has included the new disclosure requirements.
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 is 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.
In April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" was issued. This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This
statement is effective for contracts entered into or modified after June 30,
2003. Adoption of this statement is not expected to have a significant
effect on the Company's financial position or results of operations.
30
AMISTAR CORPORATION
Notes to Financial Statements, Continued
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No.
150 provides guidance on how an entity classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
Many of these instruments were previously classified as equity. This
statement is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The statement requires
cumulative effect transition for financial instruments existing at the
adoption date. The adoption of this statement did not have a material impact
on the Company's financial statements.
(3) INVENTORIES
Inventories at December 31, 2003 and 2002, consist of the following (in
thousands), net of reserves:
December 31, December 31,
2003 2002
------------------------- -------------------------
AIA AMS Total AIA AMS Total
Raw Material $ 295 $ 817 $1,112 $ 210 $ 580 $ 790
Work In Process 480 92 572 569 161 730
Finished Goods 550 79 629 669 212 881
------------------------- -------------------------
Total $1,325 $ 988 $2,313 $1,448 $ 953 $2,401
========================= =========================
The Company continues to take steps to minimize costs and inventory levels
in response to the decline in demand for its DataPlace 100LP label
identification automation equipment. During 2003 and 2002, the Company has
sold its DataPlace 100LP units out of inventory on hand at December 31,
2001. The Company sold two DataPlace 100LP units in 2003 and three in 2002.
During 2003, the Company produced and sold six of its DataPlace 1M models.
The 1M model is similar to the 100LP, but with less functionality and shares
many common parts and subassemblies. Where possible, the Company consumed
existing inventory of parts and subassemblies in the production of the
DataPlace 1M units. During 2003, the Company purchased and sold two used
DataPlace 100LP machines.
At December 31, 2003, the Company had ten completed DataPlace machines
included in finished goods inventory at a carrying value of $370,000. The
carrying value of DataPlace machines in work in process was $231,000 at
December 31, 2003. The AIA work in process inventories consist primarily of
the DataPlace machine product line.
The Company has considered the current and projected state of the machine's
technology, its expected future competitive position, and has made estimates
of anticipated DataPlace demand upon economic recovery. Estimates of future
demand are highly subjective and subject to material change. As a result,
the Company recorded an inventory write-down of DataPlace machines totaling
$75,000 during 2002. Although the Company was able to resume shipments
during the last four months of 2002 and during 2003, insufficient demand in
the future for the DataPlace label identification machines could require
additional charges for excess quantities or obsolescence in the future.
31
AMISTAR CORPORATION
Notes to Financial Statements, Continued
(4) INDUSTRIAL DEVELOPMENT BONDS
The Company financed the construction of its manufacturing and office
facility in San Marcos, California through $4,500,000 of bonds issued by the
Industrial Development Authority of the City of San Marcos on December 19,
1985. The bonds originally matured in December 1995. In October 1995, the
Company secured an extension of the maturity date to December 2005. The
bonds bear interest at a variable rate based on prevailing market conditions
that would allow the bonds to be remarketed at par (1.05% at December 31,
2003), with interest payable monthly. The bonds are guaranteed by a
$3,093,120 irrevocable letter of credit, which is secured by substantially
all assets of the Company.
The terms of the irrevocable letter of credit required the Company to
establish a $1,452,000 interest-bearing cash collateral account (restricted
cash) during 2001 in order to meet a loan-to-value ratio covenant.
On February 1, 2002, the Company paid $1,500,000 to redeem a portion of the
industrial development bonds utilizing the restricted cash balance of
$1,452,000 plus an additional $48,000 of unrestricted cash. Effective March
1, 2002, the Company began making required monthly payments of $10,000 per
month into a sinking fund (restricted cash) for redemption of the bonds.
Redemption will occur in minimum increments of $100,000 as the funds accrete
to the minimum redemption level. The terms of the Reimbursement Agreement
require the Company to make remaining annual payments of $100,000 in 2004
and 2005 and the balance of $2,700,000 in December 2005.
The Company's stand-by letter of credit reimbursement agreement with its
bank maintains certain affirmative financial covenants. At December 31,
2003, the Company was not in compliance with tangible net worth, debt
service and profitability covenants. The Company received waivers relating
to these covenants through March 31, 2004. The Company has made all required
debt service payments on the bonds. However, based on the uncertainty
concerning the Company's ability to meet the covenant after the waiver
expires, and considering that a covenant violation would constitute an event
of default, which would allow the bank to call the debt prior to maturity,
the entire Industrial Development bonds balance of $2,900,000 has been
classified as a current liability in the accompanying balance sheet.
The inability of the Company to return to profitability could result in
default on the terms of the Union Bank of California Reimbursement
Agreement, which supports the stand-by letter of credit guaranteeing the
Company's performance on the industrial development bonds. In the event the
Company defaults and is unable to present a viable turn-around plan
satisfactory to its bank, such event could cause the bank to require the
Company to seek a substitute guarantor, re-finance the building with
alternative financing or sell the San Marcos, California facility. The
inability of the Company to successfully substitute a guarantor or to
re-finance the building could have a materially adverse effect on the
Company's business. The Company will continue to seek waivers for any
covenant violations in the future until a modification of the covenants can
be negotiated.
In the event the bank chooses to no longer forbear, management would
consider several options which include utilizing some portion of cash,
refinancing the building with alternative financing, a sale-leaseback or
sale of the San Marcos, California facility and relocation to a leased
facility. Management believes that it has the ability to execute its
alternate plans in the event that repayment of the Company's industrial
development bonds would be required in 2004, and the Company would have
adequate finances to fund its operating, investing and financing activities
through 2004 under either scenario for repayment of its industrial
development bonds.
Costs incurred in connection with the bond refinancing primarily consist of
loan origination fees, broker's commission, legal, and other fees, which
have been capitalized and included in other assets. The bond costs are
amortized over the term of the bonds. Deferred bond-refinancing costs were
$25,000 and $39,000 at December 31, 2003 and 2002, respectively. Ongoing
fees related to the bonds and the irrevocable letter of credit will
approximate 2% of the bond principal annually.
32
AMISTAR CORPORATION
Notes to Financial Statements, Continued
(5) INCOME TAXES
Income tax expense (benefit) consists of the following:
Federal State Total
---------- ---------- ----------
2003 Current $ -- $ 3,500 $ 3,500
Deferred -- -- --
---------- ---------- ----------
$ -- $ 3,500 $ 3,500
========== ========== ==========
2002 Current $(400,000) $ 6,000 $(394,000)
Deferred -- -- --
---------- ---------- ----------
$(400,000) $ 6,000 $(394,000)
========== ========== ==========
2001 Current $ (73,187) $ 7,000 $ (66,187)
Deferred -- -- --
---------- ---------- ----------
$ (73,187) $ 7,000 $ (66,187)
========== ========== ==========
Actual income taxes for 2003, 2002 and 2001 differ from "expected" income
taxes for those years computed by applying the U.S. federal statutory rate
of 34% to loss before taxes as follows:
2003 2002 2001
------------ ------------ ------------
Income tax expense (benefit) $ (118,000) $ (508,000) $(1,073,000)
State and foreign income taxes, net of
federal income tax benefit (20,184) 4,000 5,000
Change in valuation allowance 349,000 162,000 1,210,000
Income tax carryforwards and credits -- (29,000) (38,000)
Other, net, including change in estimate (207,316) (23,000) (170,187)
------------ ------------ ------------
$ 3,500 $ (394,000) $ (66,187)
============ ============ ============
33
AMISTAR CORPORATION
Notes to Financial Statements, Continued
(5) INCOME TAXES (continued)
The tax effects of significant temporary differences, which comprise
deferred tax assets and liabilities, consist of the following:
2003 2002
------------ ------------
Deferred tax assets:
Allowance for doubtful accounts $ 30,000 $ 78,000
Warranty accrual 15,000 18,000
Inventory allowance 1,047,000 1,094,000
Accrued vacation 36,000 4,000
State loss carryforwards and income
tax credits 301,000 349,000
Federal loss carryforwards and tax credits 2,125,000 1,613,000
Other 168,000 190,000
------------ ------------
Gross deferred tax assets 3,722,000 3,346,000
Valuation allowance (3,607,000) (3,258,000)
------------ ------------
Total deferred tax assets 115,000 88,000
Deferred tax liabilities-depreciation and
amortization (115,000) (88,000)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the amount and timing of scheduled reversal of deferred tax
liabilities, projected future taxable income, and projections for future
taxable income over the periods, which the deferred tax assets are
deductible. Management believes it is more likely than not that the Company
will not realize the benefits of these deductible differences.
The Company has tax credits totaling $148,000. In addition, the Company has
Federal and State net operating loss carry forwards in the amount of
$6,034,000 and $3,193,000 at December 31, 2003, which are expected to begin
expiring in 2014 and 2004, respectively. The State of California has
suspended the use of net operating losses until 2004.
On March 9, 2002, the "Job Creation and Worker Assistance Act of 2002" (the
Act) was signed into law. The Act extends the period in which a net
operating loss may be carried back. As a result, the Company recognized and
received a $400,000 carry-back refund benefit during 2002, which is
partially offset by a $6,000 provision for the minimum tax liability to
various states.
34
AMISTAR CORPORATION
Notes to Financial Statements, Continued
(6) STOCK OPTION PLAN
In 1994, the Company adopted an incentive stock option plan (the "Plan") for
employees. The Plan allows for grants of options to purchase up to 310,000
shares of authorized but unissued common stock. Stock options are granted
with an exercise price equal to the stock's fair market value at the date of
grant, generally vest over four years from the date of grant, and expire
five years after the date of grant.
The Company applies APB Opinion No. 25, and related interpretations, in
accounting for the Plan and, accordingly, no compensation cost has been
recognized for stock option grants to employees and directors in the
financial statements as all grant exercise prices were equal to fair market
value on the date of grant.
There were 86,000 shares granted during 2003. There were no shares granted
during 2002. The per share weighted-average fair value of stock options
granted during 2003 and 2001 was $0.45 and $.63, respectively, on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: expected life of 5 years, expected volatility
of 69% and 65% in 2003 and 2001, respectively, no dividends, and risk-free
interest rates of 2.75% and 3.7% for 2003 and 2001, respectively.
Stock option activity during the periods indicated is as follows:
Year Ended December 31,
----------------------------------------------------------------------
2003 2002 2001
---------------------- ---------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
No. of Exercise No. of Exercise No. of Exercise
Shares Price Shares Price Shares Price
---------- ---------- ---------- ---------- ---------- ----------
Beginning balance 165,000 $ 1.8555 202,500 $ 1.8380 213,000 $ 1.8539
Options granted 86,000 0.8200 -- -- 5,000 1.1000
Options exercised (2,250) 1.2500 -- -- (3,250) 2.6000
Options expired/cancelled (16,000) 2.7500 (37,500) 1.7670 (12,250) 1.6100
---------- ---------- ---------- ---------- ---------- ----------
Ending balance 232,750 $ 1.4200 165,000 $ 1.8555 202,500 $ 1.8380
========== ========== ========== ========== ========== ==========
Balance exercisable 145,250 122,500 102,250
========== ========== ==========
The range of exercise prices on options outstanding at December 31, 2003 are
as follows:
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
-------------- ------------ ------------ ----------- ------------- -----------
$0.81 - $1.00 86,000 4.22 $ 0.82 -- $ --
$1.01 - $1.75 65,750 0.94 1.25 65,750 1.25
$1.76 - $2.50 75,000 0.27 2.15 75,000 2.15
$2.51 - $2.69 6,000 1.38 2.69 4,500 3.58
-------------- ------------ ------------ ----------- ------------- -----------
$0.81 - $2.69 232,750 2.05 $ 1.42 145,250 $ 2.27
============== ============ ============ =========== ============= ===========
35
AMISTAR CORPORATION
Notes to Financial Statements, Continued
(7) COMMITMENTS
The Company leases a 14,000 square foot facility in Anaheim, California that
it sublet in December 2001. Rental expense for operating leases on the
Anaheim, CA facility and Warrenville, IL office (until 2001) approximated
$106,000, $103,000, and $94,000 for the years ended December 31, 2003, 2002
and 2001, respectively. The Company has the following future non-cancelable
minimum lease obligations and sublease income:
Total 2004 2005 2006
---------- ---------- ---------- ----------
Minimum lease payments $ 251,000 $ 109,000 $ 114,000 $ 28,000
Sublease income (254,000) (111,000) (114,000) (29,000)
---------- ---------- ---------- ----------
Net lease obligations $ (3,000) $ (2,000) $ -- $ (1,000)
========== ========== ========== ==========
Bonus Plan for Executive Officers
---------------------------------
On August 7, 1997, the Compensation Committee of the Board of Directors
adopted a bonus plan for executives of the Company effective with years
beginning January 1, 1997. The plan provides that bonuses will be paid to
certain executives of the Company based on a formula of after tax profits
which exceed an 8% return on equity, weighted 70% on the current year and
30% on the prior year. The bonus is calculated as a percentage of salary
which equals 3, 4, or 5 times the percentage of after tax profits which
exceeds an 8% return on equity, weighted 70% on the current year's
performance and 30% on the prior year's performance. All executive officers
participate in the plan. No bonuses were accrued or paid for each of the
years ended December 31, 2003 and 2002.
(8) 401(k) PLAN
The Company has established a 401(k) savings plan for the benefit of its
employees. The plan permits eligible employees to contribute to the plan up
to the limits set by the Internal Revenue Code. The Company makes a matching
contribution to the plan equal to 50% of the first 6% of compensation
contributed by each participant. Participants are always fully vested in all
of their contributions and attain a vested right to the Company's matching
contributions at the rate of 20% for each full year of service after one
year until participants are fully vested after six full years of service.
Amounts contributed by the Company in 2003, 2002, and 2001 were $75,000,
$75,000, and $88,000, respectively.
36
AMISTAR CORPORATION
Notes to Financial Statements, Continued
(9) INDUSTRY SEGMENTS AND GEOGRAPHIC INFORMATION
The following table summarizes the Company's two operating segments: Amistar
Industrial Automation ("AIA"), which encompasses the manufacture and
distribution of manufacturing machinery, specialty products, and related
accessories, and Amistar Manufacturing Services("AMS"), which encompasses
electronics manufacturing services. The Company identifies reportable
segments based on the unique nature of operating activities, customer base
and marketing channels. Information is also provided by major geographical
area (dollars in thousands).
AIA
-------------------------------------
UNITED REST OF
STATES EUROPE WORLD TOTAL AMS CORPORATE TOTAL
--------- ------ ------ --------- --------- ------ ---------
YEAR ENDED DECEMBER 31, 2003
Net sales $ 3,302 $ 179 $ 196 $ 3,677 $ 8,406 $ -- $ 12,083
========= ====== ====== ========= ========= ====== =========
Loss from operations (294) (16) (17) (327) (10) -- (337)
========= ====== ====== ========= ========= ====== =========
Depreciation and amortization 99 -- -- 99 226 29 354
========= ====== ====== ========= ========= ====== =========
Total assets 5,392 48 -- 5,440 1,998 2,975 10,413
========= ====== ====== ========= ========= ====== =========
Additions to long-lived assets 67 -- -- 67 60 -- 127
========= ====== ====== ========= ========= ====== =========
YEAR ENDED DECEMBER 31, 2002
Net sales $ 1,524 $ 184 $ 213 $ 1,921 $ 9,158 $ -- $ 11,079
========= ====== ====== ========= ========= ====== =========
Loss from operations (823) (99) (115) (1,037) (482) -- (1,519)
========= ====== ====== ========= ========= ====== =========
Depreciation and amortization 126 -- -- 126 404 15 545
========= ====== ====== ========= ========= ====== =========
Total assets 5,520 35 3 5,558 2,502 2,735 10,795
========= ====== ====== ========= ========= ====== =========
Additions to long-lived assets 14 -- -- 14 117 -- 131
========= ====== ====== ========= ========= ====== =========
YEAR ENDED DECEMBER 31, 2001
Net sales $ 2,674 $ 211 $ 92 $ 2,977 $ 10,682 $ -- $ 13,659
========= ====== ====== ========= ========= ====== =========
Income from operations (1,819) (143) (63) (2,025) (1,231) -- (3,256)
========= ====== ====== ========= ========= ====== =========
Depreciation and amortization 230 -- -- 230 438 29 697
========= ====== ====== ========= ========= ====== =========
Total assets 5,859 57 -- 5,916 2,411 5,339 13,666
========= ====== ====== ========= ========= ====== =========
Additions to long-lived assets 29 -- -- 29 185 -- 214
========= ====== ====== ========= ========= ====== =========
Occupancy costs related to the Company's San Marcos, CA facility totaling
$113,000 were allocated to the AMS division during each of the three years
ended December 31, 2003. This occupancy allocation is based on square feet
utilized. The basis for attributing revenue to the geographical areas is
based on where products and services are sold. The basis for attributing
revenue to the segments is based on the nature of the products delivered or
services to be performed. In addition, total assets include accounts
receivables due from foreign customers aggregating $79,000 at December 31,
2003, $38,000 at December 31, 2002, and $57,000 at December 31, 2001.
37
AMISTAR CORPORATION
Notes to Financial Statements, Continued
(10) BUSINESS CONCENTRATIONS
Most of the Company's customers are located in the United States. During
2003, sales of, $2,666,000 (or 22% of total sales) were made to Merit
Medical Systems, Inc., $1,877,000 (or 16% of total sales) were made to
Signet Scientific, and $1,573,000 (or 13% of total sales) were made to Chad
Therapeutics. During 2002, sales of $2,015,000 (or 18% of total sales) were
made to Chad Therapeutics, $1,836,000 (or 17% of total sales) were made to
Merit Medical Systems, Inc. and $1,677,000 (or 15% of total sales) were made
to Signet Scientific. During 2001, sales of $2,291,000 (or 17% of total
sales) were made to Merit Medical Systems, Inc., $1,634,000 (or 12% of total
sales) to Systech Corporation, $1,579,000 (or 12% of total sales) to Chad
Therapeutics and $1,532,000 (or 11% of total sales) to Signet Scientific.
Sales to all of the above customers were from AMS.
Management believes that the loss of its most significant customers and the
inability to fill the void with sales to replacement customers, would have a
material adverse affect on the Company's results of operations and financial
condition.
The Company distributed private label accessories and spare parts under an
exclusive OEM supply agreement with i-Pulse Company Ltd. (formerly Tenryu
Technics) until June 30, 2001 when the existing agreement terminated. The
Company was able to successfully sell off its remaining distributed machine
inventory during 2000. During 2002, the Company agreed to distribute and
service the i-Pulse equipment line in North America on a non-exclusive
basis. The Company and i-Pulse formalized their agreement October 28, 2003.
(11) UNAUDITED QUARTERLY RESULTS
Quarter Ended,
-----------------------------------------------------------
3/31 6/30 9/30 12/31 Year Ended
--------- --------- --------- --------- ------------
(In thousands, except per share data)
2003
--------------------------
Net sales $ 2,769 $ 2,652 $ 3,125 $ 3,537 $ 12,083
Gross profit 548 529 582 568 2,227
Net loss (146) (79) (36) (88) (349)
Loss per common share:
Basic and diluted (0.05) (0.03) (0.01) (0.03) (0.11)
2002
--------------------------
Net sales $ 2,641 $ 2,827 $ 2,844 $ 2,767 $ 11,079
Gross profit (loss) 177 182 348 469 1,176
Net loss (102) (454) (377) (166) (1,099)
Loss per common share:
Basic and diluted (0.03) (0.15) (0.12) (0.05) (0.36)
38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 1, 2003, the Company's audit committee, as affirmed by the board
of directors, dismissed KPMG, LLP ("KPMG") as the Company's independent auditors
for the year ending December 31, 2003, and appointed BDO Seidman, LLP as the
Company's independent auditors.
The decision to change auditors is the result of the Company's ongoing
efforts to reduce expenses.
KPMG's reports on the Company's financial statements for the fiscal years
ended December 31, 2002 and 2001 did not contain an adverse opinion or
disclaimer of opinion, nor were such reports qualified or modified as to
uncertainty, audit scope or accounting principles.
During the fiscal years ended December 31, 2002 and 2001, and through the
subsequent period ended March 26, 2003, there were no disagreements with KPMG on
any matter of accounting principle or practice, financial statement disclosure,
or auditing scope or procedure which, if not resolved to KPMG's satisfaction,
would have caused them to make reference to the subject matter of the
disagreement in connection with the audit reports on the Company's financial
statements for such years.
During the fiscal years ended December 31, 2002 and 2001, and through the
subsequent period ended March 31, 2003, there were no reportable events as
defined in Item 304(a)(1)(iv) of Regulation S-K.
The Company has provided KPMG with a copy of the foregoing disclosure and
KPMG has indicated that it agrees with the statements in the disclosure.
Neither the Company nor anyone engaged on its behalf has consulted with
BDO Seidman, LLP during the Company's two most recently completed fiscal years
or during its current fiscal year with regard to either: (i) the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the Company's financial
statements; or (ii) any other matters or reportable events as set forth in Items
304(a)(2)(i) and (ii) or Regulation S-K.
The Company has provided an indemnification letter to KPMG LLP in
connection with the issuance of KPMG LLP's consent to the inclusion of their
report on the Company's financial statements for the two-year period ended
December 31, 2002.
ITEM 9A. 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 our disclosure controls and procedures are effective. There have
been no changes in our internal controls over financial reporting identified in
connection with the evaluation referred to above that occurred during our fourth
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference
from the section entitled "Election of Directors" and "Section 16(a) Beneficial
Ownership and Reporting Compliance" of the Company's definitive Proxy Statement,
dated March 25, 2004, to be filed with the Securities and Exchange Commission.
On February 26, 2004, management adopted a code of conduct for financial
managers entitled "Code of Ethics Applicable to the President and Chief
Executive Officer, Chief Financial Officer, Controller and Accounting Manager",
which can be found in the Corporate Governance subsection of the Investor
Relations section at the Company's website at www.amistar.com. The Company
intends to satisfy the disclosure requirement under Item 10 of Form 8-K
regarding an amendment to, or waiver from, a provision of the code of ethics by
posting such information on its website at the address specified above.
ITEM 11. EXECUTIVE COMPENSATION
The information required by the item is incorporated herein by reference
from the section entitled "Compensation of Directors and Executive Officers" of
the Company's definitive Proxy Statement, dated March 25, 2004, filed with the
Securities and Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
The information required by this item is incorporated herein by reference
from the section entitled "Security Ownership of Certain Beneficial Owners and
Management" of the Company's definitive Proxy Statement, dated March 25, 2004,
filed with the Securities and Exchange Commission.
Equity Compensation Plan Information
- ------------------------------------
The following table provides information as of December 31, 2003 with respect to
shares of Common Stock that may be issued under the Company's existing equity
compensation plans. All of the existing equity compensation plans have been
approved by the Company's shareholders.
- -------------------------------- ------------------------------ ------------------------------ ------------------------------
(a) (b) (c)
- -------------------------------- ------------------------------ ------------------------------ ------------------------------
Number of securities
Number of securities to be Weighted-average exercise remaining available for
issued upon exercise of price of outstanding future issuance under equity
Plan Category outstanding options, options, warrants and rights compensation plans
warrants and rights (excluding securities
reflected in column (a))
- -------------------------------- ------------------------------ ------------------------------ ------------------------------
Equity compensation plans
approved by security holders 232,750 $1.42 70,500
- -------------------------------- ------------------------------ ------------------------------ ------------------------------
Equity compensation plans not
approved by security holders None None None
- -------------------------------- ------------------------------ ------------------------------ ------------------------------
Total 232,750 $1.42 70,500
- -------------------------------- ------------------------------ ------------------------------ ------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is included under the caption "Fees
to Independent Auditors" of the Company's definitive Proxy Statement, dated
March 25, 2004, and filed with the Securities and Exchange Commission.
40
PART IV
ITEM 15. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) The following financial statements of Amistar Corporation are set forth in
item 7 of this Annual Report on Form 10-K:
1. Independent Auditors' Report
Financial Statements:
Balance Sheets - December 31, 2003 and 2002
Statements of Operations - Years ended December 31, 2003,
2002, and 2001.
Statements of Shareholders' Equity-Years ended December
31, 2003, 2002 and 2001
Statements of Cash Flows - Years ended December 31, 2003,
2002 and 2001
Notes to Financial Statements - Years ended December 31,
2003, 2002 and 2001
2. The following Financial Statement Schedule as of and for the
years ended December 31, 2003, 2002 and 2001 is submitted
herewith:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not
applicable or the required information is disclosed
elsewhere.
3. Exhibits:
3.1 (1) Restated Articles of Incorporation of Registrant, as
amended.
3.2 (1) Bylaws of Registrant, as amended.
10.1 (1) Lease dated July 30, 1982, between Registrant (Lessee)
and Skyway Business Park, 1978, a Limited Partnership
(Lessor) with respect to premises located at 3130 Skyway
Business Park, Building 2, Santa Maria, California 93454.
10.2 (1) Export Distributorship Agreement dated August 17, 1981
between the Registrant and Automation, Ltd. (England,
Scotland, Wales and Ireland).
10.3 (1) Form of Export Distributorship Agreement used in France,
West Germany, Switzerland, Liechtenstein and Australia.
10.4 (1) Form of Contract for Sales Representatives used in the
United States.
10.5 (3) Letter Agreement dated December 6, 1984, between
Registrant and First Interstate Bank of California.
10.6 (2) 1984 Employee Stock Option Plan and related forms of
Incentive Stock Option Agreement and Non-Qualified Stock
Option Agreement.
10.7 (3) Deed of Trust with assignment of rents and promissory note
dated September 21,1984, with respect to the purchase of
land in San Marcos, California.
10.8 (3) Financing documents relative to $4,500,000 of bonds issued
by the Industrial Development Authority of the City of Sam
Marcos on December 19, 1985.
10.9 (5) Bank agreement dated November 19, 1984.
10.10 (4) Amendments to the stock option plan.
10.11 (5) Form of Indemnity Agreement
10.12 (6) 1994 Employee Stock Option Plan
22.1 (1) List of Subsidiaries
23.1 Independent Auditors' Consent-BDO Seidman, LLP
23.2 Independent Auditors' Report on Schedule and Consent-KPMG
LLP
24.1* Power of Attorney (included on the signature pages hereof)
31.1 Certifications pursuant to Sec 302 of the Sarbanes-Oxley
Act of 2002-BDO Seidman, LLP
31.2 Certifications pursuant to Sec 906 of the Sarbanes-Oxley
Act of 2002-KPMG LLP
41
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K,
(CONTINUED)
(1) These exhibits are incorporated by reference from the exhibits of the
same number in the Company's Registration Statement on form S-1 (No.
2-897782).
(2) This exhibit is incorporated by reference from the exhibits numbered
28.1, 28.2 and 28.3 of the Company's Registration Statement on Form S-8
(No. 2-94696).
(3) This exhibit is incorporated by reference from the exhibits of the
same number in the Company's Annual Report on form 10-K for Year ended
December 31, 1985.
(4) This exhibit is incorporated by reference from the exhibits of the
same number in the Company's Annual Report on form 10-K for Year ended
December 31, 1986.
(5) This exhibit is incorporated by reference from the exhibits of the
same number in the Company's Annual Report on form 10-K for Year ended
December 31, 1987.
(6) This exhibit is incorporated by reference of the Company's
Registration Statement of Form-S-8 filed February 15, 1995.
42
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
AMISTAR CORPORATION
/s/ Stuart C. Baker
-------------------------
Stuart C. Baker
President
Date: March 26, 2004
POWER OF ATTORNEY
KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Stuart C. Baker and Gregory D. Leiser,
jointly and severally, his attorney-in-fact, each with full power of
substitution, for such person, in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-K, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might do or could do in person, hereby ratifying and
confirming all that each of said attorneys-in-fact and agents, or his
substitute, may do or case to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and the dates indicated.
/s/ Stuart C. Baker President and Chairman of the Board March 26, 2004
- ------------------------------- (Principal Executive Officer)
Stuart C. Baker
/s/ Gregory D. Leiser Vice President Finance and Chief March 26, 2004
- ------------------------------- Financial Officer
Gregory D. Leiser (Principal Financial and Accounting Officer)
/s/ Sanford B. Ehrlich Director March 26, 2004
- -------------------------------
Dr. Sanford B. Ehrlich
/s/ William W. Holl Secretary, Treasurer and March 26, 2004
- ------------------------------- Director
William W. Holl
/s/ Gordon S. Marshall Director March 26, 2004
- -------------------------------
Gordon S. Marshall
/s/ Carl C. Roecks Director March 26, 2004
- -------------------------------
Carl C. Roecks
/s/ Howard C. White Director March 26, 2004
- -------------------------------
Howard C. White
43
Independent Auditors' Report on Schedule
The Board of Directors
Amistar Corporation:
The audit referred to in our report dated January 30, 2004, included the related
financial statement schedule as of December 31, 2003 and for the year then
ended, included in the Form 10-K of Amistar Corporation. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audit. In our opinion, the financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Costa Mesa, California
January 30, 2004
44
AMISTAR CORPORATION
Schedule II
Valuation and Qualifying Accounts
Three years ended December 31, 2003
Column A Column B Column C Column D Column E
- ------------------ ----------- ---------------------- ---------- -----------
Additions
----------------------
Balance at Charged to Charged Balance
beginning costs and to other at end
Description of period expenses accounts Deductions of period
- ------------------ ----------- ------------ -------- ---------- -----------
Allowance for doubtful accounts
2003 $ 90,094 $ (20,000) $ -- $ (5,678) $ 75,772
=========== ============ ======== ========== ===========
2002 $ 187,497 $ (60,379) $ -- $ 37,024 $ 90,094
=========== ============ ======== ========== ===========
2001 $ 138,922 $ 60,000 $ 8,197 $ 19,622 $ 187,497
=========== ============ ======== ========== ===========
Allowance for inventory excess
and obsolescence:
2003 $2,173,825 $ -- $ -- $ 117,946 $2,055,879
=========== ============= ======== ========== ===========
2002 $1,995,717 $ 174,524 $ 3,584 $ -- $2,173,825
=========== ============= ======== ========== ===========
2001 $1,532,350 $ 463,367 $ -- $ -- $1,995,717
=========== ============= ======== ========== ===========
Net deferred tax asset valuation allowance:
2003 $3,258,000 $ 349,000 $ -- $ -- $3,607,000
=========== ============= ======== ========== ===========
2002 $3,096,000 $ 562,000 $ -- $ 400,000 $3,258,000
=========== ============= ======== ========== ===========
2001 $1,886,000 $ 1,210,000 $ -- $ -- $3,096,000
=========== ============= ======== ========== ===========
SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT ON SCHEDULE.
45