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 JANUARY 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.
(Name changed from 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: (330) 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 February 20, 1998 was 17,355,347.
1
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<TABLE>
<CAPTION>
Index
ABC Dispensing Technologies, Inc. and Subsidiaries
Part I Financial Information Page No.
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets - January 24, 1998 and April 26, 1997 3
Consolidated statements of operations - Nine months and three months
ended January 24, 1998 and January 25, 1997 4
Consolidated statements of cash flows - Nine months ended January 24, 1998 and January 25, 1997 5
Consolidated statement of stockholders' equity - Nine months ended January 24, 1998 6
Notes to consolidated financial statements - January 24, 1998 7-13
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14-17
Part II Other Information
- ---------------------------------------------------------------------------------------------------------------------------
Item 1. (Not Applicable)
Item 2. (Not Applicable)
Item 3. (Not Applicable)
Item 4. (Not Applicable)
Item 5. Failure to meet NASDAQ minimum listing requirements 18
Item 6. Exhibits and Reports 18
Signature 19
</TABLE>
2
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<TABLE>
<CAPTION>
ABC DISPENSING TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS January 24, 1998 April 26, 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 287,000 $ 445,000
Trade receivables:
Accounts receivable, less allowance for doubtful accounts
of $76,000 as of January 24 and $191,000 as of April 26 1,155,000 327,000
Inventories (Note 4) 1,084,000 1,431,000
------------ -----------
Total current assets 2,526,000 2,203,000
Property, Plant, and Equipment 663,000 704,000
Other assets:
Advances to Joint Venture (Note 12) 123,000
Discount on Notes Payable (Note 5) 59,000
Intangible assets, less accumulated amortization of $614,000
as of January 24 and $552,000 as of April 26 70,000 102,000
Patents pending and deferred charges 121,000 341,000
------------- -----------
Total other assets 373,000 443,000
Total Assets $ 3,562,000 $ 3,350,000
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 938,000 $ 877,000
Line of credit 373,000 2,000
Current portion of long-term debt (Note 5) 369,000 36,000
Accrued liabilities 450,000 517,000
------------ ----------
Total current liabilities 2,130,000 1,432,000
Long-term debt (Note 5) 265,000 283,000
Stockholders' equity:
Preferred Stock, 9% cumulative; authorized 320 shares
308 shares issued at January 24 (271 at April 26) (note 8) 3,850,000 3,388,000
Common Stock, $.01 par value; authorized 50,000,000
shares; 17,355,347 shares issued at January 24
(17,114,279 at April 26) 174,000 171,000
Additional paid-in capital ($36,785 restricted for cost of
treasury shares held at April 26) 19,291,000 19,014,000
Retained earnings (deficiency) (22,102,000) (20,850,000)
----------- -----------
1,213,000 1,723,000
Less notes receivable - stockholders (46,000) (51,000)
Less cost of treasury stock, 35,000 shares - (37,000)
------------ -----------
Total Stockholders' Equity 1,167,000 1,635,000
------------ -----------
Total Liabilities and Stockholders' Equity $ 3,562,000 $ 3,350,000
============ ===========
</TABLE>
See accompanying notes.
3
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<TABLE>
<CAPTION>
ABC DISPENSING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Nine months and three months ended January 24, 1998 and January 25, 1997
Unaudited
Nine Months Ended Three Months Ended
Jan. 24, 1998 Jan. 25, 1997 Jan. 24, 1998 Jan. 25, 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Products and services $ 4,511,000 $ 2,565,000 $ 1,995,000 $ 427,000
Cost and expenses:
Products and services 3,165,000 2,076,000 1,404,000 313,000
General and administrative 1,064,000 1,281,000 331,000 268,000
Selling and marketing 337,000 470,000 115,000 165,000
Research and development 924,000 344,000 318,000 (47,000)
-------------- -------------- -------------- -------------
Total cost and expenses 5,490,000 4,171,000 2,168,000 699,000
Loss from operations (979,000) (1,606,000) (173,000) (272,000)
Other income and expense:
Interest expense (99,000) (74,000) (43,000) (12,000)
Interest Income 10,000 14,000 2,000 5,000
Other income (expense) 35,000 16,000 (30,000) 13,000
-------------- -------------- -------------- -------------
Total other income/(expense) (54,000) (44,000) (71,000) 6,000
Net loss ($1,033,000) ($1,650,000) ($ 244,000) ($ 266,000)
=============== =============== =============== =============
Basic earnings per share (note 7) ($0.07) ($0.10) ($0.02) ($0.02)
============== ============== ============== =============
</TABLE>
See accompanying notes.
4
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<TABLE>
<CAPTION>
ABC DISPENSING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
Nine Months Ended Nine Months Ended
January 24, 1998 January 25, 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net cash used in operating activities (1,183,000) (1,525,000)
- -------------------------------------
Cash flows used in investing activities
- ---------------------------------------
Additions to patents (30,000) 5,000
Additions to property & equipment 46,000 (34,000)
Advances to joint venture (123,000) -
----------- ---------------
Net cash used in investing activities (107,000) (29,000)
Cash flows from financing activities:
- -------------------------------------
Increase in deferred charges (59,000) -
Proceeds from issuance of Common Stock - 69,000
Proceeds from private placements of Preferred Stock 462,000 2,836,000
Proceeds from private placements of Notes Payable 335,000 -
Proceeds [advances] from line of credit - net 371,000 (292,000)
Repayment of notes payable and loan costs (29,000) (592,000)
Proceeds from issuance of treasury stock 37,000 -
Proceeds from collection of Stockholders receivables 5,000 94,000
Other 10,000 (9,000)
----------- ------------
Net cash provided by financing activities 1,132,000 2,106,000
----------- ------------
Net decrease in cash and cash equivalents (158,000) 552,000
Cash and cash equivalents at beginning of year 445,000 488,000
----------- ------------
Cash and cash equivalents at end of period $ 287,000 $ 1,040,000
=========== ============
</TABLE>
See accompanying notes.
5
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<TABLE>
<CAPTION>
ABC DISPENSING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine months ended January 24, 1998
Unaudited
Common
Number of Stock Additional Retained Notes
Shares of $.01 Par Preferred Paid-in Earnings Receivable Treasury
Common Stock Value Stock Capital (Deficiency) Stockholders Stock
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 26,1997 17,114,279 $171,000 $3,388,000 $19,014,000 $(20,850,000) $(51,000) $(37,000)
Preferred Stock private
placement (Note 8) $462,000
Preferred Stock Dividend 241,068 3,000 216,000 (219,000)
(Note 8)
Warrants outstanding - Original
Issue Discount 61,000
Collection on notes receivable-
stockholders 5,000
Net loss (1,033,000)
Treasury Stock 37,000
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 24, 1998 17,355,347 $174,000 $3,850,000 $19,291,000 $(22,102,00) $(46,000) $ 0
====================================================================================================================================
</TABLE>
See accompanying notes.
6
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ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business description
ABC Dispensing Technologies, Inc. (the "Company") designs proprietary dispensing
systems to dispense and blend liquids, powders and other ingredients to a
uniform and high degree of accuracy. The Company provides training, installation
and product service and also custom designs and manufactures its own proprietary
dispensing equipment to meet the needs of its customers which are located
primarily in the United States. To date, the Company has focused its development
and marketing efforts on the Beverage and Paint Industries.
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 nine month period ended January 24, 1998 are
not necessarily indicative of the results that may be expected for the year
ended April 25, 1998. For further information, refer to the Form 10-K for the
year ended April 26, 1997.
Year End - The Company's fiscal year-end is the Saturday closest to April 30,
which results in a fifty-two or fifty-three week year. Both fiscal 1998 and
fiscal 1997 consist of fifty-two weeks ending on April 25, and April 26,
respectively. References to the years 1998 and 1997 refer to fiscal years ended
April 25, 1998, and April 26, 1997, respectively.
Consolidation - The consolidated financial statements include the accounts of
the Company and its subsidiaries, ABC Dispensing Technologies, Inc. and ABC Tech
Corp. Significant intercompany transactions and balances have been eliminated in
consolidation.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes.
Actual results could differ from those estimates.
Cash Equivalents - The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
Financial Instruments - The carrying value of the Company's cash, accounts
receivable, accounts payable and notes payable are a reasonable estimate of
their fair value due to the short-term nature of these instruments. The
Company's long-term debt has variable interest rates and carrying value
approximates fair market value at January 24, 1998.
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 - Property, plant and equipment are carried at
cost. Depreciation is provided primarily by use of the straight-line method over
the estimated useful lives of the assets, which are five years for machinery and
equipment and thirty years for buildings.
Intangible Assets - Intangible assets consist of patents and purchased selling
rights which are recorded at cost. Amortization is provided using the
straight-line method over a period of five years or less.
Revenue Recognition - Revenue on equipment sales and installation is recognized
when the product is shipped and title transfers. 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.
Reclassifications - Certain reclassifications have been made to prior year
amounts to conform with current year classifications.
7
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ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Significant accounting policies (continued)
Major Customers - Revenues from The Home Depot, Inc. were 90 percent of total
revenues for the nine months ended January 24, 1998. Revenues from The
Sherwin-Williams Company were 1 percent and 65 percent of the Company's total
revenues for the nine months ended January, 24, 1998 and January 25, 1997,
respectively. The Company currently has no orders from Sherwin-Williams and does
not expect significant revenues from sales to Sherwin-Williams in the near
future.
Provision for Warranty Claims - Estimated warranty costs are provided at the
time of sale of the warranted products.
Stock-Based Compensation - The Company grants stock options for a fixed number
of shares to employees generally with an exercise price equal to the fair value
of the shares at the date of grant. The Company accounts for stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees, " and, accordingly, recognizes no
compensation expense for the stock option grants. Additional disclosures
relating to stock option activity which are required by Statement of Financial
Accounting Standards No. 123 - "Accounting for Stock Based Compensation" are
included in note 6.
3. Going concern uncertainty
The Company has reported a net loss for each year of operation since its
inception except for 1989, and as of January 24, 1998, has an accumulated
retained earnings deficiency of $22,102,000. The Company's cash flow from
operating activities was a negative $1,183,000 for the nine months ended January
24, 1998, and a negative $2,684,000 for the year ended April 26, 1997. Cash and
cash equivalents declined from $1,309,000 at the beginning of fiscal 1996 to
$287,000 at January 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 $5,832,000 over the past three and a half
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. The Preferred Stock is convertible into
common stock at $1 per share. 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.
4. Inventories
At January 24, 1998 and April 26, 1997, inventories consisted of the following:
January 24, 1998 April 26, 1997
-------------------- -------------------
Raw Materials $ 865,000 $ 927,000
Work-in-process 85,000 118,000
Finished goods 134,000 386,000
------------------ ------------------
$ 1,084,000 $1,431,000
================== ==================
The above amounts are net of obsolescence reserves of $838,000 at January 24,
1998, and April 26, 1997, respectively.
8
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ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Financing arrangements
Notes Payable
In June 1994, the Company purchased its headquarters facility in Akron, Ohio for
$490,000. A note payable was entered into during fiscal 1995 to partially
finance this purchase which was previously leased from the former chairman. The
note payable has an adjustable interest rate (9.03% at January 24, 1998, and
9.25% at April 26, 1997) 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 $2,995 are payable monthly with the
balance of $143,000 due October 1, 2005. The note payable is secured by the
headquarters facility. At January 24, 1998, the facility and improvements
thereto have a net book value of $535,000.
In August, 1997 the Company began issuing notes payable at a discount. The notes
are sold in multiples of $12,500, or fractions thereof, and pay interest at the
rate of 10%, with principal and interest paid at maturity. The initial maturity
date is June 30, 1998, however, the Company may, at its sole option, extend the
maturity date to December 31, 1998. Attached to 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
$63,000 using the Black-Sholes option pricing model and a discount on notes
payable has been recorded for that amount. As of February 24, 1998, the Company
has issued notes in the aggregate of $335,000.
At January 24, 1998 and April 26, 1997, notes payable consisted of the
following:
January 24, 1998 April 26, 1997
--------------------- -----------------
Note payable to bank $ 259,000 $268,000
Notes payable 335,000 -
Other 40,000 51,000
--------------------- -----------------
634,000 319,000
Less amounts due within one year (369,000) ( 36,000)
--------------------- -----------------
Total long-term debt $ 265,000 $283,000
===================== =================
Maturities of notes payable for the five years subsequent to April 26, 1997, are
as follows: 1998--$36,000; 1999--$369,000 2000--$23,000; 2001--$19,000 and
2002--$18,000.
6. Common stock
Stock Option Plans
The Company has non-qualified stock option plans under which directors, officers
and key employees may be granted incentive stock options for the purchase of the
Company's common stock. An aggregate of 500,000 shares of the Company's common
stock were reserved for issuance under the Company's 1990 Stock Option Plan and
1,750,000 shares were reserved for issuance under the Company's 1995 Stock
Option Plan and amendments thereto. All granted options are exercisable after
six months from the grant date provided the employee has at least one year of
service. Grant options expire five years after grant date. The Company also may
grant incentive stock warrants to directors, officers and key employees. The
stock warrants can be redeemed to purchase the common stock of the Company.
9
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ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Common stock (continued)
A summary of the Company's stock option plans and employee stock warrants, and
related information for the nine months ended January 24, 1998, and January 25,
1997, is as follows:
<TABLE>
<CAPTION>
January 24, 1998 January 25, 1997
-----------------------------------------------------------------
Weighted Weighted
Average Average
Shares Exercise price Shares Exercise Price
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 1,518,323 $ 1.68 510,966 $ 2.46
Granted 536,000 $ 1.09 879,851 $ 1.27
Canceled (272,589) $ 2.22 - -
----------- -----------
Outstanding at end of period 1,781,734 $ 1.42 1,390,817 $ 1.72
=========== ===========
Exercisable at end of period 1,185,734 $ 1.53 909,075 $ 2.03
=========== ===========
Available for grant 1,022,366 349,183
=========== ===========
Weighted average fair value of options
granted during the period $ 1.08 $ 1.27
</TABLE>
The following table summarizes information about stock options and employee
stock warrants outstanding and exercisable by price range as of January 24,
1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------------------- -------------------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of exercise prices Shares Life Exercise Price Shares Exercise Price
- ------------------------ -------- ------------ -------------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
$0.84 - $1.25 1,170,832 4.48 $ 1.13 774,832 $ 1.14
$1.38 - $2.50 424,652 7.09 $ 1.44 224,652 $ 1.50
$2.88 - $3.50 186,250 1.87 $ 3.16 186,250 $ 3.16
---------- ----------
1,781,734 1,185,734
========== ==========
</TABLE>
Accounting for Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related interpretations in
accounting for its employee stock based compensation. The exercise price of each
stock option and employee stock warrant equals the market price of the Company's
stock on the date of grant. Accordingly, no compensation cost has been
recognized for the plans.
10
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ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Common stock (continued)
During 1995, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS 123). SFAS 123 defines a fair valued based method of accounting for an
employee stock option and similar equity instruments and encourages all entities
to adopt that method of accounting for all of their employee stock compensation
plans. However, SFAS 123 allows an entity to continue to measure compensation
cost for those plans using the method of accounting prescribed in APB 25.
Entities that elect to continue using APB 25 must make pro forma disclosures of
net income and earnings per share as if the fair value based method of
accounting defined in SFAS 123 had been adopted.
The Company has computed, for pro forma disclosure purposes, the value of all
options granted during the nine months ended January 24, 1998, and January 25,
1997, using the Black-Scholes option pricing model as prescribed by SFAS 123
using the following weighted average assumptions:
Risk-free interest rate 6.54%
Dividend yield 0 %
Volatility 79%
Average life 5 years
Using the Black-Scholes methodology, the total value of options granted during
the nine months ended January 24, 1998, and January 25, 1997, was $361,000 and
$667,000, respectively. If the Company had accounted for its stock-based
compensation plans in accordance with SFAS 123, the Company's net loss and net
loss per share would approximate the pro forma disclosures below:
<TABLE>
<CAPTION>
January 24, 1998 January 25, 1997
---------------- ----------------
<S> <C> <C> <C>
Net Loss As reported $ (1,033,000) $ (1,650,000)
Pro forma $ (1,394,000) $ (2,317,000)
Primary earnings per share As reported $ (.07) $ (0.10)
Pro forma $ (.10) $ (0.14)
</TABLE>
Warrants
On May 15, 1997, the Company granted 365,000 warrants at $1.125 per share to 38
employees of the Company. These warrants are subject to a three year vesting
schedule with one-third of the warrants vesting each year subsequent to date of
grant.
On October 10, 1997, the Company granted warrants to C. Rand Michaels, Director
(20,000), Herbert L. Luxenburg, Director (20,000), and Frank E. Vaughn, Director
(40,000) at $0.844 per share.
11
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ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Earnings per share
The following table sets forth the computation of basic earnings per share:
<TABLE>
<CAPTION>
Nine Months Ended Third Quarter Ended
January 24, January 25, January 24, January 25,
1998 1997 1998 1997
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Numerator:
Net loss $(1,033,000) $(1,650,000) $(244,000) $(266,000)
Preferred Stock Dividends (243,000) (67,000) (84,000) (39,000)
------------- ------------- ------------- -------------
Numerator for basic earnings
per share - income available
to common shareholders (1,276,000) (1,717,000) (328,000) (305,000)
------------- ------------- ------------- -------------
Denominator:
Denominator for basic earnings
per share - weighted-average shares 17,178,863 17,067,493 17,330,347 17,109,160
============= ============= ============= =============
Basic earnings per share ($ 0.07) ($ 0.10) ($ 0.02) ($ 0.02)
============= ============ ============ ============
</TABLE>
Diluted earnings per share calculations have been omitted as the effect of
potentially dilutive securities would have been anti-dilutive for the periods
reported.
Options and warrants to purchase 3,117,234 were outstanding during the nine
months ended January 24, 1998. Each option allows the holder to purchase one
share of the Company's Common Stock. The exercise price of the options varies
from $0.844 to $3.50 per share. The options and warrants were not used to
compute diluted earnings per share because the Company has net losses for the
periods reported, and therefore, the effect would be antidilutive.
8. Preferred stock
From August 1, 1996, to October 30, 1996, the Company issued 132 shares of
Preferred Stock in exchange for the surrender of the Company's outstanding
$25,000, 9% Convertible Subordinated Redeemable Notes due August 1, 1999, in the
aggregate principal amount of $1,650,000.
As of March 1, 1998, through private placements, the Company issued 181 shares
of Series A Preferred Stock in exchange for notes or $12,500 cash per share,
generating gross proceeds of $2,262,500 to the Company.
As of February 1, 1998 there is a dividend payable on Preferred Stock in the
amount of $167,463. At the discretion of the Company, the dividend will be paid
in common stock of the Company. A total of 228,636 shares will be issued to
satisfy the dividend requirement.
9. Operating leases
For the nine months ended January 24, 1998, and January 25, 1997, aggregate
rental expense was $33,000.
10. 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 4% of the participants'
compensation. The cost of the Company's matching contribution for the nine
months ended January 24, 1998, and January 25, 1997, was $11,000. The Company
has the discretion to make a profit-sharing contribution, but no such
contribution has been made by the Company.
12
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ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Litigation settlement/contingencies
The Company from time to time is subject to routine litigation incidental to its
business. The Company believes that any liability that may finally be determined
would not have a material adverse effect on its financial statements.
12. Advances to Joint Venture
The Company has provided $123,000 of juice dispensing equipment to Virtual
Squeeze, a joint venture between the Company and Damon Industries of Sparks,
Nevada. The Company will be reimbursed for the cost of the equipment through
revenues from juice sales made by Virtual Squeeze.
13
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The Company's net loss the first three quarters of fiscal 1998 decreased
$617,000, or 37.4%, to $1,033,000, from the $1,650,000 net loss for the
corresponding period of the prior year. The net loss for the third quarter of
fiscal 1998 decreased $22,000, or 8.3%, to $244,000, from the $266,000 net loss
for the third quarter of the prior year.
While revenues have increased significantly (see below), losses have not
decreased proportionately. This is due to $321,000 of development costs being
deferred into future periods in the third quarter of fiscal 1997. Had the
development costs not been deferred, the net loss for the first three quarters
of fiscal 1998 and fiscal 1997 would have been $863,000 and $1,971,000,
respectively. The decrease in net loss for the first three quarters of fiscal
1998 would have been $1,108,000, or 56.2%, from the same period in the prior
year. The net loss for the third quarter of fiscal 1997 would have been
$587,000. The decrease in net loss for the third quarter of fiscal 1998 would
have been $343,000, or 58.4%, from the net loss for the third quarter of fiscal
1997. The deferred development costs were amortized over a period of 11 months
and were fully amortized as of October 25, 1997.
REVENUES
Nine Months Ended Third Quarter Ended
January 24, January 25, January 24, January 25,
1998 1997 1998 1997
(in thousands) ---------- ----------- ---------- -----------
Equipment sales $ 4,088 $ 2,028 $ 1,857 $216
Service revenues 423 537 138 211
------- ------- ------- -----
TOTAL $ 4,511 $ 2,565 $ 1,995 $ 427
======= ======= ======= =====
Equipment sales for the first three quarters of fiscal 1998 increased
$2,060,000, or 101.6%, over the first three quarters of fiscal 1997. The
increase is due to $2,388,000 in increased sales of paint colorant dispensers
which were partially offset by decreases of $241,000 in beverage equipment sales
and $87,000 in industrial equipment sales and project development revenues.
Equipment sales for the third quarter of fiscal 1998 increased $1,641,000, or
759.7%, over the third quarter of fiscal 1997. This increase is due to
$1,792,000 in increased sales of paint colorant dispensers which were partially
offset by decreases of $124,000 in beverage equipment sales and $27,000 in
industrial equipment sales and project development revenues.
The increase in sales of paint colorant dispensers is due to the Company having
no orders for paint colorant dispensers from the middle of the second quarter to
the end of the third quarter of fiscal 1997. The decrease in sales of beverage
equipment is due to the Company discontinuing its Omnitron(TM) soft drink line
of beverage dispensers in the second quarter of fiscal 1997. The decrease in
sales of industrial equipment and project development revenues is a result of
the company focusing on the paint and institutional juice markets. The Company's
current strategy is to develop only products for which there is a known market
need and customers who are committed to the product.
Service revenues for the first three quarters of fiscal 1998 were down $114,000,
or 21.2% from the first three quarters of fiscal 1997. The decrease was due to a
$191,000 decrease in sales of replacement parts which was partially offset by a
$72,000 increase in service labor revenues. Service revenues for the third
quarter of fiscal 1998 decreased $73,000, or 34.6% from the third quarter of
fiscal 1997. The decrease was due to a $114,000 decrease in sales of replacement
parts which was partially offset by a $41,000 increase in service labor
revenues. Sales of replacement parts are down due to discontinuation of the
TINT-A-COLOR(TM) paint colorant dispensers and the Omnitron(TM) soft drink
dispensers. Service labor revenues have increased due to installation charges on
sales of ROYAL MATCH (TM) paint colorant dispensers.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GROSS MARGINS
Nine Months Ended Third Quarter Ended
January 24, January 25, January 24, January 25,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Equipment 34.3 % 31.0 % 31.4 % 18.4 %
Service ( 5.2 )% (25.9 )% 0.7 % (37.8 )%
-------- -------- --------- --------
TOTAL 30.6 % 19.1 % 30.0 % ( 0.9 )%
======== ======== ======= =========
For the first three quarters of fiscal 1998, gross margin as a percentage of
sales on equipment increased 3.3 points over the first three quarters of fiscal
1997. For the third quarter of fiscal 1998, gross margin as a percentage of
sales on equipment increased 13 points over the third quarter of fiscal 1997.
The increases resulted from changes in product mix caused by the cessation of
shipments to Sherwin-Williams in the second quarter of FY 1997 and the Company's
withdrawal from the soft drink market.
For the first three quarters of fiscal 1998, gross margin as a percentage of
service revenues increased 20.7 points over the first three quarters of fiscal
1997. For the third quarter of fiscal 1998, gross margin as a percentage of
service revenues increased 38.5 points over the third quarter of fiscal 1997.
These increases are primarily due to increased equipment installation revenues
and a decline in low (or negative) margin service on soft drink equipment
resulting from the discontinuation of the Omnitron (TM) soft drink dispensers.
Additionally, in fiscal 1997, the Company had negotiated with Sherwin-Williams
to retrofit existing paint colorant dispensers at a price equal to the Company's
cost.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased $217,000, or 16.9%, to $1,064,000
in the first three quarters of fiscal 1998, down from $1,281,000 for the same
period of the prior year. Severance expense of $221,000 which was incurred in
the first three quarters of fiscal 1997 and a decreases in payroll expense and
travel expense of $201,000 and $26,000, respectively, during the first three
quarters of fiscal 1998 are primarily responsible for the decrease. These
decreases were partially offset by an increase in amortization of deferred
charges of $152,000 and increased legal and professional fees of $79,000 in the
first three quarters of fiscal 1998. The increase in legal and professional fees
relates to matters arising from operating as a public company.
For the third quarter of fiscal 1998, general and administrative expenses
increased $63,000, or 23.5%, to $331,000, up from $268,000 for the third quarter
of fiscal 1997. The increase is attributable to $77,000 of increased
amortization expense related development expenses that were deferred in the
prior year.
SELLING AND MARKETING EXPENSES
For the first three quarters of fiscal 1998, selling and marketing expenses
decreased $133,000, or 28.3%, to $337,000, down from $470,000 for the first
three quarters of fiscal 1997. The decrease was primarily due to sales and
marketing personnel performing more research and development, and administrative
activities in the first three quarters of fiscal 1998 than in same period of the
prior year. The sales and marketing personnel are assisting with research and
development to further refine the Company's two products for its current
customers and to increase the likelihood of general market acceptance.
Selling and marketing expense decreased $50,000, or 30.3%, to $115,000 in the
third quarter of fiscal 1998 , down from $165,000 for the same period of the
prior year. A decrease in marketing activity led to decreased payroll expense of
$20,000 and decreased travel expense of $30,000 in the third quarter of fiscal
1998, as compared to the same period of the prior year.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESEARCH AND DEVELOPMENT EXPENSES
For the first three quarters of fiscal 1998 research and development expenses
increased $580,000, or 168.8%, to $924,000, up from $344,000 for the first three
quarters of fiscal 1997. In the third quarter of fiscal 1997, $321,000 of
development costs were deferred into future periods. The costs which were
deferred related to the development of the paint colorant dispenser to be sold
to The Home Depot, Inc. The costs were deferred to provide better matching of
revenue and expense when the paint colorant dispensers were to be shipped to The
Home Depot. Had the development costs not been deferred, research and
development expense for the first three quarters of fiscal 1998 and fiscal 1997
would have been $754,000 and $665,000, respectively. The increase in research
and development for the first three quarters of fiscal 1998 would have been
$89,000, or 13.8%, from the same period in the prior year. The research and
development expense for the third quarter of fiscal 1997 would have been
$274,000. The increase in research and development expense the for the third
quarter of fiscal 1998 would have been $44,000, or 16.1%, from the same period
in the prior year. The deferred development costs were amortized over a period
of 11 months and were fully amortized as of October 25, 1997.
The increase in research and development expenses is due to continued
development of, and enhancements to, the ROYAL MATCH (TM) paint colorant
dispenser, the CHECK MATE (TM) software which controls the ROYAL MATCH (TM), and
the VIRTUAL SQUEEZE (TM) juice dispenser.
OTHER INCOME AND EXPENSE
For the first three quarters of fiscal 1998, interest expense increased $25,000,
or 33.8%, to $99,000, up from $74,000 for the first three quarters of fiscal
1997. For the third quarter of fiscal 1998, interest expense increase $31,000,
or 258.3%, up from $12,000 for the third quarter of fiscal 1997. The increases
are due to higher debt balances in fiscal 1998.
Other income increased $19,000, or 118.8%, to $35,000 in the first three
quarters of fiscal 1998, up from $16,000 for the first three quarters of fiscal
1997. The increase is attributable to reversing an estimated liability and
related expense that were ultimately settled without cost to the company.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance decreased to $287,000 as of January 24, 1998 from
$445,000 as of April 26, 1997.
Operations during the first three quarters ended January 24, 1998 required cash
of $1,183,000 which resulted from a net loss of $1,033,000, an increase in net
operating assets and net operating liabilities of $435,000, and $6,000,
respectively, offset by depreciation and amortization of $291,000.
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 February 7, 1998, the Company
issued 176 shares of Series A Preferred Stock in exchange for $12,500 cash per
share, generating $2,063,000 cash (see footnote 8). Near term cash requirements
will be obtained using this same Preferred Stock vehicle.
In August, 1997, to raise additional working capital, the Company began issuing
short term promissory notes. The notes are sold in multiples of $12,500, or
fractions thereof, and pay interest at the rate of 10%, with principal and
interest paid at maturity. The initial maturity date is June 30, 1998, however,
the Company may, at its sole option, extend the maturity date to December 31,
1998. As November 14, 1997, the Company has generated $335,000 in cash by
issuing the notes.
In addition to private placements of equity and notes receivable, management
uses an accounts receivable-based credit line to meet short-term cash
requirements (see note 5 to the financial statements). The credit line bears an
interest rate of prime plus four points. As of February 24, 1998, the credit
limit was set at $500,000 with an outstanding balance of $373,000.
If the above sources of cash do not become available or are not sufficient, the
Company may be forced to curtail marketing and research and development
activities which would adversely affect future operating results. Furthermore,
if management is successful in raising additional funds, there is no guarantee
that the Company will achieve profitable operations, or positive cash flow.
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 3 to the financial statements). Management
recognizes these weaknesses and is taking aggressive steps to increase revenues
through increased sales and marketing efforts.
17
<PAGE>
PART II OTHER INFORMATION
ITEM 5. FAILURE TO MEET NASDAQ MINIMUM LISTING REQUIREMENTS
The Company is currently out of compliance with NASDAQ'S capital and surplus
requirement, as set forth in NASD Marketplace Rule 4310( c)(02) which became
effective February 23, 1998. To meet the new minimum listing requirement, the
Company must maintain net tangible assets of at least $2,000,000. The NASDAQ
Listing Requirements Department has scheduled the Company's Common Stock to be
delisted from the NASDAQ Stock Market effective with the close of business on
March 16, 1998. The Company is requesting a hearing with the NASDAQ Listing
Qualifications Department to appeal the delisting decision. The request for the
hearing will stay the delisting of the Company's Common Stock pending the
outcome of the hearing.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11. Statement regarding computation of per share earnings (see Financial
Statements at Item 1 of this Quarterly Report on Form 10-Q).
27. Financial Data Schedule.
(b) Current reports on Form 8-K during the quarter ended January 24, 1998.
During the third quarter of fiscal 1998, the Company filed no reports on
Form 8-K.
18
<PAGE>
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.
ABC Dispensing Technologies, Inc.
--------------------------------
(Registrant)
Date: March 9, 1998 /s/ Charles M. Stimac, Jr.
---------------------------- --------------------------
Charles M. Stimac, Jr.
President/CEO
19
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-25-1998
<PERIOD-START> APR-26-1997
<PERIOD-END> JAN-24-1998
<CASH> 287,000
<SECURITIES> 0
<RECEIVABLES> 1,231,000
<ALLOWANCES> (76,000)
<INVENTORY> 1,084,000
<CURRENT-ASSETS> 2,526,000
<PP&E> 1,519,000
<DEPRECIATION> (856,000)
<TOTAL-ASSETS> 3,562,000
<CURRENT-LIABILITIES> 2,130,000
<BONDS> 0
0
3,850,000
<COMMON> 174,000
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<CGS> 3,129,000
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<OTHER-EXPENSES> 2,325,000
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