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 24, 1998
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
ABC DISPENSING TECHNOLOGIES, INC.
(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: (330) 733-2841
Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $.01
----------------------------
(Title of class)
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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 1, 1998 was 17,866,483 shares.
1
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Index
ABC Dispensing Technologies, Inc. and Subsidiaries
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Part I Financial Information Page No.
- ---------------------------------------------------------------------------------------------------------------------------
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets - October 24, 1998 and April 25, 1998 3
Consolidated statements of operations - Six months and three months
ended October 24, 1998 and October 25, 1997 4
Consolidated statements of cash flows - Six months ended October 24, 1998
and October 25, 1997 5
Consolidated statement of stockholders' equity - Six months ended October 24, 1998 6
Notes to consolidated financial statements 7-10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-13
Part II Other Information
- ---------------------------------------------------------------------------------------------------------------------------
Item 1. (Not Applicable)
Item 2. (Not Applicable)
Item 3. (Not Applicable)
Item 4. Submission of matters to a vote of security holders 14
Item 5. (Not Applicable)
Item 6. (A) Exhibits and Reports 14
Signature 15
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2
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ABC DISPENSING TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
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ASSETS October 24, 1998 April 25, 1998
- ---------------------------------------------------------------------------------------------------------------------------
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Current assets:
Cash and cash equivalents $ 17,000 $ 351,000
Trade receivables:
Accounts receivable, less allowance for doubtful accounts
of $88,000 and $84,000 as of October 24 and April 25, respectively 354,000 708,000
Inventories 1,525,000 1,290,000
--------------- ---------------
Total current assets 1,896,000 2,349,000
Property, Plant, and Equipment 606,000 644,000
Other assets:
Investment in Joint Venture 198,000 202,000
Intangible assets, less accumulated amortization of $637,000
and $633,000 as of October 24 and April 25, respectively 25,000 29,000
Patents pending and deferred charges 61,000 70,000
--------------- ---------------
284,000 301,000
--------------- ---------------
Total Assets $ 2,786,000 $ 3,294,000
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Current portion of long-term debt $ 21,000 $ 36,000
Short-term notes payable 360,000 300,000
Line of credit 93,000 201,000
Accounts payable 876,000 649,000
Accrued liabilities:
Accrued Interest 39,000 22,000
Employee compensation and benefits 216,000 199,000
Warranty reserve 167,000 169,000
Other 131,000 197,000
Deferred income 326,000 261,000
--------------- ---------------
Total current liabilities 2,229,000 2,034,000
Long-term debt 244,000 257,000
Stockholders' equity:
Preferred Stock - Series A, 9% cumulative; authorized 480 shares, 399
and 374 shares issued
and outstanding at October 24 and April 25, respectively 4,987,000 4,675,000
Preferred Stock - Series B, 9% cumulative;
authorized 160 shares, 16 shares issued
and outstanding at October 24 200,000 -
Common Stock, $.01 par value; authorized 50,000,000
shares; 17,866,483 and 17,591,498 shares issued and
outstanding at October 24 and April 25, respectively 179,000 176,000
Additional paid-in capital 19,714,000 19,461,000
Retained earnings (deficiency) (24,724,000) (23,264,000)
--------------- ---------------
356,000 1,048,000
Less notes receivable - stockholders (43,000) (45,000)
--------------- ---------------
Total Stockholders' Equity 313,000 1,003,000
--------------- ---------------
Total Liabilities and Stockholders' Equity $ 2,786,000 $ 3,294,000
=============== ===============
</TABLE>
See accompanying notes.
3
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ABC DISPENSING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Six months and three months ended October 24, 1998 and October 25, 1997
(unaudited)
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Six Months Ended Three Months Ended
Oct. 24, 1998 Oct. 25, 1997 Oct. 24, 1998 Oct. 25, 1997
- ---------------------------------------------------------------------------------------------------------------------------
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Revenues:
Equipment sales $ 636,000 $ 2,231,000 $ 166,000 $ 1,040,000
Service revenues 397,000 285,000 211,000 140,000
--------------- -------------- ------------- ---------------
Total revenues 1,033,000 2,516,000 377,000 1,180,000
Cost and expenses:
Cost of equipment sold 502,000 1,582,000 160,000 744,000
Service expenses 590,000 362,000 349,000 182,000
General and administrative 774,000 833,000 387,000 384,000
Selling and marketing 215,000 222,000 104,000 109,000
Research and development 104,000 322,000 20,000 179,000
--------------- -------------- ------------- ---------------
Total cost and expenses 2,185,000 3,321,000 1,020,000 1,598,000
Loss from operations (1,152,000) (805,000) (643,000) (418,000)
Other income and expense:
Interest expense (112,000) (48,000) (64,000) (30,000)
Equity in loss of joint venture (38,000) - (14,000) -
Other income 48,000 64,000 7,000 4,000
--------------- -------------- ------------- ---------------
Total other income/(expense) (102,000) 16,000 (71,000) (26,000)
Net loss ($1,254,000) ($789,000) ($714,000) ($444,000)
=============== ============== ============= ===============
Net loss per share -
Basic and Diluted ($0.08) ($0.06) ($0.05) ($0.03)
=============== ============== ============= ===============
</TABLE>
See accompanying notes.
4
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ABC DISPENSING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
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Six Months Ended Six Months Ended
October 24, 1998 October 25, 1997
- --------------------------------------------------------------------------------------------------------
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Net cash used in operating activities (692,000) (1,154,000)
- -------------------------------------
Cash flows used in investing activities
- ---------------------------------------
Additions to property, plant and equipment (3,000) -
Investment in joint venture (79,000) (14,000)
------------ ------------
(82,000) (14,000)
Cash flows from financing activities:
- ------------------------------------
Proceeds from private placements of Preferred Stock 512,000 325,000
Proceeds from (repayments of) line of credit (107,000) 388,000
Repayment of notes payable and loan costs (17,000) (25,000)
Proceeds from issuance of notes payable 50,000 310,000
Other 2,000 13,000
------------ ------------
Net cash provided by financing activities 440,000 1,011,000
------------ ------------
Net decrease in cash and cash equivalents (334,000) (157,000)
Cash and cash equivalents at beginning of year 351,000 445,000
------------ ------------
Cash and cash equivalents at end of period $ 17,000 $ 288,000
============ ============
</TABLE>
See accompanying notes.
5
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ABC DISPENSING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended October 24, 1998
(unaudited)
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Common
Number of Stock Preferred Preferred Additional Retained Notes
Shares of $.01 Par Stock Stock Paid-in Earnings Receivable -
Common Stock Value Series A Series B Capital (Deficiency) Stockholders
- ------------------------------------------------------------------------------------------------------------------------------------
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Balance at April 25, 1998 17,591,498 $176,000 $4,675,000 $ 0 $ 19,461,000 $(23,264,000) $(45,000)
Preferred Stock private
placement (Note 8) 312,000 200,000
Preferred Stock Dividend 274,985 3,000 203,000 (206,000)
(Note 8)
Warrants Outstanding -
Original Issue Discount
(Note ) 50,000
Collection on notes receivable-
stockholders 2,000
Net loss (1,254,000)
-------------------------------------------------------------------------------------------------
Balance at October 24, 1998 17,866,483 $179,000 $4,987,000 $ 200,000 $ 19,714,000 $(24,724,000) $(43,000)
====================================================================================================================================
</TABLE>
See accompanying notes.
6
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ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information as of October 24, 1998 and for the six months and three
months ended October 24, 1998 is unaudited)
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles applicable
to interim financial statements. Accordingly, they do not include all of the
information and notes required for complete financial statements. In the opinion
of management, all adjustments and reclassifications considered necessary for a
fair and comparable presentation have been included and are of a normal
recurring nature. Operating results for the six months and three months ended
October 24, 1998, are not necessarily indicative of the results that may be
expected for the year ending April 24, 1999. These financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's Form 10-K filed with the Securities and Exchange Commission on
July 24, 1998.
1. Going concern uncertainty
The Company has reported a net loss for each year of operation since its
inception except for 1989, and as of October 24, 1998 has an accumulated
retained earnings deficiency of $24,724,000. The Company had negative cash flow
from operating activities of $692,000 for the six months ended October 24, 1998
and $1,594,000 for the year ended April 25, 1998. Cash and cash equivalents
declined from $351,000 at the beginning of fiscal 1999 to $17,000 at October 24,
1998. Management expects that the Company will continue to incur losses and use
cash in operations in the near future.
Management recognizes the Company must generate additional funds to assure
continuation of operations. The Company has been successful in raising capital
from private investors and raised $6,102,000 over the past three years through
private placements of both preferred and common stock. The Company is continuing
in it efforts to raise capital through private placements of 9% Convertible
Cumulative Preferred Stock . Proceeds from private placements will be used to
reduce accounts payable and provide additional working capital. No assurances
can be given that the Company will be successful in raising additional capital.
Further, there can be no assurance, assuming the Company successfully raises
additional funds, that the Company will achieve profitable operations or
positive cash flow. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. No adjustments to the amounts or
classification of assets and liabilities which could result from the outcome of
this uncertainty are reflected in the consolidated financial statements.
The Company intends to satisfy its short-term (i.e., the next 12-month period)
capital requirements using the proceeds of offerings of its equity securities
and/or debt securities. The Company is currently attempting to raise at least
$2,000,000 through an offering of its Convertible Preferred Stock. Longer term
capital needs are anticipated to be satisfied by additional proceeds of
offerings of the Company's equity and/or debt securities, improvements in
operational cash flow, warrant exercise proceeds, and traditional credit
facilities. There can be no assurance that at any time a sufficient market for
the Company's equity offerings or debt financings will be available upon
commercially reasonable terms, if at all.
2. Inventories
At October 24, 1998 and April 25, 1998, inventories consisted of the following:
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October 24, 1998 April 25, 1998
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Raw Materials $ 671,000 $ 785,000
Work-in-process 307,000 293,000
Finished goods 547,000 212,000
--------------------- ------------------
$1,525,000 $1,290,000
===================== ==================
</TABLE>
The above amounts are net of obsolescence reserves of $784,000 and $909,000 at
October 24 and April 25, respectively.
7
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ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information as of October 24, 1998 and for the six months and three
months ended October 24, 1998 is unaudited)
3. Financing arrangements
Short Term Notes Payable
In August, 1997 the Company began issuing notes payable through a private
placement in multiples of $12,500, or fractions thereof. As of October 24, 1998,
the Company has issued notes in the aggregate of $385,000. The notes accrue
interest at the rate of 10%, with principal and interest paid at maturity. The
initial maturity date was June 30, 1998, however, the Company had the option,
which it exercised, to extend the maturity date to December 31, 1998. Attached
to the notes are redeemable common stock purchase warrants to purchase 5,000
shares of the Company's common stock at a price of $1.25 per share. The warrants
are exercisable for a period of five years commencing on the date of issuance.
The warrants have been valued at $113,000 using the Black-Scholes option pricing
model using the following weighted-average assumptions: a risk free interest
rate of 6.37% and expected volatility of .82%. A discount on notes payable has
been recorded for that amount. The discount, which is being amortized over the
life of the Notes, as extended, was $25,000 as of October 24, 1998. In
consideration for extending the initial maturity date, per the terms of the
notes, the Company issued to each noteholder an additional 5,000 warrants to
purchase common stock of the Company at a price of $1.25.
Line of Credit
On December 18, 1995, the Company established a line of credit which is secured
by accounts receivable and other assets of the Company. The credit line, as
adjusted, provides for a maximum of $500,000 borrowing capacity to the Company.
At October 24, 1998, $93,000 was outstanding under the line of credit and due to
formula restrictions, no funds were available to be advanced thereunder. At
April 25, 1998, $201,000 was outstanding and due to formula restrictions no
funds were available to be advanced thereunder. The line of credit bears an
interest rate of prime plus four points (12.00% and 12.50% at October 24, 1998
and April 25, 1998, respectively). The weighted-average interest rate for the
six months ended October 24, 1998 and the year ended April 25, 1998 was 12.44%
and 12.50%, respectively. The credit line matures December 31, 1998.
4. Net loss per share
The following table sets forth the computation of net loss per share - basic and
diluted:
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6 Months Ended 3 Months Ended
-------------------------------- --------------------------------
October 24, October 25, October 24, October 25,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Numerator:
Net Loss $ (1,254,000) $ (789,000) $ (714,000) $ (444,000)
Preferred Stock Dividends (226,000) (160,000) (123,000) (84,000)
------------ ------------- ----------- --------------
Numerator for net loss per share - loss
attributable to common shareholders $ (1,480,000) $ (949,000) $ (837,000) $ (528,000)
Denominator:
Denominator for basic and diluted earnings
per share - weighted-average shares 17,651,934 17,104,445 17,712,370 17,129,611
------------ ------------- ----------- --------------
Net loss per share -- basic and diluted $ (0.08) $ ( 0.06) $ (0.05) $ (0.03)
============ ============= =========== ==============
</TABLE>
8
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ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information as of October 24, 1998 and for the six months and three
months ended October 24, 1998 is unaudited)
4. Net loss per share (continued)
The effect of potentially dilutive securities have not been included in the
above computations since such securities would have been anti-dilutive for the
periods presented. These potentially dilutive securities consisted of options
and warrants to purchase 3,364,719 and 2,855,211 shares of Common Stock as of
October 24, 1998 and October 25, 1997, respectively.
5. Preferred stock
In September 1996 the shareholders of the Company approved an amendment to the
Company's Certificate of Incorporation to authorize up to 5,000,000 shares of
Preferred stock. To date, the Company has authorized 480 shares as Series A
Preferred Stock and 160 shares of Series B Preferred Stock.
The Company offered shares of 9% Convertible Cumulative Redeemable Preferred
Stock, Series A ("Series A Preferred Stock") in exchange for the surrender of
the Company's outstanding $25,000, 9% Convertible Subordinated Redeemable Notes
due August 1, 1999 ("Notes").
As of October 24, 1998, through private placements, the Company issued 399
shares of Series A Preferred Stock in exchange for n0tes or $12,500 cash per
share, generating gross proceeds of $4,987,000 to the Company.
As of October 24, 1998, through private placements, the Company issued 16 shares
of Series B Preferred Stock in exchange for notes or $12,500 cash per share,
generating proceeds of $200,000 to the Company.
The Series A Preferred Stock is convertible at the option of the holder, in
whole or in part, at any time after March 1, 1997 (the "Initial Conversion
Date") into Common Stock of the Company at a price per share of Common Stock
equal to (i) $1.00 per share, or (ii) such adjusted price as may form time to
time be adjusted (the "Conversion Price"). If converted into Common Stock, each
Preferred Share will entitle the holder to receive warrants to purchase a number
of shares of Common Stock at a price of $1.25 per share, equal to the number of
shares of Common Stock into which the Preferred Shares were converted. The
warrants will be valid for a period of five years commencing from the date of
issuance.
The Series B Preferred Stock is convertible at the option of the holder, at any
time, into Common Stock of the Company at a price per share of Common Stock
equal to $0.75 If converted into Common Stock, each Preferred Share will entitle
the holder to receive warrants to purchase a number of shares of Common Stock at
a price of $1.25 per share, equal to the number of shares of Common Stock into
which the Preferred Shares were converted. The warrants will be valid for a
period of five years commencing from the date of issuance.
The Preferred Shares pay dividends semi-annually each February 1, and August 1,
commencing on February 1, 1997. The Company may elect to pay dividends in the
form of Common Stock of the Company issued at 90% of the then current market
price of the Common Stock. For the purposes of this calculation the "current
market price" shall mean the average of the daily closing prices for each of the
thirty consecutive business days prior to such dividend date.
The August 1, 1998 Preferred Stock dividend was paid in Common Stock of the
Company on September 14, 1998. The total number of common shares issued to
settle the dividend was 274,985. The common shares were valued at $0.75 per
share to calculate the number of common shares issued.
9
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ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information as of October 24, 1998 and for the six months and three
months ended October 24, 1998 is unaudited)
6. Joint venture
On June 25, 1997, the Company entered into a joint venture agreement with Damon
Industries, a privately-owned national juice manufacturer with headquarters in
Sparks, Nevada, to form the "Virtual Squeeze" joint venture.
Through October 24, 1998, the Company has provided $303,000 of juice dispensing
equipment to joint venture and has incurred $105,000 in losses from the joint
venture's operations for a net investment of $198,000. The Company is to be
reimbursed for the cost of the equipment through revenues from juice sales made
by Virtual Squeeze.
7. NASDAQ delisting
On October 7, 1998, the Company was notified by NASDAQ that the Company's common
stock would be delisted from the NASDAQ Small Cap Market effective with the
close of business on October 7, 1998. This event followed a decision by NASDAQ
Listing Qualifications Panel regarding the Company's appeal for a temporary
exemption from the recently adopted requirements for continued listing on the
NASDAQ Small Cap Market.
On October 8, 1998, the Company's common stock began trading on the OTC Bulletin
Board under the symbol ABCC. Several broker-dealers continue to publish
quotations and otherwise make a market in the Company's common stock on the OTC
Bulletin Board.
10
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The net loss for the six months ended October 24, 1998 was $1,254,000, an
increase of $465,000, or 58.9% over the net loss of $789,000 for the same period
of the prior year. The net loss for the second quarter of fiscal 1999 was
$714,000, an increase of $270,000, or 60.89% over the net loss of $444,000 for
the second quarter of fiscal 1998.
Revenues Six Months Ended
October 24, October 25,
1998 1997
Equipment sales $ 636,000 $ 2,231,000
Service revenues 397,000 285,000
----------- -----------
Total $ 1,033,000 $ 2,516,000
=========== ===========
Equipment sales for the first six months of fiscal 1999 decreased $1,595,000, or
71.5%, over the same period of the prior year. Sales of paint colorant
dispensers and beverage equipment decreased $1,431,000 and $164,000,
respectively. For the second quarter of fiscal 1999, equipment sales decreased
$874,000, or 84.0%, from the second quarter of 1998. Sales of the Royal
Match(TM) paint colorant dispensers have decreased because the equipment has not
yet gained widespread market acceptance. Sales of beverage equipment decreased
because the Company is not actively marketing its beverage equipment.
Service revenues for the first six months of fiscal 1999 increased $112,000, or
39.3% from the same period of the prior year. For the second quarter of fiscal
1999 service revenues increased $71,000, or 50.7%, over the second quarter of
fiscal 1998. These increases are attributable to service contract revenues on
Royal Match(TM) paint colorant dispensers.
Gross margins Six Months Ended
October 24, October 25,
1998 1997
Equipment 41.7% 36.8%
==== ====
Service (28.3)% (12.7)%
==== ====
Total 14.8% 31.2%
==== ====
For the first six months of fiscal 1999, gross margin as a percentage of sales
on equipment increased 4.9 points over the same period of the prior year. The
increase resulted from higher margins obtained from sales of the Royal Match(TM)
paint dispensers.
For the first six months of fiscal 1999, gross margin as a percentage of service
revenues decreased 15.6 points over the same period of the prior year. The
decrease was caused by increased labor, travel, and parts expenses during the
first six months of fiscal 1999.
General and administrative
For the first six months of fiscal 1999, general and administrative expenses
decreased $59,000, or 7.1%, to $774,000 down from $833,000 for the same period
of the prior year. Amortization of deferred charges of $173,000 is primarily
responsible for the decrease. Additionally, during the first six months of
fiscal 1999 the accrual for legal fees decreased $54,000. These decreases were
partially offset by an increase in payroll expense of $177,000 during the first
six months of fiscal 1999. More labor is being charged to general and
administrative expense during fiscal 1999 due to lack of activity in other
functional areas.
11
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Selling and marketing expenses
For the six months of fiscal 1999, selling and marketing expense decreased
$7,000, or 3.1%, to $215,000, down from $222,000 for the same period of the
prior year. For the second quarter of fiscal 1999, selling and marketing expense
decreased $5,000, or 4.6%, to $104,000, down from $109,000 for the second
quarter of fiscal 1998. The decreases are due to changes in sales and marketing
personnel.
Research and development
For the six months of fiscal 1999, research and development expense decreased
$218,000, or 67.7%, to $104,000, down from $322,000 for the same period of the
prior year. For the second quarter of fiscal 1999, research and development
expense decreased $159,000, or 88.8%, to $20,000, down from $179,000 for the
second quarter of fiscal 1998. The decreases are due to the ROYAL MATCH(TM)
paint colorant dispenser and the VIRTUAL SQUEEZE(TM) juice dispenser being
virtually completed during the fourth quarter of fiscal 1998.
Interest expense
For the first six months of fiscal 1999, interest expense increased $64,000, or
133.3%, to $112,000, up from $48,000 for the same period of the prior year. For
the second quarter of fiscal 1999, interest expense increased $34,000, or
113.3%, to $64,000, up from $30,000 for the second quarter of fiscal 1998. The
increases were caused by higher debt balances in the current periods and
amortization of the discount on notes payable.
Equity in loss of joint venture
The Company's equity in the loss of the Virtual Squeeze Joint Venture for the
first six months of fiscal 1999 was $38,000. For the second quarter of fiscal
1998, the Company's equity in the loss of the joint venture was $14,000. The
losses are attributable to the start up costs and marketing expenses of the
joint venture.
Other income
Other income decreased $16,000, or 25%, to $48,000 for the first six months of
fiscal 1999, down from $64,000 for the same period of the prior year. Other
income for the current period is primarily attributable to a distribution excess
earnings on fund assets by the Ohio Bureau of Workers Compensation. Other income
for the six months of fiscal 1998 related to the reversal of estimated
liabilities and related expenses which were recorded by the Company in fiscal
1997. The underlying matters were ultimately settled without cost to the Company
in that year.
For the second quarter of fiscal 1999, other income increased $3,000, or 75%, to
$7,000, up from $4,000 for the second quarter of fiscal 1998. The increase is
attributable to funds received from the sale of scrap materials.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance decreased to $17,000 as of October 24, 1998 from
$351,000 at April 25, 1998. Operations for the first quarter of fiscal 1999 used
cash of $692,000. Net cash used by investing activities was $82,000 which
included advances of $79,000 to the Virtual Squeeze Joint Venture and $3,000 in
additions to the machinery and equipment. Net cash provided by financing
activities was $440,000. The cash provided by financing activities is
attributable to $562,000 in private placements of Preferred Stock and Notes
Payable which were offset by net repayments of $107,000 to the Company's line of
credit and notes payable. The Company currently has no material commitments for
capital expenditures.
Consistent with prior years, the Company's primary source of liquidity
has been private placements of equity and equity derivative instruments. From
August 1, 1996, to October 30, 1996, the Company issued 132 shares of Series A
Preferred Stock in exchange for the surrender of the Company's outstanding
$25,000, 9% Convertible Subordinated Redeemable Notes Payable in the aggregate
principal amount of $1,650,000. From August 1, 1996, through December 1, 1998,
the Company issued 267 shares of Series A Preferred Stock in exchange for
$12,500 cash per share, generating $3,438,000 cash. From September 18, 1998 to
December 1, 1998, the Company issued 16 shares of Series B Preferred Stock in
exchange for $12,500 cash per share, generating $200,000 cash
In August, 1997, to raise additional capital, the Company began issuing
short term promissory notes through a private placement. The notes are sold in
multiples of $12,500, or fractions thereof, and accrue interest at the rate of
10%, with principal and interest due at maturity. The initial maturity date was
June 30, 1998, however, the Company had the option, which it exercised, to
extend the maturity date to December 31, 1998. The Company anticipates using
proceeds of one or more equity offerings to satisfy its obligation under the
Notes at the extended maturity date. If the Company is not successful is raising
such proceeds, it may seek to further extend the maturity date through
negotiations with Holders of the Notes and their representatives. As of December
1, 1998, the Company has issued notes in the aggregate of $385,000.
The Company maintains an accounts receivable credit line to meet
short-term cash requirements. The credit line bears an interest rate of prime
plus four points. The credit line provides for a maximum of $500,000 borrowing
capacity to the Company. As of October 24, 1998, $93,000 was outstanding under
the line of credit and due to collateral requirements no funds were available to
be advanced thereunder. The credit line matures December 31, 1998.
The Company intends to satisfy its short-term (i.e., the next 12-month
period) capital requirements using the proceeds of offerings of its equity
and/or debt securities and short-term borrowings. The Company is currently
attempting to raise at least $2,000,000 through an offering of its Convertible
Preferred Stock. Longer term capital needs are anticipated to be satisfied by
additional proceeds of offerings of the Company's equity and/or debt securities,
improvements in operational cash flow, warrant exercise proceeds, and
traditional credit facilities. There can be no assurance that at any time a
sufficient market for the Company's equity offerings or debt financings will be
available upon commercially reasonable terms, if at all.
The Company's long-term capital plan is critically dependent upon the
commercial success of its Products and, to the extent success is not timely
achieved, its ability to implement significant cost reduction programs. Toward
this end, Management has taken steps to increase revenue through sales and
marketing efforts that include the redeployment of research and development
resources of the Company to work closely with the Company's existing and
prospective customers in the paint and beverage industry to refine the Company's
products and maximize their commercialization. If it becomes necessary to
implement significant cost reduction programs, it is likely that such programs
will involve a significant curtailment of marketing and research and development
activities as well as payroll reductions which would likely have an adverse
affect on future operating results. There can be no assurance that the Company
will be successful in generating operating profit and sufficient operational
cash flow through the commercial success of its products or any such cost
reduction programs. If the Company is not successful in this regard, Management
will have to consider alternative uses of its assets including the possible
licensing or outright sale of one or more of its proprietary technologies.
The current liquidity position of the Company and the inability of
operations to generate positive cash flow raises doubt about the Company's
ability to continue as a going concern (see Note 1 to the Financial Statements).
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The 1998 Annual Meeting of Shareholders of the Company was held on October 9,
1998.
The Director nominees, Charles M. Stimac, Jr., C. Rand Michaels, William L.
Shanklin and Frank E. Vaughn were elected with 14,331,624 shares of common stock
voting in favor of their election and 81,378 shares withholding authority to
vote for said Director nominees.
The Director nominees, Herbert L. Luxenburg and Norbert J. Lewandowski were
elected with 14,330,624 shares of common stock voting in favor of their election
and 82,378 shares withholding authority to vote for said Director nominees.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are incorporated by reference herein or annexed to
this quarterly report:
3.1 Certificate of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
5.1 Opinion of St. John & Wayne, L.L.C. as to the legality of the
securities to be registered.
10.1 Employment agreement dated March 1, 1997 by and between the Registrant
and Charles M. Stimac, Jr.
10.2 Form of Director Option Agreement dated October 30, 1998.
10.3 Amended 1995 Stock Option Plan.
11.1 Statement regarding computation of per share earnings (see Item 8 of
this Annual Report in Form 10-K).
21.1 Subsidiaries of the Registrant.
23.1 Consent of Grant Thornton LLP.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of St. John & Wayne, L.L.C. (included in Eshibit 5.1)
24. Power of Attorney (see signature page hereof).
27. Financial Data Schedule (for S.E.C. electronic filing only)
(b) Current reports on Form 8-K during the quarter ended July 25, 1998.
A report on Form 8-K was filed on October 8, 1998 to report the
following event:
On October 7, 1998, the Company was notified by NASDAQ that the
Company's common stock would be delisted from the NASDAQ Small Cap
Market effective with the close of business on October 7, 1998.
14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ABC Dispensing Technologies, Inc.
Date: December 8, 1998 /s/ Charles M. Stimac, Jr.
--------------------- -----------------------------------
Charles M. Stimac, Jr.
President/CEO
15
DIRECTOR OPTION AGREEMENT
This Option Agreement, dated October ____, 1998, between ABC Dispensing
Technologies, Inc., a Florida corporation (the "Company") and [insert name of
director] (the "Director").
WHEREAS, as consideration of the Director's prior service as a director
of the Company to induce the Director to continue to serve as a member of the
Company's Board of Directors, the Company intends to grant to the Director
common stock purchase options that will vest only upon a Change of Control (as
defined in paragraph two (2) below),
NOW, THEREFORE, in consideration for Director's prior service as a
director of the Company and as an inducement to the Director to continue to
serve as a director of the Company, the Company and the Director hereby agree as
follows:
1. The Company hereby grants to the Director an option to
purchase 40,000 shares of the Company's Common Stock, par
value $.01 per share, subject to the provisions set forth
herein. The option price to be paid per share of common stock
upon exercise of such option shall be equal to the market
price per share on the date which is 90 days prior to the date
of the Change of Control. The option represented by this
Agreement shall only vest if the Director remains a director
of the Company at the time of the occurrence of a Change of
Control, if and whenever such Change in Control shall occur.
The option will not vest until the occurrence of a Change of
Control.
2. For purposes of this Agreement, a "Change of Control" shall
occur if (i) any person or group of persons (within the
meaning of Section 13 or Section 14 of the Securities Exchange
Act of 1934, as amended) shall acquire (other than directly
from the Company) beneficial ownership (within the meaning of
Rule 13d-3 promulgated by the Securities and Exchange
Commission under said Act) of 20% or more of the outstanding
shares of common stock of the Company, (ii) during any period
of 12 consecutive calendar months, individuals who were
directors of the Company on the first day of such period (or
who were appointed or nominated for election as directors of
the Company by at least a majority of the individuals who were
directors on the first day of such period or who were so
elected or appointed other than in connection with an actual
or threatened proxy contest) (the "Incumbent Board") shall
cease to constitute a majority of the Board of Directors of
the Company, or (iii) there is consummation of a complete
liquidation or dissolution of the Company or a merger,
consolidation or sale of all or substantially all of the
Company's assets (collectively, a "Business Combination")
other than a Business Combination in which all or
substantially all of the stockholders of the Company receive
50% or more of the
1
<PAGE>
stock of the company resulting from the Business Combination,
at least a majority of the Board of Directors of the resulting
company were members of the Incumbent Board and after which no
person owns 20% or more of the stock of the resulting
corporation, which did not own such stock immediately before
the Business Combination. For purposes of this Agreement, the
term "market value" shall mean the last reported sales price
of a share of the Company's common stock as reported by any
national securities exchange on which the common stock is then
listed or admitted to trading, or the National Market System
of NASDAQ, or if the common stock is neither so reported or
listed, the closing price as reported by NASDAQ, or if not
listed or admitted to trading on NASDAQ, the average of the
closing bid and asked price in the over-the-counter market as
reported by NASDAQ or any comparable system or if not approved
for quotation on NASDAQ or any comparable system, the average
of the closing bid and asked prices as furnished by the two
members of the National Association of Securities Dealers,
Inc. selected from time to time by the Company for that
purpose, or if no such bid or asked prices are available
because no market then exists for the Company's common stock,
the book value per share determined as of the date of the then
most recent quarterly or annual financial statements prepared
by the Company.
3. Upon vesting, such option may be exercised in whole or in
part, from time to time, by the giving to the Company of
notice in writing to that effect. Within 10 days after the
receipt by it of notice of exercise of such option, the
Company shall cause certificates for the number of shares with
respect to which such option is exercised to be issued in the
name of the Director or his executors, administrators, or
other legal representatives, heirs, legatees, next of kin, or
distributees, or properly endorsed or accompanied by separate
stock powers duly executed, and to be delivered to Director or
his executors, administrators, or other legal representatives,
heirs, legatees, next of kin, or distributees. Payment of the
option price for the shares with respect to which such option
is exercised may be made in cash or upon surrender of a number
of shares at the then current market price per share necessary
to satisfy the aggregate exercise price of such option.
4. The option herein granted shall not be transferrable by the
Director other than by will or the laws of descent and
distribution, and shall be exercisable, during his lifetime
only by him. Notwithstanding anything in this Agreement to the
contrary, the option herein granted shall in no event be
exercisable after the expiration of ten (10) years from the
date such option vests.
5. If the Company shall issue any additional shares of stock by
way of a stock dividend on, or split-up, subdivision, or
reclassification of outstanding common shares, then such
option shall be deemed to cover such additional shares to the
extent that the same would have been issued to Director had
such option been exercised in its entirety at the time of such
issuance of additional shares, and there shall be a
2
<PAGE>
corresponding proportionate adjustment of the option price per
share set forth above so that in the aggregate the option
price for all shares then covered shall be the same as the
aggregate option price for the shares remaining subject to
such option immediately prior to the issuance of such
additional shares.
6. If there shall be any capital reorganization, or
consolidation, or merger of the Company with any other entity
or entities or any sale of all or substantially all of the
Company's property and assets to any other entity or entities,
the Company shall take appropriate action to enable the
Director to receive upon any subsequent exercise of such
option, in whole or in part, in lieu of any shares of common
stock of the Company, the share or shares, securities or other
assets as were issuable or payable upon such reorganization,
consolidation, merger or sell in respect of or in exchange for
such shares of common stock.
7. This Agreement shall be governed by the laws of the State of
Florida.
8. This Agreement may be amended or terminated by the Board of
Directors of the Company without the consent of the Director
at any time prior to the occurrence of a Change of Control
provided all Director Option Agreements then outstanding are
similarly amended or terminated (providing for options vesting
upon the occurrence of a change of control).
IN WITNESS WHEREOF, the Company and the Director have caused this
Agreement to be executed, as of the day and year first above written.
ABC DISPENSING TECHNOLOGIES, INC.
By:_____________________________
Name: Charles M. Stimac, Jr.
Title: President
DIRECTOR
________________________________
Name:
3
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