FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED JANUARY 23, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission file number: 0-14922
ABC DISPENSING TECHNOLOGIES, INC.
---------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-2001203
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
451 Kennedy Road Akron, Ohio 44305
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330) 733-2841
Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $.01
----------------------------
(Title of class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: [ X ] Yes [ ] No
The number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date is:
Common Stock outstanding at March 1, 1999 was 17,866,483 shares.
1
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INDEX
ABC DISPENSING TECHNOLOGIES, INC. AND SUBSIDIARIES
Part I Financial Information Page No.
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Item 1. Financial Statements (Unaudited)
Consolidated balance sheets - January 23, 1999 and April 25, 1998 3
Consolidated statements of operations - Nine months and three months
ended January 23, 1999 and January 24, 1998 4
Consolidated statements of cash flows - Nine months ended January 23, 1999
and January 24, 1998 5
Consolidated statement of stockholders' equity - Nine months ended January 23, 1999 6
Notes to consolidated financial statements 7-10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-13
Part II Other Information
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Item 1. (Not Applicable)
Item 2. (Not Applicable)
Item 3. (Not Applicable)
Item 4. (Not Applicable)
Item 5. (Not Applicable)
Item 6. (A) Exhibits and Reports 14
Signature 15
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2
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ABC DISPENSING TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS January 23, 1999 April 25, 1998
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Current assets:
Cash and cash equivalents $ - $ 351,000
Trade receivables:
Accounts receivable, less allowance for doubtful accounts
of $57,000 and $84,000 as of January 23, 1999, and
April 25, 1998, respectively 192,000 708,000
Inventories 1,783,000 1,290,000
-------------- --------------
Total current assets 1,975,000 2,349,000
Property, Plant, and Equipment 594,000 644,000
Other assets:
Investment in Joint Venture - 202,000
Intangible assets, less accumulated amortization of $639,000
and $633,000 as of January 23, 1999, and April 25, 1998, respectively 24,000 29,000
Patents pending and deferred charges 51,000 70,000
-------------- --------------
75,000 301,000
-------------- -------------
TOTAL ASSETS $ 2,644,000 $ 3,294,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Current portion of long-term debt $ 22,000 $ 36,000
Short-term notes payable 595,000 300,000
Line of credit - 201,000
Accounts payable 888,000 649,000
Accrued liabilities:
Accrued Interest 51,000 22,000
Employee compensation and benefits 240,000 199,000
Warranty reserve 161,000 169,000
Other 142,000 197,000
Deferred income 240,000 261,000
-------------- --------------
Total current liabilities 2,339,000 2,034,000
Long-term debt 238,000 257,000
Stockholders' equity:
Preferred Stock - Series A, 9% cumulative; authorized 480 shares, 399
and 374 shares issued
and outstanding at January 23, and April 25, respectively 4,987,000 4,675,000
Preferred Stock - Series B, 9% cumulative;
authorized 160 shares, 24 shares issued
and outstanding at January 23 300,000 -
Preferred Stock - Series C, 9% cumulative;
authorized 200 shares, 12 shares issued
and outstanding at January 23 120,000 -
Common Stock, $.01 par value; authorized 50,000,000
shares; 17,866,483 and 17,591,498 shares issued and
outstanding at January 23 and April 25, respectively 179,000 176,000
Additional paid-in capital 19,714,000 19,461,000
Retained earnings (deficiency) (25,212,000) (23,264,000)
-------------- --------------
88,000 1,048,000
Less notes receivable - stockholders ( 21,000) ( 45,000)
-------------- --------------
Total Stockholders' Equity 67,000 1,003,000
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,644,000 $ 3,294,000
============== ==============
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See accompanying notes.
3
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ABC DISPENSING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Nine months and three months ended January 23, 1999 and January 24, 1998
(unaudited)
Nine Months Ended Three Months Ended
Jan. 23, 1999 Jan. 24, 1998 Jan. 23, 1999 Jan. 24, 1998
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Revenues:
Equipment sales $ 720,000 $ 4,088,000 $ 84,000 $ 1,857,000
Service revenues 598,000 423,000 201,000 138,000
-------------- ------------- ------------- ---------------
Total revenues 1,318,000 4,511,000 285,000 1,995,000
Cost and expenses:
Cost of equipment sold 546,000 2,917,000 44,000 1,135,000
Service expenses 811,000 525,000 221,000 270,000
General and administrative 1,250,000 1,214,000 476,000 331,000
Selling and marketing 289,000 337,000 74,000 115,000
Research and development 128,000 497,000 24,000 318,000
-------------- ------------- ------------- ---------------
Total cost and expenses 3,024,000 5,490,000 839,000 2,169,000
Loss from operations (1,706,000) ( 979,000) (554,000) ( 174,000)
Other income and expense:
Interest expense ( 160,000) ( 89,000) ( 48,000) ( 41,000)
Equity in loss of joint venture ( 42,000) - ( 4,000) -
Gain on dissolution of
joint venture 88,000 - 88,000 -
Other income 78,000 35,000 30,000 ( 29,000)
-------------- ------------- ------------- ---------------
Total other income/(expense) ( 36,000) (54,000) 66,000 ( 70,000)
Net loss ($1,742,000) ($ 1,033,000) ($ 488,000) ($ 244,000)
============== ============= ============= ===============
Net loss per share -
Basic and Diluted ($ 0.12) ($ 0.07) ($ 0.03) ($ 0.02)
============== ============= ============= ===============
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See accompanying notes.
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ABC DISPENSING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Nine Months Ended Nine Months Ended
January 23, 1999 January 24, 1998
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NET CASH USED IN OPERATING ACTIVITIES ( 938,000) (1,242,000)
- -------------------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Additions to property, plant and equipment ( 9,000) 46,000
Additions to patents - ( 30,000)
Investment in joint venture ( 188,000) ( 123,000)
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( 197,000) ( 107,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from private placements of Preferred Stock 732,000 462,000
Proceeds from (repayments of) line of credit ( 201,000) 371,000
Repayment of notes payable and loan costs ( 33,000) ( 29,000)
Proceeds from issuance of notes payable 260,000 335,000
Proceeds from issuance of treasury stock - 37,000
Proceeds from collection of stockholders receivable 24,000 5,000
Other 2,000 10,000
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Net cash provided by financing activities 784,000 1,191,000
------------- -------------
Net decrease in cash and cash equivalents ( 351,000) ( 158,000)
Cash and cash equivalents at beginning of year 351,000 445,000
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ - $ 287,000
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See accompanying notes.
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ABC DISPENSING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended January 23, 1999
(unaudited)
Common
Number of Stock Preferred Preferred Preferred Additional Retained Notes
Shares of $.01 Par Stock Stock Stock Paid-in Earnings Receivable -
Common Stock Value Series A Series B Series C Capital (Deficiency) Stockholders
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BALANCE AT APRIL 25, 1998 17,591,498 $176,000 $4,675,000 $ 0 $ 0 $19,461,000 $(23,264,000) $(45,000)
Preferred Stock private
placement 312,000 300,000 120,000
Preferred Stock Dividend 274,985 3,000 203,000 (206,000)
Warrants Outstanding -
Original Issue Discount 50,000
Collection on notes receivable-
stockholders 24,000
Net loss (1,742,000)
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BALANCE AT JANUARY 23, 1999 17,866,483 $179,000 $4,987,000 $ 300,000 $ 120,000 $19,714,000 $(25,212,000) $(21,000)
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See accompanying notes.
6
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ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles applicable
to interim financial statements. Accordingly, they do not include all of the
information and notes required for complete financial statements. In the opinion
of management, all adjustments and reclassifications considered necessary for a
fair and comparable presentation have been included and are of a normal
recurring nature. Operating results for the nine months and three months ended
January 23, 1999, are not necessarily indicative of the results that may be
expected for the year ending April 24, 1999. These financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's Form 10-K filed with the Securities and Exchange Commission on
July 24, 1998.
1. GOING CONCERN UNCERTAINTY
The Company has reported a net loss for each year of operation since its
inception except for 1989, and as of January 23, 1999 has an accumulated
retained earnings deficiency of $25,212,000. The Company had negative cash flow
from operating activities of $938,000 for the nine months ended January 23, 1999
and $1,594,000 for the year ended April 25, 1998. Cash and cash equivalents
declined from $351,000 at the beginning of fiscal 1999 to $0 at January 23,
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 successful in raising capital
from private investors and raised approximately $6,200,000 over the past three
years through private placements of both preferred and common stock. The Company
is continuing in it efforts to raise capital through private placements of 9%
Convertible Cumulative Preferred Stock . Proceeds from private placements will
be used to reduce accounts payable and provide additional working capital. No
assurances can be given that the Company will be successful in raising
additional capital. Further, there can be no assurance, assuming the Company
successfully raises additional funds, that the Company will achieve profitable
operations or positive cash flow. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. No adjustments to the
amounts or classification of assets and liabilities which could result from the
outcome of this uncertainty are reflected in the consolidated financial
statements.
The Company intends to satisfy its short-term (i.e., the next 12-month period)
capital requirements using the proceeds of offerings of its equity securities
and/or debt securities. The Company is currently attempting to raise at least
$2,000,000 through an offering of its Convertible Preferred Stock. Longer term
capital needs are anticipated to be satisfied by additional proceeds of
offerings of the Company's equity and/or debt securities, improvements in
operational cash flow, warrant exercise proceeds, and traditional credit
facilities. There can be no assurance that at any time a sufficient market for
the Company's equity offerings or debt financings will be available upon
commercially reasonable terms, if at all.
2. INVENTORIES
At January 23, 1999 and April 25, 1998, inventories consisted of the following:
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October 24, 1998 April 25, 1998
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Raw Materials $ 660,000 $ 785,000
Work-in-process 283,000 293,000
Finished goods 840,000 212,000
-------------------- -----------------
$1,783,000 $1,290,000
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The above amounts are net of obsolescence reserves of $782,000 and $909,000 at
January 23, 1999 and April 25, 1998 respectively.
7
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ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. FINANCING ARRANGEMENTS
SHORT TERM NOTES PAYABLE
In August, 1997 the Company began issuing notes payable through a private
placement in multiples of $12,500, or fractions thereof. As of January 23, 1999,
the Company has issued notes in the aggregate of $385,000. The notes accrue
interest at the rate of 10%, with principal and interest paid at maturity. The
initial maturity date was June 30, 1998, however, the Company had the option,
which it exercised, to extend the maturity date to December 31, 1998. 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. At December 31, 1998
the holders of the notes agreed to extend the maturity date of the notes to
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 $113,000
using the Black-Scholes option pricing model using the following
weighted-average assumptions: a risk free interest rate of 6.37% and expected
volatility of .82%. A discount on notes payable has been recorded for that
amount. The discount has been fully amortized as of December 31, 1998.
In October, 1998 the Company began issuing notes payable in multiples of $10,000
through a private placement. As of January 23, 1999, the company has issued
notes in the aggregate of $210,000. The notes accrue interest at the rate of
10%, with principal and interest paid at maturity. The initial maturity date of
the notes is December 31, 1999.
LINE OF CREDIT
On December 18, 1995, the Company established a line of credit which is secured
by accounts receivable and other assets of the Company. The credit line, as
adjusted, provided for a maximum of $500,000 borrowing capacity to the Company.
The credit line matured on December 31, 1998 and no amounts were outstanding at
that time. At April 25, 1998, $201,000 was outstanding and due to formula
restrictions no funds were available to be advanced thereunder. The line of
credit bears an interest rate of prime plus four points (12.00% and 12.50% at
December 26, 1998 and April 25, 1998, respectively). The weighted-average
interest rate for the nine months ended January 23, 1998 and the year ended
April 25, 1998 was 12.36% and 12.50%, respectively.
4. NET LOSS PER SHARE
The following table sets forth the computation of net loss per share - basic and
diluted:
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9 Months Ended 3 Months Ended
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January 23, January 24, January 23, January 24,
1999 1998 1999 1998
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Numerator:
Net Loss $( 1,742,000) $ ( 1,033,000) $( 488,000) $ ( 244,000)
Preferred Stock Dividends ( 338,000) ( 243,000) ( 117,000) ( 84,000)
------------- --------------- ------------- --------------
Numerator for net loss per share - loss
attributable to common shareholders $( 2,080,000) $ ( 1,276,000) $( 605,000) $ ( 328,000)
Denominator:
Denominator for basic and diluted earnings
per share - weighted-average shares 17,651,934 17,178,863 17,712,370 17,330,347
------------- --------------- ------------- --------------
Net loss per share -- basic and diluted $ ( 0.12) $ ( 0.07) $ ( 0.03) $ ( 0.02)
============= =============== ============= ==============
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8
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ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. NET LOSS PER SHARE (CONTINUED)
The effect of potentially dilutive securities have not been included in the
above computations since such securities would have been anti-dilutive for the
periods presented. These potentially dilutive securities consisted of options
and warrants to purchase 3,364,719 and 2,855,211 shares of Common Stock as of
January 23, 1999, and January 24, 1998, respectively.
5. PREFERRED STOCK
In September 1996 the shareholders of the Company approved an amendment to the
Company's Certificate of Incorporation to authorize up to 5,000,000 shares of
Preferred stock. To date, the Company has authorized 480 shares as Series A
Preferred Stock, 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 October 24, 1998, 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 $4,987,000 to the Company.
As of January 23, 1999, through private placements, the Company issued 24 shares
of Series B 9% Cumulative Redeemable Preferred Stock in exchange for $12,500
cash per share, generating proceeds of $300,000 to the Company.
As of January 23, 1999, through private placements, the Company issued 12 shares
of Series C B 9% Cumulative Redeemable Preferred Stock in exchange for $10,000
cash per share, generating proceeds of $120,000 to the Company.
The Series A Preferred Stock is convertible at the option of the holder, in
whole or in part, at any time after March 1, 1997 (the "Initial Conversion
Date") into Common Stock of the Company at a price per share of Common Stock
equal to (I) $1.00 per share, or (II) such adjusted price as may form time to
time be adjusted (the "Conversion Price"). If converted into Common Stock, each
Preferred Share will entitle the holder to receive warrants to purchase a number
of shares of Common Stock at a price of $1.25 per share, equal to the number of
shares of Common Stock into which the Preferred Shares were converted. The
warrants will be valid for a period of five years commencing from the date of
issuance.
The Series B Preferred Stock is convertible at the option of the holder, at any
time, into Common Stock of the Company at a price per share of Common Stock
equal to $0.75 If converted into Common Stock, each Preferred Share will entitle
the holder to receive warrants to purchase a number of shares of Common Stock at
a price of $1.25 per share, equal to the number of shares of Common Stock into
which the Preferred Shares were converted. The warrants will be valid for a
period of five years commencing from the date of issuance.
The Series C Preferred Stock is convertible at the option of the holder, at any
time, into Common Stock of the Company at a price per share of Common Stock
equal to $0.25.
The Preferred Shares pay dividends semi-annually each February 1, and August 1,
commencing on February 1, 1997. The Company may elect to pay dividends in the
form of Common Stock of the Company issued at 90% of the then current market
price of the Common Stock. For the purposes of this calculation the "current
market price" shall mean the average of the daily closing prices for each of the
thirty consecutive business days prior to such dividend date.
As of February 1, 1999 there is a dividend payable on the Preferred Stock in the
amount of $234,859. The dividend will be paid in common stock of the Company. A
total of 1,231,565 common shares will be issued to satisfy the dividend.
9
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ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Dissolution of Joint venture
The Company and Damon Industries mutually agreed to dissolve the "Virtual
Squeeze" joint venture as of December 31, 1998. The Company will continue to
operate the Virtual Squeeze juice program for its own account.
Through December 31, 1998, the Company has provided $249,000 of juice dispensing
equipment to the joint venture and has incurred $109,000 in losses from the
joint venture's operations for a net investment of $140,000. Equipment and other
assets the Company obtained from joint venture upon dissolution totaled
$228,000, resulting in a gain of $88,000.
7. NASDAQ delisting
On October 7, 1998, the Company was notified by NASDAQ that the Company's common
stock would be delisted from the NASDAQ Small Cap Market effective with the
close of business on October 7, 1998. This event followed a decision by NASDAQ
Listing Qualifications Panel regarding the Company's appeal for a temporary
exemption from the recently adopted requirements for continued listing on the
NASDAQ Small Cap Market.
On October 8, 1998, the Company's common stock began trading on the OTC Bulletin
Board under the symbol ABCC. Several broker-dealers continue to publish
quotations and otherwise make a market in the Company's common stock on the OTC
Bulletin Board.
10
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The net loss for the nine months ended January 23, 1999 was $1,742,000, an
increase of $709,000, or 68.6% over the net loss of $1,033,000 for the same
period of the prior year. The net loss for the third quarter of fiscal 1999 was
$488,000, an increase of $244,000, or 100% over the net loss of $244,000 for the
third quarter of fiscal 1998.
Revenues Nine Months Ended
January 23, January 24,
1999 1998
Equipment sales $ 720,000 $ 4,088,000
Service revenues 598,000 423,000
----------- -----------
Total $ 1,318,000 $ 4,511,000
=========== ===========
Equipment sales for the first nine months of fiscal 1999 decreased $3,368,000,
or 82..4%, over the same period of the prior year. Sales of paint colorant
dispensers and beverage equipment decreased $3,194,000 and $174,000,
respectively. For the third quarter of fiscal 1999, equipment sales decreased
$1,773,000, or 95.5%, from the third quarter of 1998. Sales of the Royal
Match(TM) paint colorant dispensers have decreased because the equipment has not
yet gained widespread market acceptance. Sales of beverage equipment decreased
because the Company is not actively marketing its beverage equipment.
Service revenues for the first nine months of fiscal 1999 increased $175,000, or
41.4% from the same period of the prior year. For the third quarter of fiscal
1999 service revenues increased $63,000, or 45.6%, over the third quarter of
fiscal 1998. These increases are attributable to service contract revenues on
Royal Match(TM) paint colorant dispensers.
Gross margins Nine Months Ended
January 23, January 24,
1999 1998
Equipment 39.4% 34.3%
==== ====
Service (20.5)% ( 5.2)%
==== ====
Total 12.2% 30.6%
==== ====
For the first nine months of fiscal 1999, gross margin as a percentage of sales
on equipment increased 5.1 points over the same period of the prior year. The
increase resulted from higher margins obtained from sales of the Royal Match(TM)
paint dispensers.
For the first nine months of fiscal 1999, gross margin as a percentage of
service revenues decreased 15.3 points over the same period of the prior year.
The decrease was caused by increased labor, travel, and parts expenses during
the first nine months of fiscal 1999.
General and administrative
For the first nine months of fiscal 1999, general and administrative expenses
increased $36,000, or 2.9%, to $1,250,000, up from $1,214,000 for the same
period of the prior year. Severance expense of $89,000 and increased payroll
expense of $214,000 were responsible for the increase. More labor is being
charged to general and administrative expense during fiscal 1999 due to lack of
activity in other functional areas. These increases were partially offset by
decreases in legal fee accruals and decreased supplies usage. Additionally,
there was not amortization of deferred charges in the current year.
11
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Selling and marketing expenses
For the first nine months of fiscal 1999, selling and marketing expense
decreased $48,000, or 14.2%, to $289,000, down from $337,000 for the same period
of the prior year. For the third quarter of fiscal 1999, selling and marketing
expense decreased $41,000, or 35.7%, to $74,000, down from $115,000 for the
third quarter of fiscal 1998. The decreases are due to changes in sales and
marketing personnel and decreased commissions paid.
Research and development
For the first nine months of fiscal 1999, research and development expense
decreased $369,000, or 74.2%, to $128,000, down from $497,000 for the same
period of the prior year. For the third quarter of fiscal 1999, research and
development expense decreased $152,000, or 86.4%, to $24,000, down from $176,000
for the third quarter of fiscal 1998. The decreases are due to the ROYAL
MATCH(TM) paint colorant dispenser, the VIRTUAL SQUEEZE(TM) juice dispenser and
the ROYAL MATCH(TM) operating software being virtually completed during the
fourth quarter of fiscal 1998.
Interest expense
For the first nine months of fiscal 1999, interest expense increased $71,000, or
79.8%, to $160,000, up from $89,000 for the same period of the prior year. For
the third quarter of fiscal 1999, interest expense increased $7,000, or 17.1%,
to $48,000, up from $41,000 for the third quarter of fiscal 1998. The increases
were caused by higher debt balances in the current periods and amortization of
the discount on notes payable.
Equity in loss of joint venture
The Company's equity in the loss of the Virtual Squeeze Joint Venture for the
first nine months of fiscal 1999 was $42,000. For the third quarter of fiscal
1999, the Company's equity in the loss of the joint venture was $4,000. The
losses are attributable to the start up costs and marketing expenses of the
joint venture.
Other income
Other income increased $43,000, or 122.8%, to $78,000 for the first nine months
of fiscal 1999, down from $35,000 for the same period of the prior year. Other
income for the current period is attributable to a distribution excess earnings
on fund assets by the Ohio Bureau of Workers Compensation and the collection of
accounts receivable that were previously written off. Other income for the nine
months of fiscal 1998 related to the reversal of estimated liabilities and
related expenses which were recorded by the Company in fiscal 1997. The
underlying matters were ultimately settled without cost to the Company in that
year.
12
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LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance decreased to $0 as of January 23, 1999, down from
$351,000 at April 25, 1998. Operations for the first three quarters of fiscal
1999 used cash of $918,000. Net cash used by investing activities was $197,000
which included advances of $188,000 to the Virtual Squeeze Joint Venture and
$9,000 in additions to the machinery and equipment. Net cash provided by
financing activities was $764,000. The cash provided by financing activities is
attributable to $992,000 in private placements of Preferred Stock and Notes
Payable which were offset by net repayments of $234,000 to the Company's line of
credit and notes payable. The Company currently has no material commitments for
capital expenditures.
The decline in sales during the first nine months of fiscal 1999 has
worsened the Company's liquidity position. The Company is currently unable to
make operational expenditures, including payroll, on a timely basis.
Additionally, the Company is unable to make any significant payments towards its
trade payables balance. To date, six lawsuits are pending against the Company by
vendors seeking payment of amounts owed them by the Company. The aggregate
amount of the suits totals $346,821.
In response to the lack of liquidity, management has reduced or
contained expenditures at the minimum levels necessary to maintain the
operations of the Company. Currently, the Company's primary source of liquidity
is raising capital through the sale of equity or equity derivatives, and debt
instruments.
The Company intends to satisfy its short-term (i.e., the next 12-month
period) capital requirements using the proceeds of offerings of its equity
and/or debt securities. The Company is currently attempting to raise at least
$2,000,000 through an offering of its Convertible Preferred Stock. Longer term
capital needs are anticipated to be satisfied by additional proceeds of
offerings of the Company's equity and/or debt securities, improvements in
operational cash flow, warrant exercise proceeds, and traditional credit
facilities. There can be no assurance that at any time a sufficient market for
the Company's equity offerings or debt financings will be available upon
commercially reasonable terms, if at all.
The Company's long-term capital plan is critically dependent upon the
commercial success of its Products and, to the extent success is not timely
achieved, its ability to implement significant cost reduction programs. Toward
this end, Management has taken steps to increase revenue through sales and
marketing efforts that include the redeployment of research and development
resources of the Company to work closely with the Company's existing and
prospective customers in the paint and beverage industry to refine the Company's
products and maximize their commercialization. If it becomes necessary to
implement significant cost reduction programs, it is likely that such programs
will involve a significant curtailment of marketing and research and development
activities as well as payroll reductions which would likely have an adverse
affect on future operating results. There can be no assurance that the Company
will be successful in generating operating profit and sufficient operational
cash flow through the commercial success of its products or any such cost
reduction programs. If the Company is not successful in this regard, Management
will have to consider alternative uses of its assets including the possible
licensing or outright sale of one or more of its proprietary technologies.
The current liquidity position of the Company and the inability of
operations to generate positive cash flow raise substantial doubt about the
Company's ability to continue as a going concern (see Note 1 to the Financial
Statements).
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) The following exhibits are incorporated by reference herein or annexed to
this quarterly report:
3.1 Certificate of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
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.
11.1 Statement regarding computation of per share earnings (see Item 1 of
this Form 10-Q).
21.1 Subsidiaries of the Registrant.
27. Financial Data Schedule (for S.E.C. electronic filing only)
(b) Current reports on Form 8-K during the quarter ended January 23, 1999.
During the Quarter ended January 23, 1999, no reports were filed on
Form 8-K.
14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ABC Dispensing Technologies, Inc.
Date: March 11, 1999 /s/ Charles M. Stimac, Jr.
----------------- ----------------------------
Charles M. Stimac, Jr.
President/CEO
15
AMENDMENT NO. 1
to
EMPLOYMENT AGREEMENT
This Amendment No. 1 to Employment Agreement ("Amendment No. 1") is
made as of December 16, 1998, between ABC Dispensing Technologies, Inc., a
Florida corporation (the "Company") and Charles M. Stimac, Jr. (the "Employee").
WHEREAS, the Company and the Employee have entered into an Employment
Agreement dated as of March 1, 1997 (the "Original Agreement" and as amended
hereby the "Employment Agreement"); and
WHEREAS, the Board of Directors of the Company have deemed it
appropriate to amend the Original Agreement to provide better tailored
incentives for the Employee,
NOW, THEREFORE, the Company and the Employee, for good and valuable
consideration the receipt of which is hereby acknowledged, agree as follows:
1. All terms of the Original Agreement not expressly modified or
amended herein shall remain in full force and effect.
2. Employee shall receive additional compensation (the "Capital
Bonus") in an amount equal to 2% of the gross proceeds of the
sale by the Company of its capital stock or warrants to
purchase same between September 1, 1998 and June 30, 1999 if
the aggregate of such proceeds exceeds $1,000,000; provided
that (i) proceeds received by the Company as a result of the
conversion or exercise of a derivative security whether
outstanding on the date hereof or issued hereafter shall not
be considered as proceeds eligible for inclusion in the
computation of the Capital Bonus, (ii) to the extent such
gross proceeds exceed in the aggregate $3,000,000, the Capital
Bonus shall be 3% of the gross proceeds (for example, if the
Company raised $750,000, $1,500,000 or $3,400,000, the Capital
Bonus would be $0, $30,000 or $102,000, respectively), (iii)
proceeds of the sale of securities for which the Company pays
a commission to a person other than Employee shall not be
eligible for inclusion in the computation of the Capital
Bonus, (iv) proceeds received by the Company in a form other
than cash or other immediately available funds shall not be
eligible for inclusion in the computation of the Capital Bonus
and (v) for purposes of this provision, capital stock shall be
deemed to include preferred stock and common stock. The
Capital Bonus shall be paid to the Employee at the end of each
fiscal quarter of the Company based upon the proceeds of the
sale of the capital stock (or warrants to purchase same)
received during such fiscal quarter. In the event the
Employment Agreement is terminated for any reason other than
by the Company without cause (as specified in Section 5(b) of
the Original Agreement), the Employee's right to the Capital
Bonus shall cease as of the end of the fiscal quarter during
which such termination occurred. If the Employment Agreement
is terminated by the Company without cause (as specified in
Section 5(b) of the Original Agreement), the Employee shall
continue to be entitled to the Capital Bonus through June 30,
1999.
1
<PAGE>
3. Reference is made to the warrants to purchase 300,000 shares
of common stock granted to Employee by the Board of Directors
on July 15, 1996, which included 100,000 warrants vesting upon
the earlier to occur of the expiration of ten (10) years from
the date of grant or such date that the price per share of the
Company's common stock has traded at a price of $5.00 or
better for ninety (90) consecutive days (the "$5 Warrants")
and 100,000 warrants vesting upon the earlier to occur of the
expiration of 10 years from the date of grant or the date the
price per share of the Company's common stock has traded at a
price of $10.00 or better for ninety (90) consecutive days
(the "$10 Warrants"). Effective immediately, the $5 Warrants
are hereby amended to vest upon the earlier to occur of July
15, 2006 or such date the price per share of the Company's
common stock has traded at a price of $3.00 or better for
ninety (90) consecutive days and the $10 Warrants are hereby
amended to vest upon the earlier to occur on July 15, 2006 or
the date the price per share of the Company's common stock has
traded at a price of $4.00 or better for ninety (90)
consecutive days. For purposes of this section, the Company's
common stock shall be deemed to trade for a particular day at
the closing price per share for such day as reported by the
NASDAQ or similar reporting service, or if no such closing
price is available, the average of the bid and asked for such
day. The per share prices described above shall be adjusted
appropriately for stock splits and dividends.
4. In addition to the other compensation provided for elsewhere
in this Employment Agreement, in the event of a Change of
Control (as defined below) followed by the termination of the
Employee's employment by the Company without cause (other than
due to disability or death), or a constructive termination
without cause, the Employee shall receive (within thirty (30)
days of the date of such termination) a lump sum payment of
twice the base salary and incentive compensation bonus
(exclusive of any Capital Bonus) received by the Employee
during or with respect to the last completed fiscal year of
the Company. For purposes of this Agreement, a "Change of
Control" shall occur if (i) any person or group of persons
(within the meaning of Section 13 or Section 14 of the
Securities Exchange Act of 1934, as amended) shall acquire
(other than directly from the Company) beneficial ownership
(within the meaning of Rule 13d-3 promulgated by the
Securities and Exchange Commission under said Act) of 20% or
more of the outstanding shares of common stock of the Company,
(ii) during any period of twelve (12) consecutive calendar
months, individuals who were directors of the Company on the
2
<PAGE>
first day of such period (or who were appointed or nominated
for election as directors of the Company by at least a
majority of the individuals who were directors on the first
day of such period or who were so elected or appointed other
than in connection with an actual or threatened proxy contest)
(the "Incumbent Board") shall cease to constitute a majority
of the Board of Directors of the Company, or (iii) there is
consummation of a complete liquidation or dissolution of the
Company or a merger, consolidation or sale of all or
substantially all of the Company's assets (collectively, a
"Business Combination") other than a Business Combination in
which all or substantially all of the stockholders of the
Company receive 50% or more of the stock of the company
resulting from the Business Combination, at least a majority
of the Board of Directors of the resulting company were
members of the Incumbent Board and after which no person owns
20% or more of the stock of the resulting corporation, which
did not own such stock immediately before the Business
Combination. For purposes of this section, the term
"constructive termination without cause" shall mean the
termination by the Employee of his employment at his
initiative following the occurrence of any of the following
events without his consent (i) a reduction in the Employee's
then current Base Salary, bonus formula, or a material
reduction of any employee benefit or prerequisite enjoyed by
him (other than as part of an across-the-board reduction
applicable to all executive officers of the Company); (ii) the
failure to elect or re-elect the Employee to the Board of
Directors or the removal of him from such position; (iii) a
material diminution in the Employee's duties or the assignment
to the Employee of duties that are materially inconsistent
with his duties or which materially impair the Employee's
ability to function as Chief Executive Officer and President
of the Company; (iv) the relocation of the Company's principal
office, or the Employee's own office location, as assigned to
him by the Company to a location more than 50 miles from
Akron, Ohio; or (v) the failure of the Company to obtain the
assumption in writing of its obligation to perform the
Employment Agreement by any successor to all or substantially
all of the assets of the Company within fifteen (15) calendar
days after a merger, consolidation, sale or similar
transition.
5. Except as otherwise expressly provided in this Amendment No.
1, nothing herein shall be deemed to amend or modify any
provision of the Original Agreement which shall remain in full
force and effect. This Amendment No. 1 is not intended to be,
nor shall it be construed to create a novation.
3
<PAGE>
6. This Amendment No. 1 shall not become effective under
counterparts hereof shall have been executed and delivered by
each party hereto.
IN WITNESS WHEREOF, the Company and the Employee have caused this
Amendment No. 1 to be executed, as of the day and year first above written.
ABC DISPENSING TECHNOLOGIES, INC.
By: /s/ Charles M. Stimac, Jr.
-----------------------------
Name: Charles M. Stimac, Jr.
Title: Predisent/CEO
EMPLOYEE
/s/ Charles M. Stimac Jr.
-----------------------------
Name: Charles M. Stimac, Jr.
4
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<PERIOD-END> JAN-23-1999
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5,407,000
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