<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED OCTOBER 28, 1995
OR
[ ] 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: 0-14922
AMERICAN BUSINESS COMPUTERS CORPORATION
(Exact name of registrant as specified in its charter)
Florida 59-2001203
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
451 Kennedy Road Akron, Ohio 44305
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 733-2841
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01
----------------------------
(Title of class)
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: [X] Yes [ ] No
The number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date is:
Common Stock outstanding at December 11, 1995 was 16,672,493 shares.
-1-
<PAGE> 2
INDEX
AMERICAN BUSINESS COMPUTERS CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Part I Financial Information Page No.
- --------------------------------------------------------------------------
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets - October 28, 1995
and April 29, 1995 3
Consolidated statements of operations - Three
months and six months ended October 28, 1995 and
October 28, 1994 4
Consolidated statements of cash flows - Six
months ended October 28, 1995 and October 28, 1994 5
Consolidated statement of stockholders' equity -
Six months ended October 28, 1995 6
Notes to consolidated financial statements -
October 28, 1995 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-13
Part II Other Information
- --------------------------------------------------------------------------
Item 1. Legal Proceedings 14
Item 2. (Not Applicable)
Item 3. (Not Applicable)
Item 4. (Not Applicable)
Item 5. (Not Applicable)
Item 6. (A) Exhibits 15
(B) Reports on Form 8-k
Signature 16
</TABLE>
-2-
<PAGE> 3
<TABLE>
<CAPTION>
AMERICAN BUSINESS COMPUTERS CORPORATION
CONSOLIDATED BALANCE SHEETS
Unaudited Audited
ASSETS October 28, 1995 April 29, 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 844,000 $ 1,309,000
Trade receivables:
Accounts receivable, less allowance for doubtful accounts
of $89,000 as of July 29 and $78,000 as of April 29 1,179,000 285,000
Notes receivable 24,000 22,000
Inventories (Note 3) 1,108,000 1,219,000
------------ ------------
Total current assets 3,155,000 2,835,000
Property, Plant, and Equipment 1,465,000 1,428,000
Less accumulated depreciation and amortization (757,000) (725,000)
------------ ------------
708,000 703,000
Other assets:
Notes receivable 48,000 59,000
Patents, less accumulated amortization of $445,000 as of October 28
and $438,000 as of April 29 30,000 37,000
Patents pending and deferred charges 135,000 85,000
------------ ------------
213,000 181,000
------------ ------------
TOTAL ASSETS $ 4,076,000 $ 3,719,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 752,000 $ 454,000
Notes payable (Note 4) 281,000 190,000
Current portion of long-term debt (Note 4) 10,000 10,000
Accrued liabilities:
Legal fees and settlement costs (Note 9) 537,000 1,635,000
Employee compensation and benefits (Note 8) 212,000 232,000
Warranty reserve 253,000 183,000
Other 215,000 202,000
Deferred income 3,000 20,000
------------ ------------
Total current liabilities 2,263,000 2,926,000
Long-term debt (Note 4) 273,000 278,000
Stockholders' equity (Note 6):
Common Stock, $.01 par value; authorized
20,000,000 shares; 16,668,165 shares issued
and outstanding (15,996,116 at April 29, 1995) 167,000 160,000
Additional paid-in capital 18,590,000 17,070,000
Retained earnings (deficiency) (17,066,000) (16,558,000)
------------ ------------
1,691,000 672,000
Less notes receivable - stockholders (151,000) (157,000)
------------ ------------
Total Stockholders' Equity 1,540,000 515,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,076,000 $ 3,719,000
============ ============
</TABLE>
See accompanying notes.
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<PAGE> 4
AMERICAN BUSINESS COMPUTERS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Six Months and Three Months Ended October 28, 1995 and October 29, 1994
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
Oct. 29, 1995 Oct. 29, 1994 Oct. 28, 1995 Oct. 29, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Products and services $ 3,555,000 $ 2,383,000 $2,429,000 $1,224,000
Royalties 256,000 148,000 184,000 78,000
---------- ---------- ---------- ----------
3,811,000 2,531,000 2,613,000 1,302,000
Cost and expenses:
Products and services 3,156,000 2,082,000 2,077,000 1,043,000
General and administrative 577,000 476,000 309,000 223,000
Selling and marketing 255,000 198,000 141,000 102,000
Research and development 363,000 214,000 200,000 1 28,000
---------- ---------- --------- ---------
4,351,000 2,970,000 2,727,000 1,496,000
---------- ---------- --------- ---------
Loss from operations (540,000) (439,000) (114,000) (194,000)
Other income:
Investment income 68,000 - 6,000 (19,000)
Other income and expense, net (36,000) - (31,000) ( 2,000)
----------- ----------- ---------- ----------
32,000 -0- (25,000) (21,000)
----------- ----------- ----------- -----------
Net loss (Note 5) $ (508,000) $ (439,000) $(139,000) $(215,000)
============ ============ ========== ===========
Weighted average number of shares
outstanding 16,140,467 15,341,941 16,272,087 15,706,810
=========== =========== =========== ===========
Net loss per share $ (0.03) $ (0.03) $ ( 0.01) $ (0.01)
============ ============ =========== ============
</TABLE>
Unaudited
See accompanying notes.
-4-
<PAGE> 5
AMERICAN BUSINESS COMPUTERS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
October 28, 1995 October 29, 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
- ------------------------------------
Net loss $ (508,000) $ (439,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 39,000 44,000
Changes in operating assets and liabilities:
Receivables (885,000) 69,000
Inventories 111,000 291,000
Patents pending and deferred charges (50,000) 15,000
Accounts payable 298,000 (47,000)
Accrued liabilities (1,035,000) (291,000)
Deferred income (17,000) (39,000)
----------- -----------
Total adjustments (1,539,000) 42,000
----------- -----------
Net cash used in operating activities (2,047,000) (397,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
- ------------------------------------
Additions to property, plant, and equipment (37,000) (617,000)
Additions to patents - (9,000)
----------- -----------
Net cash used in investing activities (37,000) (626,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
- ------------------------------------
Proceeds (cost) of private placements 584,000 1,072,000
Proceeds from issuance of notes payable 475,000 490,000
Stock contribution to class action settlement fund 450,000 -
Proceeds from stock issued for exercise of warrants 428,000 -
Proceeds from stock issued for exercise of stock options 65,000 1,000
Proceeds from collection of stockholders receivables 6,000 -
Repayment of notes payable and loan costs (389,000) (18,000)
----------- -----------
Net cash provided by financing activities 1,619,000 1,545,000
----------- -----------
Net increase (decrease) in cash and cash equivalents (465,000) 522,000
Cash and cash equivalents at beginning of year 1,309,000 2,021,000
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 844,000 $ 2,543,000
=========== ===========
</TABLE>
Unaudited
See accompanying notes.
-5-
<PAGE> 6
AMERICAN BUSINESS COMPUTERS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended October 28, 1995
Unaudited
<TABLE>
<CAPTION>
Number of Common Stock Additional Retained Notes
Shares of $.01 Par Paid-in Earnings Receivable-
Common Stock Value Capital (Deficiency) Stockholders
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at April 29, 1995 15,996,116 $160,000 $17,070,000 $(16,558,000) $(157,000)
Private Placements (Note 6) 258,000 3,000 581,000
Exercise of warrants (Note 6) 214,000 2,000 426,000
Exercise of stock options (Note 6) 50,049 1,000 64,000
Collection of note receivable- 6,000
stockholders
Contribution to class-action 150,000 1,000 449,000
settlement fund (Note 9)
Net loss for the six months ended (508,000)
October 28, 1995
- -
---------- -------- ----------- ------------ ---------
Balance at October 28, 1995 16,668,165 $167,000 $18,590,000 $(17,066,000) $(151,000)
========== ======== =========== ============ =========
</TABLE>
Unaudited
See accompanying notes.
-6-
<PAGE> 7
AMERICAN BUSINESS COMPUTERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION
- -----------------------------
ABC ("the Company") is a technology firm. Our core competence is our
ability to use existing technology and to create new technology to develop
dispensing systems and mechanisms. Our interpretation of dispensing systems
and the related technology is unrestricted. The Company is not limited to
dispensing liquids; the Company will dispense virtually any substance. The
Company is not limited to pneumatic or electronic technology, the Company will
utilize any technology including mechanical, electro-mechanical, hydraulic, and
sonic.
2. SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------
BASIS OF PRESENTATION - The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the six months ended October 28, 1995 are not
necessarily indicative of the results that may be expected for the year ended
April 27, 1996.
YEAR END - Effective May 1, 1994, the Company changed the fiscal year end to
the Saturday closest to April 30, which results in a fifty-two or fifty-three
week year. Both fiscal 1996 and fiscal 1995 consist of fifty-two weeks. The
thirteen week quarters for fiscal 1996 end July 29, October 28, January 27, and
April 27. The thirteen week quarters for fiscal 1995 ended July 30, October
29, January 28, and April 29.
CONSOLIDATION - The consolidated financial statements include the accounts of
the Company and its subsidiaries, ABC Dispensing Technologies, Inc. and ABC
TechCorp. Significant intercompany transactions and balances have been
eliminated in consolidation.
CASH EQUIVALENTS - The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
CONCENTRATION OF CREDIT - In the normal course of business, the Company enters
into transactions to meet the financing needs of customers. The Company
performs ongoing credit evaluations of customers' financial condition and
generally requires collateral from customers who finance purchases beyond
thirty days. The Company's exposure to credit risk associated with
nonperformance on these transactions is limited to amounts reflected in the
Company's consolidated financial statements, less the value, if any, of the
secured equipment.
INVENTORIES - Inventories are valued at the lower of cost or market, using the
first-in, first-out (FIFO) method.
PROPERTY, PLANT, AND EQUIPMENT - These assets are recorded at cost.
Depreciation is provided primarily by use of the straight-line method over the
estimated useful lives of the assets.
PATENTS - Patents are recorded at cost. Amortization is provided under the
straight-line method over a period of five years or less.
REVENUE RECOGNITION - Revenue on equipment sales is recognized when the product
is shipped and title transfers, including equipment that requires subsequent
installation. Revenue for development services and for service and support is
recognized when the service is performed unless there is a service contract.
Revenue from service contracts is recognized ratably over the contract term,
generally one year. Royalty income is recognized in accordance with the terms
of the royalty agreement, which generally provides that royalties are based on
units shipped.
MAJOR CUSTOMER - Revenues from The Sherwin-Williams Company were 84 and 69
percent of the Company's total revenues, for the six months ended October 28,
1995 and October 29, 1994, respectively.
PROVISION FOR WARRANTY CLAIMS - Estimated warranty costs are provided at the
time of sale of the warranted products.
NET LOSS PER SHARE - Net loss per share is computed on the basis of weighted
average number of shares outstanding for the period. Common stock equivalents
are not material, and therefore, are not included in the computation of primary
earnings per share.
3. INVENTORIES
- --------------------
<TABLE>
<CAPTION>
Composition of inventories: October 28, 1995 April 29, 1995
<S> <C> <C>
Raw materials $ 530,000 $ 527,000
Work-in-process 250,000 207,000
Finished goods 328,000 485,000
---------- ----------
$1,108,000 $1,219,000
========== ==========
</TABLE>
The above amounts are net of obsolescence reserves of $906,000 as of October and
$943,000 as of April.
-7-
<PAGE> 8
AMERICAN BUSINESS COMPUTERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. FINANCING ARRANGEMENTS
- -------------------------------
BANK NOTE
Long-term debt consists of the following at October 28, 1995:
<TABLE>
<S> <C>
Note payable to bank $283,000
Less amounts due within one year (10,000)
--------
Total long-term debt $273,000
========
</TABLE>
The note payable to bank was entered into during fiscal 1995 to
partially finance the purchase of the headquarters facility which was
previously leased. The note payable has an adjustable interest rate (9.25% at
October 28, 1995) which may not increase or decrease by more than 2% once every
three years. The maximum increase or decrease is 6% over the life of the loan.
Principal and interest payments of $3,026 are payable monthly with the balance
of $143,000 due October 1, 2005. The note payable is secured by the
headquarters facility. The facility has a net book value of $470,000.
Maturities of long-term debt for the five years subsequent to April
29, 1995 are as follows: 1996--$10,000; 1997--$11,000; 1998--$12,000;
1999--$13,000 and 2000--$15,000.
"BRIDGE" NOTES
On June 13, 1995, the Company initiated a private offering to sell 20
units of $25,000 10% Senior Subordinate Notes due June 1, 1998 and three year
redeemable warrants to purchase 12,500 shares of the Company's common stock at
$2 per share. The transaction was exempt from registration under the
Securities Act of 1933. 19 units were issued under the offering, providing the
Company with $475,000 in proceeds. The Notes include a repayment provision
requiring the Company to apply 40% of the net proceeds received by it from the
sale of any of its Common Stock other than Common Stock issued upon the
exercise of employee, director, or consultant stock options, to the pro-rata
repayment of the Notes within sixty (60) days of the receipt of such proceeds.
The Company has classified these Notes as short-term because of this repayment
provision.
5. INCOME TAXES
- ---------------------
Deferred income taxes are provided for the temporary differences
between the financial reporting basis and the tax basis of Company assets and
liabilities. The components of the Company's deferred income tax assets are as
follows:
<TABLE>
<CAPTION>
As of April 29, 1995
<S> <C>
Net operating loss carryforwards $ 4,709,000
Inventory 447,000
Other 363,000
-----------
Total deferred tax assets 5,519,000
Valuation allowance for deferred taxes (5,519,000)
-----------
Net deferred taxes $ -0-
===========
</TABLE>
At April 29, 1995, the Company had Federal net operating loss
carryforwards for tax reporting purposes of approximately $12,208,000 which
expire in the years 1996 to 2010. It is uncertain if benefits relating to
these deferred tax assets are realizable and accordingly, a valuation allowance
equal to the amount of such deferred tax assets has been recorded.
-8-
<PAGE> 9
6. COMMON STOCK
- ---------------------
Stock Option Plans
- ------------------
On February 16, 1990, the Board of Directors adopted the American
Business Computers Corporation 1990 Non-qualified Stock Option Plan (the "1990
Plan") for directors, officers and employees of the Company, its subsidiaries
and affiliates. The 1990 Plan was approved by the affirmative vote of the
Company's stockholders at the Annual Meeting on August 24, 1990 authorizing
500,000 shares. All granted options expire five years after grant date; all
options were granted at the fair market value at the date of the grant.
On August 1, 1995, the company granted options to Gary T. Salhany,
Treasurer (30,000 options at $3.00 per share) and Thomas S. Green, V.P.
Research and Development of ABC Dispensing Technologies, Inc. (30,000 options
at $3.00 per share).
<TABLE>
<CAPTION>
Stock option transactions
under the 1990 plan: Officers' & Employees' Officers' & Employees' Directors' Directors'
Shares Under Option Shares Under Option Shares Under Option Shares Under Option
For Six Months Ended For Six Months Ended For Six Months Ended For Six Months Ended
October 28, 1995 October 29, 1994 October 28, 1995 October 29, 1994
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Outstanding, April 29, 1995 191,941 104,018 195,000 75,000
Granted 97,250 113,000 - 120,000
Exercised (10,049) (779) (40,000) -
Cancelled (121,828) (10,500) - -
------- ------- ------- -------
Outstanding, October 28, 1995 157,314 205,739 155,000 195,000
------- ------- ------- -------
Exercise Price Per Share $1.63 to $3.44 $1.50 to $2.88 $1.25 to $3.25 $1.25 to $3.25
</TABLE>
Warrants
- --------
On May 2, 1995, the Company granted David B. Hudson, V.P. - Domestic
Beverage Sales, and Keith P. Jordan, National Account Manager (both of ABC
Dispensing Technologies, Inc.), warrants to purchase 20,000 and 10,000
restricted shares of common stock, respectively, at $3.38 per share; the
warrants expire May 2, 2000.
On June 13, 1995, the Company initiated a private offering to sell 20
units of $25,000 10% Senior Subordinate Notes due June 1, 1998 and three year
redeemable warrants to purchase 12,500 shares of the Company's common stock at
$2 per share. The transaction was exempt from registration under the
Securities Act of 1933. 19 units were issued under the offering, providing the
Company with $460,000 in proceeds, net of the original issue discount. The
notes include a repayment provision requiring the Company to apply 40% of the
net proceeds received by it from the sale of any of its Common Stock other than
Common Stock issued upon the exercise of employee, director, or consultant
stock options, to the pro-rata repayment of the Notes within sixty (60) days of
the receipt of such proceeds.
On August 1, 1995, the Company granted warrants to Herbert M. Pearlman,
Chairman (200,000 at $3.00 per share), Robert A. Cutting, President (100,000 at
$3.00 per share), and others (30,000 at varied prices).
On September 14, 1995, the Company issued 200,000 warrants at $3.50 per
share to Hussmann Corporation pursuant to the securities litigation settlement
(see footnote 9 to the Consolidated Financial Statements).
Shares Under Option
<TABLE>
<CAPTION>
For Six Months
Ended October 28, 1995
<S> <C>
Outstanding, April 29, 1995 1,275,000
Granted 797,500
Exercised (214,000)
Cancelled -
---------
Outstanding, July 28, 1995 1,858,500
==============
Exercise price per share $1.25 to $3.50
</TABLE>
Sale of Common Stock
- --------------------
In October 1995, the Company sold 258,000 registered shares at $2.25
per share in private transactions.
-9-
<PAGE> 10
7. OPERATING LEASES
- -------------------------
For the six months ended October 28, 1995 and October 29, 1994,
aggregate rental expense for all operating leases, except those with terms of
a month or less, was $20,000, and $43,000, respectively.
8. RETIREMENT BENEFITS
- ----------------------------
The Company sponsors a 401(k) plan which covers substantially all
full-time employees. Eligible employees may contribute up to 14% of their
compensation to this plan. The Company has agreed to match participants'
contributions at the rate of 25 cents on the dollar up to a maximum of 3% of
the participants' compensation. The cost of the Company's matching
contribution for the six months ended October 28, 1995 and October 29, 1994
amounted to $5,000, and $4,000, respectively. The Company has the discretion
to make a profit-sharing contribution, but no such contribution has been made
by the Company.
9. CONTINGENCIES
- ----------------------
A. SECURITIES LITIGATION
On March 2, 1995 the Company reported it had reached a settlement with
the plaintiffs in a class action lawsuit, filed originally in 1991. The
Federal Court approved the settlement on June 16, 1995. The plaintiffs are
current and former shareholders who purchased shares during the period January
24, 1990 through August 1, 1991. The settlement provides for the payment to
the plaintiff class of a minimum aggregate of $6,500,000 in cash and shares of
the Company's common stock. The cash portion of the settlement will consist of
$1,850,000, of which approximately $1,400,000 has been funded by certain of the
named individual defendants who are current or former officers or directors,
with the Company funding the remaining $450,000 on June 8, 1995. The stock
portion of the settlement will consist of 1,550,000 shares of the Company's
common stock, subject to adjustment if the per-share price falls below $3.00 or
rises above $4.50. The Company has funded 150,000 shares, with the Pepsi-Cola
Company funding 1,000,000 shares and Hussmann Corporation funding 400,000
shares. Pepsi-Cola and Hussmann were co-defendants in the litigation. The
Company has granted common stock purchase warrants having a term of five years
to Pepsi for 500,000 shares and to Hussmann for 200,000 shares, at an exercise
price of $3.50 per share. The warrants are callable after three years if the
price of the Company's common stock is in excess of $10.00 per share.
Refer to Form 10-K for the fiscal year ended April 30, 1994 for more
information on this litigation.
B. CONTRACT LITIGATION
On December 22, 1994, the Company reported it had reached a definitive
settlement agreement with the Pepsi-Cola Company relating to litigation that
had been pending since 1993 in the United States District Court for the
Northern District of Ohio in Akron. The Company sought to recover damages for
substantial breaches of contract by Pepsi with respect to the development,
manufacture, and sales of the Omnitron, Minitron, Midtron, and Advanced
Omnitron soft drink dispensing systems. Pepsi has agreed for a period of five
years to offer its customers using the Company's beverage dispensing equipment
its standard marketing, merchandising or equipment allowances, which will help
the Company build its beverage dispensing sales. Pepsi has agreed to give any
application for approval of the Company's fountain equipment and soft drink
dispensing equipment fair consideration in accordance with its supplier
approval procedures, with Pepsi retaining the right to approve within its sole
discretion. Pepsi is also under no obligation to recommend, encourage, or
promote the sale or use of the Company's products.
Refer to Form 10-K for the fiscal year ended April 30, 1994 for more
information on this litigation.
As of December 11, 1995, Pepsi owned 1,000,000 common shares of the
Company, or 6.0% of the total outstanding stock.
C. LEGAL FEE AND SETTLEMENT COST ACCRUAL
The estimated legal fees and settlement costs have been accrued for
both of the above actions. The accrual as of October 28, 1995 was $445,000.
The accrual as of April 29, 1995 was $1,498,000.
-10-
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company reports on a fiscal year end on the Saturday closest to
April 30. Fiscal year 1996 will end on April 27. The quarters end on July 29,
1995, October 28, 1995, January 27, 1996 and April 27, 1996 respectively.
DESCRIPTION OF BUSINESS
ABC ("the Company") is a technology firm. Our core competence is our
ability to use existing technology and to create new technology to develop
dispensing systems and mechanisms. Our interpretation of dispensing systems
and the related technology is unrestricted. The Company is not limited to
dispensing liquids; the Company will dispense virtually any substance. The
Company is not limited to pneumatic or electronic technology, the Company will
utilize any technology including mechanical, electro-mechanical, hydraulic, and
sonic.
Dispensing pervades nearly every industry. Dispensing plays a key
role in some of the world's largest industries: for example, transportation,
medical/pharmaceutical, and food service, to name a few. In addition to a
growing, global demand for dispensing systems for fuel, drugs, and beverages,
there is a need for dispensing systems in the construction industry for
concrete additives, the graphics industry for printing ink, and the paint
industry for tints and bases. Everyday each of us uses water in our homes,
without thinking of it as a dispensing system--but it is. The industrial use
of water for cooling, heating, and cleaning also requires a dispensing system.
Dispensing systems are an ubiquitous part of most individual's and business'
daily routines. Dispensing occurs at the manufacturing, wholesale, retail
levels, and residential. The current trend in corporate downsizing could
create additional opportunities for outsourced research and development.
Our strategy is to develop dispensing systems and components in
partnership with industry leaders who have significant market shares and
effective marketing organizations. These new dispensing systems are to be
marketed by our business partners. Our joint efforts will maximize our
technological strengths and capitalize on the marketing strengths of our
industry leading partners.
As a research and development company, the Company faces certain
inherent risks: (1) new product ideas may not advance beyond the development
stage; (2) new products could be technically successful but fail commercially;
(3) successful new products could develop unplanned warranty expenses or face
recall; (4) new products could be replaced by more advanced competitive
products, and (5) sufficient funds may not be available to complete the
development of new products.
SIGNIFICANT INCOMING ORDERS
On July 17, 1995, the Company received a $7 million initial order for
its new Juice Dispenser. This is the largest single order the Company has ever
received and brought the Company's backlog to a record $9.4 million as of July
17, 1995. The microprocessor-driven system mixes and dispenses from juice
concentrates, ensuring a controlled mixture and an accurate, standard portion.
The Company filed for a patent on the controlling electronics and software.
To date, the Company has shipped four field test units and expects to ship an
additional 25 field test units in the December 1995-January 1996 time-frame.
Shipments of subsequent units are expected to spread over a period of 18 months.
On December 7, 1995, the Company received a $1.8 million order from
The Sherwin-Williams Company for Tint-A-Color dispensers. These units are
expected to ship in the Company's 4th fiscal quarter (February-April 1996).
This incoming order brings the Company's back to approximately $8.8 million as
of December 7, 1995.
SIX MONTHS ENDED OCTOBER 28, 1995 COMPARED TO SIX MONTHS ENDED OCTOBER 29, 1994
The net loss was $508,000 for the current period compared to $439,000
for the same period last year. Total revenues for the current period were
$3,811,000 compared to prior year-to-date total revenues of $2,531,000.
<TABLE>
<CAPTION>
Equipment/royalty sales: YTD 95 YTD 94
<S> <C> <C>
Paint dispensers $2,950,000 $1,650,000
Beverage dispensers 357,000 412,000
---------- ----------
$3,307,000 $2,062,000
</TABLE>
<TABLE>
<CAPTION>
Services/component sales: YTD 95 YTD 94
<S> <C> <C>
Paint $237,000 $154,000
Beverage 230,000 249,000
Other 37,000 66,000
-------- --------
$504,000 $469,000
</TABLE>
-11-
<PAGE> 12
The increase in Paint services/component sales is due to the increased
number of installed paint dispensers now being serviced versus the same period
last year. On February 13, 1995, the Company received a $990,000 initial
order of "TAC-CB" units, the down-sized, lower-cost tint dispenser designed
expressly for paint retailers and chains. The TAC-CB was in joint development
for two years with Sherwin-Williams. The Company shipped this order in
May-October 1995.
The FY95 and FY96 history of Tint-A-Color orders and shipments is as follows:
<TABLE>
<CAPTION>
Model Order dates Ship dates Sales Volume
<S> <C> <C> <C>
TAC March 1994 June-October 1994 $1,659,000
TAC-CB February 1995 May-October 1995 $ 990,000
TAC April 1995 July-October 1995 $1,856,000
TAC December 1995 (Est.) February-April 1996 $1,855,000
</TABLE>
The Company's gross profit on overall equipment sales was 27.5%
year-to-date as compared to 27.9% for the same period last year.
General and administrative expenses increased 21% from from the same
period last year primarily as a result of increased public entity related
costs (e.g. public relation expenses).
Selling and marketing expenses increased 29% from the same period last
year with the following additions: (1) In November 1994, Randolph D. Letsch
was recruited as V.P. Paint Sales of ABC Dispensing Technologies, Inc., the
Company's operating subsidiary. Mr. Letsch joined the Company from
Sherwin-Williams where he was Director of Sales, OEM and National Accounts, a
position he held since 1986. The Company's intent was to acquire marketing
expertise needed to expand the commercialization of paint dispensing both
domestically and internationally; (2) In February 1995, the Company promoted
David B. Hudson to V.P. Sales - Domestic Beverage Equipment of ABC Dispensing
Technologies, Inc. to enhance the beverage marketing efforts; (3) In March
1995, the Company recruited Keith P. Jordan from Pepsi-Cola Company, Houston,
to enhance both beverage and new product marketing efforts; (4) an
international marketing effort has begun for both paint and beverage products.
Research and development expenses increased 70% from the same period
last year as a result of increased new product development activity. Numerous
dispensing applications were under development during FY95 and these
development projects have continued into FY96. The Juice Dispenser and TAC-CB
were two such projects.
SALES BACKLOG
As of October 28, 1995 sales order backlog (unshipped product orders)
was $7,061,000. As of October 29, 1994, backlog was $287,000. The December 7,
1995 incoming order of $1.8 million for "TAC" units brings the current backlog
to approximately $8.8 million.
QUARTER ENDED OCTOBER 28, 1995 COMPARED TO QUARTER ENDED OCTOBER 29, 1994
The net loss was $139,000 for the current quarter ("Q95"), compared to
$215,000 for the same period last year ("Q94"). Total revenues for Q95 were
$2,613,000 compared to Q94 revenues of $1,302,000.
<TABLE>
<S> <C> <C>
Equipment/royalty sales: Q95 Q94
Paint dispensers $2,187,000 $ 873,000
Beverage dispensers 215,000 176,000
---------- ----------
$2,402,000 $1,049,000
Services/component sales: Q95 Q94
Paint $ 74,000 $ 69,000
Beverage 124,000 155,000
Other 13,000 29,000
-------- --------
$211,000 $253,000
</TABLE>
The Company's gross profit on overall equipment sales was 28.5% for Q95
as compared to 26.6% for Q94. This improvement is due to a favorable product
mix.
-12-
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance decreased to $844,000 as of October 28,
1995 from $1,309,000 as of April 29, 1995. Litigation settlement and fee
payments (see Note 9 to Consolidated Financial Statements) required $603,000
this year. The Company also contributed 150,000 shares of common stock to the
litigation settlement fund.
Operations required an additional $994,000: the Company acquired
inventory, built, and shipped the backlog of TAC-CB and TAC orders, which
resulted in a net accounts receivable increase of $894,000, as of October 28,
1995 compared to April 29, 1995.
To aid in financing these cash demands during this growth year, the
Company issued $475,000 in 10% senior subordinated notes ("bridge loan") due
June 1, 1998. Each unit ($25,000) of this note was granted 12,500 three-year
warrants at an exercise price of $2.00. Interest payments are due
semi-annually on June 1 and December 1. The Company also agreed to use 40% of
the net proceeds of the issuance of Common Stock (other than via
employee/director stock options) to prepay the notes within 60 days of the
receipt of such proceeds. As of October 28, 1995, the Company has repaid
$194,000 on this note: these repayments were triggered by the issuance of
common stock.
The Company sold 258,000 registered shares at $2.25 per share in
private transactions, for net proceeds of $584,000.
Additional financing was received via the exercise of 214,000 warrants
for the purchase of 214,000 common shares at the exercise price of $2.00 per
share for a total of $428,000. These warrants were acquired in the
August-September 1994 private placement of 1 million common shares.
The Company has received verbal approval from two lending sources. The
first source has offered an accounts receivable-based credit line of $750,000.
The second source has offered an asset-based 3-year term loan of $500,000. Both
funding offers are currently being reviewed.
Fiscal year 1996 is a growth year for the Company. The year to date
revenues and backlog of orders is approximately 3 times the total revenues of
the Company for Fiscal year 1995. The Company must complete the development of
certain new products, acquire inventory, build and ship finished products, and
collect its receivables to complete each business cycle. During this growth
period, the Company will utilize various fudning alternatives:
a. Accounts receivable credit lines
b. Asset-based term loans
c. Private placements
d. Warrant exercises
e. Employee/director stock option exercises
If the above sources of cash do not become available or are not
sufficient, the Company may be forced to curtail marketing and R&D activities
which would adversely affect future operating results.
Of the 20 million authorized shares of common stock, 16.7 million are
issued and outstanding, 2.4 million are committed for warrants, 300,000 are
committed for employee/director stock options, and 200,000 are committed to an
asset-based lender. Approximately 400,000 shares remain uncommitted. The
Company will seek authorization in the upcoming Proxy from the shareholders for
additional shares of common stock.
-13-
<PAGE> 14
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
A. SECURITIES LITIGATION
On March 2, 1995 the Company reported it had reached a settlement with
the plaintiffs in a class action lawsuit, filed originally in 1991. The
Federal Court approved the settlement on June 16, 1995. The plaintiffs are
current and former shareholders who purchased shares during the period January
24, 1990 through August 1, 1991. The settlement provides for the payment to
the plaintiff class of a minimum aggregate of $6,500,000 in cash and shares of
the Company's common stock. The cash portion of the settlement will consist of
$1,850,000, of which approximately $1,400,000 has been funded by certain of the
named individual defendants who are current or former officers or directors,
with the Company funding the remaining $450,000 on June 8, 1995. The stock
portion of the settlement will consist of 1,550,000 shares of the Company's
common stock, subject to adjustment if the per-share price falls below $3.00 or
rises above $4.50. The Company has funded 150,000 shares, with the Pepsi-Cola
Company funding 1,000,000 shares and Hussmann Corporation funding 400,000
shares. Pepsi-Cola and Hussmann were co-defendants in the litigation. The
Company has granted common stock purchase warrants having a term of five years
to Pepsi for 500,000 shares and to Hussmann for 200,000 shares, at an exercise
price of $3.50 per share. The warrants are callable after three years if the
price of the Company's common stock is in excess of $10.00 per share.
Refer to Form 10-K for the fiscal year ended April 30, 1994 for more
information on this litigation.
B. CONTRACT LITIGATION
On December 22, 1994, the Company reported it had reached a definitive
settlement agreement with the Pepsi-Cola Company relating to litigation that
had been pending since 1993 in the United States District Court for the
Northern District of Ohio in Akron. The Company sought to recover damages for
substantial breaches of contract by Pepsi with respect to the development,
manufacture, and sales of the Omnitron, Minitron, Midtron, and Advanced
Omnitron soft drink dispensing systems. Pepsi has agreed for a period of five
years to offer its customers using the Company's beverage dispensing equipment
its standard marketing, merchandising or equipment allowances, which will help
the Company build its beverage dispensing sales. Pepsi has agreed to give any
application for approval of the Company's fountain equipment and soft drink
dispensing equipment fair consideration in accordance with its supplier
approval procedures, with Pepsi retaining the right to approve within its sole
discretion. Pepsi is also under no obligation to recommend, encourage, or
promote the sale or use of the Company's products.
Refer to Form 10-K for the fiscal year ended April 30, 1994 for more
information on this litigation.
As of December 11, 1995, Pepsi owned 1,000,000 common shares of the
Company, or 6.0% of the total outstanding stock.
C. LEGAL FEE AND SETTLEMENT COST ACCRUAL
The estimated legal fees and settlement costs have been accrued for
both of the above actions. The accrual as of October 28, 1995 was $445,000.
The accrual as of April 29, 1995 was $1,498,000.
-14-
<PAGE> 15
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) EXHIBITS
4.1 Form of Senior Subordinate Promissory Note due June 1, 1998 issued in
connection with a private placement of the Registrants Securities (the
"1995 Private Placement").
4.2 Form of Common Stock Purchase Warrant issued in connection with the
1995 Private Placement.
10.1 Development and Manufacture Agreement dated July 27, 1992 between the
Company and The Sherwin-Williams Company relating to the Tint-A-Color
System.*
10.2 L.C.R.U. Tint System Development and Manufacture Agreement dated
September 14, 1993 between the Company and The Sherwin-Williams Company
relating to a lower priced, less automated version of the
Tint-A-Color System.*
10.3 Form of Warrant Agreement to be delivered by the Company to each of
PepsiCo, Inc., and Hussmann Corporation in connection with the
settlement of the Securities Litigation.
21.1 Subsidiaries of the Registrant.
24. Power of Attorney (see signature page).
99.1 Stipulation of Settlement entered as of March 13, 1995 in connection
with the Securities Litigation.
*A portion of this exhibit has been omitted pursuant to an application for
confidential treatment filed with the Securities and Exchange Commission
pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934,
as amended.
(b) REPORTS ON FORM 8-K FILED IN THE QUARTER ENDED OCTOBER 28, 1995.
Form 8-K was filed on August 2, 1995 to report the following event:
On July 17, 1995, the Company received a $7 million initial order for
its Juice Dispenser. This is the largest single order the Company has ever
received and brings the Company's backlog to a record $9.4 million. The
customer name and market cannot be divulged at this time pursuant to their
request for secrecy for competitive reasons.
Form 8-K was filed on October 10, 1995 to report the following event:
Shares of the Common Stock of the Company are listed for trading on
the NASDAQ SmallCap Market. Paragraph 1(c)(3) of Part II of Schedule D on the
NASD By-Laws states that for continued inclusion, an "issuer" shall have
capital and surplus of at least $1,000,000. The form 10-Q of the Company for
the period ending July 27, 1995 reported capital and surplus of $321,000.
The Company submitted a Plan of Compliance to the NASD, at their
request, demonstrating how the Company will comply with the NASD requirements.
The Company is able to report that effective October 6, 1995, the Company's
capital and surplus is $1,379,000, in excess of the NASDAQ requirements. The
Company believes that it will be able to continue to meet NASDAQ's maintenance
standards.
-15-
<PAGE> 16
SIGNATURE
Pursuant to requirements of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
AMERICAN BUSINESS COMPUTERS CORPORATION
-------------------------------------------
(Registrant)
DATE:
------------------- -------------------------------------------
Gary T. Salhany
Treasurer
-16-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-27-1996
<PERIOD-START> APR-30-1995
<PERIOD-END> OCT-28-1995
<CASH> 825,000
<SECURITIES> 19,000
<RECEIVABLES> 1,340,000
<ALLOWANCES> 89,000
<INVENTORY> 1,108,000
<CURRENT-ASSETS> 3,155,000
<PP&E> 1,465,000
<DEPRECIATION> 757,000
<TOTAL-ASSETS> 4,076,000
<CURRENT-LIABILITIES> 2,263,000
<BONDS> 283,000
<COMMON> 167,000
0
0
<OTHER-SE> 1,373,000
<TOTAL-LIABILITY-AND-EQUITY> 4,076,000
<SALES> 3,451,000
<TOTAL-REVENUES> 3,811,000
<CGS> 2,450,000
<TOTAL-COSTS> 3,156,000
<OTHER-EXPENSES> 1,163,000
<LOSS-PROVISION> 24,000
<INTEREST-EXPENSE> 41,000
<INCOME-PRETAX> (508,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (508,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (508,000)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
