AMERICAN BUSINESS CORPORATION
11921 Brinley Avenue - Louisville, KY 40243
Telephone (502) 244-1964 - Facsimile (502) 244-1327
March 23, 2006
Via Facsimile: (202) 772-9202
Claire Erlanger, Division of Corporate Finance
US Securities and Exchange Commission
Washington, DC 20549
Re: Commission File Number 033-16417-LA
Dear Ms. Erlanger:
Enclosed please find our response to your letter of December 13, 2005
presented in the same order as your comments:
Form 10-KSB for the year ended December 31, 2004
Item 3. Legal Proceedings, page 11
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1. In all future filings, the Registrant's Estimated Liability for
Claims and Litigation that may arise from its discontinued operations
will be more clearly described as such on the face of its Balance Sheet
and further clarified and cross-referenced in the footnotes to its
financial statements.
The $370,000 money judgment in favor of Rice, as Receiver for
Carangela Holdings, Inc., disclosed by the Registrant in Item 3. Legal
Proceedings was included in the Registrant's Estimated Liability for
Claims and Litigation at December 31, 2002 for $275,000, and increased
by $95,000 in connection with evaluating the adequacy of the Estimated
Liability for Claims and Litigation in 2003. As such, no further
accrual was required in 2004. There have been no payments to Carangela
Holdings, Inc. or anyone acting on its behalf since this matter arose
in 2002. The matter has been dormant since 2004.
2. Although the Margolies matter was disclosed as in the earliest
stages where counsel is "unable to definitively assess liability", the
Registrant also disclosed that it denied all material allegations of
wrongdoing and that it had been advised by counsel that the matter may
be subject to dismissal based upon applicable statute of limitations
and statute of frauds. In the Registrant's judgment, the Margolies
matter required no accrual because it was completely frivolous and
without merit. Therefore, the potential loss contingency did not meet
either condition stipulated in paragraph 8 of SFAS No. 5 based on
management's
judgment in consultation with legal counsel. In fact, the matter was
subsequently dismissed by the court based upon jurisdictional grounds.
Although the plaintiff re-filed its case in the New York courts in June
2005, the Registrant and its Counsel continue to believe that it will
incur no loss in this matter. Accordingly, no accrual was made for this
claim during 2004, or any subsequent periods in 2005 based on the
guidance in paragraph 8 of SFAS No. 5.
As requested, draft language of the Registrant's revised disclosure for
this matter for inclusion in its Form 10-KSB for December 31, 2005 is
as follows:
"In February 2005, Michael Margolies commenced a civil action
against us, W. Anthony Huff, and Danny L. Pixler in the United States
District Court for the Southern District of New York (White Plains
Division), 05 Civ. 1512 (CLB) alleging breech of agreements concerning
sales of assets and the payment of commissions totaling $4 million, and
bad faith in contract dealings seeking an additional $4.5 million which
was subsequently dismissed on jurisdictional grounds. The Plaintiff
re-filed his case in the Supreme Court of the State of New York, New
York County, Index # 05-602327, alleging damages in the amount of
$18.5 million. This matter is currently in the discovery phase.
Defendants have denied all allegations and intend to vigorously defend
against the claims."
Financial Statements, Balance Sheets, page 19
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3. In all future filings the Registrant will add an appropriate Notes
Payable footnote disclosing all material terms of each note outstanding
including interest rates, due dates, etc.
March 2002 is prior to my joining the Registrant as a director in
February 2003. The Registrant has carried forward the practice of not
accruing interest on its defaulted notes from March 2002 through the
current date. I have examined Registrant's reports for 2002 and, with
the exception of a statement within 2002's Management's Discussion that
the decrease in its Loss from Operations was principally attributable
to the cessation of (i) its transportation business and (ii) all
interest accruals, I could find no accounting explanation or
rationalization.
Using an average rate of interest at the time of 12%, accrued interest
expense not being recognized over the three years ended December 31,
2004 is estimated as follows: (a) 2002 (for nine months) $226,620, (b)
2003 (full year) $302,160, and (c) 2004 (full year) $302,160, or
$830,940 in total. Given the $40+ million the Registrant has reported
in losses associated with its failed transportation business, I believe
this apparent omission may not be material to assessing financial
condition.
4. In all future filings the Registrant will prominently disclose the
nature and terms of convertible debentures in appropriate notes to its
financial statements.
2
Notes to the Financial Statements -
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Note 4 - Discontinued Operation and Net Liabilities of Discontinued
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Operations, page 24
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5. The approximately $4,000,000 in liabilities that were settled in
2003 were included under the following captions within Current
Liabilities on the Balance Sheet of the Registrant at December 31, 2002:
Convertible Debentures $1,405,000
Loans Payable 26,000
Accrued Interest and Penalties 2,335,742
Estimated Liability for Claims and Litigation
(f/k/a Net Liabilities of Discontinued Operation) 165,231
Accrued Expenses 11,967
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$3,943,940
==========
An analysis of Loss from Discontinued Operations and the Estimated
Liability for Claims and Litigation for the years 2001 through 2004 is
attached as Exhibit A.
It is management's intent that the entire balance of the Estimated
Liability for Claims and Litigation will be resolved in the
Reorganization of the Registrant effective December 31, 2005, in
connection with preparing for its planned merger with Telomolecular
Inc.
6. In all future filings the Registrant will present the carrying
value of the Series B Preferred Stock of $2,000,000 as a liability for
all periods presented. The Statement of Shareholders' Equity (Deficit)
will also be revised to present the 2,000 Series B Preferred Shares as
outstanding with no associated value reflected within equity based on
the reclassification. In addition a note will be added to the
Registrant's financial statements stating that certain
reclassifications have been made to the prior year's financial
statements to conform to the current year presentation and that the
reclassifications had no effect on previously reported results of
operations or retained earnings.
7. In all future filings the Registrant will prominently disclose the
issuance of any preferred shares which are charged to operations and
credited to equity in the notes to its financial statements.
8. As the dates of issuance of the various Series of Preferred Stock
precede my engagement by the Registrant, I am not aware of whether an
analysis of each Series was conducted for the existence of a beneficial
conversion feature ("BCF") at the time of each issuance. Using the
guidelines of ETIF 98-5 and ETIF 00-27, an analysis of each Series has
been performed currently and is presented on Exhibit B.
3
As Exhibit B sets forth, no BCF was recognizable related to Series A as
its conversion was contingent on future events which had not occurred,
Series C is not a convertible instrument just "super voting", and
Series E was out of the money. The BCF applicable to Series B and D
totaled $752,703 which should have been charged to Additional Paid-In
Capital in 1999. At December 31, 1999, the Registrant's Shareholders'
Equity was $13,095,102 which would turn into a Shareholders' Deficit of
$(18,174,243) by December 31, 2000 and $(30,771,618) by December 31,
2001. Based upon the current analysis it appears that the Registrant
missed the essence of ETIF 98-5 and ETIF 00-27. The small
overstatement of Shareholders' Equity that may have occurred, however,
was certainly short lived and may also not be material in determining
financial condition.
Note 7 - Common Stock, page 27
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9. As the market price for the Registrant's common stock at the date
the 6% Secured Convertible Note was issued was $.01 and the conversion
price was $.01, the guidelines of EITF 98-5 and EITF 00-27 support the
Registrant's determination that the Convertible Note did not have a BCF
at the time of issuance.
Other
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10. In connection with responding to SEC Division of Corporate Finance
Staff comments, the Registrant acknowledges that: a) it is responsible
for the adequacy and accuracy of the disclosure in its filings,
b) Staff comments or changes to disclosure in response to Staff
comments do not foreclose the SEC from taking any action with respect
to the filing, and c) the Registrant may not assert Staff comments as
a defense in any proceeding initiated by the SEC or any person under
the federal securities laws of the United States. The Registrant
further understands that the Division of Enforcement has access to all
information the Registrant provides to the Staff in connection with
their review of the Registrant's filing or in response to their
comments on its filings.
Thank you for extending the deadline for responding to your
December 13, 2005 letter. I hope this response satisfies your
concerns. However, should you wish further discussion of any of the
foregoing information, I'll welcome your call.
Sincerely,
/s/ Anthony R. Russo
Anthony R. Russo
President
Enclosures
4
EXHIBIT A
Estimated Liability as
Gain (Loss) Affect on Liability % Loss of
Discontinued Other for Claims Discontinued
Operations Accounts and Litigation Proof Operations
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Balance December 31, 2000 $(38,205,215) $28,524,215 $9,681,000 - 25.3%
Restatement in 2001 (506,337) - 506,337 -
Discontinued operations - 2001 (4,954,218) - 4,954,218 -
Other increase to Estimated Liability (1,818,949) 1,818,949 -
-------------------------------------------
Balance December 31, 2001 (43,665,770) 26,705,266 16,960,504 - 38.8%
Discontinued operations - 2002 10,800,913 - (10,800,913) -
Other decrease to Estimated Liability - 1,558,087 (1,558,087) -
-------------------------------------------
Balance December 31, 2002 (32,864,857) 28,263,353 4,601,504 - 14.0%
Discontinued operations - 2003 3,928,940 (3,768,093) (160,847) -
-------------------------------------------
Balance December 31, 2003 (28,935,917) 24,495,260 4,440,657 - 15.3%
Discontinued operations - 2004 - - - -
-------------------------------------------
Balance December 31, 2004 $(28,935,917) $24,495,260 $4,440,657 - 15.3%
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EXHIBIT B
Conversion to Common Stock
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Preferred Convert
Shares Stated Convert Price Market In (Out) of Number of Value of
Series Outstanding Value Date Applicable Value the Money Com Shares BCF Comments
- ------------------------------------------------------------------------------------------------------
A 990,000 $ 762 2/1/99 $0.0001 $4.870 $4.8699 9,900,000 762 (a)
B 2,000 2,000,000 10/28/99 2.590 3.370 0.780 772,201 602,317 (b)
C 450,000 135,000 N/A N/A N/A N/A 45,000,000 - (c)
D 950 950,000 1/8/00 2.590 3.000 0.41 366,795 150,386 (d)
E 2,300 2,300,000 3/9/00 3.180 2.87 (0.31) 723,270 - (e)
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(a) No BCF to be recognized as the conversion feature of Series A was
contingent upon the occurance of future events which were not met
in 1999, and have not been met subsequent to the issuance through
the current date.
(b) BCF of $602,317 should have been charged to APIC in 1999.
(c) BCF does not apply. Series C is not convertible just super voting.
(d) BCF of $150,386 should have been charged to APIC in 1999.
(e) No BCF, out of the money.