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 24, 1999
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
451 Kennedy Road Akron, Ohio 44305
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330) 733-2841
Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: [ X ] Yes [ ] No
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: [ ]
The aggregate market value of the voting stock held by non-affiliates
as of July 15, 1999 was $5,367,000.
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 15, 1999 was 19,168,049 shares.
Documents Incorporated by Reference
The Registrant's Proxy Statement for the 1999 Annual Meeting of
Shareholders is incorporated by reference in Part III.
Total number of pages of this report: 33
Index to Exhibits located on page 32.
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ITEM 1. BUSINESS
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When used in this report, the words "estimate", "project", "intend",
"expect", "believe" and similar expressions are used to identify forward-looking
statements. Such statements are subject to risks and uncertainties that could
cause actual results to differ materially. Such risks include, without
limitation, substantial competition, future capital needs, uncertainty of
additional financing, potential future dilution, dependence on key-personnel and
uncertainty as to full scale commercialization of the Company's products.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. There can be no assurances
that the Company's forward-looking statements will prove to be true. The Company
undertakes no obligation to publicly release updates or revisions to these
statements.
CORE COMPETENCE
The Company designs, manufactures and services state-of-the-art
dispensing systems that utilize standard micro-processing technology and
proprietary operating software. The current product offerings are specifically
designed to allow semi-skilled operators to efficiently dispense liquids in
varied environments. The Company's technology is protected by 22 patents and 3
patents pending. This technology provides users with a superior ability to
effectively dispense and control materials and minimize labor and waste.
The Company's patent protected technology is complemented by a
talented, highly responsive workforce. These core assets allow the Company to
design, manufacture, install and service dispensing equipment that provides the
Company with uniquely beneficial capabilities to meet the needs of its
dispensing customers.
MARKET FOCUS
The Company has set a strategy to focus all of its existing resources
on its paint dispensing and juice dispensing product lines. These product lines
represent the Company's primary product development efforts during the past
three years. Revenues and profits from these lines may be reinvested to develop
additional applications for dispensing systems. The Company will consider new
development only under strict financial guidelines including advance customers'
commitments necessary to defray development expenses.
PRODUCTS
Paint and Coatings
The Company produces Royal Match(R) equipment, a pneumatic colorant
dispenser serving the architectural paint manufacturing and retailing
industries. Royal Match(R) is designed to accommodate the ever changing, more
environmentally friendly colorant formulations resulting from the mandatory
elimination of V.O.C. (Volatile Organic Compounds). Check Mate(R) operating
software, used for Royal Match(R), is user friendly with advanced functionality
and efficient keystroke and screen commands.
Royal Match(R) is state-of-the-art technology that provides many years
of inexpensive operating use with the following:
Features Benefits
- -------- --------
Pneumatic flow control. Reduced operational cost.
Eliminates costly mechanical pumps and
manual calibration.
Modular Configuration: Customer flexibility over the long
Up to 18 colorant reservoirs run. System matches customers needs.
in 5, 7, or 9 quart capacities. Tells operator when low on product.
Includes electronic inventory Prevents dispense if sufficient
fill level monitoring. colorant amounts are unavailable.
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Automatic, simultaneous dispense. Eight ingredients dispensed at a time
for efficient completion of task.
Nozzle protection:
Eliminates manual purging:
1.) Clear flush after each dispense. --Self cleaning--carries colorant to
paint can and prevents drying and
clogging.
2.) Pneumatic nozzle cover. --Keeps tips moist--automatically
slips on and off for dispense.
3.) Colorant line strainer system. --Prevents colorant debris from
clogging valves.
Electronic self-calibration. System automatically adjusts during
constant recycle for changes in
colorant rheology, including
temperature and viscosity.
Proprietary, high tech easy to
use Check Mate(R) operating
software. --Operates from a single screen.
--Simple operation 1) color 2) product
3) dispense.
--Save custom formulas.
--Adjust standard formulas-customize
by percentage increments up or down.
--Modification of data base at
location-enter and delete paint
manufacturing formulas on site.
--Internet ready, allowing for
electronic ordering.
--Remote diagnosis and troubleshooting
by modem.
The Company has positioned Royal Match(R) with its Check Mate(R)
operating software to displace existing, obsolete dispensing systems. The
Company has adapted the applicability of Royal Match(R) to range from the
highest volume paint seller to the small operator who wants to modernize and
expects its business to grow. The Company has focused its efforts on the U.S.
and Western Europe markets.
The Company has great confidence in its paint dispensing products and
service organization. The Company is currently in discussions with customers
that represent a majority of the domestic market, although the Company has no
assurance of sales. Units are installed and running or being specially prepared
for further testing at True Value, I.C.I., Wal-Mart, Akzo Nobel and others.
During the last year, the Company has enjoyed a continuing relationship with The
Home Depot as evidenced by renewed service agreements and the shipment of 25
units.
A 30-day, free trial program of the Royal Match(R) colorant system has
resulted in the sale of 13 units to eight smaller, independent paint companies.
To date, virtually all of the customers who have evaluated the products have
purchased the equipment.
During the fiscal years ended April 24, 1999, and April 25, 1998, paint
product sales to The Home Depot represented 52%, and 89% of total Company
revenues, respectively.
The Company assembles its own equipment from standard industry parts
and custom assemblies made to the Company's specifications. The Company does not
foresee any shortage of materials needed to meet the demand of its customers.
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Beverage
The Company currently manufactures and markets two types of beverage dispensers:
juice and liquor.
Virtual Squeeze(R) is designed to be a complete fruit-juice program
being marketed primarily to the health care industry by major foodservice
companies, independent beverage companies and directly by the Company. The
package includes state-of-the-art, proprietary dispensing equipment,
shelf-stable bag-in-the box fruit-juice concentrates and service and support.
The joint venture agreement with Damon Industries, through which the
Company previously marketed the Virtual Squeeze(R) program, has been terminated
effective December 31, 1998. The Company is now solely responsible for all
aspects of the juice program. Damon Industries remains a vendor of juice
concentrates.
Direct marketing efforts during the year in Northeast Ohio have
resulted in the naming of approved distribution by SYSCO Foods, Alliant
Foodservice, and Avalon Distributing. The direct placement of units in this
market and the support of the committed distributors has generated significant
interest and has led to the evaluation of the system by national and regional
nursing home chains.
The Company's electronically brix-controlled, high-volume, automatic
system is capable of consecutively pouring 400, four ounce drinks chilled to
under 40(Degree). This dispenser adds 30 inches of kitchen counter space.
Built-in "dishwasher-like" mandatory, periodic internal sanitization
functionality ensures compliance and freshness while extending the reliability
and useful life of the dispenser. The button-actuated, patented nozzle inside
the convenient, moveable wand dispenses water and concentrate simultaneously and
repeatedly for up to six flavors. The space saving unit is totally
self-contained--electronics, power supply, compressor, chiller, and bins for up
to six bags of concentrate--all fitting within the small footprint.
Automatically blending two juices at a time provides an expanded universe of
flavors.
Other aspects of the Virtual Squeeze(R) program are:
Features Benefits
- -------- --------
Large capacity chilling for drinks Designed to meet requirements of State
dispensed well below 40(Degree). and Federal regulatory agencies
regarding serving temperature and
cleanliness.
Semi automatic mandatory sanitization
set every 28 days.
Shelf stable 200 oz. bag-in-box juice Bags are easy to handle, juice is high
stored at room temperature dispensed quality and con- sistent while
quickly with ability to blend any two increasing variety, saving time,
flavors at once. money, and labor while eliminating
waste. Eliminates frozen and
refrigerated storage.
Totally self contained unit that Designed for large volume juice
includes bag storage, increased consumption. Kitchen space is
counter space, with movable or maximized while adding productivity
stationary dispense wand for hands and efficiency to serving duties.
free pouring, portion control and
auto-dispense.
Program summary:
- --Customer receives state-of-art dispenser, installation, and maintenance at no
charge for use with Virtual Squeeze juice.
- --Help desk support for all customers--80% of calls answered without service
dispatched.
- --Virtual Squeeze(R) juice delivered to customers by foodservice, independents
and the Company.
- --Customer enjoys high tech package and competitive prices for juice.
The Company's immediate goal is the penetration of skilled nursing
facilities within the institutional juice market. In addition, an opportunity
also exists for hospitals, government facilities, prisons, military
installations and schools.
Because of the nature of the former joint venture with Damon
Industries, there is not a full year consolidation of sales and expenses in the
Company's financial statements. Financial results for the joint venture, prior
to January 1, 1999, are included as Equity in Loss of Joint Venture. The Virtual
Squeeze(R) juice program has generated total revenues of $344,000 during the
fiscal year ended April 24, 1999. This compares to total revenues of $155,000
for the fiscal year ended April 25, 1998.
The Company's UltraBar(R) 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(R) products accounted for 3.2%, 5.2% and 10.1%, of
total Company revenues in FY 1999, FY 1998, and FY 1997, respectively.
The Company assembles its own equipment from standard industry parts
and custom assemblies made to the Company's specifications. The Company does not
foresee any shortage of materials needed to meet the demand of its customers.
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SERVICE AND 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 Company is continuing to analyze the need for additional service
technicians as the equipment base grows. A solid reputation regarding quick and
thorough service response is a contributing factor to the sales effort. The
Company is dedicated to providing the best ongoing support and service in its
respective markets.
Service sales accounted for 52.2%, 11.4%, and 21% of total Company
revenues in FY 1999, FY 1998 and FY 1997, respectively.
SALES BACKLOG
As of April 24, 1999 the sales order backlog (un-shipped product
orders) was $44,000. As of April 25, 1998 the sales order backlog was $483,000.
This decrease is a result of fewer un-shipped orders for Royal Match(R)and
UltraBar(R)equipment.
INTERNATIONAL SALES
Revenues from international sales were 3% of sales for fiscal 1999, and
3% for fiscal 1998. Primary international sales efforts center on liquor
equipment to Canada and Royal Match(R) colorant dispensers to Western Europe.
Royal Match(R) is being introduced to large paint manufacturers in
Europe. With the proliferation of V.O.C. free colorant and the resulting extra
wearing of conventional mechanical pumps, the appeal of Royal Match(R) should
increase. The sales process includes introduction of the Company, the technology
and the dispenser while building a confident relationship with the customer.
Formal testing is in progress.
COMPETITION
The markets for the Company's beverage and industrial products are
extremely competitive. The Company competes in both markets with organizations
that have greater financial resources, stronger name recognition, larger sales,
marketing and product development departments and greater economies of a scale
that cause their products to be more competitive in those regards. Such intense
competition may have a material adverse effect on the Company's ability to
achieve full scale commercialization of its products. Although the Company
believes that the appeal of its state-of-the-art technology countervails these
competitive disadvantages, no assurance can be made that the Company will be
able to compete successfully against current and future competitors.
The Company is one of four manufacturers that offer automatic, computer
controlled tint dispensers 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 Company believes that the design and features of its
dispensing equipment, in combination with the ability to provide nationwide,
on-site technical support gives the Company a distinct competitive advantage in
our respective markets.
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(R) and Minute Maid(R). The
Company 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(R) is the only
dispenser specifically designed for bag in the box juice products.
HUMAN RESOURCES
As of July 15, 1999, the Company had 26 full-time employees. This
compares to 44 full-time employees at the same time last year. This decrease is
a primary result of cost-savings measures taken during the year that were made
possible, because of less development efforts needed for industrial and beverage
products. 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, 22 patents are outstanding and an
additional three are pending. Patent coverage of our dispensing technology is
broad. Research and development expenditures for the fiscal years 1999, 1998,
and 1997 were $124,000, $691,000, and $629,000, respectively. These
significantly reduced expenditures have been possible because of the focus
strategy implemented to concentrate on paint and juice dispensing, which are
basically developed.
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Entities & Fiscal Year
The Company is comprised of three legal entities: the parent (public
entity)--ABC Dispensing Technologies, Inc., (a Florida corporation) (OTC
BB: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). ABC was formed in 1972.
"Fiscal Year 1999" ended April 24, 1999. The Company has adopted a
fiscal year ending on the Saturday closest to April 30. Each fiscal quarter
consists of 13 weeks.
ITEM 2. PROPERTIES
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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 an institutional lender. The
principal balance of the mortgage was $244,000 as of April 24, 1999.
On June 24, 1999, the Company entered into a contract to sell this
property for $590,000 in cash. The contract provides the buyer 60 days within
which to cancel the contract to the extent it cannot obtain the necessary
financing to effect the purchase. The contract also provides for a lease to the
Company of at least one year with a monthly rent of $5,000 plus insurance, taxes
and other operating expenses of the property. The Company believes that there is
sufficient supply of similar space in the greater Akron, Ohio area to provide
adequate alternatives at the expiration of such lease.
The Company leases warehouse space from independent third parties on an
as needed basis.
ITEM 3. LEGAL PROCEEDINGS
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The Company is subject to routine litigation incidental to its
business. The most significant matters are as follows.
1. Clark Metal Products Company v. ABC Dispensing Technologies, Inc. in
the Summit County Common Pleas Court was instituted on May 18, 1999.
Clark Metal Products is a vendor of the Company and alleges a total
of $19,000 is due. The Company agrees to the majority of the claim
and has begun to make payments to satisfy the claim. The Company is
presently in settlement negotiations with the Plaintive.
2. Tetrad Electronics, Inc. v. ABC Dispensing Technologies, Inc. in the
Summit County Common Pleas Court was instituted on December 14,
1998. Tetrad Electronics is a vendor of the Company and alleges a
total of $92,000 is due. The Company is vigorously defending this
action, however, there is no assurance that the Company will
prevail.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were submitted to a vote of security holders during the
fourth quarter of FY 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
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MATTERS
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A. PRICE RANGE OF COMMON STOCK
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The Company's common stock currently trades on the Bulletin Board of
the Over the Counter Market under the symbol ABCC. The Company was delisted from
the NASDAQ SmallCap Market on October 7, 1998, as a result of an increase in
NASDAQ's equity requirements. The table below shows the range of bid prices of
the common stock for the last two years as reported by Over the Counter (OTC)
Market and NASDAQ reflecting inter-dealer prices, without retail mark-up or
markdowns, or commissions (and may not necessarily represent actual
transactions).
Common Stock (ABCC):
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Year Ended April 24, 1999 Prices: High Bid Low Bid
- --------------------------------------------------------------------------------
01/24/99 - 04/24/99 (Fourth Quarter) $ 9/32 $ 7/64
10/25/98 - 01/23/99 (Third Quarter) 35/64 9/64
07/26/98 - 10/24/98 (Second Quarter) 31/32 4/32
04/26/98 - 07/25/98 (First Quarter) 28/32 20/32
Common Stock (ABCC):
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Year Ended April 25, 1998 Prices: High Bid Low Bid
- --------------------------------------------------------------------------------
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
B. APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
---------------------------------------------
Approximate Number of
Record Holders
Title of Class as of July 15, 1999
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Common Stock, $.01 par value Approximately 1,100
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C. DIVIDENDS
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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.
D. EQUITY SALES
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The Company issued Series A Preferred Stock, a 9% convertible
cumulative redeemable instrument that is convertible into Common Stock at a
price of $1.00 per shares. At conversion, each Preferred Share will entitle the
holder to warrants to purchase the same number of shares of Common Stock at a
price of $1.25 per share. For the fiscal year ended April 24, 1999, the Company
issued 25 shares generating gross proceeds of $313,000 and for the fiscal year
ended April 25, 1998, the Company issued 91 shares generating gross proceeds of
$1,287,000.
The Company issued Series B Preferred Stock, a 9% convertible
cumulative redeemable instrument that is convertible into Common Stock at a
price of $0.75 per share and is identical to Series A Preferred Stock in all
other aspects. For fiscal year ended April 24, 1999, the Company issued 24
shares generating gross proceeds of $300,000.
The Company issued Series C Preferred Stock, a 9% convertible
cumulative redeemable instrument with a conversion price of $0.25 per share.
There are no warrants attached to this issuance. During the fiscal year ended
April 24, 1999, the Company issued 37 shares generating gross proceeds of
$370,000.
<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
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FOR THE FISCAL YEARS ENDED APRIL 24, APRIL 25, APRIL 26, APRIL 27, APRIL 29,
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1999 1998 1997 1996 1995
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<S> <C> <C> <C> <C> <C>
REVENUES (a) $1,710,000 $5,299,000 $3,073,000 $5,312,000 $3,359,000
NET LOSS $(2,204,000) $(2,028,000) $(2,968,000) $(1,324,000) $(2,681,000)
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 17,774,000 17,230,000 17,074,000 16,414,000 15,669,000
NET LOSS PER SHARE -
BASIC AND DILUTED $(0.15) $(0.13) $(0.18) $(0.08) $(0.17)
TOTAL ASSETS $2,622,000 $3,294,000 $3,350,000 $4,020,000 $3,719,000
LONG-TERM OBLIGATIONS $233,000 $257,000 $283,000 $294,000 $278,000
STOCKHOLDERS' EQUITY $(139,000) $1,003,000 $1,635,000 $1,085,000 $515,000
DIVIDENDS DECLARED
PER SHARE OF COMMON STOCK $-0- $-0- $-0- $-0- $-0-
RESEARCH & DEVELOPMENT (a) $124,000 $691,000 $629,000 $714,000 $606,000
</TABLE>
(a) Research & Development costs for fiscal years 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.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
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RESULTS OF OPERATIONS
Fiscal 1999 compared to Fiscal 1998
The net loss for FY 1999 was $2,204,000 representing an increased loss
of $176,000, or 8.7% over the net loss of $2,028,000 for FY 1998. The net loss
for the fourth quarter of FY 1999 decreased $533,000, or 53.6%, to $462,000 from
the $995,000 net loss for the fourth quarter of the prior year. The full year
increased loss is primarily due to significantly lower sales partially off set
by lower operating expenses. The fourth quarter loss improvement is primarily
due to cost reduction initiatives taken during the year.
Revenues FY 1999 FY 1998
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Equipment Sales - Net $ 818,000 $4,694,000
Service Revenues 892,000 605,000
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Total $1,710,000 $5,299,000
Equipment sales for FY 1999 decreased $3,876,000, or 82.6% from FY
1998. The decrease is primarily due to the completion of a significant order of
the Royal Match(R) product during FY 1998. Beverage equipment sales for FY 1999
declined $229,000, or 81%, from FY 1998. The decrease is due to a de-emphasis of
liquor equipment marketing. Equipment sales for the fourth quarter of FY 1999
declined by $534,000, or 84.6%. The decrease is due to a significant order being
completed in the fourth quarter of FY 1998.
Juice sales in the FY 1999, for the account of the Company (as opposed
to the Joint Venture with Damon Industries) have been reported for the months of
January through April and included in service sales. Juice sales prior to the
termination of the joint venture were not consolidated, because of the nature of
the joint venture agreement. Prior to January 1, 1999, the financial results for
the joint venture are included as Equity in Loss of Joint Venture.
Service revenues for FY 1999 increased $287,000, or 47.4%, over FY
1998. The increase is due to a $372,000 increase in service agreement revenue
generated from paint units that were sold in FY 1998 and juice sales for January
through April of $117,000. These increases were partially off-set by lower
installation revenues that are generated with most new paint equipment sales.
Service revenues for the fourth quarter for FY 1999 increased by $112,000, or
61.5%, over the FY 1998. This was due primarily to an increase of $87,000 in
service agreement revenue on Royal Match(R) paint colorant dispensers, and juice
sales for the quarter of $91,000. These increases were partially off-set by
lower installation revenues that are generated with most new paint equipment
sales.
Gross Margins FY 1999 FY 1998
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Equipment 31.4% 30.5%
Service (9.2)% 5.5%
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Total 10.2% 27.6%
For FY 1999, gross margins as a percentage of sales on equipment
increased by 0.9 percentage points. This modest improvement is a result of price
improvement exceeding the higher costs associated with lower production levels.
For FY 1999, gross margins as a percentage of service revenues
decreased 14.7 percentage points. This is a result of higher employee costs
needed to service the expanding customer base of the Royal Match(R) products.
Many of these employee costs are due to new technicians being trained in our
technology.
General and Administrative
General and Administrative expenses decreased $119,000, or 6.8%, to $1,623,000.
This has resulted from expense reduction programs initiated during the year and
a reallocation of administrative resources from research and development
projects to indirect product costs, made possible with the completion of
development efforts for the juice products and fewer ongoing development efforts
for the Royal Match(R) products.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
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Selling and Marketing expenses
Selling and marketing expenses decreased $83,000, or 18.2% to $373,000.
This decrease is due primarily to reorganization the management structure of the
sales force.
Research and Development expenses
For the FY 1999, Research and Development expenses decreased $567,000,
or 82.1%, to $124,000. This decline is directly attributable to development
completion of the juice and Royal Match(R) products. Development efforts have
continued in the Check Mate(R) software systems associated with the Royal
Match(R) product line.
Interest expense
Interest expense increased $29,000, or 18%, to $189,000 for FY 1999.
This was due to notes issued to finance operations.
Other income
For FY 1999, other income increased $115,000 to $73,000 compared to a
loss of $42,000 for the fiscal year 1998. This was due to lower operating losses
for the joint venture that was terminated on December 31, 1998 and the
liquidation of the joint venture assets.
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(R) 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
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Equipment sales $ 4,694,000 $ 2,427,000
Service revenues 605,000 646,000
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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.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
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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(R) 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(R) paint colorant dispensers and the
Omnitron(R) soft drink dispensers. Additionally, Royal Match(R) 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(R) paint colorant dispensers.
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(R) 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(R)
paint colorant dispensers, and a decline in low (or negative) margin service on
soft drink equipment resulting from the discontinuation of the Omnitron(R) 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.
-10-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
- -------------
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(R) paint colorant dispenser, the Check Mate(TM) software
which controls the Royal Match(TM) , and the Virtual Squeeze(R) 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(R) paint colorant dispenser and the
Virtual Squeeze(R) juice dispenser being virtually completed during the fourth
quarter of fiscal 1998.
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(R) 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.
-11-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
- -------------
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance decreased to $65,000 as of April 24, 1999
from $351,000 at April 25, 1998. Operations for FY 1999 used cash of $1,453,000
which resulted from a net loss of $2,204,000, and net decreases in operating
assets of $278,000, plus depreciation and amortization and non-cash charges of
$216,000, and increases in net operating liabilities of $281,000. Net cash used
in investing activities was $1,000. Net cash provided by financing activities
was $1,166,000. The cash provided by financing activities is mainly attributable
to $983,000 in private placements of Preferred Stock and notes payable increases
of $390,000. 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. During
the fiscal year ended April 24, 1999, the Company generated $983,000 from the
issuance of Preferred Stock.
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 extended the maturity
date through negotiations with Holders of the Notes and their representatives
until December 31, 1999. As of April 24, 1999, the Company has issued notes in
the aggregate of $725,000. The Company anticipates using proceeds of equity
offerings, additional extensions or other re-financing options to satisfy the
notes..
The Company decided against renewal of the accounts receivables credit
line on December 31, 1998. The fixed costs associated with the credit line
became too high, because of significantly lower equipment sales. All liabilities
and encumbrances associated with the line have been satisfied. The Company plans
to investigate similar financing options when sales reach a level that will
interest lenders.
The Company intends to satisfy its short-term (i.e., the next 12-month
period) capital requirements using the proceeds of offerings of its equity
securities and the issuance of additional notes. 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. 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>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
- -------------
1999 Audit
Grant Thornton, LLP has audited the consolidated balance sheet of the
Company as of April 24, 1999, and the related consolidated statement of
operations, cash flows and stockholders' equity for the year ended April 24,
1999. In their report of July 14, 1999, to the Board of Directors and to the
Company, Grant Thornton LLP 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 FY 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 is not aware of any difficulties that will
arise from customers or vendors who have not updated their software to be 2000
compliant. However, there can be no guarantee that the Company will not
encounter unexpected year 2000 compliance problems that will adversely affect
its operations.
During FY 1999, the Company reviewed the compliance status of all of
the computer systems used. The compliance status of the software development
department and the critical operational software were verified. The compliance
status of the local-area network hardware and software have not been verified.
Plans to replace or eliminate these systems are being studied.
The costs to update the local-area network hardware and software has
been estimated at $30,000. The estimate cost for new applications software is
$20,000. Should these funds not be available in time to upgrade these systems a
contingency plan is being prepared to eliminate the use of these systems.
ITEM 7A. DISCLOSURES ABOUT MARKET RISK
- ---------------------------------------
There are no material risk elements associated with foreign currency,
interest rates and commodity prices. The building mortgage is the only variable
interest rate contract and does not present a material risk to the Company.
-13-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES PAGE NO.
- -------------------------------------------------------------------------------------------------------
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 15
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of April 24, 1999 and April 25, 1998 16
Consolidated Statement of Operations for the Years ended April 24, 1999,
and April 25, 1998, and April 26, 1997 17
Consolidated Statement of Cash Flows for the Years ended April 24, 1999,
and April 25, 1998, and April 26, 1997 18
Consolidated Statement of Stockholders' Equity/(Deficit) for the Years ended
April 24, 1999, and April 25, 1998, and April 26, 1997 19
Notes to Consolidated Financial Statements 20-29
SUPPLEMENTARY DATA:
Schedule II-Valuation and Qualifying Accounts 30
</TABLE>
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.
-14-
<PAGE>
Report of Independent Certified Public Accountants
The Board of Directors and Stockholders
ABC Dispensing Technologies, Inc.
We have audited the accompanying consolidated balance sheets of ABC Dispensing
Technologies, Inc. and Subsidiaries as of April 24, 1999 and April 25, 1998, and
the related consolidated statements of operations, cash flows and stockholders'
equity (deficit) for each of the three years in the period ended April 24, 1999.
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. and Subsidiaries at April 24, 1999 and April 25,
1998, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended April 24, 1999, 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
July 14, 1999, except for the first
paragraph of Note 16 as to which the date is
July 20, 1999
-15-
<PAGE>
ABC DISPENSING TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS April 24, 1999 April 25, 1998
============================================================================================================================
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 65,000 $ 351,000
Accounts receivable, less allowance for doubtful accounts
of $60,000 in 1999 and $84,000 in 1998 202,000 708,000
Inventories (Note 4) 1,497,000 1,290,000
------------- -------------
Total current assets 1,764,000 2,349,000
Property, plant, and equipment (Note 5 and 11) 745,000 644,000
Other assets:
Investment in Joint Venture (Note 14) - 202,000
Intangible assets, less accumulated amortization of
$640,000 in 1999 and $633,000 in 1998 22,000 29,000
Patents pending and deferred charges 91,000 70,000
-------------- ---------------
113,000 301,000
--------------- ---------------
Total Assets $ 2,622,000 $ 3,294,000
============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIT)
Current Liabilities
Current portion of long-term debt $ 25,000 $ 36,000
Short-term notes payable (Note 5) 725,000 300,000
Line of credit (Note 5) - 201,000
Accounts payable 885,000 649,000
Accrued liabilities:
Accrued interest 67,000 22,000
Employee compensation and benefits 134,000 199,000
Warranty reserve 157,000 169,000
Other 171,000 197,000
Deferred income 364,000 261,000
------------ ------------
Total current liabilities 2,528,000 2,034,000
Long-term debt (Note 5) 233,000 257,000
Stockholders' equity/(deficit) (Notes 7, 9):
Preferred Stock - Series A, 9% cumulative;
authorized 840 shares 399 and 374 shares issued
and outstanding in 1999 and 1998, respectively
Series B, 9% cumulative authorized 160 shares
24 shares issued in 1999
Series C, 9% cumulative authorized 200 shares
37 shares issued in 1999 5,608,000 4,675,000
Common Stock, $.01 par value; authorized 50,000,000
shares; 17,936,483 and 17,591,498 shares issued 1999
and 1998, respectively 179,000 176,000
Additional paid-in capital 19,768,000 19,461,000
Accumulated deficit ( 25,674,000) ( 23,264,000)
------------- --------------
( 119,000) 1,048,000
Less notes receivable - stockholders ( 20,000) ( 45,000)
--------------- ----------------
Total Stockholders' Equity/(Deficit) ( 139,000) 1,003,000
-------------- --------------
Total Liabilities and Stockholders' Equity/(Deficit) $ 2,622,000 $ 3,294,000
===========================================================================================================================
</TABLE>
See accompanying notes.
-16-
<PAGE>
ABC DISPENSING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended April 24, April 25, April 26,
----------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Equipment Sales $ 818,000 $ 4,694,000 $ 2,427,000
Service revenues 892,000 605,000 646,000
----------- ----------- -----------
1,710,000 5,299,000 3,073,000
Cost and expenses:
Cost of equipment sold 703,000 3,604,000 1,848,000
Service expenses 975,000 632,000 991,000
General and administrative 1,623,000 1,742,000 1,997,000
Selling and marketing 373,000 456,000 700,000
Research and development 124,000 691,000 629,000
------------ -------------- --------------
3,798,000 7,125,000 6,165,000
------------ ------------- -------------
Loss from operations ( 2,088,000) ( 1,826,000) ( 3,092,000)
Other income (expense)
Interest expense ( 189,000) ( 160,000) ( 138,000)
Equity in loss of joint venture ( 42,000) (67,000) -
Litigation fees and settlement (Note 13) - - 95,000
Other, net 115,000 25,000 167,000
-------------- -------------- --------------
( 116,000) (202,000) 124,000
---------------- ------------- -------------
Net loss $( 2,204,000) $ (2,028,000) $( 2,968,000)
==============================================================================================================================
Net loss per share - Basic and Diluted $( 0.15) $ (0.13) $ (0.18)
==============================================================================================================================
</TABLE>
See accompanying notes.
-17-
<PAGE>
ABC DISPENSING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended April 24, April 25, April 26,
----------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net loss $( 2,204,000) $( 2,028,000) $( 2,968,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Deprecation and amortization 175,000 386,000 313,000
(Gain) / Loss on disposal of asset (1,000) 6,000 -
Gain on termination of Joint Venture (79,000)
Loss on equity investment in Joint Venture 42,000 67,000
Treasury stock issued as compensation
for legal services - 37,000 -
Changes in operating assets and liabilities:
Receivables 513,000 ( 381,000) 437,000
Inventories ( 159,000) 141,000 272,000
Other assets ( 21,000) 75,000 ( 307,000)
Accounts payable 236,000 ( 228,000) 2,000
Accrued liabilities ( 58,000) 98,000 ( 428,000)
Deferred income 103,000 233,000 ( 5,000)
------------ ------------ --------------
Total adjustments 751,000 434,000 284,000
----------- ------------ ------------
Net cash used in operating activities ( 1,453,000) ( 1,594,000) ( 2,684,000)
Investing activities:
Purchases of property, plant, and equipment ( 3,000) ( 6,000) ( 69,000)
Additions to patent - ( 33,000) ( 4,000)
Proceeds from sale of equipment 4,000 1,000 -
Investment in Joint Venture - ( 255,000) ( 14,000)
----------------- ------------ -------------
Net cash used in investing activities ( 1,000) ( 293,000) ( 87,000)
Financing activities:
(Payments) /Proceeds from Line of Credit - Net (201,000) 199,000 -
Proceeds from private placement of
Stock - Net 982,000 1,282,000 3,388,000
Proceeds from private placement of
notes payable 390,000 335,000 29,000
Private placement costs - - ( 73,000)
Proceeds from issuance of common stock - - 140,000
Repayment of notes payable and loan costs ( 35,000) ( 37,000) ( 820,000)
Proceeds from collection of stockholders receivable 25,000 6,000 95,000
Proceeds from stock issued for exercise of stock
options and warrants 5,000 8,000 6,000
Purchase of treasury shares - - ( 37,000)
----------------- -------------------- --------------
Net cash provided by financing activities 1,166,000 1,793,000 2,728,000
------------ ------------ ------------
Net decrease in cash and cash equivalents ( 286,000) ( 94,000) ( 43,000)
Cash and cash equivalents at beginning of year 351,000 445,000 488,000
------------ ------------ -------------
Cash and cash equivalents at end of year $ 65,000 $ 351,000 $ 445,000
==============================================================================================================================
</TABLE>
See accompanying notes.
-18-
<PAGE>
ABC DISPENSING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY/(DEFICIT)
Years ended April 24, 1999, April 25, 1998, and April 26, 1997
<TABLE>
<CAPTION>
Common
Number of Stock Additional
Shares of $.01 Par Preferred Paid-in
Common Stock Value Stock Capital
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at April 27, 1996 16,984,160 $ 170,000 $ 18,942,000
Preferred Stock private
placement (Note 9) $ 3,388,000
Private placement costs (73,000)
Issuance of Stock to Mezzanine
Financial Fund, L.P. 125,000 1,000 139,000
Exercise of Stock Options 5,119 6,000
Collection on notes receivable-
stockholders
Net loss
Treasury Stock
---------------------------------------------------------------------
Balance at April 26, 1997 17,114,279 $ 171,000 $ 3,388,000 $ 19,014,000
Preferred Stock private
placement (Note 9) 1,287,000
Commissions on Preferred Stock (5,000)
Preferred Stock Dividend
(Note 9) 469,704 5,000 381,000
Warrants Outstanding -
Original Issue Discount (Note 5) 63,000
Exercise of Stock Options 7,515 8,000
Collection on notes receivable-
stockholders
Net loss
Issuance of Treasury Stock
(35,000 shares) issued for
legal services received
-----------------------------------------------------------------------
Balance at April 25, 1998 17,591,498 $ 176,000 $ 4,675,000 $ 19,461,000
Preferred Stock private
placement (Note 9) 983,000
Commissions on Preferred Stock (1,000)
Preferred Stock Dividend
(Note 9) 274,985 3,000 203,000
Warrants Outstanding -
Original Issue Discount (Note 5) 50,000
Exercise of Stock Warrants 20,000 5,000
Collection on notes receivable-
stockholders
Net loss
Preferred Stock Conversion 50,000 (50,000) 50,000
-----------------------------------------------------------------------
Balance at April 24, 1999 17,936,483 $ 179,000 $ 5,608,000 $19,768,000
</TABLE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Notes
Accumulated Receivable- Treasury
Deficit Stockholders Stock
----------------------------------------------------------
<S> <C> <C> <C>
Balance at April 27, 1996 $(17,882,000) $(146,000)
Preferred Stock private
placement (Note 9)
Private placement costs
Issuance of Stock to Mezzanine
Financial Fund, L.P.
Exercise of Stock Options
Collection on notes receivable-
stockholders 95,000
Net loss (2,968,000)
Treasury Stock (37,000)
------------------------------------------------------------
Balance at April 26, 1997 $(20,850,000) $(51,000) (37,000)
Preferred Stock private
placement (Note 9)
Commissions on Preferred Stock
Preferred Stock Dividend
(Note 9) (386,000)
Warrants Outstanding -
Original Issue Discount (Note 5)
Exercise of Stock Options
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 $(23,264,000) $(45,000) $ 0
Preferred Stock private
placement (Note 9)
Commissions on Preferred Stock
Preferred Stock Dividend
(Note 9) (206,000)
Warrants Outstanding -
Original Issue Discount (Note 5)
Exercise of Stock Warrants
Collection on notes receivable-
stockholders 25,000
Net loss (2,204,000)
Preferred Stock Conversion
-----------------------------------------------------------
Balance at April 24, 1999 $(25,674,000) $(20,000) $ 0
==================================================================================================================
</TABLE>
See accompanying notes.
-19-
<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, specification with a 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. The Company is currently focusing 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 1999, fiscal 1998
and fiscal 1997 consisted of fifty-two weeks ending on April 24, April 25, and
April 26, respectively. References to the years 1999, 1998 and 1997 refer to
fiscal years ended April 24, 1999; April 25, 1998; and April 26, 1997
respectively.
Consolidation - The consolidated financial statements include the accounts of
the Company and its subsidiaries, ABC Dispensing Technologies, Inc. (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 24, 1999, April 25, 1998, and April 26, 1997, 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 24, 1999.
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 and seven 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.
-20-
<PAGE>
ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Significant accounting policies (continued)
Major Customer - Revenues from The Home Depot, Inc. were 52%, 89% and 3% of
total revenues for the years ended April 24, 1999, April 25, 1998 and April 26,
1997, respectively. Revenues from The Sherwin-Williams Company were 1%, 1%, and
54% of total revenues for the years ended April 24, 1999, April 25, 1998 and
April 26, 1997, respectively. The Company currently has no orders from
Sherwin-Williams and does not expect significant revenues from sales to
Sherwin-Williams in the near future.
Provision for Warranty Claims - Estimated warranty costs are provided at the
time of sale of the warranted products.
Stock-Based Compensation - The Company grants stock options for a fixed number
of shares to employees generally with an exercise price equal to the fair value
of the shares at the date of grant. The Company accounts for stock-based
compensation in accordance with Statement of Financial Accounting Standards No.
123, "Accounting for Stock Board Compensation," (SFAS 123) which allows to
continue to recognize compensation expense pursuant to Accounting Principles
Board Opinion No. 25, (APB 25), "Accounting for Stock Issued to Employees," but
requiring companies to disclose the effect on earnings of compensation expense
for stock options based on the fair value of the options of the grant date. The
effect on net loss and net loss per share had the Company adopted the expense
recognition of SFAS 123, are shown in note 7.
Newly Issued Accounting Standards - Effective October 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. The Company was required to adopt these standards in fiscal year
ended April 24, 1999. The adoption of these standards did not have a material
impact on the Company's financial disclosures. The Company operates in only one
business segment and, therefore, no segment disclosure is required.
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 24, 1999 has an accumulated deficit
of $25,674,000. The Company had negative cash flow from operating activities of
$1,453,000, $1,594,000, and $2,684,000 for the years ended April 24, 1999, April
25, 1998, and April 26, 1997, respectively. Cash and cash equivalents declined
from $351,000 at the beginning of fiscal 1999 to $65,000 at April 24, 1999.
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 able to raise $6,573,000 in
capital from private investors over the past four years through private
placements of both preferred and common stock. The Company is continuing in it
efforts to raise capital through private placements of 9% Convertible Cumulative
Preferred Stock. Proceeds from private placements will be used to reduce
accounts payable and provide additional working capital. No assurances, however,
can be given that the Company will be successful in raising additional capital.
Further, there can be no assurance, assuming the Company does successfully raise
additional capital, that the Company will achieve profitable operations or
positive cash flow. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. No adjustments to the amounts or
classification of assets and liabilities which could result from the outcome of
this uncertainty are reflected in the consolidated financial statements.
The Company intends to satisfy its short-term (i.e., the next 12-month period)
capital requirements using the proceeds of offerings of its equity securities
and notes payable. The Company is currently attempting to raise additional
capital 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.
-21-
<PAGE>
ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Inventories
At April 24, 1999 and April 25, 1998, inventories consisted of the following:
1999 1998
----------- -------------
Raw Materials $ 907,000 $ 785,000
Work-in-process 275,000 293,000
Finished goods 315,000 212,000
----------- -------------
$1,497,000 $1,290,000
=========== =============
The above amounts are net of an obsolescence reserve of $474,000 and $909,000 at
1999 and 1998, respectively.
5. Financing arrangements
At April 24, 1999 and April 25, 1998, long-term debt consisted of the following:
1999 1998
------------ -------------
Note payable to bank $244,000 $257,000
Other 14,000 36,000
------------ -------------
258,000 293,000
Less amounts due within one year (25,000) (36,000)
----------- -------------
Total long-term debt $233,000 $257,000
============ =============
The note payable to bank, which is secured by the Company's headquarters
facility, has an adjustable interest rate (9.03% at April 24, 1999) 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 $4,013 are payable monthly with a final payment of $143,000 due
October 1, 2005. At April 24, 1999, the collateralizing facility and
improvements thereto have a net book value of $445,000.
Maturities of long-term debt for the five years subsequent to April 24, 1999 are
as follows: 2000--$25,000; 2001--$19,000; 2002--$19,000; 2003--$19,000 and
2004--$21,000.
-22-
<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 24, 1999,
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. The
Company further extended the maturity date through negotiations with the
noteholders until December 31, 1999. 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 is being amortized over the life of the Notes, as extended.
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. The warrants have been
valued at $50,000 using the Black-Scholes option pricing model, using the
following weighted-average assumptions: a risk free interest rate of 6.50% and
expected volatility of 287%. A total of 134,000 warrants were issued to satisfy
this extension.
During the year ended April 24, 1999, the Company began issuing notes payable
through a private placement in multiples of $10,000 or fractions thereof. The
notes accrue interest at a rate of 10% with principal and interest paid at
maturity. A total of $390,000 were issued with $260,000 using the building as
collateral and $130,000 using the technology of the Company as collateral.
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 24, 1999 and
April 25, 1998 are as follows:
1999 1998
------------ -----------
Net operating loss carryforwards $ 8,752,000 $ 7,410,000
Inventories 237,000 422,000
Other 273,000 269,000
------------ -----------
Total deferred tax asset 9,262,000 8,101,000
Valuation allowance for deferred taxes ( 9,262,000) (8,101,000)
----------- ----------
Net deferred taxes $ 0 $ 0
============= =============
At April 24, 1999 and April 25, 1998, the Company had Federal net operating loss
carryforwards for tax reporting purposes of approximately $23,000,000 and
$19,500,000, 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.
-23-
<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, generally at current market
prices, 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 24, 1999, April 25, 1998, and
April 26, 1997, is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------ -----------------------
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 1,898,219 1.39 1,518,323 $ 1.68 510,966 $ 2.46
Granted 700,000 .23 611,000 $ 1.07 1,029,851 $ 1.29
Exercised (7,515) $ 1.00 (5,119) $ 1.10
Canceled (524,134) 1.62 (223,589) $ 2.05 (17,375) $ 1.50
----------- ------------ -------
Outstanding - end of year 2,074,085 .94 1,898,219 $ 1.39 1,518,323 $ 1.68
=========== ========= =========
Exercisable at end of year 1,230,085 1.25 1,302,219 $ 1.48 1,039,652 $ 1.92
=========== ========= =========
Available for grant 1,623,796 1,379,662 341,677
========= ========= =======
Weighted average fair value of options
granted during the year $ 0.22 $ 0.74 $ 0.96
</TABLE>
The following table summarizes information about stock options and employee
stock warrants outstanding and exercisable by price range as of April 24, 1999:
<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>
$.20 - $1.125 1,189,239 4.08 $ 0.61 445,239 $ .86
$1.25 - $1.46 807,194 2.29 $ 1.32 707,194 $ 1.32
$2.06 - $3.38 77,652 1.35 $ 2.84 77,652 $ 2.84
---------- ----------
2,074,085 1,230,085
========= =========
</TABLE>
-24-
<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 24, 1999, April 25, 1998
and April 26, 1997, using the Black-Scholes option pricing model as prescribed
by SFAS 123 using the following weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- -------
<S> <C> <C> <C>
Risk-free interest rate 6.50% 6.37% 6.54%
Dividend yield 0 % 0 % 0 %
Volatility 287% 82% 79%
Average life 5 years 5 Years 5 Years
</TABLE>
Using the Black-Scholes methodology, the total value of options granted during
fiscal 1999, 1998 and 1997 was $126,000 and $257,000 and $781,000, 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 24, 1999 April 25, 1998 April 26, 1997
--------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Loss As reported $ (2,204,000) $ (2,028,000) $ (2,968,000)
Pro forma $ (2,330,000) $ (2,285,000) $ (3,749,000)
Basic and Diluted
Earnings per share As reported $ (0.15) $ (0.13) $ (0.18)
Pro forma $ (0.16) $ (0.16) $ (0.22)
</TABLE>
-25-
<PAGE>
ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Common stock (continued)
Warrants
- --------
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.
On October 9, 1998, the Company granted 20,000 warrants to each Member of the
Board of Directors at $.2969 per share. These include: Norbert Lewandowski,
Herbert Luxenburg, C. Rand Michaels, William L. Shanklin, and Frank E. Vaughn.
On January 14, 1999, the Company granted 25,000 warrants exercisable at $.35 per
share to a former employee with connection with a termination agreement.
On February 12, 1999, the Company granted 600,000 warrants exercisable at $.20
per share to Charles M. Stimac, Jr., President and CEO.
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 24, April 25, April 26,
1999 1998 1997
Numerator:
Net Loss $ (2,204,000) $ (2,028,000) $( 2,968,000)
Preferred Stock Dividends (441,000) (243,000) (143,000)
-------------- ------------ ------------
<S> <C> <C> <C>
Numerator for net loss per share - loss attributable
to common shareholders $ (2,645,000) $ (2,271,000) $( 3,111,000)
Denominator:
Denominator for basic and diluted earnings
per share - weighted-average shares 17,774,000 17,230,000 17,074,000
------------- ------------ ------------
Net loss per share -- basic and diluted $ (0.15) $ (0.13) $ ( 0.18)
============= ============= =============
</TABLE>
-26-
<PAGE>
ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Net loss per share (continued)
In the above computation of net loss per share, preferred stock dividends
include dividends accumulated during the fiscal year on cumulative preferred
stock. 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 4,105,585, 3,244,719, and 2,853,234 shares of
Common Stock as of April 24, 1999, April 25, 1998, and April 26, 1997,
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 840 shares as Series A
Preferred Stock, 160 shares of Series B Preferred Stock and 200 shares of Series
C 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 24, 1999, through private placements, the Company issued 399 shares
of Series A Preferred Stock in exchange for notes or $12,500 cash per share,
generating gross proceeds of $4,988,000 to the Company.
The Series A Preferred Stock is convertible at the option of the holder, in
whole or in part, at any time after March 1, 1997 (the "Initial Conversion
Date") into Common Stock of the Company at a price per share of Common Stock
equal to (i) $1.00 per share, or (ii) such adjusted price as may form time to
time be adjusted (the "Conversion Price"). If converted into Common Stock, each
Preferred Share will entitle the holder to receive warrants to purchase a number
of shares of Common Stock at a price of $1.25 per share, equal to the number of
shares of Common Stock into which the Preferred Shares were converted. The
warrants will be valid for a period of five years commencing from the date of
issuance.
The Series B Preferred Stock is convertible at the option of the holder into
Common Stock of the Company at a price of $.75 per share and is identical to
Series A Preferred Stock in all other aspects. The Company has authorized 160
shares and sold 24 shares as of April 24, 1999, generating gross proceeds of
$300,000.
The Series C Preferred Stock is a $10,000 denomination, 9% convertible
cumulative redeemable issue with a conversion price of $.25 per share. There are
no warrants attached to this issuance. The Company has authorized 200 shares and
sold 37 shares through April 24, 1999, generating gross proceeds of $370,000.
Series A, B, and C Preferred Shares pay dividends semi-annually each February 1,
and August 1, commencing on February 1, 1997. The Company may elect to pay
dividends in the form of Common Stock of the Company issued at 90% of the then
current market price of the Common Stock. For the purposes of this calculation
the "current market price" shall mean the average of the daily closing prices
for each of the thirty consecutive business days prior to such dividend date.
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.
On October 15, 1998, the Company paid its August 1, 1998 Preferred Stock
dividend requirement by issuing common stock. The total number of common shares
issued for the dividend was 274,985. The shares were common stock. The shares
were valued at $0.75 per share.
10. Operating leases
Aggregate rental expense for fiscal years 1999, 1998, and 1997 was $45,000,
$53,000, and $48,000, respectively.
-27-
<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 24, 1999 and
April 25, 1998:
<TABLE>
<CAPTION>
1999 1998
----------- ------------
<S> <C> <C>
Land $ 57,000 $ 57,000
Building and building improvements 572,000 572,000
Machinery and equipment 1,120,000 948,000
---------- ----------
1,749,000 1,577,000
Less accumulated depreciation (1,004,000) (933,000)
------------ ----------
$ 745,000 $ 644,000
========== ==========
</TABLE>
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
$15,000 in 1999, $16,000 in 1998, and $13,000 in 1997. 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
The Company has been named as defendant in a case with a current vendor. The
Company is vigorously defending this action with alleged damages of $92,000.
There is no assurance that the Company will prevail with its defense.
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, other than the aforementioned suit, would not have a material
adverse effect on its financial statements.
Although there can be no assurance as to the ultimate disposition of these
matters and the lawsuits disclosed above, management of the Company believes,
based upon information available at this time, that the ultimate outcome of
these maters will not have a material adverse effect on the operations and
financial condition of the Company.
-28-
<PAGE>
ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Joint venture agreement
On June 25, 1997, the Company entered into an agreement with Damon Industries, a
privately-owned national juice manufacturer with headquarters in Sparks, Nevada,
to form the "Virtual Squeeze(R)" joint venture. The purpose of the joint venture
was 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 manufactured dispensing equipment and provided
technical support to the joint venture, and Damon manufactured fruit juice and
provided marketing and administrative support for the joint venture. The
dispensing equipment was placed in a customer's facility at no charge providing
the customer commited to purchasing all of its juice from the Virtual
Squeeze(R). Resulting profits or losses from the juice sales were split equally
by the Company and Damon.
On December 31, 1998, the joint venture was terminated with the mutual consent
of both parties. Changes in the strategic direction of the two organizations
made it necessary to liquidate the joint venture assets. The Company has taken
full control of the product line and the joint venture assets.
Through December 31, 1998, the Company provided $269,000 of juice dispensing
equipment to the joint venture and incurred $109,000 in losses from the joint
venture's operations. Equipment and other assets the Company obtained in the
liquidation totaled $239,000, resulting in a gain of $79,000.
15. NASDAQ delisting
On October 7, 1998, the Company was notified by NASDAQ that its common stock
would be delisted from the NASDAQ Small Cap Market effective with the close of
business on October 7, 1998. This event followed a decision by NASDAQ Listing
Qualifications Panel regarding the Company's appeal for a temporary exemption
from the recently adopted requirements for continued listing on the NASDAQ Small
Cap Market.
On October 8, 1998, the Company's common stock began trading on the OTC Bulletin
Board under the symbol ABCC. Several broker-dealers continue to publish
quotations and otherwise make a market in the Company's common stock on the OTC
Bulletin Board.
16. Subsequent events
Subsequent to fiscal year end, April 24, 1999, and through July 20, 1999, the
Company has received $420,000 from the issuance of a promissory note that bears
interest 10% per annum. These funds will be used for necessary operating
expenses.
On June 11, 1999, the Company issued Common Stock to satisfy the February 1,
1999 Preferred Stock Dividend requirement. There were 1,231,565 shares issued
which were valued at $ 0.191 per share.
On June 24, 1999, the Company entered into a contract to sell its Akron, Ohio
headquarters for $590,000 in cash. The property is encumbered by a mortgage in
favor of an institutional lender. The principal balance of the mortgage was
$244,000 as of April 24, 1999 (See Note 5). The contract provides the buyer 60
days within which to cancel the contract to the extent it cannot obtain the
necessary financing to effect the purchase. The contract also provides for a
lease to the Company of at least one year with a monthly rent of $5,000 plus
insurance, taxes and other operating expenses of the property. The Company
believes that there is sufficient supply of similar space in the greater Akron,
Ohio area to provide adequate alternatives at the expiration of such lease.
-29-
<PAGE>
ABC DISPENSING TECHNOLOGIES, INC. (CONSOLIDATED)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
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 24, 1999
Allowance for doubtful accounts $ 84,000 $ (22,000) $ 2,000(a) $ 60,000
======== =========== ============ ========
Allowance for inventory obsolescence $909,000 $ 5,000 $ 440,000(b) $474,000
======= =========== ========== =======
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
======= ============= ======= =======
</TABLE>
(a) Uncollectable accounts written off, net of recoveries.
(b) Inventory written off and/or disposed of.
-30-
<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. Certain information concerning the Executive Officers is also
included below:
Name Position
---- --------
Charles M. Stimac, Jr. President and Director
Herbert L. Luxenburg 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. 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.
Dr. William L. Shanklin has been a Director of the Company since
December 1998.
Mr. C. Rand Michaels resigned his position as director of the Company
effective June 23, 1999.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
Incorporated herein by reference from the Company's definitive Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
Incorporated herein by reference from the Company's definitive Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
Incorporated herein by reference from the Company's definitive Proxy
Statement.
-31-
<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:
10.1 Employment agreement dated March 1, 1997 by and between the Registrant
and Charles M. Stimac, Jr.
10.2 Form of Director Option Agreement dated October 30, 1998.
10.3 Amended 1995 Stock Option Plan.
10.4 Amendment #1 to Employment agreement between the Registrant and Charles
M. Stimac, Jr.
10.5 Contract for sale of property.
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.
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 24, 1999, the Company filed no
reports on Form 8-K.
-32-
<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.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/S/ President & Director July 22, 1999
----------------------------
Charles M. Stimac, Jr.
/S/ Director July 22, 1999
----------------------------
Herbert L. Luxenburg
/S/ Director July 22, 1999
----------------------------
Frank E. Vaughn
/S/ Director July 22, 1999
----------------------------
Norbert J. Lewandowski
/S/ Director July 22, 1999
----------------------------
William L. Shanklin
</TABLE>
-33-
NAI Cummins Real Estate COMMERCIAL REAL ESTATE SERVICES, WORLDWIDE
New America International
REAL ESTATE SALES AGREEMENT
1. GENERAL TERM: ABC Beverage Seller, agrees to sell to Donald R. Bourn Buyer,
who agrees to buy, for the sum of ($595,000.00) real estate located at 451
Kennedy Road, Akron, Ohio 44305 which sale is prcured by NAL/ JIM CUMMINS REAL
ESTATE Broker, including the following: N/A
2. Co-brokerage: This sales is co-brokered with Colliers International Broker,
on a basis.
3. Payment: The buyer agrees to place in escrow payable to the order
of NAI/ JIM CUMMINS REAL ESTATE, TRUST ACCOUNT.
$ CASH CHECK When buyer signs this Agreement.
$ 5,000.00 CASH CHECK X When Seller signs this Agreeement.
$ To be deposited with NAI/ Jim Cummins Real Estate [ILLEGIBLE] upon
acceptance of the Offer.
$ 590,000.00 Balance by: at Closing.
4. DEPOSIT: Pursuant to the Ohio Revised Code, in the event of a dispute, a
Mutual Release shall be executed by all parties prior to the release of any
monies deposited. In the event of a dispute over the disposition of the
deposit, the Broker shall retain said deposit until: (1) Buyer and Seller
have settled the dispute; (2) Disposition has been ordered by a final court
order or (3) Replace deposits said amount with a court pursuant to
applicable court procedures.
5. SPECIAL CONDITIONS: Buyer has the right to make physical, mechanical and
environmental inspections at his expense and to his satisfaction. Buyer
will occupy property at closing or if Seller desires to stay as a Tenant
will lease to Seller for a period of one year at a lease rate of $5,000.00
per month absolute net.
6. MORTGAGE: Buyer has 60 days to obtain a mortgage commitment and if not
obtained this Contract is void. All money and notes in escrow shall be
promptly returned to Buyer, without further liability by, between and among
Seller, Buyer, and Broker pursuant to Paragraph 4 above.
7. GENERAL WARRANTY DEED: The General Warranty Deed will be in the name of
Donald R. Bourn. Seller shall convey title by General Warranty Deed, which
shall accept reservations, restrictions, [ILLEGIBLE], conditions, zoning
ordinances, legal highways, if any, of record, and taxes and assessments
not yet due and payable.
8. ESCROW/CLOSING: Chicago Title Iinsurance Company of its assigns, shall be
the Escrow/Closing Agent. Closing of the sale under this Agreement shall
take place on or before September 1, 1999; or such other time and place as
is mutually agreeable to the parties. Authority is given to the
Escrow/Closing Agent to make payment of the selling expenses.
9. POSSESSION: Buyer shall be given possession of the property (to be
negotiated) the Deed is filed.
10. TITLE POLICY: Seller shall provide and pay for the expense of a Guaranteed
Title in the amount of the purchase price. The additional cost for Title
Insurance coverage, if required, shall be paid for by Buyer.
11. SELLER'S EXPENSES: Seller shall pay a brokerage fee as set forth by
agreement between the Seller and the Broker, expenses of preparing deed,
county transfer taxes, cost of guaranteed title, a tax promotion and
one-half the escrow fee.
12. BUYER'S EXPENSES: The buyer shall pay the cost of filing the deed and shall
pay for any additional cost of Title Insurance coverage, if required, and
any other expenses of the mortgage and one-half the escrow fee.
13. TAXES AND ASSESSMENTS: Taxes and Certified assessments shall be prorated as
of the date the deed is filed. If new construction or a tax bill is not yet
available, the Escrow/Closing Agent shall estimate the taxes, hold 1.5
times the estimated amount in escrow, and pay the actual bill when
available and refund the difference to Seller.
14. RISK OF LOSS: Any risk of loss to the property shall be borne by Seller
until title has been conveyed to Purchaser.
15. TENANTS: If this is rental property, rent shall be prorated to the date the
deed is filed. Sellers shall pay Buyer the amount of the proration and the
amount of any security Deposits.
16. VACANT LAND: If this is vacant land for which there is no County approved
sewer, Buyer has 45 days to obtain septic approval. If the approval is
denied, this Contract is void.
<PAGE>
17. CONDITION OF PROPERTY: Buyer has inspected the property and is buying the
property in its present "AS IS" condition, except as written, and
acknowledges that he has examined the same, including underground petroleum
storage. EPA requirements, costs and/or income and expense and signed this
agreement as a result of examination and not upon representation made by
SELLER, BROKER, or any Agent or Salesperson. (BROKER shall not be liable
for anydefaults arising from any acts or omissions by or upon the part of
SELLER or BUYER). Buyer and his agent shall havae reasonable access to the
property to inspect the condition of the premises including the plumbing,
heating and electrical systems, and if applicable, well and septic systems,
and conduct Environmental Phase I Audit. THE SELLER HEREBY AFFIRMS THERE
ARE NO EXISTING OR PENDING COMPLIANCE ORDERS BY ANY GOVERNMENT AGENCY OR
AUTHORITY.
18. ARBITRATION: Any dispute as a result of this transaction shall be settled
by binding arbitration by the American Arbitration Association and its
rules.
19. USE OF PROPERTY: It is Buyer's duty to determine zoning and any regulations
restricting the use of the property. Buyer accepts the property based on
its independent duty to determine zoning and is not relying upon any
statements or actions of Seller, the Broker or any person representing
either.
20. ORAL STATEMENTS: Are you relying on any oral statement that is not in this
agreement? (Please initial your answer). Yes [ ] No [X] If yes, please
write the oral statement:
21. EXPIRATION: This offer shall expire unless a copy hereof with Seller's
written acceptance is delivered to Buyer or his Representatives within 7
days from date.
22. TIME: This is of the essence of this Agreement.
23. ADDENDUMS: THIS CONTRACT IS SUBJECT TO THE AGENCY DISCLOSURE. FORMS
PROVIDED BY SELLER, AND THE FOLLOWING ADDENDUM:
24. All data about the property, its condition, [ILLEGIBLE], income and
expense, buildings, dimensions, or environmental disclosure has been
provided by Seller. NAI/Jim Cummins Real Estate and its agents or sales
persons do not guarantee any of the information. If you have any doubts,
you should contact your legal counsel, your accountant, or any of your
advisors so that you can determine the accuracy of any of this information
independently.
BUYER: /s/ Date: 6/23/98 SELLER: Date: 6/23/99
BUYER: Date: SELLER: Date:
ADDRESS: ADDRESS:
TELEPHONE: TELEPHONE:
WITNESS: WITNESS:
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-25-1999
<PERIOD-START> APR-27-1998
<PERIOD-END> APR-26-1998
<CASH> 65,000
<SECURITIES> 0
<RECEIVABLES> 262,000
<ALLOWANCES> 60,000
<INVENTORY> 1,497,000
<CURRENT-ASSETS> 1,764,000
<PP&E> 1,749,000
<DEPRECIATION> 1,004,000
<TOTAL-ASSETS> 2,622,000
<CURRENT-LIABILITIES> 2,528,000
<BONDS> 233,000
0
5,608,000
<COMMON> 19,947,000
<OTHER-SE> (25,694,000)
<TOTAL-LIABILITY-AND-EQUITY> 2,622,000
<SALES> 1,710,000
<TOTAL-REVENUES> 1,710,000
<CGS> 1,678,000
<TOTAL-COSTS> 2,120,000
<OTHER-EXPENSES> (73,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 189,000
<INCOME-PRETAX> (2,204,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,204,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,204,000)
<EPS-BASIC> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
