----

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**FORM10-Q**

**SECURITIES AND EXCHANGECOMMISSION****Washington, D.C. 20549**

| **(Mark One)** |
|----------------|
| ý         | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  FOR THE PERIOD ENDED JULY 31, 2001** |

**OR**

| o | **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**

**ABCDISPENSING TECHNOLOGIES, INC.******(Exact name of registrant as specified inits charter)

| **Florida******                                                                    | **59-2001203******                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (State or other  jurisdiction of                                                   | (I.R.S. Employer                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| incorporation or  organization)                                                    | Identification No.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **451  Kennedy Road   Akron, Ohio******                                  | **44305******                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (Address of principal  executive offices)                                          | (Zip Code)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| Registrant’s telephone  number, including area code:  **(330) 733-2841** |
|                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                                                                               | Securities  registered pursuant to Section 12(b) of the Act:   None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                                                                               | Securities  registered pursuant to Section 12(g) of the Act:   Common Stock, Par Value $.01                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                                                                               |                                                                                                            (Title  of class) |
|                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |

             Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filing requirementsfor the past 90 days: ýYes    o No

             Thenumber of shares outstanding of each of the registrant’s classes of commonstock as of the latest practicable date is:

                           CommonStock outstanding at September 5, 2001 was 23,269,976 shares.

----

----

 

**Index**

**ABC Dispensing Technologies,Inc. and Subsidiaries**

| Part  I   | Financial  Information                                                                          |   |
|-----------|-------------------------------------------------------------------------------------------------|--------|
|      |                                                                                            |   |
| Item  1.  | Condensed  Financial Statements (Unaudited)                                                     |   |
|      |                                                                                            |   |
|      | Consolidated balance sheets  – July 31, 2001 and April 30, 2001                            |   |
|      |                                                                                            |   |
|      | Consolidated statements  of operations - Three months ended July 31, 2001 and July 31, 2000     |   |
|      |                                                                                            |   |
|      | Consolidated  statements of cash flows –Three months ended July 31, 2001 and July 31, 2000 |   |
|      |                                                                                            |   |
|      | Consolidated  statement of stockholders’ equity - Three months ended July 31, 2001         |   |
|      |                                                                                            |   |
|      | Notes to  consolidated financial statements                                                     |   |
|      |                                                                                            |   |
| Item  2.  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations     |   |
|      |                                                                                            |   |
| Part II   | Other Information                                                                               |   |
|      |                                                                                            |   |
| 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                                                                       |   |
|      |                                                                                            |   |
| Signature |                                                                                            |

 

 

**ABCDISPENSING TECHNOLOGIES, INC.CONSOLIDATED BALANCE SHEETS**

|                                                      | **(Unaudited)**                                                                                                                |          | **(Audited)**       |        |
|-----------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------|---------------|---------------------|-------------|
| **ASSETS**                                                | **July  31, 2001**                                                                                                             |          | **April  30, 2001** |        |
|                                                      | ****                                                                                                                           |          | ****                |        |
| Current Assets                                            |                                                                                                                           |          |                |        |
|                                                      | Cash and cash  equivalents                                                                                                     | $             | 48,000              |        | $ | 204,000 |   |
|                                                      | Accounts receivable,  less allowance for doubtful accounts of $152,000  as of July 31 and $159,000 as of April 30              | 200,000       |                | 138,000     |   |
|                                                      | Inventories (Note 2)                                                                                                           | 998,000       |                | 1,014,000   |   |
|                                                      | Prepaid Expenses                                                                                                               | 63,000        |                | 68,000      |   |
|                                                      |                                                                                                                                |          |                     |        |
|                                                      | Total current assets                                                                                                           | 1,309,000     |                | 1,424,000   |   |
|                                                      |                                                                                                                           |          |                |        |   |
| Property, plant, and  equipment                           | 532,000                                                                                                                        |          | 549,000             |        |
|                                                      |                                                                                                                           |          |                |        |
| Other assets                                              |                                                                                                                           |          |                |        |
|                                                      | Intangible assets,  less accumulated amortization of $501,000 for both  July 30 and April 30                                   | 11,000        |                | 11,000      |   |
|                                                      | Other                                                                                                                          | 44,000        |                | 47,000      |   |
|                                                      |                                                                                                                           |               |                |             |   |
|                                                      | 55,000                                                                                                                         |          | 58,000              |        |
|                                                      |                                                                                                                                |          |                     |        |
|                                                      |                                                                                                                           |          |                |        |
| **Total Assets**                                          | **$**                                                                                                                          | **1,896,000** | ** **          | **$**       | **2,031,000** | ** ** |
|                                                      | ****                                                                                                                           |          | ****                |        |
|                                                      |                                                                                                                           |          |                |        |
| **LIABILITIES AND STOCKHOLDERS'  EQUITY/(DEFICIT)**       |                                                                                                                           | ** **    |                | ** **  |
| Current Liabilities:                                      |                                                                                                                           |          |                |        |
|                                                      | Current portion of  long-term debt                                                                                             | $             | 19,000              |        | $ | 19,000 |   |
|                                                      | Short-term notes  payable                                                                                                      | 175,000       |                | 175,000     |   |
|                                                      | Accounts payable                                                                                                               | 473,000       |                | 302,000     |   |
| Accrued liabilities:                                      |                                                                                                                           |          |                |        |
|                                                      | Accrued interest                                                                                                               | 605,000       |                | 511,000     |   |
|                                                      | Employee compensation  and benefits                                                                                            | 118,000       |                | 82,000      |   |
|                                                      | Warranty reserve                                                                                                               | 4,000         |                | 5,000       |   |
|                                                      | Other                                                                                                                          | 93,000        |                | 206,000     |   |
|                                                      | Deferred income                                                                                                                | 318,000       |                | 329,000     |   |
|                                                      |                                                                                                                           |               |                |             |   |
|                                                      | Total current  liabilities                                                                                                     | 1,805,000     |                | 1,629,000   |   |
|                                                      |                                                                                                                           |               |                |             |   |
| Long-term debt (Note  3):                                 | 3,297,000                                                                                                                      |          | 3,192,000           |        |
| Stockholders'  equity/(deficit) (Note 5):                 |                                                                                                                           |          |                |        |
|                                                      | Preferred Stock -  Series A, 9% cumulative; authorized 840 shares; 399 shares issued and  outstanding                          |          |                |        |   |
|                                                      | Series B, 9%  cumulative authorized 160 shares; 24 shares issued and outstanding                                               |          |                |        |   |
|                                                      | Series C, 9%  cumulative authorized 200 shares; 37 shares issued and outstanding;                                              |          |                |        |   |
|                                                      | Total Preferred Stock                                                                                                          | 5,608,000     |                | 5,608,000   |   |
|                                                      | Common Stock, $.01 par  value; authorized 50,000,000 shares;  23,269,976 shares issued and outstanding at July 31 and April 30 | 233,000       |                | 233,000     |   |
|                                                      | Additional paid-in  capital                                                                                                    | 20,911,000    |                | 20,911,000  |   |
|                                                      | Accumulated deficit                                                                                                            | (29,956,000   | )                   | (29,540,000 | ) |
|                                                      |                                                                                                                           |               |                |             |   |
|                                                      | (3,204,000                                                                                                                     | )             | (2,788,000          | )           |
|                                                      | Less Treasury Stock at  cost:                                                                                                  | (2,000        | )                   | (2,000      | ) |
|                                                      |                                                                                                                           |          |                |             |   |
|                                                      | Total Stockholders’  Equity/(Deficit)                                                                                     | (3,206,000    | )                   | (2,790,000  | ) |
|                                                      |                                                                                                                                |          |                     |        |
| **Total Liabilities and  Stockholders' Equity/(Deficit)** | **$**                                                                                                                          | **1,896,000** | ** **          | **$**       | **2,031,000** | ** ** |
|                                                      |                                                                                                                                |          |                     |        |
|                                                           |                                                                                                                                |               |                     |             |  |  |  |  |

Seeaccompanying notes.

 

**ABC DISPENSING TECHNOLOGIES, INC.CONSOLIDATED STATEMENT OF OPERATIONS**Three months ended July 31, 2001 and July31, 2000(Unaudited)

|                         | **Three  Months Ended** |       |
|------------------------------|-------------------------|------------|
|                         | **July  31, 2001**      |       | **July  31, 2000** |   |
|                         | ****                    | ** ** | **** | ** ** |
| **Revenues:**                |                    | ** ** |   | ** ** |
|                         | Equipment sales         | $          | 71,000 |   | $ | 58,000 |   |
|                         | Service revenues        | 320,000    |   | 329,000 |   |
|                         |                    |            |   |  |   |
|                         | Total revenues          | 391,000    |   | 387,000 |   |
|                         |                    | ** ** |   | ** ** |
| **Cost and expenses:**       |                    | ** ** |   | ** ** |
| Cost of equipment sold       | 42,000                  |       | 44,000 |   |
| Service expenses             | 308,000                 |       | 259,000 |   |
| General and  administrative  | 259,000                 |       | 336,000 |   |
| Selling and marketing        | 83,000                  |       | 70,000 |   |
| Research and  development    | 14,000                  |       | 37,000 |   |
|                         |                         |       |  |   |
|                         |                    | ** ** |   | ** ** |
| **Total cost and expenses:** | 706,000                 |       | 746,000 |   |
|                         |                         |       |  |   |
|                         |                    |       |   |   |
| **Loss from operations:**    | (315,000                | )          | (359,000 | ) |
|                         |                    |       |   |   |
| **Other income (expense):**  |                    |       |   |   |
| Interest expense             | (102,000                | )          | (68,000 | ) |
| Other                        | 1,000                   |       | 35,000 |   |
|                         |                         |       |  |   |
|                         | (101,000                | )          | (33,000 | ) |
|                         |                    |       |   |   |
| **Net loss:**                | $                       | (416,000   | ) | $ | (392,000 | ) |
|                         |                         |       |  |   |
|                         |                    |       |   |   |
| **Net loss per share:**      |                    |       |   |   |
| Basic and diluted  (Note 4)  | **$**                   | **(0.02**  | **)** | **$** | **(0.02** | **)** |
|                         | ****                    | ** ** | **** | ** ** |

Seeaccompanying notes

 

**ABCDISPENSING TECHNOLOGIES, INC.CONSOLIDATED STATEMENT OF CASH FLOWS**(Unaudited)

|                                            | **Three Months Ended**                            |       |
|-------------------------------------------------|---------------------------------------------------|------------|
|                                            | **July 31, 2001**                                 |       | **July 31, 2000** |   |
|                                            |                                                   |       |  |   |
| **Cash flows from operating  activities****:**  |                                              |       |   |   |
| Net cash used in  operating activities:         | $                                                 | (247,000   | ) | $ | (231,000 | ) |
|                                            |                                              |       |   |   |
| **Cash flows from investing  activities****:**  |                                              |       |   |   |
|                                            | Additions to property,  plant, and equipment      | (4,000     | ) | - |   |
|                                            |                                              |       |   |   |   |
| Net cash used in  investing activities          | (4,000                                            | )          |   |   |
|                                            |                                              |       |   |   |
| **Cash flows from financing  activities****:**  |                                              |       |   |   |
|                                            | Proceeds from private  placement of notes payable | 100,000    |   | 100,000 |   |
|                                            | Other                                             | (5,000     | ) | - |   |
|                                            |                                              |            |   |  |   |
|                                            |                                              |       |   |   |
| Net cash provided by  financing activities      | 95,000                                            |       | 100,000 |   |
|                                            |                                                   |       |  |   |
|                                            |                                              |       |   |   |
| Net decrease in cash  and cash equivalents      | (156,000                                          | )          | (131,000 | ) |
| Cash and cash  equivalents at beginning of year | 204,000                                           |       | 163,000 |   |
|                                            |                                                   |       |  |   |
|                                            |                                              |       |   |   |
| **Cash and cash equivalents at  end of period** | **$**                                             | **48,000** | ** ** | **$** | **32,000** | ** ** |
|                                            | ****                                              |       | **** |   |

 

Seeaccompanying notes.

 

**ABC DISPENSING TECHNOLOGIES, INC.CONSOLIDATED STATEMENT OFSTOCKHOLDERS' EQUITY**(Three months ended July 31, 2001unaudited)

|                         | **Number of    Shares of   Common Stock** |       | **Stock   $.01 Par  Value** |        | **Preferred  Stock** |       | **Additional  Paid-in  Capital** |       | **Accumulated  Deficit** |           | **Treasury Stock** |   |
|------------------------------|------------------------------------------------|------------|----------------------------------|-------------|---------------------------|------------|--------------------------------------------|------------|-------------------------------|----------------|-------------------------|--------|
|                         | ****                                           |       | ****                             |        | ****                      |       | ****                                       |       | ****                          |           | ****                    |   |
| Balance at April 30,  2001   | 23,269,976                                     |       | $                                | 233,000     |                      | $          | 5,608,000                                  |       | $                             | 20,911,000     |                    | $      | (29,540,000 | ) | $ | (2,000 | ) |
|                         |                                                |       |                                  |        |                           |       |                                            |       |                               |           |                         |   |
| Net loss                     |                                           |       |                             |        |                      |       |                                       |       | (416,000                      | )              |                    |   |
|                         |                                           |       |                             |        |                      |       |                                       |       |                               |           |                    |   |
| **Balance at July 31, 2001** | **23,269,976**                                 | ** ** | **$**                            | **233,000** | ** **                | **$**      | **5,608,000**                              | ** ** | **$**                         | **20,911,000** | ** **              | **$**  | **(29,956,000** | **)** | **$** | **(2,000** | **)** |
|                         | ****                                           | ** ** | ****                             | ** **  | ****                      | ** ** | ****                                       | ** ** | ****                          |           | ****                    |   |

 

Seeaccompanying notes.

**ABCDISPENSING TECHNOLOGIES, INC.NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**(Information as of July 31, 2001 and forthe three months ended July 31, 2000 is unaudited)

             Theaccompanying, unaudited condensed consolidated financial statements have beenprepared in accordance with generally accepted accounting principles applicableto interim financial statements. Accordingly, they do not include all of the information and notesrequired for complete financial statements. In the opinion of management, alladjustments and reclassifications considered necessary for a fair andcomparable presentation have been included and are of a normal recurringnature.  Operating results for the threemonths ended July 31, 2001, are not necessarily indicative of the results thatmay be expected for the year ending April 30, 2002.  These financial statements should be read in conjunction with thefinancial statements and notes thereto included in the Company’s Form 10-Kfiled with the Securities and Exchange Commission on July 31, 2001.

             Whenused in this report, the words “estimate”, “project”, “intend”, “expect”,“believe” and similar expressions are used to identify forward-lookingstatements.  Such statements are subjectto risks and uncertainties that could cause actual results to differmaterially. Such risks include, without limitation, substantial competition,future capital needs, uncertainty of additional financing, potential futuredilution, dependence on key-personnel and uncertainty as to full scalecommercialization of the company’s products. Readers are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date hereof.  There can be no assurances that thecompany’s forward-looking statements will prove to be true.  The company undertakes no obligation topublicly release updates or revisions to these statements.

**1.**          **Going concern uncertainty**

             Thecompany has reported a net loss for each year of operation since its inceptionexcept for 1989, and as of July 31, 2001, has an accumulated deficit of$29,956,000.  The Company had negativecash flow from operating activities of $995,000, $1,375,000 and $1,453,000, forthe years ended April 30, 2001, April 20, 2000, and April 24, 1999,respectively.  For three months endedJuly 31, 2001, the Company had negative cash flow from operating activities of$247,000.  Management expects that theCompany will continue to incur losses and use cash in operations in the nearfuture.

             Managementrecognizes the Company must generate additional funds to ensure continuation ofoperations. The Company has been able to raise $6,573,000 in capital fromprivate investors over the past four years through private placements of bothpreferred and common stock.  The Companyraised $1,500,000 during the fiscal year ended April 30, 2001 using interest bearingNotes Payable.  The Company iscontinuing in it efforts to raise capital. The Company hopes to satisfy its short-term (i.e., the next 12-monthperiod) capital requirements with the use of proceeds from the privateplacement of its 9% Convertible Cumulative Preferred Stock and notes payable.The Company is currently attempting to raise additional capital through anoffering of its Convertible Preferred Stock. The exact terms of this offering have not been finalized.  The company hopes to satisfy its longer-termcapital needs with additional proceeds of offerings of the Company’s equityand/or debt securities, improvements in operational cash flow, warrant exerciseproceeds, and traditional credit facilities. There can be no assurance that atany time a sufficient market for the Company's equity offerings or debtfinancings will be available upon commercially reasonable terms, if atall.  Further, there can be noassurance, 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 tocontinue as a going concern.  Noadjustments to the amounts or classification of assets and liabilities, whichcould result from the outcome of this uncertainty, are reflected in theconsolidated financial statements.

**2.**          **Inventories**

             AtJuly 31, 2001 and April 30, 2001, inventories consisted of the following:

|            | **July 31, 2001** |    | **April 30, 2001** |    |
|-----------------|-------------------|---------|--------------------|---------|
|            |                   |    |                    |    |
| Raw Materials   | 598,000           |    | $                  | 608,000 |   |
| Work-in-process | 140,000           |    | 142,000            |    |
| Finished goods  | 260,000           |    | 264,000            |    |
|            |                   |    |                    |    |
| **Total**       | $                 | 998,000 |               | $       | 1,014,000 |   |
|                 |                   |         |                    |         |  |  |

Theabove amounts are net of obsolescence reserves of $622,000 at both July 31,2001 and April 30, 2001.

**3.**             **Financing arrangements**

             AtJuly 31, 2001 and April 30, 2001, long-term debt consisted of the following:

|                                                                                                     | **July 31, 2001** |      | **April 30, 2001** |   |
|----------------------------------------------------------------------------------------------------------|-------------------|-----------|--------------------|--------|
|                                                                                                     |                   |      |                    |   |
| Note payable to bank                                                                                     | $                 | 208,000   |               | $      | 213,000 |   |
| Note payable – Private  party                                                                       | 3,104,000         |      | 2,997,000          |   |
| (Less unamortized  discount of $107,000 and $114,000 for July 31,2001 and April 30, 2001,  respectively) |              |      |               |   |
| Other                                                                                                    | 4,000             |      | 1,000              |   |
|                                                                                                     |                   |      |                    |   |
|                                                                                                     | 3,316,000         |      | 3,211,000          |   |
| Less amounts due  within one year                                                                        | (19,000           | )         | (19,000            | )      |
|                                                                                                     |                   |      |                    |   |
|                                                                                                     |              |      |               |   |
| **Total Long-term debt**                                                                                 | $                 | 3,297,000 |               | $      | 3,192,000 |   |
|                                                                                                     |                   |      |                    |   |

             Thenote payable to bank, which is secured by the Company’s headquarters facility,has an adjustable interest rate (9.03% at July 31, 2001) which may not increaseor decrease by more than 3% once every three years.  On August 2, 2001, the Company renegotiated $500,000 of NotesPayable in order to obtain $150,000 of additional capital.  The total was secured by a second mortgageon the Company’s headquarters facility.

                On August 1, 1999, the Companyrenegotiated most of the 10% APR, short term notes to a 5 year, 10% APRPromissory Note that comes due on August 1, 2004.  These notes are collatoralized with the intellectual property ofthe Company.  In return for converting theshort term note to long term, the Company issued 5 year Warrants to Purchase 2,500,000Shares of Common Stock at the then current market price of $.10 per share.  The Warrants have been valued at $175,000using the Black-Scholes Option Pricing Model, using the following weightedaverage assumptions:  A Risk-Freeinterest rate of 6.355% and an expected volatility of 88.55%.  A discount on the notes payable has beenrecorded for that amount which will be amortized on a straight line basis overthe term of the notes.  During the threemonths ended July 31, 2001, the Company raised an additional $100,000 ofcapital using this long term Promissory Note.

**4.**          **Net loss per share**

             Thefollowing table sets forth the computation of net loss per share – basic anddiluted:

|                                                                               | **Three  Months Ended** |           |
|------------------------------------------------------------------------------------|-------------------------|----------------|
|                                                                               | **July  31, 2001**      |           | **July  31, 2000** |   |
|                                                                               | ****                    |           | **** |   |
| **Numerator:**                                                                     |                    |           |   |   |
| Net loss                                                                           | $                       | (416,000       | ) | $ | (392,000 | ) |
| Preferred Stock  Dividends                                                         | -                       |           | - |   |
|                                                                               |                         |           |  |   |
| Numerator for net loss  per share – loss  attributable to common shareholders | $                       |  (416,000 | ) | $ |  (392,000 | ) |
|                                                                               |                    |           |   |   |
| **Denominator:**                                                                   |                    |           |   |   |
| Denominator for basic  and diluted                                                 |                    |           |   |   |
| Earnings/share-weighted  - average shares                                          | 23,269,976              |           | 21,888,336 |   |
|                                                                               |                         |           |  |   |
|                                                                               |                    |           |   |   |
| Net loss per share -  basic diluted                                                | $                       | (0.02          | ) | $ | (0.02 | ) |
|                                                                               |                         |           |  |   |

             Theeffect of potentially dilutive securities have not been included in the abovecomputations since such securities would have been anti-dilutive for theperiods presented.  These potentiallydilutive securities consisted of options and warrants to purchase 7,223,387 and7,771,985 shares of Common Stock as of July 31, 2001 and July 31, 2000,respectively.

**5.**          **Preferred stock**

             InSeptember 1996 the shareholders of the Company approved an amendment to theCompany’s Certificate of Incorporation to authorize up to 5,000,000 shares ofPreferred stock.  To date, the Companyhas authorized 840 shares as Series A Preferred Stock, 160 shares of Series BPreferred Stock and 200 shares of Series C Preferred Stock.

             TheCompany offered shares of 9% convertible cumulative redeemable Preferred Stock,Series A (“Series A Preferred Stock”) in exchange for the surrender of theCompany’s outstanding  $25,000, 9%Convertible Subordinated Redeemable Notes due August 1, 1999 (“Notes”).

             Throughprivate placements, the Company has issued 399 shares of Series A PreferredStock in exchange for notes or $12,500 cash per share, generating grossproceeds of $4,988,000 to the Company.

             TheSeries A Preferred Stock is convertible at the option of the holder, in wholeor 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 timeto time be adjusted (the “Conversion Price”). If converted into Common Stock, each Preferred Share will entitle theholder to receive warrants to purchase a number of shares of Common Stock at aprice of $1.25 per share, equal to the number of shares of Common Stock intowhich the Preferred Shares were converted. The warrants will be valid for a period of five years commencing fromthe date of issuance.

             TheSeries B Preferred Stock is convertible at the option of the holder into CommonStock of the Company at a price of $.75 per share and is identical to Series APreferred Stock in all other aspects. The Company has authorized 160 shares and sold 24 shares, generatinggross proceeds of $300,000.

             TheSeries C Preferred Stock is a $10,000 denomination, 9% convertible cumulativeredeemable issue with a conversion price of $.25 per share.  There are no warrants attached to thisissuance.  The Company has authorized200 shares and sold 37 shares, generating gross proceeds of $370,000.

             SeriesA, B, and C Preferred Shares pay dividends semi-annually each February 1, andAugust 1, commencing on February 1, 1997. The Company may elect to pay dividends in the form of Common Stock ofthe Company issued at 90% of the then current market price of the CommonStock.  For the purposes of thiscalculation the “current market price” shall mean the average of the dailyclosing prices for each of the thirty consecutive business days prior to suchdividend date.

             TheCompany plans to issue common stock to satisfy the February 1, 2001, PreferredStock dividend during the second quarter of fiscal 2002.  The total number of shares to be issued is5,471,822 and will be valued at $0.0461 per share.

 

**MANAGEMENT’S DISCUSSION ANDANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**RESULTS OF OPERATIONS**

**Three months ended July 31, 2001 compared to the three monthsended July 31, 2000**

             Thenet loss for the three months ending July 31, 2001 was $416,000, an increase of$24,000, or 6.1% over the net loss of $392,000 for the three months ending July31, 2000.

| **Revenues**     | **Three Months Ended** |   |
|------------------|------------------------|--------|
|             | ****                   |   |
|             | **July 31,**           |   | **July 31,** |   |
|             | **2001**               |   | **2000** |   |
|             | ****                   |   | **** |   |
| Equipment sales  | $                      | 71,000 |   | $ | 58,000 |   |
| Service revenues | 320,000                |   | 329,000 |   |
|             |                        |   |  |   |
|             | Total                  | $      | 391,000 |   | $ | 387,000 |   |
|             |                        |   |  |   |
|                  |                        |        |  |  |  |  |  |

             Equipmentsales for the three months ending July 31, 2001, increased $13,000, or 22.4%,over the same period of the prior year. A sale of beverage equipment was responsible for this increase.

             Servicerevenues for the three months ending July 31, 2001, decreased $9,000, or 2.7%from the same period of the prior year. The decrease is due to a reduction in parts sales of $25,000 and anincrease in service contracts and travel of $16,000.

| **Gross margins** | **Three Months Ended** |   |
|-------------------|------------------------|--------|
|              | ****                   |   |
|              | **July 31,**           |   | **July 31,** |   |
|              | **2001**               |   | **2000** |   |
|              | ****                   |   | **** |   |
| Equipment         | 45.1                   | %      | 20.8 | % |
|              |                        |   |  |   |
| Service           | 9.4                    | %      | 25.4 | % |
|              |                        |   |  |   |
|              | Total                  | 15.9   | % | 24.7 | % |
|              |                        |   |  |   |
|                   |                        |        |  |  |  |  |  |

             Forthe three months ending July 31, 2001, gross margin as a percentage of sales onequipment increased 24 points over the same period of the prior year.  The increase resulted from higher sales ofbeverage equipment.

             Forthe three months ending July 31, 2001, gross margin as a percentage of servicerevenues decreased 16 points over the same period of the prior year. Thedecrease is attributable to a change in distribution of service employees fromadministrative costs to service.

**General and administrative**

             Forthe three months ending July 31, 2001, general and administrative expensesdecreased $77,000, or 22.9%, to $259,000, as compared to the same period of theprior year.  This was due to areallocation of existing resources.

**Selling and marketing expenses**

             Forthe three months ending July 31, 2001, selling and marketing expense increased$13,000, or 18.6%, to $83,000, up from $70,000 for the same period of the prioryear.  The increase is due primarily toincreased travel and expenses associated with developing new equipment customers.

**Research and development**

             Forthe first three months ending July 31, 2001, research and development expensesdecreased $23,000, or 62.1%, to $14,000. The decrease is due to a reduction in personnel required for researchactivities.

**Interest expense**

             Forthe first three months ending July 31, 2001, interest expense increased$34,000, or 50.0%, to $102,000.  This isa result of higher notes payable balances.

**LIQUIDITY AND CAPITAL RESOURCES**

             TheCompany's cash balance decreased to $48,000 as of July 31, 2001 from $204,000at April 30, 2001.  Operations for thethree months ended July 31, 2001, required cash of $247,000, an increase of$16,000, or 6.9%, when compared to the three months ended July 31, 2000.  The $247,000 use of cash was caused by a netloss of $416,000, primarily offset by an increase in accounts payable of$171,000.

             Consistentwith prior years, the Company's primary source of liquidity has been privateplacements of equity instruments and the private issuance of short andlong-term Notes Payable.  During thefiscal year ended April 30, 2001, the Company generated $1,060,000 from theprivate issuance of Notes payable. During the quarter ended July 31, 2001, the Company generated $100,000from the private issuance of Notes Payable.

             InAugust, 1997, to raise additional capital, the Company began issuing short-termpromissory notes through a private placement. The notes are sold in multiples of $12,500, or fractions thereof, andaccrue interest at the rate of 10%, with principal and interest due atmaturity.  The initial maturity date wasJune 30, 1998, however, the Company had the option, which it exercised, toextend the maturity date to December 31, 1998. The Company extended the maturity date through negotiations with Holdersof the Notes and their representatives until December 31, 1999.  On August 1, 1999, the Company renegotiatedmost of the 10% APR, short term notes to a 5 year, 10% APR Promissory Note thatcomes due on August 1, 2004.  These notesare collatoralized with the intellectual property of the Company.  In return for converting the short-term noteto long term, the Company issued 5 year Warrants to Purchase 2,500,000 Sharesof Common Stock at the then current market price of $.10 per share.  The Warrants have been valued at $175,000using the Black-Scholes Option Pricing Model, using the following weightedaverage assumptions:  A Risk-Freeinterest rate of 6.355% and an expected volatility of 88.55%.  A discount on the notes payable has beenrecorded for that amount which will be amortized on a straight line basis overthe term of the notes.  During thequarter ended July 31, 2001, the Company raised an additional $100,000 ofcapital using this long term Promissory Note. As of July 31, 2001, the Company has issued notes in the aggregate of$3,385,000.  The Company anticipatesusing proceeds of equity offerings, additional extensions or other re-financingoptions to satisfy the notes.

             The Company intends to satisfy itsshort-term (i.e., the next 12-month period) capital requirements using theproceeds of offerings of its equity securities and the issuance of additionalnotes.  The Company is currentlyattempting to raise at least $2,000,000 through an offering of its convertiblepreferred stock.  The exact terms ofthis offering have not been finalized. Longer-term capital needs areanticipated to be satisfied by additional proceeds of offerings of theCompany’s equity and/or debt securities, improvements in operational cash flow,warrant exercise proceeds, and traditional credit facilities. There can be noassurance that at any time a sufficient market for the Company's equityofferings or debt financings will be available upon commercially reasonableterms, if at all.

             TheCompany's long-term capital plan is critically dependent upon the commercialsuccess of its Products and, to the extent success is not timely achieved, itsability to implement significant cost reduction programs.  Toward this end, Management has taken stepsto increase revenue through sales and marketing efforts that include theredeployment of research and development resources of the Company to workclosely with the Company’s existing and prospective customers in the paint andbeverage industry.  If it becomesnecessary to implement significant cost reduction programs, it is likely thatsuch programs will involve a significant curtailment of marketing and researchand development activities as well as payroll reductions which would likelyhave an adverse affect on future operating results.  There can be no assurance that the Company will be successful ingenerating operating profit and sufficient operational cash flow through thecommercial success of its products or any such cost reduction programs.  If the Company is not successful in thisregard, Management will have to consider alternative uses of its assetsincluding the possible licensing or outright sale of one or more of itsproprietary technologies.

             Thecurrent liquidity position of the Company and the inability of operations togenerate positive cash flow raises doubt about the Company's ability tocontinue as a going concern (see Note 1 to the Financial Statements).

**PART II- OTHER INFORMATION**

**ITEM 6 -  EXHIBITS ANDREPORTS ON FORM 8-K**

| (a)    | The  financial statements listed on the index set forth in Item 1 of this  Quarterly report on Form 10-Q are filed as part of this Quarterly Report.      |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                      |
| (b)    | 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 Financial Statements at Item  1 of this Quarterly Report on Form 10-Q).                       |
|   |                                                                                                                                                      |
|        |
| *      | Incorporated  by reference to a similarly numbered exhibit to the registrant’s registration  on form S-1 filed with the Commission on April 8, 1998. |
|   |                                                                                                                                                      |
| (c)    | Current  reports on Form 8-K during the quarter ended July 31, 2001.                                                                                      |
|   |                                                                                                                                                      |
|   | During  the first quarter of Fiscal 2002, the Company filed no reports on Form 8-K.                                                                       |

 

**SIGNATURE**

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

|   |                | ABC  Dispensing Technologies, Inc. |
|--------|---------------------|------------------------------------|
|   |                |                               |
|   |                |                               |
| Date:  | September  12, 2001 | /s/  Charles M. Stimac, Jr.        |
|   |                | Charles  M. Stimac, Jr.            |
|   |                | President/CEO                      |