FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended April 25, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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
----
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: [ ] Yes [ X ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: [ X ]
The aggregate market value of the voting stock held by non-affiliates
as of July 15, 1998 was $12,863,000.
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 July 24, 1998 was 17,591,498 shares.
Documents Incorporated by Reference
The Registrant's Proxy Statement for the 1998 Annual Meeting of
Shareholders is incorporated by reference in Part III.
Total number of pages of this report: 34
Index to Exhibits located on page 33.
-1-
<PAGE>
ITEM 1. BUSINESS
- -----------------
CORE COMPETENCE
The Company designs, manufactures and services dispensing systems that
utilize standard micro-processing technology and proprietary operating software.
The current product offerings are specifically designed to allow amateur
operators to accurately dispense liquids in varied retail environments. The
Company's technology is protected by 23 patents and 4 patents pending. The
systems were designed to provide their customers the capability to effectively
dispense and control materials and minimize labor and waste.
The core of the Company is the talented work force and patent protected
technology. This core in combination with the ability to design, manufacture,
install and service dispensing equipment provides the Company with the
capabilities to meet the needs of its dispensing customers.
NEW DIRECTIONS
The Company has set a strategy to focus all of its existing resources
on the paint dispensing and juice dispensing product lines. These product lines
represent the primary product development efforts of the past three years.
Revenues and profits from these lines will be necessary to develop any
additional dispensing systems. The successful commercialization of these
products will allow for a balanced approach to development expense and resource
allocations.
New development project selection will be based on strict financial
guidelines that include financial commitments from our customers as expenses are
incurred. The Company will no longer expend development resources based on the
speculation of a possible future order. This new, pay as you go, approach will
ensure customer commitment to co-development efforts and will minimize the risk
of development projects.
PRODUCTS
Industrial
During the year, the Company has successfully introduced a new
universal line of tint dispensing equipment in the United States market. The
product line has been designed in a modular fashion that allows the
configuration of the number of colorants and the size of the reservoirs to be
matched to the customer's needs. It is estimated that over 95% of the world's
tinting systems can be accommodated with the current modular design. The fiscal
year ended April 25, 1998 included shipments of 299 units to The Home Depot and
14 units to smaller, independent paint companies. The benefits of the Royal
Match(TM) system include:
1. Elimination of daily purging:
2. Self-calibration to adjust for changes in tint rheology, including
temperature, density and viscosity.
3. Limited moving parts to minimize maintenance requirements; and
4. Self-cleaning dispensing of clear flush after each dispense cycle.
The Company is committing $400,000 in resources to a 30-day free
trial of Royal Match(TM) paint colorant dispensers to qualified, prospective
members of the AllPro Group and other paint manufacturers and retailers. To
date, 100% of the customers who have evaluated the Royal Match(TM) dispensers
have purchased equipment.
During the fiscal years ended April 25, 1998, and April 26, 1997, paint
product sales to The Home Depot represented 89%, and 3% of total Company
revenues, respectively. As anticipated, fiscal 1998 sales to the
Sherwin-Williams Company decreased dramatically to 1% of FY 1998 revenues. This
compares to total revenues from the Sherwin-Williams Company in fiscal 1997 and
fiscal 1996 of 54% and 72%, respectfully. Future sales to the Sherwin-Williams
Company are uncertain and are not being included in current plans. Future sales
to The Home Depot are not anticipated to include large single orders but rather
multiple small unit orders to meet the customer's need for new store openings
and to gradually retrofit the existing store base.
-2-
<PAGE>
Other Industrial dispensers that have been partially developed and
field tested have not received any significant resources during fiscal 1998. The
Company has implemented a focused strategy that centers on successful
commercialization of existing projects prior to shifting resources to new
products.
Beverage
The Company currently manufactures and markets two types of beverage
dispensers: juice and liquor.
The juice dispensers are marketed through the Virtual Squeeze(TM) joint
venture agreement with Damon Industries Inc., a Nevada based juice manufacturer
and distributor. Virtual Squeeze has targeted the $3 billion institutional juice
market with a self-contained, dispenser designed to use shelf stable, bag in the
box concentrates. The equipment is the only known juice dispenser specifically
designed to use shelf stable fruit juice products. The program features include:
1. No charge for dispenser, installation or service.
2. Self contained unit includes bag storage and provides additional
counter space.
3. Mandatory sanitization is required every 28 days.
4. Three programmable portion sizes.
5. Shelf stable product is stored at room temperatures.
6. Can be used as a stationary tower or hand held wand.
7. Large capacity chilling to dispense drinks at 40 degrees or less.
8. Easy to handle, 200 oz concentrate bag.
9. Blending of any 2 flavors to increase variety.
10. Virtual elimination of waste.
11. Saves time, money and labor.
Because of the nature of the joint venture, there is no consolidation
of sales and expenses in the Company's financial statements. Financial results
for the joint venture are included as Equity in Loss of Joint Venture. The joint
venture's total revenues from June 7, 1997 through April 25, 1998 were $155,000.
The Company's UltraBar(TM) liquor dispensing system pours
multi-ingredient drinks quickly and consistently. Advantages of the system
include: speed, accuracy, cash and inventory accountability, and control of
theft, spillage, overpours and giveaways.
Sales of UltraBar(TM) products accounted for 5.2%, 10.1%, and 7.5% of
total Company revenues in FY 1998, FY 1997, and FY 1996, respectfully.
New Product Development
The Company offers development services on a contract basis to
customers wishing to develop dispensers that are specifically designed to meet
specific needs. These development efforts are offered only on a pay as you go
contract basis that ensures the Company will be adequately compensated for its'
knowledge and resources.
-3-
<PAGE>
SERVICES
Service/Technical Support
The Company has a geographically dispersed service organization that
has the ability to support the equipment sales of the Company in the United
States. The support of third party equipment is performed on a contracted basis
and generally includes special travel compensation. The Company is continuing to
analyze the need for additional service technicians as the equipment base grows.
The full service responsibilities of The Home Depot equipment has necessitated
the addition of several technicians in strategic locations.
The Company utilizes it technical service organization to perform third
party installation and service for other electronic equipment manufacturers.
Service sales accounted for 11.4%, 21% and 15.1% of total Company revenues in
fiscal 1998, fiscal 1997 and fiscal 1996, respectfully.
SALES BACKLOG
As of April 25, 1998 the sales order backlog (unshipped product orders)
was $483,000. As of April 27, 1997 the sales order backlog was $4.4 million,
primarily related to The Home Depot order of 300 machines, which was shipped in
fiscal 1998.
INTERNATIONAL SALES
Revenues from international sales were 3 percent of sales for fiscal
1998, and 1 percent for fiscal 1997 and fiscal 1996. Primary international sales
efforts center on liquor equipment to Canada and Industrial Sales to South
America, Europe and Canada.
COMPETITION
The Company is one of four manufacturers that offer automatic, computer
controlled tint dispenser in the United States. Of the other three
manufacturers, one has an established presence in the U.S. market, the other two
being foreign companies trying to enter the domestic paint industry. The
technology of all of the competition is similar and is based on mechanical
displacement pumps. The release of exclusivity from the Sherwin-Williams in
April of 1997, has provided the Company access to the entire U.S. market. The
Company believes that the design and features of its' dispensing equipment, in
combination with the ability to provide nationwide, on-site technical support
can give the Company a distinctive competitive advantage in the marketplace.
The institutional juice market in the United States is estimated at $3
billion and is highly competitive. Competition in this market is fragmented and
diverse, ranging from small independent juice manufacturers, distributors, and
brokers to major economic concerns such as Sunkist(TM). There is no dominate
entity that controls the juice market. The joint venture will compete in this
market place with shelf stable juice products that will be dispensed with a unit
specifically designed to meet the needs of the health care industry. The Company
believes that Virtual Squeeze(TM) is the only dispenser specifically designed
for bag in the box juice products.
HUMAN RESOURCES
As of July 24, 1998, the Company had 44 full-time employees, equivalent
to the same time last year. The Company has cash and stock option incentive plan
programs for substantially all full-time employees. In fiscal year 1997, the
Company has increased the employee option program to provide greater degrees of
employee ownership and to help ensure a stable workforce. The employees are not
represented by a union. Temporary workers are utilized in the production
process. A highly qualified labor pool exists in the immediate geographic area
should the Company need to expand its workforce.
PATENTS
The Company has consistently sought patent protection for its
proprietary technology and products. To date, 23 patents are outstanding and an
additional 4 are pending. Patent coverage of our dispensing technology is broad.
Research and development expenditures for the fiscal years 1998, 1997, and 1996
were $691,000, $629,000, and $714,000, respectively.
-4-
<PAGE>
ENTITIES & FISCAL YEAR
"ABC" is comprised of three legal entities: the parent (public
entity)--ABC Dispensing Technologies, Inc., (a Florida corporation)
(NASDAQ:ABCC), the operating subsidiary--ABC Dispensing Technologies, Inc. (an
Ohio corporation), and a second subsidiary that holds the patents--ABC Tech Corp
(an Ohio corporation).
"Fiscal Year 1998" ended April 25, 1998. The Company has adopted a
fiscal year ending on the Saturday closest to April 30. Each quarter consists of
13 weeks.
ITEM 2. PROPERTIES
- ------------------
The Company owns a single floor building of approximately 18,400 square
feet of office, laboratory, and production space located in Akron, Ohio. The
property is encumbered by a mortgage in favor of a institutional lender. The
principal balance of the mortgage was $257,000 as of April 25, 1998.
The Company leases additional laboratory and warehouse space from
independent third parties on an as needed basis.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Company presently is not involved in any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
- -------------------------------------------------------------------------
MATTERS
- -------
A. PRICE RANGE OF COMMON STOCK
---------------------------
The Company's common stock trades on The Nasdaq SmallCap Market under
the symbol ABCC. The table below shows the range of bid prices of the common
stock for the last two years as reported by NASDAQ reflecting inter-dealer
prices, without retail mark-up or markdowns, or commissions (and may not
necessarily represent actual transactions).
<TABLE>
<CAPTION>
Common Stock (ABCC):
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended April 25, 1998 Prices: High Bid Low Bid
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
01/25/98 - 04/25/98 (Fourth Quarter) $1 - 5/8 $ 7/8
10/26/97 - 01/24/98 (Third Quarter) 1 - 1/4 17/32
07/27/97 - 10/25/97 (Second Quarter) 1 - 11/32 23/32
04/27/97 - 07/26/97 (First Quarter) 1 - 3/16 25/32
Common Stock (ABCC):
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended April 26, 1997 Prices: High Bid Low Bid
- ------------------------------------------------------------------------------------------------------------------------------------
01/26/97 - 04/26/97 (Fourth Quarter) $2 - 1/4 $1 - 1/16
10/27/96 - 01/25/97 (Third Quarter) 2 - 1/16 11/16
07/28/96 - 10/26/96 (Second Quarter) 1 - 7/16 13/16
04/28/96 - 07/27/96 (First Quarter) 2 - 1/8 1 - 3/16
</TABLE>
B. APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
---------------------------------------------
Approximate Number of
Record Holders
Title of Class as of July 15, 1998
-------------- ---------------------
Common Stock, $.01 par value 1,100
-5-
<PAGE>
C. DIVIDENDS
---------
The Company has never paid a dividend on common stock and has no
current plans to do so. Future policy for common stock dividends will be
determined by the Board of Directors based on the Company's earnings, financial
condition, capital requirements, and other existing conditions.
On October 7, 1997, the Company paid its February 1 and August 1, 1997 Preferred
Stock dividend requirements by issuing common stock. The total number of common
shares issued for the February 1, 1997 dividend was 61,240. The shares were
valued at $1.094 per share. The total number of common shares issued for the
August 1, 1997 dividend was 179,828. The shares were valued at $0.844 per share.
On April 15, 1998, the Company paid its February 1, 1998 Preferred Stock
dividend requirement by issuing common stock. The total number of common shares
issued for the February 1, 1998 dividend was 228,636. The shares were valued at
$0.733 per share.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED APRIL 25, APRIL 26, APRIL 27, APRIL 29, APRIL 30,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES (a) $5,299,000 $3,073,000 $5,312,000 $3,359,000 $5,010,000
NET LOSS $(2,028,000) $(2,968,000) $(1,324,000) $(2,681,000) $(1,378,000)
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 17,230,000 17,074,000 16,414,000 15,669,000 14,155,000
NET LOSS PER SHARE -
BASIC AND DILUTED $(0.13) $(0.18) $(0.08) $(0.17) $(0.10)
TOTAL ASSETS $3,294,000 $3,350,000 $4,020,000 $3,719,000 $4,190,000
LONG-TERM OBLIGATIONS $257,000 $283,000 $294,000 $278,000 $-0-
STOCKHOLDERS' EQUITY $1,003,000 $1,635,000 $1,085,000 $515,000 $2,194,000
DIVIDENDS DECLARED
PER SHARE OF COMMON STOCK $-0- $-0- $-0- $-0- $-0-
RESEARCH & DEVELOPMENT (a) $691,000 $629,000 $714,000 $606,000 $386,000
</TABLE>
(a) Research & Development costs for fiscal years 1994, 1995, 1996, and
1997 include costs subject to reimbursement under various agreements.
The amounts earned under these agreements are included in revenues for
the respective years.
-6-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The Company has continued its new focus on project commercialization. No longer
are resources committed to new projects without financial commitment from the
customer. Development projects are now being limited to concepts that are
financially supported by the requesting organizations. The Company's focus can
best be illustrated by its efforts to achieve successful market acceptance of
its current development projects.
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997
The net loss for FY 1998 was $2,028,000, a decrease of $940,000, or 31%
over the net loss of $2,968,000 for FY 1997. The net loss for the fourth quarter
of fiscal 1998 decreased $323,000, or 24.5%, to $995,000, from the $1,318,000
net loss for the fourth quarter of the prior year.
While revenues have increased significantly (see below), losses have
not decreased proportionately. This is due to $321,000 of costs being deferred
into future periods in October 1996. The deferred costs relate to the adaptation
of the ROYAL MATCH(TM) tint dispensing system to meet the specific needs of The
Home Depot. Had the costs not been deferred, the net loss for fiscal 1998 and
fiscal 1997 would have been $1,858,000 and $3,138,000, respectively. The
decrease in net loss for fiscal 1998 would have been $1,280,000, or 40.7%, from
the same period in the prior year. The costs were amortized over a period of 11
months and were fully amortized as of October 25, 1997.
Revenues FY 1998 FY 1997
Equipment sales $ 4,694,000 $ 2,427,000
Service revenues 605,000 646,000
----------- -----------
Total $ 5,299,000 $ 3,073,000
=========== ===========
Equipment sales for fiscal 1998 increased $2,267,000, or 93.4%, over
fiscal 1997. The increase is due to $2,609,000 in increased sales of paint
colorant dispensers which were partially offset by decreases of $246,000 in
beverage equipment sales and $96,000 in industrial equipment sales and project
development revenues. Equipment sales for the fourth quarter of fiscal 1998
increased $338,000, or 79.3%, over the fourth quarter of fiscal 1997. This
increase is due to $352,000 in increased sales of paint colorant dispensers
which was partially offset by a $14,000 decrease in beverage equipment sales.
The increase in sales of paint colorant dispensers is due to the
Company not having any significant orders for paint colorant dispensers from the
middle of the second quarter to the end 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 fiscal 1998 were down $41,000, or 6.3% from fiscal
1997. The decrease was due to a $203,000 decrease in sales of replacement parts
which was partially offset by a $162,000 increase in service labor revenues.
Service revenues for the fourth quarter of fiscal 1998 increased $73,000, or
34.6% from same period of the prior year. The increase was due to a $85,000
increase in service labor revenues which was partially offset by a $12,000
decrease in sales of replacement parts. Sales of replacement parts decreased due
to discontinuation of the TINT-A-COLOR(TM) paint colorant dispensers and the
Omnitron(TM) soft drink dispensers. Additionally, Royal Match(TM) paint
dispensers sold during fiscal 1998 were under warranty throughout the year.
Service labor revenues increased due to installation charges and service
contract revenues on ROYAL MATCH(TM) paint colorant dispensers.
-7-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Gross Margins FY 1998 FY 1997
Equipment 30.5% 29.9%
===== ====
Service 5.5% (41.1)%
===== ====
Total 27.6% 15.0%
===== ====
For fiscal 1998, gross margin as a percentage of sales on equipment
increased 0.6 points over fiscal 1997. For the fourth quarter of fiscal 1998,
gross margin as a percentage of sales on equipment increased 11.6 points over
the fourth quarter of fiscal 1998. The increases resulted from higher margins
obtained from sales of the new Royal Match(TM) paint dispensers and the
Company's withdrawal from the soft drink market.
For fiscal 1998, gross margin as a percentage of service revenues
increased 46.6 points over fiscal 1997. For the fourth quarter of fiscal 1998,
gross margin as a percentage of service revenues increased 71.5 points over the
fourth quarter of fiscal 1997. These increases are primarily due to increased
equipment installation charges and service contract revenues on ROYAL MATCH(TM)
paint colorant dispensers, 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
General and administrative expenses decreased $255,000, or 12.7%, to
$1,742,000 in fiscal 1998, down from $1,997,000 for the same period of the prior
year. Severance expense of $221,000 which was incurred in fiscal 1997 and a
decrease in bad debt expense of $96,000 in fiscal 1998 are primarily responsible
for the decrease. These decreases were partially offset by an increase in
payroll expense of $60,000 during fiscal 1998.
For the fourth quarter of fiscal 1998, general and administrative expenses
decreased $38,000, or 5.3%, to $678,000, down from $716,000 for the fourth
quarter of fiscal 1997. The decrease is comprised of individually immaterial
increases and decreases in various expenses which aggregate to a $38,000
decrease.
Selling and marketing expenses
For fiscal 1998, selling and marketing expenses decreased $244,000, or 34.8%, to
$456,000, down from $700,000 for 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 allocation of sales and merchandising payroll
expense to research and development and general and administrative expense was
responsible for $148,000 of the decrease. The decreased selling and marketing
activity also resulted in a decrease of $44,000 in travel expense and an
aggregate decrease of $52,000 for fees, subscriptions, promotions and literature
during fiscal 1998, as compared to the same period of the prior year.
Selling and marketing expense decreased $111,000, or 48.3%, to $119,000 in the
fourth quarter of fiscal 1998, down from $230,000 for the same period of the
prior year. A decrease in marketing activity led to decreased payroll expense of
$73,000, decreased travel expense of $16,000, and an aggregate decrease of
$52,000 for fees, subscriptions, promotions and literature as compared to the
same period of the prior year
Research and development
For fiscal 1998 research and development expenses increased $62,000, or
9.8%, to $691,000, up from $629,000 for fiscal 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.
For the fourth quarter of fiscal 1998, research and development
expenses decreased $91,000, or 31.9%, to $194,000, down from $285,000 in fiscal
1997. The decrease is 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.
-8-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
Interest expense
For fiscal 1998, interest expense increased $22,000, or 15.9%, to $160,000, up
from $138,000 in fiscal 1997. The increase is due to higher debt balances in
fiscal 1998.
Equity in loss of joint venture
The Company's equity in the loss of the Virtual Squeeze Joint Venture was
$67,000 for fiscal 1998. Fiscal 1998 was the first year of operations for the
joint venture. The loss is attributable to the start up costs and marketing
expenses for the joint venture.
Other income
Other income decreased $142,000, or 85%, to $25,000 in fiscal 1998, down from
$167,000 for fiscal 1997. The decrease is primarily attributable to the reversal
of estimated liabilities and related expenses of the securities litigation
settlement in fiscal 1997. The underlying matters were ultimately settled
without cost to the Company in the prior year.
FISCAL 1997 COMPARED TO FISCAL 1996
The net loss for FY 1997 was $2,968,000, an increase of $1,644,000, or 124% over
the net loss of $1,324,000 for FY 1996. The Company's consolidated results of
operations for the two years are summarized below:
Revenues FY 1997 FY 1996
Equipment sales $ 2,427,000 $ 4,258,000
Service revenues 646,000 799,000
Royalties - 255,000
----------- -----------
Total $ 3,073,000 $ 5,312,000
=========== ===========
Equipment sales for FY 1997 were $2,427,000, a decrease of $1,831,000,
or 43%, from FY 1996 equipment sales of $4,258,000. The decrease was primarily
due to a $1,504,000 decline in sales of paint colorant dispensers to The
Sherwin-Williams Company. The production and shipment of equipment to fill an
order from Sherwin-Williams was completed during the second quarter of FY 1997
and no additional orders for equipment were received from Sherwin-Williams.
Sales of beverage equipment decreased $227,000 due to the Company's
withdrawal from the soft drink market in FY 1997. Additionally, project
development revenues decreased in FY 1997 and are responsible for the remaining
$100,000 decrease. The Company's new strategy to develop only products for which
there is a known market need led to the decrease in project development
revenues. Service revenues for FY 1997 were $646,000, a decrease of $153,000, or
19.1%, from FY 1996 service revenues of $799,000. The decrease was due to
decreased installation revenue from Sherwin-Williams as their order was
completed in the second quarter of FY 1997, and decreased service revenue on
soft drink equipment as the Company withdrew from the soft drink market in FY
1997.
Royalty revenues for FY 1997 decreased $255,000, or 100%, from FY 1996.
The absence of royalty revenues in FY 1997 was due to the termination of the
Company's contractual relationship with Sherwin-Williams.
Gross Margins FY 1997 FY 1996
Equipment 29.9% 30.8%
==== ====
Service (41.1)% (20.7)%
==== ====
Total 15.0% 23.0%
==== ====
In FY 1997, gross margin as a percentage of sales on equipment
decreased 0.9 points to 29.9%, down from 30.8% in FY 1996. The decrease was due
to a change 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.
-9-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Gross margin as a percentage of service revenue in FY 1997 decreased
20.4 points to a negative 41.1%, down from a negative 20.7% in FY 1996. The
decrease was primarily due to the Company terminating its relationship with
Sherwin-Williams and the Company's withdrawal from the soft drink market.
Service expenses did not decrease with the decline in revenues. Additionally,
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
General and administrative expenses increased $891,000, or 80.6%, to
$1,997,000 in FY 1997, up from $1,106,000 in FY 1996. The increase was
attributable to $509,000 in management reorganization and related payroll costs;
a $191,000 increase in amortization of deferred charges during fiscal 1997; a
$93,000 increase in bad debt expense; a $61,000 increase in payroll expense; and
$37,000 of individually immaterial increases in various expenses. The management
reorganization was completed in fiscal 1997.
Selling and marketing expenses
Selling and marketing expenses increased $160,000 or 29.6%, to $700,000
in FY 1997, up from $540,000 in FY 1996. Selling & marketing expenses increased
due to a larger sales force in the current year, and increased expenses related
to product presentations at trade shows and to industry councils.
Research and development
Research and development expenses decreased $85,000 or 11.9%, to
$629,000 in FY 1997, down from $714,000 in FY 1996. The decrease was due to
fewer product development projects in FY 1997 than in the prior year.
Management's strategy is to only pursue development projects when there is a
known market need for the product and there is a customer who has committed to
purchase the product. Management believes that this strategy will increase the
commercial viability of the project.
Other income (expense)
Other income (net) decreased $210,000, or 62.9%, in FY 1997 to
$124,000, from $334,000 in Fiscal 1996. The decrease was primarily attributable
to the reversal of $95,000 of securities and contract litigation fees in FY
1997, versus a $366,000 reversal in FY 1996 (see note 13 to the financial
statements). Additionally, investment income decreased $74,000 from the prior
year as most of the Company's investments were liquidated. These decreases were
offset by individually immaterial increases in other revenues. The funds
received from liquidating investments were used for continuing operations. The
Company's operating results may fluctuate in the future as a result of a number
of factors, including changes in pricing policies by the Company's suppliers,
the market acceptance of new and enhanced versions of the Company's products,
and general economic conditions.
FISCAL 1996 COMPARED TO FISCAL 1995
The net loss for FY 1996 was $1,324,000, down $1,357,000, or 50.6%,
from the $2,681,000 net loss for FY 1995. The Company's consolidated results of
operations for the two years are summarized below:
Revenues FY 1996 FY 1995
Equipment sales $4,258,000 $2,525,000
Service revenues 799,000 683,000
Royalties 255,000 151,000
----------- -----------
Total $5,312,000 $3,359,000
=========== ===========
Equipment sales increased $1,733,000, or 68.6%, to $4,258,000 in FY
1996, up from $2,525,000 in FY 1995. The increase was due to $1,710,000 in
increased sales of paint-tint dispensers to The Sherwin-Williams Company and an
increase of $23,000 in project development revenues during FY 1996.
-10-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Service revenues for FY 1996 were $799,000, an increase of $116,000, or
17.0%, from FY 1995 service revenues of $683,000. The increase was due to
service and installation for new equipment sales to Sherwin-Williams.
In FY 1996, royalty revenue increased $104,000, or 68.8%, to $255,000,
up from $151,000 in FY 1995. Increased sales of paint-tint dispensers to The
Sherwin-Williams Company caused the increase.
Gross margins FY 1996 FY 1995
Equipment 30.8% 27.2%
===== =====
Service (20.7)% (10.4)%
===== =====
Total 23.0% 19.6%
===== =====
In FY 1996, gross margin as a percentage of sales on equipment
increased 3.6 points to 30.8%, up from 27.2% in FY 1995. The variance was caused
by a $150,000 write-off of obsolete inventory in FY 1995 that exceeded the FY
1996 write-off by $92,000. The additional write-off in FY 1995 lowered the gross
margin from 30.8% to 27.2%.
Gross margin as a percentage of service revenue in FY 1996 decreased
10.3 points to a negative 20.7%, down from a negative 10.4% in FY 1995. The
decrease was due to increased travel and administrative expenses associated with
installation and service of new equipment.
General and administrative
General and administrative expenses increased $57,000, or 5.4%, to $1,106,000 in
FY 1996, up from $1,049,000 in FY 1995. The increase was due to increased
payroll expense and supplemental legal counsel for public company matters.
Selling and Marketing
Selling and marketing expenses increased $134,000, or 33%, to $540,000
in FY 1996, up from $406,000 in FY 1995. The increase was caused by additional
international marketing efforts for both paint and beverage products.
Research and development
Research and development expenses increased $108,000, or 17.8%, to
$714,000 in FY 1996, up from $606,000 in FY 1995. The change resulted from
increased new product development activity. Numerous dispensing applications
were under development during FY 1996, including: the institutional juice
dispenser, a chemical coatings dispenser, and a cement additives dispenser.
Securities and contract litigation
The distribution of the Class Action settlement fund (see Note 14 to
the Consolidated Financial Statements) and the final valuation of the Company's
contributed common stock to the fund allowed the Company to lower the accrual
for settlement costs and legal expenses by $366,000. The Company had originally
accrued $1,000,000 in FY 1995 to record estimated remaining settlement costs and
legal fees. The remaining accrual at April 27, 1996, was $95,000.
Interest expense
Interest expense was $134,000 in FY 1996, up $106,000, or 378.6%, from
the FY 1995 interest expense of $28,000. The increase is due to a full year of
interest on the building mortgage, an increased average balance on the line-of
credit, and an increase of $500,000 in long-term debt during FY 1996.
-11-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance decreased to $351,000 as of April 25, 1998
from $488,000 at April 27, 1996. Operations for fiscal 1998 used cash of
$1,594,000 which resulted from a net loss of $2,028,000, and net increases in
operating assets of $165,000, offset by depreciation and amortization and
non-cash charges of $496,000, and net increases in net operating liabilities of
$103,000. Net cash used by investing activities was $293,000 which included net
advances of $255,000 to the Virtual Squeeze Joint Venture and $33,000 in
additions to the Company's patent portfolio. Net cash provided by financing
activities was $1,793,000. The cash provided by financing activities is
attributable to $1,617,000 in private placements of Preferred Stock and notes
payable and $199,000 in advances from the Company's Line of Credit. 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 May 1, 1998, the
Company issued 267 shares of Series A Preferred Stock in exchange for $12,500
cash per share, generating $3,338,000 cash (see footnote 9).
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 April
25, 1998, the Company has issued notes in the aggregate of $335,000.
The Company maintains an accounts receivable credit line to meet
short-term cash requirements (see note 5 to financial statements). 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 July 15,
1998, $178,000 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 plans to seek extension of the credit line
every 12 months until the Company's cash flows from operations are sufficient to
satisfy its short-term cash requirements. If the Company is unable to extend the
credit line maturity date, it will be forced to more heavily rely on the
proceeds of the debt and/or equity placements.
The Company intends to satisfy its short-term (i.e., the next 12-month
period) capital requirements using advances from its line of credit and through
the proceeds of offerings of its equity securities. The Company is currently
attempting to raise at least $2,000,000 through an offering of its Convertible
Preferred Stock. The exact terms of this offering have not been finalized.
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 3 to the Financial Statements).
-12-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
1998 AUDIT
Grant Thornton, LLP has audited the consolidated balance sheet of the
Company as of April 25, 1998, and the related consolidated statement of
operations, cash flows and stockholders' equity for the year ended April 25,
1998. In its report of June 30, 1998, to the Board of Directors and to the
Company it is stated that the financial statements have been prepared assuming
that the Company will continue as a going concern. However, their report states
that the "history of operating losses and limited capital resources raise
substantial doubt" about the Company's ability to continue as a going concern
(see Note 3 to the Consolidated Financial Statements).
IMPACT OF YEAR 2000
The year 2000 issue pertains to computer programs that were written
using two digits rather than four to define the applicable year. As a result,
those computer programs have time-sensitive software that recognize the year
"00" as the year 1900 rather than the year 2000. This could cause a system
failure or miscalculations causing disruptions of operations.
During fiscal 1998, the Company updated its critical operational
software to make the software "2000 compliant." The cost to update the Company's
software approximated $3,000. The Company believes that the updates to its
existing software have eliminated any operational problems that may have
occurred due to the year 2000 issue. The Company does not believe that it will
experience any difficulties arising from customers or vendors who have not
updated their software to be 2000 compliant.
-13-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES PAGE NO.
- -------------------------------------------------------- --------
<S> <C>
REPORTS OF INDEPENDENT AUDITORS 15-16
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of April 25, 1998 and April 26, 1997 17
Consolidated Statement of Operations for the Years ended April 25, 1998,
and April 26, 1997, and April 27, 1996 18
Consolidated Statement of Cash Flows for the Years ended April 25, 1998,
and April 26, 1997, and April 27, 1996 19
Consolidated Statement of Stockholders' Equity for the Years ended
April 25, 1998, and April 26, 1997, and April 27, 1996 20
Notes to Consolidated Financial Statements 21-30
SUPPLEMENTARY DATA:
Schedule II-Valuation and Qualifying Accounts 31
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and
therefore have been omitted.
</TABLE>
-14-
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
ABC Dispensing Technologies, Inc.
We have audited the accompanying consolidated balance sheets of ABC Dispensing
Technologies, Inc. as of April 25, 1998 and April 26, 1997, and the related
consolidated statements of operations, cash flows and stockholders' equity for
the years then ended. Our audits also included the financial statement schedule
listed in the index at Item 8. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ABC
Dispensing Technologies, Inc. at April 25, 1998 and April 26, 1997, and the
consolidated results of its operations and its cash flows for the years then
ended, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
The accompanying consolidated financial statements and schedule have been
prepared assuming that the Company will continue as a going concern. As more
fully described in Note 3, the Company's history of operating losses and limited
capital resources raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 3. The consolidated financial statements and schedule do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
might result from the outcome of this uncertainty.
GRANT THORNTON LLP
Cleveland, Ohio
June 30, 1998
(Except for note 15,
as to which the date
is July 9, 1998)
-15-
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
ABC Dispensing Technologies, Inc.
We have audited the accompanying consolidated statements of operations, cash
flows and stockholders' equity of ABC Dispensing Technologies, Inc. (name
changed from American Business Computers Corporation) for the fiscal year ended
April 27, 1996. Our audit also included the financial statement schedule listed
in the index at Item 14(a) for the fiscal year ended April 27, 1996. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of ABC Dispensing Technologies, Inc. for the fiscal year ended
April 27, 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule for the fiscal
year ended April 27, 1996, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
The accompanying consolidated financial statements for the fiscal year ended
April 27, 1996, have been prepared assuming that the Company will continue as a
going concern. As more fully described in Note 3, the Company's history of
operating losses and limited capital resources raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 3. The consolidated financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability of assets or the amounts of liabilities that might result from
the outcome of this uncertainty.
ERNST & YOUNG LLP
Akron, Ohio
June 8, 1996
-16-
<PAGE>
<TABLE>
<CAPTION>
ABC DISPENSING TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS April 25, 1998 April 26, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 351,000 $ 445,000
Accounts receivable, less allowance for doubtful accounts
of $84,000 in 1998 and $191,000 in 1997 708,000 327,000
Inventories (Note 4) 1,290,000 1,431,000
-------------- ---------------
Total current assets 2,349,000 2,203,000
Property, plant, and equipment (Note 5 and 11) 644,000 704,000
Other assets:
Investment in Joint Venture (Note 14) 202,000 -
Intangible assets, less accumulated amortization of
$633,000 in 1998 and $552,000 in 1997 29,000 102,000
Patents pending and deferred charges 70,000 341,000
-------------- ---------------
301,000 443,000
-------------- ---------------
Total Assets $ 3,294,000 $ 3,350,000
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 36,000 $ 36,000
Short-term notes payable (Note 5) 300,000 -
Line of credit (Note 5) 201,000 2,000
Accounts payable 649,000 877,000
Accrued liabilities:
Accrued interest 22,000 -
Employee compensation and benefits 199,000 224,000
Warranty reserve 169,000 88,000
Other 197,000 177,000
Deferred income 261,000 28,000
-------------- ---------------
Total current liabilities 2,034,000 1,432,000
Long-term debt (Note 5) 257,000 283,000
Stockholders' equity (Notes 7, 9):
Preferred Stock - Series A, 9% cumulative;
authorized 480 shares 374 and 271 shares issued
and outstanding in 1998 and 1997, respectively 4,675,000 3,388,000
Common Stock, $.01 par value; authorized 50,000,000
shares; 17,591,498 and 17,114,279 shares issued 1998
and 1997, respectively 176,000 171,000
Additional paid-in capital ($37,000 restricted for cost of
treasury shares held in 1997) 19,461,000 19,014,000
Retained earnings (deficiency) ( 23,264,000) ( 20,850,000)
-------------- ---------------
1,048,000 1,723,000
Less notes receivable - stockholders ( 45,000) ( 51,000)
Less cost of treasury stock, 35,000 shares - ( 37,000)
-------------- ---------------
Total Stockholders' Equity 1,003,000 1,635,000
-------------- ---------------
Total Liabilities and Stockholders' Equity $ 3,294,000 $ 3,350,000
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
-17-
<PAGE>
<TABLE>
<CAPTION>
ABC DISPENSING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Years Ended April 25, April 26, April 27,
1998 1997 1996
-----------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Equipment Sales $ 4,694,000 $ 2,427,000 $ 4,258,000
Service revenues 605,000 646,000 799,000
Royalties - - 255,000
----------------- --------------- ---------------
5,299,000 3,073,000 5,312,000
Cost and expenses:
Cost of equipment sold 3,604,000 1,848,000 3,060,000
Service expenses 632,000 991,000 1,550,000
General and administrative 1,742,000 1,997,000 1,106,000
Selling and marketing 456,000 700,000 540,000
Research and development 691,000 629,000 714,000
----------------- --------------- ---------------
7,125,000 6,165,000 6,970,000
----------------- --------------- ---------------
Loss from operations ( 1,826,000) ( 3,092,000) ( 1,658,000)
Other income (expense)
Litigation fees and settlement (Note 13) - 95,000 366,000
Interest expense ( 160,000) ( 138,000) ( 134,000)
Equity in loss of joint venture ( 67,000) - -
Other, net 25,000 167,000 102,000
----------------- --------------- ---------------
( 202,000) 124,000 334,000
----------------- --------------- ---------------
Net loss $( 2,028,000) $( 2,968,000) $( 1,324,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss per share - Basic and Diluted $( 0.13) $( 0.18) $( 0.08)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
-18-
<PAGE>
<TABLE>
<CAPTION>
ABC DISPENSING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended April 25, April 26, April 27,
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
- ---------------------
Net loss $( 2,028,000) $( 2,968,000) $( 1,324,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Deprecation and amortization 386,000 313,000 110,000
Loss on disposal of asset 6,000 - -
Loss on equity investment in Joint Venture 67,000
Treasury stock issued as compensation
for legal services 37,000 - -
Changes in operating assets and liabilities:
Receivables ( 381,000) 437,000 ( 398,000)
Inventories 141,000 272,000 ( 484,000)
Other assets 75,000 ( 307,000) ( 283,000)
Accounts payable ( 228,000) 2,000 421,000
Accrued liabilities 98,000 ( 428,000) ( 869,000)
Deferred income 233,000 ( 5,000) 13,000
------------ -------------- ------------
Total adjustments 434,000 284,000 (1,490,000)
------------ -------------- ------------
Net cash used in operating activities ( 1,594,000) ( 2,684,000) ( 2,814,000)
Investing activities:
- ---------------------
Purchases of property, plant, and equipment ( 6,000) ( 69,000) ( 16,000)
Additions to patent ( 33,000) ( 4,000) -
Proceeds from sale of equipment 1,000 - -
Investment in Joint Venture ( 255,000) ( 14,000) -
------------ -------------- ------------
Net cash used in investing activities ( 293,000) ( 87,000) ( 16,000)
Financing activities:
- ---------------------
Proceeds from Line of Credit - Net 199,000 - -
Proceeds from private placement of
Stock - Net 1,282,000 3,388,000 926,000
Proceeds from private placement of
notes payable 335,000 29,000 1,267,000
Private placement costs - ( 73,000)
Proceeds from issuance of common stock - 140,000 -
Repayment of notes payable and loan costs ( 37,000) ( 820,000) ( 684,000)
Proceeds from collection of stockholders receivable 6,000 95,000
Proceeds from stock issued for exercise of stock
options and warrants 8,000 6,000 500,000
Purchase of treasury shares - ( 37,000) -
------------ -------------- ------------
Net cash provided by financing activities 1,793,000 2,728,000 2,009,000
------------ -------------- ------------
Net decrease in cash and cash equivalents ( 94,000) ( 43,000) ( 821,000)
Cash and cash equivalents at beginning of year 445,000 488,000 1,309,000
------------ -------------- ------------
Cash and cash equivalents at end of year $ 351,000 $ 445,000 $ 488,000
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
-19-
<PAGE>
<TABLE>
<CAPTION>
ABC DISPENSING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended April 25, 1998, April 26, 1997, and April 27, 1996
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>
Balance at April 29, 1995 15,996,116 $160,000 $17,070,000 $(16,558,000) $(157,000)
Private placements 569,667 6,000 909,000
Stock issued to settle litigation 150,000 1,000 466,000
Exercise of warrants 214,000 2,000 426,000
Exercise of stock options 54,377 1,000 71,000
Collection on notes receivable-
stockholders 11,000
Net loss (1,324,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at April 27, 1996 16,984,160 $170,000 $18,942,000 $(17,882,000) $(146,000)
Preferred Stock private
placement (Note 9) $3,388,000
Private placement costs (73,000)
Issuance of Stock to Mezzanine
Financial Fund, L.P. (Note 5) 125,000 1,000 139,000
Exercise of Stock Options 5,119 6,000
Collection on notes receivable-
stockholders 95,000
Net loss (2,968,000)
Treasury Stock $(37,000)
- ------------------------------------------------------------------------------------------------------------------------------------
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 9) $1,287,000
Preferred Stock Dividend
(Note 9) 469,704 5,000 381,000 (386,000)
Warrants Outstanding -
Original Issue Discount (Note 5) 63,000
Exercise of Stock Options 7,515 8,000
Commissions on Preferred Stock (5,000)
Collection on notes receivable-
stockholders 6,000
Net loss (2,028,000)
Issuance of Treasury Stock
(35,000 shares) issued for
legal services received 37,000
Balance at April 25, 1998 17,591,498 $176,000 $4,675,000 $19,461,000 $(23,264,000) $(45,000) $ 0
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
-20-
<PAGE>
ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business description
ABC Dispensing Technologies, Inc. (the "Company"), a Florida Corporation,
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
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. Fiscal 1998, fiscal 1997
and fiscal 1996 consisted of fifty-two weeks ending on April 25, April 26, and
April 27, respectively. References to the years 1998, 1997 and 1996 refer to
fiscal years ended April 25, 1998; April 26, 1997; and April 27, 1996
respectively.
Consolidation - The consolidated financial statements include the accounts of
the Company and its subsidiaries, ABC Dispensing Technologies, Inc. (an Ohio
Corporation) and ABC Tech Corp. Significant intercompany transactions and
balances have been eliminated in consolidation.
Loss Per Share - In 1997, the Financial Accounting Standards Board issued
Statement (SFAS) No. 128, Earnings per share. SFAS No. 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. All loss per share amounts for all periods have been
presented, and where appropriate, restated to conform to the SFAS No. 128
requirements.
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 Flow Statements - The Company considers all highly liquid investments with
a maturity of three months or less when purchased to be cash equivalents. For
the years ended April 25, 1998, April 26, 1997, and April 27, 1996, interest
expense approximated interest paid by the Company.
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 April 25, 1998.
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 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.
-21-
<PAGE>
ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Significant accounting policies (continued)
Major Customer - Revenues from The Home Depot, Inc. were 89% and 3% of total
revenues for the years ended April 25, 1998 and April 26, 1997, respectively.
Revenues from The Sherwin-Williams Company were 1%, 54%, and 72% of total
revenues for the years ended April 25, 1998, April 26, 1997 and April 27, 1996,
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 (SFAS) No. 123 - Accounting for Stock Based Compensation
are included in note 7.
Newly Issued Accounting Standards - During the first quarter of 1998, the
Financial Accounting Standards Board issued SFAS No. 130, Reporting
Comprehensive Income, and SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. These standards are effective for fiscal
years beginning after December 15, 1997. The Company believes that adoption of
these standards will not have a material impact on the Company's financial
disclosures.
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 April 25, 1998 has an accumulated retained
earnings deficiency of $23,264,000. The Company had negative cash flow from
operating activities of $1,594,000, $2,684,000 and $2,814,000 for the years
ended April 25, 1998, April 26, 1997, and April 27, 1996, respectively. Cash and
cash equivalents declined from $1,309,000 at the beginning of fiscal 1996 to
$351,000 at April 25, 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 $5,590,000 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. 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.
The Company intends to satisfy its short-term (i.e., the next 12-month period)
capital requirements using advances from its line of credit and through the
proceeds of offerings of its equity securities. The Company is currently
attempting to raise at least $2,000,000 through an offering of its Convertible
Preferred Stock. The exact terms of this offering have not been finalized.
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.
-22-
<PAGE>
ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Inventories
At April 25, 1998 and April 26, 1997, inventories consisted of the following:
1998 1997
----------------- -------------
Raw Materials $ 785,000 $ 927,000
Work-in-process 293,000 118,000
Finished goods 212,000 386,000
================= =============
$1,290,000 $1,431,000
================= =============
The above amounts are net of obsolescence reserves of $909,000 and $838,000 at
1998 and 1997, respectively.
5. Financing arrangements
At April 25, 1998 and April 26, 1997, long-term debt consisted of the following:
1998 1997
-------------- --------------
Note payable to bank $257,000 $268,000
Other 36,000 51,000
-------------- --------------
293,000 319,000
Less amounts due within one year ( 36,000) ( 36,000)
============== ==============
Total long-term debt $257,000 $283,000
============== ==============
The note payable to bank, which is secured by the Company's headquarters
facility, has an adjustable interest rate (9.03% at April 25, 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 a final
payment of $143,000 due October 1, 2005. At April 25, 1998, the collateralizing
facility and improvements thereto have a net book value of $528,000.
Maturities of long-term debt for the five years subsequent to April 25, 1998 are
as follows: 1999--$36,000; 2000--$24,000; 2001--$20,000; 2002--$19,000 and
2003--$19,000.
Mezzanine Note
On January 17, 1996, the Company obtained a $500,000 working capital
asset-secured loan from the Mezzanine Financial Fund, L.P. ("Mezzanine").
Interest is due monthly at the rate of 18% per annum. In consideration for
providing the loan, Mezzanine received a five (5) year warrant to acquire 58,910
shares of common stock at a $2.04 per share. The Company also paid a closing fee
equal to 2% of the amount of the loan and reimbursed Mezzanine for expenses
associated with the making of the loan. On July 24, 1996, the Company
distributed 125,000 shares of common stock to Mezzanine. Mezzanine subsequently
sold 90,000 of the shares to satisfy interest charges from April through
September, 1996, prepayment penalties and other fees. On September 24, 1996, the
Company repaid the $500,000 principal balance of the loan in full. On December
31, 1996, the loan agreement was terminated and Mezzanine returned 35,000 shares
of Common Stock to the Company.
-23-
<PAGE>
ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Financing arrangements (continued)
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 April 25, 1998,
the Company has issued notes in the aggregate of $335,000. 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 $63,000 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 $35,000 as of April 25, 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 April 25, 1998, $201,000 was outstanding under the line of credit and due to
formula restrictions, no funds were available to be advanced thereunder. At
April 26, 1997, $2,000 was outstanding and due to formula restrictions, only
$108,000 of the line of credit was available. The line of credit bears an
interest rate of prime plus four points (12.50% at April 25, 1998 and April 26,
1997). The weighted-average interest rate for the years ended April 25, 1998 and
April 26, 1997 was 12.50% and 12.25%, respectively. The credit line matures
December 31, 1998. The Company plans to seek extension of the credit line every
12 months until the Company's cash flows from operations are sufficient to
satisfy its short-term cash requirements.
6. 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 taxes at April 25, 1998 and
April 26, 1997 are as follows:
1998 1997
------------ -----------
Net operating loss carryforwards $ 7,410,000 $ 6,650,000
Inventories 422,000 413,000
Other 269,000 170,000
------------ ------------
Total deferred tax asset 8,101,000 7,233,000
Valuation allowance for deferred taxes (8,101,000) (7,233,000)
------------ ------------
Net deferred taxes $ 0 $ 0
============ ============
At April 25, 1998 and April 26, 1997, the Company had Federal net operating
loss carryforwards for tax reporting purposes of approximately $19,500,000 and
$17,500,000, respectively. The net operating loss carryforwards expire in the
years 1999 to 2013. 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.
-24-
<PAGE>
ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. 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 or 90 days after the
Employee's or Director's relationship with the Company is terminated. The
Company also may grant incentive stock warrants to purchase the common stock of
the Company to directors, officers and key employees.
A summary of the Company's stock option plans and employee stock warrants, and
related information for the years ended April 25, 1998, April 26, 1997, and
April 27, 1996, is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------- ------------------------ -------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise price Shares Exercise price Shares Exercise price
--------- -------------- -------- -------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year 1,518,323 $ 1.68 510,966 $ 2.46 411,941 $ 1.81
Granted 611,000 $ 1.07 1,029,851 $ 1.29 273,902 $ 2.89
Exercised (7,515) $ 1.00 (5,119) $ 1.10 (54,377) $ 1.32
Canceled (223,589) $ 2.05 (17,375) $ 1.50 (120,500) $ 1.75
--------- --------- --------
Outstanding - end of year 1,898,219 $ 1.39 1,518,323 $ 1.68 510,966 $ 2.46
========= ========= ========
Exercisable at end of year 1,302,219 $ 1.48 1,039,652 $ 1.92 468,814 $ 2.48
========= ========= ========
Available for grant 1,379,662 341,677 894,034
========= ======== ========
Weighted average fair value of options
granted during the year $ 0.74 $ 0.96 $ 1.95
</TABLE>
The following table summarizes information about stock options and employee
stock warrants outstanding and exercisable by price range as of April 25, 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>
$.844 - $1.63 1,688,317 4.15 $ 1.19 1,092,317 $ 1.18
$1.51 - $2.50 24,652 2.57 $ 2.19 24,652 $ 2.19
$2.51 - $3.44 185,250 1.73 $ 3.16 185,250 $ 3.16
--------- ----------
1,898,219 1,302,219
========= ==========
</TABLE>
-25-
<PAGE>
ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Common stock (continued)
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 options 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.
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 instrument 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 fiscal years ending April 25, 1998, April 26, 1997
and April 27, 1996, using the Black-Scholes option pricing model as prescribed
by SFAS 123 using the following weighted average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- --------
<S> <C> <C> <C>
Risk-free interest rate 6.37% 6.54% 6.18%
Dividend yield 0 % 0 % 0 %
Volatility 82% 79% 92%
Average life 5 years 5 Years 5 Years
</TABLE>
Using the Black-Scholes methodology, the total value of options granted during
fiscal 1998, 1997 and 1996 was $453,000 and $781,000 and 495,000, 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>
April 25, 1998 April 26, 1997 April 27, 1996
--------------- -------------- --------------
<S> <C> <C> <C>
Net Loss As reported $ (2,028,000) $ (2,968,000) $ (1,324,000)
Pro forma $ (2,285,000) $ (3,749,000) $ (1,819,000)
Basic and Diluted
Earnings per share As reported $ (0.13) $ (0.18) $ (0.08)
Pro forma $ (0.16) $ (0.22) $ (0.11)
</TABLE>
Warrants
- --------
On May 2, 1995, the Company granted an employee warrants to purchase 20,000
restricted shares of common stock 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
(See Note 5).
-26-
<PAGE>
ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Common stock (continued)
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 12 to the Consolidated Financial Statements).
On November 1, 1995, the Company issued 500,000 warrants at $3.50 per share to
Pepsi-Cola Company pursuant to the securities litigation settlement (see
footnote 12).
On December 11, 1995, the Company issued 30,000 warrants at $2.25 per share
pursuant to a sale of common stock.
On July 15, 1996, the Company granted 300,000 warrants at $1.375 per share to
Charles M. Stimac, Jr. pursuant to the terms of his employment agreement as
President of the Company. The warrants are subject to a 10 year vesting
schedule.
On September 7, 1996, the Company granted 10,000 warrants at $3.50 per share and
25,000 warrants at $1.25 per share to William L. Shanklin, consultant to the
Company.
On October 27, 1996, the Company granted 15,000 warrants at $1.25 per share to
Charles M. Stimac, Jr., President.
On January 2, 1997, the Company granted warrants to Herbert L. Luxenburg,
Director (20,000), and C. Rand Michaels, Director (20,000), at $1.25 per share.
On February 5, 1997, the Company issued 50,000 warrants at $1.25 per share to
Herbert M. Pearlman, former Director.
On March 1, 1997, the Company issued 100,000 warrants at $1.25 per share to
Charles M. Stimac, Jr., President.
On May 15, 1997, the Company granted 381,000 warrants with an exercise price of
$1.125 per share to 38 employees of the Company.
On August 22. 1997, the Company granted 15,000 warrants at $0.96 per share to an
employee of the Company.
On September 10, 1997, the Company granted 40,000 warrants to Frank E. Vaughn,
Director; 20,000 warrants to Herbert Luxenburg, Director; and 20,000 warrants to
C. Rand Michaels, Director at $0.844 per share.
On November 27, 1997, the Company granted 55,000 warrants at $1.063 per share to
an employee of the Company.
On January 29, 1998, the Company granted 40,000 warrants to Norbert Lewandowski,
Director; and 40,000 warrants to William L. Shanklin, Director at $1.125 per
share.
8. Net loss per share
The following table sets forth the computation of net loss per share - basic and
diluted:
<TABLE>
<CAPTION>
Years Ended
-------------------------------------------------------------
April 25, April 26, April 27,
1998 1997 1996
<S> <C> <C> <C>
Numerator:
Net Loss $ (2,028,000) $( 2,968,000) $ (1,324,000)
Preferred Stock Dividends (243,000) (143,000) -
---------------- --------------- -----------------
Numerator for net loss per share - loss attributable
to common shareholders $ (2,271,000) $( 3,111,000) $( 1,324,000)
Denominator:
Denominator for basic and diluted earnings
per share - weighted-average shares 17,230,000 17,074,000 16,414,000
---------------- ---------------- -----------------
Net loss per share -- basic and diluted $ (0.13) $ ( 0.18) $ ( 0.08)
================ ================ =================
</TABLE>
-27-
<PAGE>
ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. 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 3,244,719; 2,853,234 and 2,775,679 shares of Common
Stock as of April 25, 1998, April 26, 1997, and April 27, 1996, respectively.
9. 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.
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 April 25, 1998, through private placements, the Company issued 374 shares
of Series A Preferred Stock in exchange for notes or $12,500 cash per share,
generating gross proceeds of $4,675,000 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 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. A cash adjustment shall be paid for any fractional
shares that are due under the dividend calculation. 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.
On October 7, 1997, the Company paid its February 1 and August 1, 1997 Preferred
Stock dividend requirements by issuing common stock. The total number of common
shares issued for the February 1, 1997 dividend was 61,240. The shares were
valued at $1.094 per share. The total number of common shares issued for the
August 1, 1997 dividend was 179,828. The shares were valued at $0.844 per share.
On April 15, 1998, the Company paid its February 1, 1998 Preferred Stock
dividend requirement by issuing common stock. The total number of common shares
issued for the February 1, 1998 dividend was 228,636. The shares were valued at
$0.733 per share.
10. Operating leases
Aggregate rental expense for fiscal years 1998, 1997 and 1996 was $53,000,
$48,000, and $60,000, respectively.
-28-
<PAGE>
ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Property, plant and equipment
Property, plant and equipment consisted of the following at April 25, 1998 and
April 26, 1997:
1998 1997
----------- ------------
Land $ 57,000 $ 57,000
Building and building improvements 572,000 572,000
Machinery and equipment 948,000 934,000
------------ -------------
1,577,000 1 563,000
Less accumulated depreciation (933,000) (859,000)
------------ -------------
$ 644,000 $ 704,000
============ =============
12. 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 was approximately
$16,000 in 1998, $13,000 in 1997 and $9,000 in 1996. The Company has the
discretion to make a profit-sharing contribution, but no such contribution has
been made by the Company.
13. Litigation settlement/contingencies
On March 13, 1995, the Company and other defendants (officers and directors and
former directors of the Company) entered into a Stipulation of Settlement (the
"Settlement") in a class action lawsuit that provided for the settlement of the
litigation. The Settlement provided for a Gross Settlement Fund of $1,850,000,
plus 1,550,000 shares of the Company's common stock. The Company's contribution
to the Settlement Fund was $443,000 and 150,000 shares.
In February, 1996, the distribution of the Net Settlement Fund consisting of
approximately $1,082,000 cash and 1,085,000 shares of common stock of the
Company was made to 1,469 authorized claimants. There is no further action to be
taken in connection with the litigation since the Settlement has been
effectuated in accordance with the Order of the Court.
The estimated legal fees and settlement costs had been accrued for the above
action. At April 29, 1995, the accrual amounted to $1,498,000. During 1996,
$1,037,000 of this amount was settled in cash and securities, $366,000 was
reversed and credited to income and $95,000 remained in the accrual at April 26,
1996 to cover certain remaining legal fees. In 1997, the remaining $95,000
accrual was reversed and credited to income.
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.
-29-
<PAGE>
ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Joint venture agreement
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. The purpose of the
joint venture is to provide shelf-stable juice products and state-of-the-art
dispensing technology to health care facilities with high volume juice
consumption. Under the agreement, the Company will manufacture dispensing
equipment and provide technical support to the joint venture, and Damon will
manufacture fruit juice and provide marketing and administrative support for the
joint venture. The joint venture will finance the dispensing equipment through
sale/leaseback arrangements. The dispensing equipment will be placed in a
customer's facility at no charge providing the customer commits to purchasing
all of its juice from the Virtual Squeeze. Resulting profits or losses from the
juice sales will be split equally by the Company and Damon.
Through April 25, 1998, the Company has provided $269,000 of juice dispensing
equipment to joint venture and has incurred $67,000 in losses from the joint
venture's operations for a net investment of $202,000. The Company is to be
reimbursed for the cost of the equipment through revenues from juice sales made
by Virtual Squeeze.
15. Subsequent events
On June 8, 1998 the Company was notified by the NASDAQ Listing Qualifications
Panel that the Company's listing will remain on the NASDAQ Stock Market if the
Company can evidence a minimum of $3,000,000 in net tangible assets by June 30,
1998. The Company must make a public filing with the Securities and Exchange
Commission no later than June 30, 1998. The filing must include a balance sheet
which is dated no earlier than May 17, 1998. Should the Company fail to evidence
the minimum net tangible assets by June 30, 1998, the Company's securities will
be delisted from the NASDAQ Stock Market.
On June 15, 1998 the Company requested an oral hearing to appeal the NASDAQ
Listing Qualifications Panel's June 8, 1998 decision. On July 9, 1998, NASDAQ
notified the Company that its' request for an appeal hearing had been granted.
The appeal hearing is to be held on August 14, 1998. The June 8, 1998 decision
has been stayed pending the appeal hearing.
The Company is actively attempting to raise capital to meet the requisite net
tangible assets set by the NASDAQ Listing Qualifications Panel, however, there
can be no assurance that the Company will meet the net tangible assets
requirement. If the NASDAQ delists the Company's securities, the market price
thereof and the efficiency of the trading market therefor may be materially
adversely affected.
-30-
<PAGE>
<TABLE>
<CAPTION>
ABC DISPENSING TECHNOLOGIES, INC. (CONSOLIDATED)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------------------------
Additions
Balance at Charged to Balance
Beginning Costs and at End
Description of Period Expenses Deductions of Period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended April 25, 1998
- -------------------------
Allowance for doubtful accounts $ 191,000 $ 39,000 $ 146,000(a) $ 84,000
======== ========= ========== ========
Allowance for inventory obsolescence $838,000 $ 105,000 $ 34,000(b) $909,000
======== ========= ========== ========
Year ended April 26, 1997
- -------------------------
Allowance for doubtful accounts $ 136,000 $ 141,000 $ 86,000(a) $191,000
======== ========= ========== ========
Allowance for inventory obsolescence $985,000 - $ 147,000(b) $838,000
======== ========= ========== ========
Year ended April 27, 1996
- -------------------------
Allowance for doubtful accounts $ 78,000 $ 40,000 $(18,000)(a) $ 136,000
======== ========= ========== ========
Allowance for inventory obsolescence $943,000 $ 80,000 $ 38,000(b) $985,000
======== ========= ========== ========
</TABLE>
(a) Uncollectable accounts written off, net of recoveries.
(b) Inventory written off and/or disposed of.
-31-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
Information regarding the Directors and Executive Officers of the
Company is incorporated herein by reference from the Company's definitive Proxy
Statement of the Annual Meeting of Stockholders to be held in October 1998.
Certain information concerning the Executive Officers is also included below:
Name Position
---- --------
Charles M. Stimac, Jr. President and Director
Herbert L. Luxenburg Director
C. Rand Michaels Director
Frank E. Vaughn Director
Norbert J. Lewandowski Director
William L. Shanklin Director
Mr. Charles M. Stimac, Jr. has been President of the Company since July
15, 1996, replacing Mr. Robert A. Cutting, who was President of the Company
since April 1990 and was President of the Company's wholly-owned subsidiary, ABC
Dispensing Technologies, Inc., since September 1986.
Mr. Herbert L. Luxenburg has been a Director of the Company since
September, 1988.
Mr. C. Rand Michaels has been a Director of the Company since
September, 1986.
Mr. Frank E. Vaughn has been a Director of the Company since
October 1997.
Mr. Norbert J. Lewandowski has been a Director of the Company since
December 1998.
Mr. William L. Shanklin has been a Director of the Company since
December 1998.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
Incorporated herein by reference from the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in October 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
Incorporated herein by reference from the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in October 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
Incorporated herein by reference from the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in October 1998.
-32-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ------------------------------------------------------------------------
(a) The financial statements listed on the index set forth in Item 8 of this
Annual Report on Form 10-K are filed as part of this Annual Report.
(b) The following exhibits are incorporated by reference herein or annexed to
this Annual Report:
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. Consent of Grant Thornton LLP.
23.1 Consent of Ernst & Young LLP.
24. Power of Attorney (see signature page).
27. Financial Data Schedule (for S.E.C. electronic filing only)
*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.
(c) Current reports on Form 8-K during the quarter ended April 25, 1998.
During the fourth quarter ended April 25, 1998, the Company filed no
reports on Form 8-K.
-33-
<PAGE>
SIGNATURES
- ----------
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /S/
---------------------------
Charles M. Stimac, Jr.
President
Principal Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/S/________________________ President & Director July 24, 1998
Charles M. Stimac, Jr.
/S/________________________ Director July 24, 1998
Herbert L. Luxenburg
/S/________________________ Director July 24, 1998
C. Rand Michaels
/S/________________________ Director July 24, 1998
Frank E. Vaughn
/S/________________________ Director July 24, 1998
Norbert J. Lewandowski
/S/________________________ Director July 24, 1998
William L. Shanklin
-34-
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements on
Form S-8 No. 33-39875; Post-Effective Amendment No. 1 to Form S-2 No. 33-89596
and Post-Effective Amendment No. 1 to Form S-3 No. 33-89398 of ABC Dispensing
Technologies, Inc. and in the related Prospectuses of our report dated June 30,
1998 (except for note 15, as to which the date is July 9, 1998), with respect to
the consolidated financial statements and schedule of ABC Dispensing
Technologies, Inc. included in this Annual Report (Form 10-K) for the year ended
April 25, 1998.
GRANT THORNTON LLP
Cleveland, Ohio
July 24, 1998
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements on
Form S-8 No. 33-39875; Post-Effective Amendment No. 1 to Form S-2 No. 33-89596
and Post-Effective Amendment No. 1 to Form S-3 No. 33-89398 of ABC Dispensing
Technologies, Inc. (formerly American Business Computers Corporation) and in the
related Prospectuses of our report dated August 8, 1996, with respect to the
consolidated financial statements and schedule of ABC Dispensing Technologies,
Inc. included in this Annual Report (Form 10-K) for the year ended April 25,
1998.
ERNST & YOUNG LLP
Akron, Ohio
July 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-25-1998
<PERIOD-START> APR-27-1997
<PERIOD-END> APR-25-1998
<CASH> 351,000
<SECURITIES> 0
<RECEIVABLES> 792,000
<ALLOWANCES> 84,000
<INVENTORY> 1,290,000
<CURRENT-ASSETS> 2,349,000
<PP&E> 1,577,000
<DEPRECIATION> 933,000
<TOTAL-ASSETS> 3,294,000
<CURRENT-LIABILITIES> 2,291,000
<BONDS> 0
0
4,675,000
<COMMON> 176,000
<OTHER-SE> 3,848,000
<TOTAL-LIABILITY-AND-EQUITY> 3,294,000
<SALES> 5,299,000
<TOTAL-REVENUES> 5,299,000
<CGS> 3,833,000
<TOTAL-COSTS> 7,125,000
<OTHER-EXPENSES> 42,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 160,000
<INCOME-PRETAX> (2,028,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,028,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,028,000)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
