SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB/A-1 [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended June 30, 1997 Commission file number: 33-70882 OR [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the transition period from ______ to ______ USA TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) Pennsylvania 23-2679963 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 200 Plant Avenue, Wayne, PA. 19087 (Address of principal executive offices) (Zip Code) (610)-989-0340 (Registrant's telephone number, including area code) NONE (Securities registered pursuant to Section 12(g) of the Act 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 periods that the registrant was required to for such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405, of regulations S-B is not contained herein, and will not be contained to, the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendments to this Form 10-KSB. [ ] Transitional Small Business Disclosure Format Yes No X --- --- Registrant's total revenues for its most recent fiscal year............$607,772. As of September 25, 1997, there were outstanding 31,618,019 shares of Common Stock, no par value, and 644,295 shares of Series A Convertible Preferred Stock, no par value. The company's voting securities are traded on the Over the Counter (OTC) Electronic Bulletin Board. The aggregate market value of the company's voting securities held by non-affiliates of the Registrant was $13,615,938 on September 25, 1997 based upon the average bid and asked price of the Registrant's Common Stock and Preferred Stock on that date. TABLE OF CONTENTS Page - ------------------------------------------------------------------------------- Part I Item 1. Business 1 Part II 6. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 7. Financial Statements 10 Part III 10. Executive Compensation 11 12. Certain Relationships and Related Transactions 15 Part IV 13. Exhibits 17 USA TECHNOLOGIES, INC. PART I Item 1. Business USA Technologies, Inc., a Pennsylvania corporation (the "Company") was founded in January 1992. The Company is in the development stage and intends to become a leading provider and licensor of unattended, credit card activated control systems for the copying, debit card and personal computer industries. The Company's devices make available credit card payment technology in connection with the sale of a variety of products and services. The Company anticipates generating its revenues from retaining a portion of the monies generated from all credit card transactions conducted through its control systems, as well as the direct sale of its control systems and the resale of configured office products. The Company has developed an unattended, credit card activated control system to be utilized with photocopying machines, facsimile machines, computer printers, and debit card purchase/revalue stations. The control systems allow consumers to use credit cards to pay for use of these products. The Company has also developed the Public PCTM, which is an unattended credit card activated control system to be used in connection with a personal computer, including on-line services, such as the Internet. This product enables locations to offer the use of personal computers to the public on an "as needed" basis utilizing credit cards as a method of payment. In addition the Company introduced to the university library market its Automated Print Payment System(TM) (APPS). This system enables libraries to charge users via credit/debit cards for the printed output from computer networks, thus providing a new source of revenue to cover their increasing costs of operations. During the fiscal year ended June 30, 1997, the Company introduced the Business Express(TM), which is being marketed to the hospitality industry as an amenity to the business traveler. The Business Express(TM) combines the Company's existing applications for computers, copiers, and facsimiles into a kiosk type configuration. All services provided are credit card activated. The Business Express(TM) continues the Company's move toward the sale of the Company's proprietary equipment to operators rather than the revenue sharing arrangements employed in past years. The Company still retains all rights to software and proprietary technology which it licenses to location operators for their exclusive use. The Company anticipates generating its revenues from the sale of equipment utilizing its control systems, from retaining a portion of the revenues generated from all credit card transactions conducted through its control systems, and from monthly management fees from each location utilizing its control systems. The Company has entered into joint marketing agreements with Minolta Corportation and Lexmark International, Inc., and has been designated as authorized equipment reseller by Hewlett-Packard Company, International Business Machines Corporation and Dell Computer Corporation. The Company believes that the Company will benefit from the association of its control systems with the well-known brands of business equipment manufactured by these companies. In May 1997, the Company entered into an agreement with a newly formed Canadian company pursuant to which it agreed to purchase 10 Business Express(TM) business centers from the Company. The total purchase price for the 10 units if all units had been purchased would have been $1,118,261 (Canadian dollars). As of the date hereof, only one complete Business Express(TM) unit and another unit consisting of equipment only (with no control systems) have been purchased under the agreement by the purchaser. The Company does not anticipate that any of the remaining units will be ordered by the purchaser under the agreement. The Company believes that the purchaser has breached its obligations under the agreement and is currently exploring the viability of pursuing appropriate legal action against the purchaser, 1217909 Ontario, Inc., as well as its affiliates. There can be no assurance that the Company will be successful in any of its potential legal claims, or if successful, be able to actually collect any damages from the purchaser or any of its affiliates. On September 24, 1997, the Company entered into a Joint Venture Agreement with Mail Boxes Etc. ("MBE"), the leading franchisor of postal, business, and communications retail service centers with approximately 3,000 locations in North America. The joint venture shall exclusively sell and market unattended, credit card activated business centers under the name MBE Express(TM) to the hospitality industry, travel industry, convention centers, colleges, universities, supermarkets, banks, military, convenience stores, and mass merchandisers located in the United States. The gross profits from any sales of the MBE Express(TM) are to be shared by the Company and MBE. The agreement provides that any gross profits earned by the joint venture from sales on a national account level (where the buying decision is made at the customer's headquarters rather than at the local or store level) shall be split equally between the Company and MBE. Any gross profits earned from sales of the MBE Express(TM) to MBE franchisees in connection with placement handoffs provided by either USA or MBE would be split equally. For any sales made at the local or store level, the gross profit would be split so that the partner responsible for contractually obligating the customer for that particular sale would receive 75% and the other partner 25%. In addition, other revenues resulting from activities relating to the MBE Express(TM), such as electronic commerce, licensing, marketing and advertising, are to be split equally between MBE and the Company. MBE has agreed not to sell, use, endorse, approve, or purchase any unattended, credit card activated technology or terminals other than those offered by the Company for use in connection with the equipment included in the MBE Express(TM). The Company and MBE will agree from time to time on an advertising and marketing budget which would cover anticipated expenses for trade shows, trade advertising, direct mail, telemarketing, national account coverage, merchandising, market research and lead generation. All such expenses would be split equally between the Company and MBE. The Company is to act as the merchant for all MBE Express(TM) business centers and will receive a monthly service fee of $20.00 for each terminal. The initial term of the joint venture is five years. If certain sales goals are not met by the joint venture, the Company may terminate the exclusivity provisions of the agreement after the second year. The joint venture may also be terminated at any time by either partner if the other partner has breached any material term or condition of the agreement; provided, that the terminating partner has allowed the other partner at least a sixty day period to cure any alleged breach. The MBE Express(TM) bundles together the same components as the Business Express(TM): Public PC(TM), Copy Express(TM), and Fax Express(TM), but under the MBE brand name. In addition, the MBE Express(TM) would include a dial-through service to a nearby MBE store making available the products and services of the store. In addition, MBE has ordered 195 TransAct(TM) control boxes from the Company to be used by MBE franchisees for their in-store computer workstations (computer and printer). The Company will act as the merchant in connection with credit card sales and will receive a monthly service of $20.00 for each terminal. The terminals are to be delivered to MBE by the Company in October 1997. The Company has entered into corporate agreements which establish itself as a preferred supplier of business center products to two of the top hospitality companies in the world: Choice Hotels International (Clarion, Quality, Comfort, Sleep Inns), and Promus Hotel Corporation (Embassy Suites, Hampton, Doubletree). In addition, the Company's Business Express(TM) has been approved and recommended as a solution by Marriott for its hotels. For the years ended June 30, 1996 and 1997, the Company has spent approximately $224,000 and $344,000, respectively for the development of its proprietary technology. These amounts include the expense of outside consultants and contractors as well as compensation paid to certain of the Company's employees as reflected in Compensation in the accompanying financial statements. As of June 30, 1997, the Company had 130 Business Express(TM) control systems, 44 Copy Express(TM) control systems, 34 Debit Express(TM) control systems, 23 Fax/Printer Express(TM) control systems, and 54 Public PC(TM) control systems located at various hotels and libraries throughout the United States and Canada. Through June 30, 1997 the total gross revenues received by the Company from these systems has been nominal. The Company has been certified by PNC Merchant Services (a subsidiary of First Data Corporation), a leading credit card processor in the United States. PNC Merchant Services has extended to the Company a fixed rate percentage processing charge in connection with the credit card transactions conducted through the Company's control systems. This charge is payable by the Company (not the locations) out of its share of the gross proceeds. 1 Industry Trends With trends over the last twenty years indicating an ever increasing customer reliance on the use of credit cards as a method of payment, the Company believes the future of purchasing retail products and services is in credit cards rather than cash. For example, according to the New York Times, November 20, 1994 in 1970 the average balance on credit cards in the United States was $649; by 1986 it was $1,472, and in 1994 it was $2,800. According to Time Magazine, May 9, 1994 from 1986 to 1994, the number of credit card transactions in the United States increased 200% compared to an increase of 17% for cash and check transactions. Consumers are constantly searching for ways to purchase quality products and services in the most convenient manner. Examples of this trend include the increasing use of unattended, Automated Teller Machines ("ATM's") in banking transactions and the use of unattended, self-service gasoline pumps with credit and debit card payment capabilities. In addition, consumers are becoming more accustomed to using credit cards as a method of payment in an ever increasing array of retail and service settings. Almost every department store, restaurant and supermarket accepts credit card payments. Consumers are increasingly using mail order, telephone and the Internet to order goods and services and are using credit cards to pay for these goods and services. In response to this increasing consumer demand for convenience and this increasing consumer acceptance of credit cards as a method of payment, the Company has focused its efforts towards developing and marketing its unattended, credit card activated control systems. Credit Card Processing Each of the Company's credit card activated control devices records and transmits all transaction data to the Company, and the Company then forwards such data to the credit card processor. After receiving transaction information from the Company, the credit card processor electronically transfers the funds (less the credit card processor's charge) to the Company. The Company then forwards to the location its share of the funds. The Company and each location have agreed on a percentage split of the gross proceeds from the Company's device. The credit card processor's fees and cost to forward the location's share of the gross proceeds are all paid for out of the Company's portion of the gross revenue. The Company currently retains a portion of the gross revenues from each device. If the Company has sold the equipment to the location, the portion retained is generally 8% of the gross revenues. In cases where the Company continues to own the equipment, the portion retained can be as high as 90% of gross revenues. In addition the Company charges a fixed monthly management fee which is generally $25 per control device. Product Lines The Business Express(TM) The hotel/motel hospitality industry continues to expand, but has become more competitive as chains increase their efforts to attract the most dominant and profitable customer: the business traveler. Business travelers and conference attendees account for the majority of hotel occupancy, stay longer and spend more per visit than the leisure traveler. For these reasons, hotels have become very sensitive and responsive to the needs and preferences of the business traveler. The Business Express(TM) enables a hotel to address these needs in a comprehensive and cost effective manner, while simultaneously generating incremental revenue. The Business Express(TM) utilizes the Company's existing applications for computers, copiers, and facsimile equipment, and combines them into a branded product. The Business Express(TM) bundles the Public PC(TM) unit, the Copy Express(TM) unit, and the Fax Express(TM) unit, into a functional kiosk type work station. All devices are credit card activated, therefore eliminating the need for an attendant normally required to provide such services. The Company assists the location in the design of the unit, including selecting a layout and furniture for the equipment. To date, the Company has sold business equipment to the locations, has supplied Company owned equipment to the certain locations and has supplied control systems to the location for use with location owned equipment. In all such cases, the Company licenses the control systems to the locations and receives a fixed percentage (approximately 5.76%) of the proceeds generated from any transactions. 2 The MBE Express(TM) On September 24, 1997, the Company entered into a Joint Venture Agreement with Mail Boxes Etc. ("MBE"), the leading franchisor of postal, business, and communications retail service centers with approximately 3,000 locations in North America. The joint venture shall exclusively sell and market unattended, credit card activated business centers under the name MBE Express(TM) to the hospitality industry, travel industry, convention centers, colleges, universities, supermarkets, banks, military, convenience stores, and mass merchandisers located in the United States. MBE has agreed not to sell, use, endorse, approve, or purchase any unattended, credit card activated technology or terminals other than those offered by the Company for use in connection with the equipment included in the MBE Express(TM). If a customer would not desire to purchase the MBE Express(TM), the Company is permitted to sell to such customer a private label product under any name other than MBE Express(TM). The initial term of the joint venture is five years. If certain sales goals are not met by the joint venture, the Company may terminate the exclusivity provisions of the agreement after the second year. The joint venture may be terminated at any time by either partner if the other partner has breached any material term or condition of the agreement; provided that the terminating partner has allowed the other partner at least a sixty day period to cure any alleged breach. The MBE Express(TM) bundles together the same components as the Business Express(TM): Public PC(TM), Copy Express(TM), and Fax Express(TM), but under the MBE brand name. In addition, the MBE Express(TM) would include a dial-through service to a nearby MBE store making available the products and services of the store. The Copy Express(TM) Traditionally, customers wishing to use a photocopying machine have either used a prepaid, stored value card or cash. In most instances, this places a burden on employees of the facility to provide a number of services unrelated to their primary jobs, such as providing change and collecting/counting/reloading coins. With the Copy Express(TM), the attendant no longer needs to interact with the customers for these purposes. The Copy Express(TM) provides a cashless method to pay for the use of photocopying machines. The device is attached to the photocopying machine, computer printer, or microfilm/fiche printer in a similar manner as attaching a standard coin acceptor. The device can be attached to either existing or new equipment. The control system enables customers to photocopy documents with the use of a credit card. The Debit Express(TM) Many "closed" environments such as universities or hospitals utilize a private card known as a debit or "stored value" card, to store cash value. The system works by encouraging customers (by discounting the price of the products or services) to transfer lump sum cash values onto a magnetic stripe or imbedded chip card that can be used to activate equipment within the closed environment. As the cardholder uses the card to purchase products or services the cash value is deducted from the total value on the card. Typically, the cards are purchased from attendants or from machines which accept coins or dollar bills. The Company's Debit Express(TM) enables customers to purchase or revalue their debit cards with the swipe of a credit card and eliminates the need for cash or for an attendant to handle cash or provide change. The Debit Express(TM) eliminates any reliance on cash by allowing customers to use a valid credit card to purchase or place additional value on a debit card. The Public PC(TM) The Company believes that the growing dependence on personal computers has created an environment where there is a need for access to personal computers by the general public on an " as needed" basis. To meet this need, the Company has developed the Public PC(TM). Through June 30, 1997, the Company has installed 54 units in libraries and retail locations. The device enables the public to utilize personal computers and/or the services they offer on an "as-needed" basis. The system is designed so that the computer cannot be used until a valid credit card is swiped through the control system. Once the user is authorized to proceed, the system has the ability to charge for time in use, printed output, and any modem activity. The Company believes that the personal computer is becoming an integral part of how people access and utilize the information available to them. The Company believes that the majority of libraries do not currently offer general use personal computers to their patrons. The Company will pursue print shops, cyber cafes, hotels, airports, convention and conference centers, and various retail outlets as potential customers. 3 Marketing The Company is currently marketing its products through its full-time sales staff consisting of four persons to hotel and retail locations, either directly or through facility management companies servicing these locations. On September 24, 1997, the Company entered into a Joint Venture Agreement with Mail Boxes Etc. ("MBE"), the leading franchisor of postal, business, and communications retail service centers with approximately 3,000 stores in North America. The joint venture shall exclusively sell and market unattended, credit card activated business centers under the name MBE Express(TM) to the hospitality industry, travel industry, convention centers, colleges, universities, supermarkets, banks, military, convenience stores, and mass merchandisers located in the United States. MBE has agreed not to sell, use, endorse, approve, or purchase any unattended, credit card activated technology or terminals other than those offered by the Company for use in connection with the equipment included in the MBE Express(TM). The Company and MBE will agree from time to time on an advertising and marketing budget which would cover anticipated expenses for trade shows, trade advertising, direct mail, telemarketing, national account coverage, merchandising, market research and lead generation. All such marketing and sales expenses would be split equally between the Company and MBE. The initial term of the joint venture is five years. If certain sales goals are not met by the joint venture, the Company may terminate the exclusivity provisions of the agreement after the second year. The joint venture may be terminated at any time by either partner if the other partner has breached any material term or condition of the agreement; provided, that the terminating partner has allowed the other partner at least a sixty day period to cure any alleged breach. The MBE Express(TM) bundles together the same components as the Business Express(TM): Public PC(TM), Copy Express (TM), and Fax Express(TM), but under the MBE brand name. In addition, the MBE Express(TM) would include a dial-through service to a nearby MBE store making available the products and services of the store. The Company has entered into agreements which establish itself as a preferred supplier of business center products to two of the top hospitality companies in the world: Choice Hotels International (Clarion, Quality, Comfort, Sleep Inns), and Promus Hotel Corporation (Embassy Suites, Hampton, Doubletree). The agreement with Choice Hotels International was entered into in April 1997 and the agreement with Promus Hotels, Inc. was entered into in May 1997. The agreement with Choice is for one year and is automatically renewed from year to year unless terminated upon at least 30 days notice prior to the end of any one year period. The agreement with Promus is for a term of three years and may be terminated by either party for any reason upon at least 90 days written notice. The agreements provide that Choice or Promus, as the case may be, would promote the products of the Company to its owned, franchised and licensed properties at the prices set forth in the agreements. The agreements do not obligate Choice, Promus, or any other party to purchase any of the Company's products. Through October 31, 1997, Business Express(TM) units have been installed in 14 Choice Hotels and in 10 Doubletree or Embassy Suites. In addition, the Company's Business Express(TM) has been approved and recommended as a solution by Marriott for its hotels. The recommendation was set forth in an interoffice memo from Marriott corporate to its hotels to satisfy an identified Business Service Center need, and was distributed during September 1997. In March 1997, the Company entered into a co-marketing agreement with Minolta Corporation ("Minolta") pursuant to which the Company and Minolta would work together to market and sell the Business Express(TM) featuring the Minolta copier to the hospitality industry. The agreement is on a nonexclusive basis and can be terminated by either party on thirty days notice. Through October 31, 1997, over $100,000 of Minolta equipment has been purchased by the Company, and 60 units have been installed in customer locations. In March 1997, the Company entered into a co-marketing agreement with Lexmark International, Inc. ("Lexmark") pursuant to which the Company and Lexmark would work together to market and sell the Business Express(TM) featuring the Lexmark printer to the hospitality industry. The agreement is on a nonexclusive basis and can be terminated by either party on thirty days notice. In December 1996, the Company entered into an agreement with International Business Machines Corporation ("IBM") pursuant to which it was appointed an IBM Business Partner-Personal Computer Reseller. This agreement will allow the Company to purchase IBM personal computers at a wholesale price for resale to its customers as a configured Public PC(TM) that is credit card activiated. The agreement can be terminated by either party on thirty days notice. 4 During February 1996, the Company entered into an agreement with Dell Marketing, L.P., a subsidiary of Dell Computer Corporation ("Dell"), pursuant to which the Company was appointed as a Dell authorized "Remarketer/Integrator". This agreement allows the Company to purchase Dell personal computers at a wholesale price for resale to its customers. The agreement can be terminated by either party upon thirty days notice. In December 1996, the Company was designated as an authorized "Hewlett-Packard Value-Added Reseller," ("HP") pursuant to which the Company may purchase Hewlett-Packard facsimile machines at a wholesale price for resale to its customers. The agreement can be terminated by either party upon thirty days notice. The Company believes these agreements are an important component of the Company's effort to market the Business Express(TM) to the hospitality industry because they provide instant brand name recognition. In addition, each of these companies offers maintenance and service agreements relating to the equipment directly to the location, thus removing the need for the Company to provide maintenance services or warranties to any of the equipment (other than the control systems). Procurement The Company's control system devices consist of a card reader, printer, amplifier, circuit board and micro chip in a specially designed housing. The devices are currently manufactured to the Company's design specification by an independent contractor, LMC - Autotech Technologies, LP. The Company has recently contracted for the purchase of 500 control devices, for a total purchase price of $242,325. The Company anticipates obtaining its complete computer systems (other than the Public PC(TM) control system) from IBM. Competition The Company believes that there are currently no other businesses offering an unattended, credit card activated control systems for use in connection with copiers, printers or general use personal computers. There are other companies presently offering unattended, credit card activated control devices in connection with facsimile machines, Internet and e-mail access, and debitcard purchase/revalue stations. In addition, the businesses which have developed unattended, credit card activated control systems currently in use in connection with gasoline dispensing, public telephones, prepaid telephone cards, ticket dispensing machines, vending machines, or facsimile machines, are capable of developing products or utilizing their existing products in direct competition with the Company. Many of these businesses are well established, have substantially greater resources than the Company and have established reputations for success in the development, sale and service of high quality products. The Company is aware of one business which has developed an unattended, credit card activated control system to be used in connection with vending machines. Any such increased competition may result in reduced sales and/or lower percentages of gross revenues being retained by the Company in connection with its licensing arrangements, or otherwise may reduce potential profits or result in a loss of some or all of its customer base. The Company is also aware of several businesses which make available use of the Internet and use of personal computers to hotel guests in their hotel rooms on an "as-needed" basis. Although these services are not credit card activated, such services would compete with the Company"s Business ExpressTM ,and the locations may not order the Business Express(TM), or if ordered, the hotel guest may not use it. Recently, the Company became aware that one potential competitor has developed a credit card activated personal computer kiosk. Patents, Trademarks and Proprietary Information The Company has applied for federal registration of its trademarks Business Express(TM), Printer Express(TM), Copy Express(TM), Debit Express(TM), C3X(TM), Public PC(TM) and TransAct(TM). Much of the technology developed or to be developed by the Company is subject to trade secret protection. To reduce the risk of loss of trade secret protection through disclosure, the Company has entered into confidentiality agreements with its key employees. There can be no assurance that the Company will be successful in maintaining such trade secret protection or that others will not capitalize on certain of the Company's technology. The Company has applied for ten United States patents and has applied for foreign patents in connection therewith. To date, two of these patents have been approved: Patent Number 5,619,024 entitled "Credit card and bank issued debit card operated system and method for controlling and monitoring access of computer and copy equipment," and Patent Number 5,637,845 entitled "Credit and bank issued debit card operated system and method for controlling a prepaid card encoding/dispensing machine." As of the date hereof, the remaining eight applications are pending and have not been granted. Employees The Company has seventeen full time employees. 5 PART II Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations. Introduction Since its inception in January 1992, the Company, a development stage corporation, has been engaged largely in research and development activities focused on designing, developing, and marketing its credit card activated control systems. From inception through September 30, 1997, the Company has had nominal operating revenues of $1,035,185 and has generated funds primarily through the sale of its securities. Through September 30, 1997 the Company has received, net of expenses of such sales, the amount of $5,067,308 in connection with private placements, $2,492,626 from the exercise of Common Stock options and purchase warrants, and $2,345,104 in connection with its initial public offering. The Company has incurred operating losses since its inception through September 30, 1997 of $10,024,195 and such losses are expected to continue through September 30, 1998. The Company's independent auditors have included an explanatory paragraph in their report on the Company's June 30, 1997 financial statements discussing issues which raise substantial doubt about the Company's ability to continue as a going concern. The Company believes that the funds available at June 30, 1997 combined with the revenues to be generated during fiscal year 1998, the potential capital to be raised from the exercise of Common Stock purchase warrants, and the ability to defer anticipated expenditures, if required, will provide for the Company to continue a a going concern. There can be no assurance, however, that any significant revenues will be generated during the 1998 fiscal year or that sufficient capital can be raised by the Company. In such event, the Company may cease to be a going concern and investors in the Common Stock may lose all of their investment. Results of Operations Fiscal year ended June 30, 1997: For the fiscal year ended June 30, 1997, the Company had a net loss of $3,120,712. Overall this loss reflects the continuing development stage activities of the Company. The Company's preferred stock provides for an annual cumulative dividend of $1.50 per share payable to the shareholders of record on February 1 and August 1 each year as declared by the Company's Board of Directors. The $4,364,007 loss applicable to common shares or $.21 loss per common share was derived by adding the $3,120,712 net loss and the $1,243,295 of cumulative preferred dividends earned for the year ending June 30, 1997, and dividing by the weighted average shares outstanding, of 20,984,381. Revenues for the period were $607,772, which increased $554,793 from last year, primarily reflecting the sales of the Business Express(TM) product line. 6 Operating expenses for the fiscal year ended June 30,1997 were $3,742,961, representing a $1,212,166 or 47.9% increase over the prior year. The primary contributors to this increase were Cost of Sales, General and Administrative expense and Compensation, as detailed below. Cost of sales increased by $525,090 from the prior year, reflecting the first year of equipment sales. The cost of equipment sales increased $473,529 and the cost of license fee revenues increased $51,561. General and administrative expense of $2,040,163 increased sharply by $528,882 or 35.0% which reflects both a general increase in spending to support the expansion of operations as well as several non-operational factors. Specifically the major contributors to this increase were: Travel and lodging increased by a total of $66,393, which reflected significant marketing related travel as well as an increase in travel for the increased numbers of installations. Marketing promotions, mailings and trade show expenses increased $110,147. Advertising increased by $26,000, reflecting the need to increase product awareness in the marketplace. Professional and consultant fees increased by $86,770, reflecting increased legal, public relations and patent activity. Product development expense increased $119,852 primarily due to developmental costs for new customers. The balance of the increase includes temporary services, telephone, office expense, and postage. Compensation expense was $1,080,458, an increase of $177,060 or 19.6% over the previous year. This increase was primarily due to headcount increases in the sales function and to a lesser extent, operations.The cost of employee benefits also rose by $34,468. Depreciation expense of $97,250 increased by $25,234, which is attributable to the increased depreciable asset base. Fiscal year ended June 30, 1996: For the fiscal year ended June 30, 1996, the Company had a net loss of $2,451,697. Overall this loss reflects the continuing development stage activities of the Company. The Company's preferred stock provides for an annual cumulative dividend of $1.50 per share payable to the shareholders of record on February 1 and August 1 each year as declared by the Company's Board of Directors. The $3,405,997 loss applicable to common shares or $.23 loss per common share was derived by adding the $2,451,697 net loss and the $954,300 of cumulative preferred dividends for the year ending June 30, 1996 and dividing by the weighted average shares outstanding. Revenues for the period remained at a nominal level reflecting the disappointing performance of the Credit Card Copy Express(TM) product line. Expenses for the fiscal year ended June 30,1996 were $2,536,544, representing a $868,546 or 52% increase over the prior year. The primary contributors to this increase were General and Administrative expense and Compensation. At June 30, 1996, cash was $1,773,356 compared to $376,191 on June 30, 1995. Such increase reflects the net proceeds received by the Company in connection with a private placement offering that closed in June 1996 which raised net proceeds of $1,249,264. In addition, during fiscal year 1996, 3,686,000 1995 Warrants were exercised for aggregate proceeds to the Company of $1,105,800. At June 30, 1996, inventory was $426,391 compared to zero on June 30, 1995. Such inventory was purchased by the Company in connection with the marketing of its Credit Card Computer Express (TM) product (now known as the Public PC(TM). The increase of accounts payable and accrued expenses reflects the increased operating expenses incurred by the Company. General and administrative expense of $1,511,281 increased sharply by $852,681 or 12.2% which reflects both a general increase in spending to support the expansion of operations as well as several non-operational factors. Specifically the major contributors to this increase were (a) $187,122 increase in travel and lodging which was concentrated in the operations area and reflects the installation of the Company's control devices; (b) $103,355 increase in professional fees due to financial consultant and legal fees, including increased patent activity; (c) $93,888 increase in product development expense primarily due to the programming and configuration of the Company's newly completed C3X(TM); (d) $313,548 increase in consulting expenses of which $247,205 is a non-cash transaction attributable to the issuance of Common Stock in exchange for services rendered; and the 7 balance of the increase which includes public relations and technical services. Telephone, office expense, and postage increased moderately. Compensation expense was $903,398, an increase of $215,013 or 31% over the previous year. This increase was concentrated in the marketing function and corporate staffing, and also including $27,343 of expense to initiate an employee medical benefits plan. Depreciation expense of $72,016 increased by $56,548, which is attributable to the increased depreciable asset base. Advertising remained consistent with the previous year. A provision for losses on equipment was charged to operations in the amount of $44,100 which represents the final charge for the discontinuance of the Golfers Oasis(TM) product line. Interest expense returned to normal levels with the elimination of the public offering interest cost reflected in the prior year. Plan of Operations As of June 30, 1997, the Company had a total of 285 credit card activated control systems installed in the field as follows: Business Express(TM) 130, Copy Express(TM) 44, Debit Express(TM) 34, Public PC(TM) 54, Fax/Printer Express(TM) 23. Through June 30, 1997 the total license fee income received by the Company from these systems was $117,158. The Company has been certified by PNC Merchant Services (a subsidiary of First Data Corporation), a leading credit card processor in the United States. PNC Merchant Services has extended to the Company a fixed rate percentage processing charge of approximately 5.76% in connection with the credit card transactions conducted through the Company's control systems. This charge is payable by the Company (not the locations) out of its share of the gross proceeds. Charges of $51,561 and $9,555 were assessed for credit card processing for the fiscal years ended June 30, 1997 and 1996 respectively. During the past year the Company has continued its new direction in product development. It has focused on products capable of generating new incremental revenue for equipment operators (ie, Business Express) as opposed to in the past simply providing a better method of payment (ie. Copy Express). The new direction is also reflected in the move toward the sale of the Company's proprietary equipment to operators rather than the revenue sharing arrangements employed to date. The Company still retains all rights to software and proprietary technology which it licenses to location operators for their exclusive use. However this shift in market approach reduces the Company's dependency on equipment revenue by providing a built in gross profit on the sale of the equipment, and simultaneously reduces the Company's capital asset requirements. Plans for the coming fiscal year include progressing from the developmental stage to an operating mode. The Company also intends to continue to focus on the sales and/or leasing of its Business Express(TM) business centers. Liquidity and Capital Resources During the fiscal year ended June 30, 1997, the Company completed a number of equity transactions. Net proceeds of $394,688 were realized from the two Private Placement Offerings of Preferred Stock and $1,141,126 was realized from Common Stock transactions, principally the exercise of Common Stock purchase warrants. As of June 30, 1997 total working capital was $671,914, including cash on hand of $630,266. During the fiscal year ended June 30, 1997, net cash of $2,651,341 was used by operating activities, primarily compensation and general and administrative expenses. Consulting expense reflected $277,198 of a non-cash transaction attributable to the issuance of common stock in exchange for services rendered. Net cash of $17,855 was used by investing activities principally for the purchase of furniture. The net cash provided by financing activities of $1,526,107 was principally due to the net proceeds generated from the issuance of securities described in the prior paragraph. The Company's independent auditors have included an explanatory paragraph in their report on the Company's June 30, 1997 financial statements discussing issues which raise substantial doubt about the Company's ability to 8 continue as a going concern. The Company believes that the funds available at June 30, 1997 combined with the revenues and earnings to be generated during fiscal year 1998, the potential capital to be raised from the exercise of the Common Stock purchase warrants, and the ability to defer anticipated expenditures, if required, will provide for the Company to continue as a going concern through at least June 30, 1998. There can be no assurance, however, that any significant revenues and earnings will be generated during the 1998 fiscal year or that sufficient capital can be raised by the Company. In such event, the Company may cease to be a going concern or may have to reduce its operations or operating procedures. In such event, investors in the Common Stock may lose all of their investment. The Company anticipates that for the year ended June 30, 1998 there will be a negative cash flow from operations in excess of $1 million. The Company anticipates that the shortfall in cash flow will be supported by additional equity infusion from the exercise of the Common Stock purchase warrants, and, if needed, the ability to defer planned expenditures. Commitment During October 1996, the Company entered into a lease for approximately 7,000 square feet in Wayne, Pennsylvania for a monthly rental of $5,000 plus utilities and operating expenses. The lease expires on October 15, 1999. A former property located at 1265 Drummers Lane, Wayne, PA, was vacated in October, 1996. The lease payment of approximately $5,000 per month ceased as of August 31, 1997. During August 1997, the Company entered into a commitment to acquire 500 control system equipment for $242,325. These amounts are expected to be paid from the existing cash resources plus funds generated by Common Stock warrant exercises. 9 Item 7. Financial Statements Page ---- Report of Independent Auditors F-1 Balance Sheets F-2 Statements of Operations F-3 Statement of Shareholders' Equity F-4 Statements of Cash Flows F-9 Notes to Financial Statements F-11 10 Report of Independent Auditors To the Board of Directors and Shareholders USA Technologies, Inc. We have audited the accompanying balance sheets of USA Technologies, Inc. (A Development Stage Corporation) as of June 30, 1997 and 1996, and the related statements of operations, shareholders' equity, and cash flows for each of the two years in the period ended June 30, 1997 and the period January 16, 1992 (inception) through June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of USA Technologies, Inc. at June 30, 1997 and 1996, and the results of its operations and its cash flows for each of the two years in the period ended June 30, 1997 and for the period January 16, 1992 (inception) through June 30, 1997, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming USA Technologies, Inc. will continue as a going concern. As discussed in Note 2 to the financial statements, the Company's recurring losses from operations from its inception and its accumulated deficit through June 30, 1997, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might result from the outcome of this uncertainty. /s/ Ernst & Young LLP Philadelphia, Pennsylvania August 14, 1997 F-1 USA Technologies, Inc. (A Development Stage Corporation) Balance Sheets See accompanying notes. F-2
June 30, 1997 1996 ------------ ------------ Assets Current assets: Cash and cash equivalents $ 630,266 $ 1,773,356 Accounts receivable less allowance for uncollectible accounts of $19,345 at June 30, 1997 and $0 at June 30, 1996, respectively 127,318 -- Inventory 378,318 426,391 Stock subscriptions receivable 60,000 106,350 Prepaid expenses and deposits 15,670 3,614 ------------ ------------ Total current assets 1,211,572 2,309,711 Property and equipment, net 178,457 235,214 Other assets 20,250 42,446 ------------ ------------ Total assets $ 1,410,279 $ 2,587,371 ============ ============ Liabilities and shareholders' equity Current liabilities: Accounts payable $ 474,646 $ 301,849 Accrued expenses 46,742 41,559 Current obligations under capital leases 18,270 9,048 ------------ ------------ Total current liabilities 539,658 352,456 Obligations under capital leases, less current portion 24,480 21,209 Accrued rent -- 13,516 ------------ ------------ Total liabilities 564,138 387,181 Shareholders' equity: Preferred Stock, no par value: Authorized shares - 1,200,000 Series A Convertible issued and outstanding shares - 861,205 and 796,025 at June 30, 1997 and 1996 (liquidation preference of $11,449,136 at June 30, 1997) 7,024,811 6,776,132 Common Stock, no par value: Authorized shares - 55,000,000 Issued and outstanding shares - 29,969,934 and 23,023,976 at June 30, 1997 and 1996, respectively 4,355,334 2,720,201 Deficit accumulated during the development stage (10,534,004) (7,296,143) ----------- ------------ Total shareholders' equity 846,141 2,200,190 ----------- ----------- Total liabilities and shareholders' equity $1,410,279 $2,587,371 =========== =========== USA Technologies, Inc. (A Development Stage Corporation) Statements of Operations See accompanying notes F-3
Year ended June 30 January 16, 1992 ------------------------------------ (date of inception) through 1997 1996 June 30, 1997 ------------ ------------ ---------------------------- Revenues: Equipment sales $ 490,614 $ -- $ 490,614 License fees 117,158 52,979 180,816 Other -- ------------ ------------ ------------ Total revenues 607,772 52,979 671,430 ------------ ------------ ------------ Operating expenses: General and administrative 2,040,163 1,511,281 5,258,688 Compensation 1,080,458 903,398 3,546,234 Cost of sales 525,090 -- 525,090 Depreciation and amortization 97,250 72,016 195,644 Provision for losses on equipment -- 44,100 400,715 Costs incurred in connection with abandoned private placement -- -- 50,000 ------------ ------------ ------------ Total operating expenses 3,742,961 2,530,795 9,976,371 ------------ ------------ ------------ (3,135,189) (2,477,816) (9,304,941) Other income (expense): Interest income 26,676 31,868 80,080 Interest expense (12,199) (5,749) (138,810) ------------ ------------ ------------ Total other income (expense) 14,477 26,119 (58,730) ------------ ------------ ------------ Net loss (3,120,712) (2,451,697) $ (9,363,671) ============ Cumulative preferred dividends (1,243,295) (954,300) ------------ ------------ Loss applicable to common shares $ (4,364,007) $ (3,405,997) ============ ============ Loss per common share $ (.21) $ (.23) ============ ============ Weighted average number of common shares outstanding 20,984,381 14,908,904 ============ ============ USA Technologies, Inc. (A Development Stage Corporation) Statements of Shareholders' Equity - continued - F-4
Deficit Series A Accumulated Convertible During the Preferred Common Development Stock Stock Stage Total ---------------------------------------------------------------------- Balance, January 16, 1992, inception $ -- $ -- $ -- $ -- April 1992-10,500,000 shares of Common Stock at $.001 per share -- 10,500 -- 10,500 May 1992-10,000 shares of Convertible Preferred Stock at $9.98 per share 99,800 -- -- 99,800 June 1992-100,000 shares of Common Stock at $.001 per share -- 100 -- 100 Net loss -- -- (1,848) (1,848) ----------- ----------- ----------- ----------- Balance, June 30, 1992 99,800 10,600 (1,848) 108,552 September 1992-15,000 shares of Convertible Preferred Stock at $9.97 per share 149,550 -- -- 149,550 September 1992-450,000 shares of Common Stock at at $.001 per share -- 450 -- 450 April 1993-400,000 shares of Common Stock at $.001 per share -- 400 -- 400 June 1993-695,000 shares of Common Stock at $.001 per share -- 695 -- 695 June 1993-142.2 units (142,200 shares, net of offering costs, of Convertible Preferred Stock at $9.97 per share and 4,266,000 shares of Common Stock at $.001 per share) 1,266,439 3,815 -- 1,270,254 Net loss -- -- (899,547) (899,547) ----------- ----------- ----------- ----------- Balance, June 30, 1993 1,515,789 15,960 (901,395) 630,354 September 1993-110,000 shares of Common Stock at $.001 per share -- 110 -- 110 February 1994-79,522 units (79,522 shares, net of offering costs, of Convertible Preferred Stock at $9.99 per share and 556,654 shares of Common Stock at $.001 per share) 624,824 438 -- 625,262 March 1994-34,960 units (34,960 shares, net of offering costs, of Convertible Preferred Stock at $9.99 per share and 244,720 shares of Common Stock at $.001 per share) 288,591 202 -- 288,793 June 1994-15,940 units (15,940 shares, net of offering costs, of Convertible Stock at $9.99 per share and 111,580 shares of Common Stock at $.001 per share 75,196 52 -- 75,248 Net loss -- -- (1,244,117) (1,244,117) ----------- ----------- ----------- ----------- Balance, June 30, 1994 2,504,400 16,762 (2,145,512) 375,650 USA Technologies, Inc. (A Development Stage Corporation) Statements of Shareholders' Equity (continued) - continued - F-5
Deficit Series A Accumulated Convertible During the Preferred Common Development Stock Stock Stage Total --------------------------------------------------------------- July 1994-5,092 units (5,092 shares, net of offering costs, of Convertible Preferred Stock at $9.99 per share and 35,644 of Common Stock at $.001 per share) $ 37,248 $ 26 $ -- $ 37,274 August 1994-9,132 units (9,132 shares, net of offering costs, of Convertible Preferred Stock at $9.99 per share and 63,924 of Common Stock at $.001 per share) 66,801 47 -- 66,848 September 1994-4,935 units (4,935 shares, net of offering costs, of Convertible Preferred Stock at $9.99 per share and 34,545 of Common Stock at $.001 per share) 36,098 25 -- 36,123 October 1994-12,205 units (12,205 shares, net of at $9.99 per share offering costs, of Convertible Preferred Stock and 85,435 of Common Stock at $.001 per share) 88,895 62 -- 88,957 October 1994-cancellation of 900,000 shares of Common Stock -- -- -- -- November 1994-11,478 units (11,478 shares net of offering costs, of Convertible Preferred Stock at $9.99 per share and 80,346 of Common Stock at $.001 per share) 83,600 59 -- 83,659 December 1994-16,430 units (16,430 shares, net of offering costs, of Convertible Preferred Stock at $9.99 per share and 115,010 of Common Stock at $.001 per share) 119,668 84 -- 119,752 January 1995-12,225 units (12,225 shares, net of offering costs, of Convertible Preferred Stock at $9.99 per share and 85,575 of Common Stock at $.001 per share) 102,244 71 -- 102,315 February 1995-98,081 units (98,081 shares, net of offering costs, of Convertible Preferred Stock at $9.99 per share and 686,567 of Common Stock at $.001 per share) 820,298 575 -- 820,873 March 1995-cancellation of 1,100,000 shares of Common Stock -- -- -- -- April 1995 - June 1995-issuance of 150,000 shares of Common Stock in exchange for consulting services -- 99,750 -- 99,750 June 1995-24.9 units (24,900 shares, net of offering costs, of Convertible Preferred Stock at $10 per share) 206,382 -- -- 206,382 June 1995-issuance of options to purchase 10,000 shares of Common Stock at $.25 per share in exchange for services -- 2,600 -- 2,600 June 1995-conversion of 1,000 shares of Convertible Preferred Stock to 10,000 shares of Common Stocks (8,262) 8,262 -- -- Net loss -- -- (1,645,750) (1,645,750) Common stock dividend to be distributed - 3 shares of Common Stock for each outstanding share of Convertible Preferred Stock on August 1, 1995 (1,473,300 shares as of June 30, 1995) -- 780,849 (780,849) -- --------- ------- ---------- ------- Balance, June 30, 1995 4,057,372 909,172 (4,572,111) 394,433 USA Technologies, Inc. (A Development Stage Corporation) Statements of Shareholders' Equity (continued) - continued - F-6
Deficit Series A Accumulated Convertible During the Preferred Common Development Stock Stock Stage Total ------------------------------------------------------------------- July 1995 - 145.1 units (145,100 shares, net of offering costs, of Convertible Preferred Stock $ 1,441,185 $ -- $ -- $ 1,441,185 at $10 per share) July 1995 - September 1995 - issuance of 100,000 shares of Common Stock in exchange for consulting services -- 50,000 -- 50,000 July 1995 - Common Stock options exercised - 180,000 shares at $.05 per share -- 9,000 -- 9,000 August 1995 - Common stock dividend distributed -3 shares of Common Stock for each outstanding share of Preferred Stock on August 1, 1995 (435,300 shares) -- 230,709 (230,709) -- October 1995 - Common Stock options exercised-100,000 shares at $.05 per share -- 5,000 -- 5,000 January 1996 - issuance of 30,000 shares of Common Stock in exchange for consulting services -- 14,205 -- 14,205 February 1996 - issuance of 50,000 shares of Convertible Preferred Stock at $4.00 per share 200,000 -- -- 200,000 February 1996 - Common Stock warrants exercised- 145,500 at $.40 per warrant -- 58,200 -- 58,200 March 1996 - Common Stock warrants exercised- 125,500 at $.40 per warrant -- 50,200 -- 50,200 March 1996 - issuance of 300,000 shares of Common Stock in exchange for consulting services -- 183,000 -- 183,000 March 1996 - cancellation of 305,000 shares of Common Stock -- -- -- -- April 1996 - Common Stock warrants exercised - 264,000 at $.30 per warrant -- 79,200 -- 79,200 May 1996 - Common Stock warrants exercised - 381,000 at $.30 per warrant -- 114,300 -- 114,300 Refund to warrant holders due to the reduction of the 1995 Common Stock warrant exercise price from $.40 per warrant to $.30 per warrant -- (27,100) -- (27,100) May 1996 - conversion of 20,175 shares of Convertible Preferred Stock to 201,750 shares of Common Stock (171,689) 171,689 -- -- May 1996 - conversion of $41,626 of cumulative preferred dividends into 41,626 shares of Common Stock at $1.00 per share -- 41,626 (41,626) -- June 1996 - Common Stock warrants exercised - 2,770,000 at $.30 per warrant -- 831,000 -- 831,000 June 1996 - 130 units (130,000 shares, net of offering costs, of Convertible Preferred Stock at $10 per share) 1,249,264 -- -- 1,249,264 Net loss -- -- (2,451,697) (2,451,697) ----------- ----------- ----------- ----------- Balance, June 30, 1996 6,776,132 2,720,201 (7,296,143) 2,200,190 USA Technologies, Inc. (A Development Stage Corporation) Statements of Shareholders' Equity (continued) - continued - F-7
Deficit Series A Accumulated Convertible During the Preferred Common Development Stock Stock Stage Total ---------------------------------------------------------------- October 1996 - issuance of 250,000 shares of Common Stock in exchange for consulting services $ -- $117,500 $ -- $117,500 October 1996 - issuance of 15,000 shares of Common Stock in exchange for consulting services -- 8,000 -- 8,000 November 1996 - conversion of 2,030 shares of Convertible Preferred Stock to 20,300 shares of Common Stock (17,275) 17,275 -- -- November 1996 - conversion of $4,868 of cumulative preferred dividends into 4,868 shares of Common Stock at $1.00 per share -- 4,868 (4,868) -- December 1996 - Common Stock warrants exercised - 2,345,000 at $.20 per warrant -- 469,000 -- 469,000 January 1997 - issuance of 7,750 shares of Convertible Preferred Stock at $10.00 per share 77,500 -- -- 77,500 January 1997 - Common Stock warrants exercised - 724,000 at $.20 per warrant, net of offering costs -- 90,795 -- 90,795 January 1997 - conversion of 2,450 shares of Convertible Preferred Stock to 24,500 shares of Common Stock (20,850) 20,850 -- -- January 1997 - conversion of $11,513 of cumulative preferred dividends into 11,513 shares of Common Stock at $1.00 per share -- 11,513 (11,513) -- February 1997 - issuance of 1,600 shares of Convertible Preferred Stock at $10.00 per share, net of offering costs 16,000 -- -- 16,000 February 1997 - Common Stock warrants exercised - 25,000 at $.20 per warrant, net of offering costs -- 3,071 -- 3,071 February 1997 - conversion of 250 shares of Convertible Preferred Stock to 2,500 shares of Common Stock (2,128) 2,128 -- -- February 1997 - conversion of $1,500 of cumulative preferred dividends into 1,500 shares of Common Stock at $1.00 per share -- 1,500 (1,500) -- March 1997 - issuance of 160,000 shares of Common Stock in exchange for consulting services -- 57,200 -- 57,200 March 1997 - Common Stock warrants exercised - 108,000 at $.20 per warrant, net of offering -- 13,242 -- 13,242 costs March 1997 - conversion of 3,390 shares of Convertible Preferred Stock to 33,900 shares of Common Stock (28,849) 28,849 -- -- March 1997 - conversion of $10,170 of cumulative preferred dividends into 10,170 shares of Common Stock at $1.00 per share -- 10,170 (10,170) -- April 1997 - 1.2 units (2,400 shares of Convertible Preferred Stock at $10,000 per unit, net of offering costs) 10,835 -- -- 10,835 April 1997 - conversion of 6,800 shares of Convertible Preferred Stock to 81,600 shares of Common Stock (58,004) 58,004 -- -- USA Technologies, Inc. (A Development Stage Corporation) Statements of Shareholders' Equity (continued) See accompanying notes F-8
Deficit Series A Accumulated Convertible During the Preferred Common Development Stock Stock Stage Total ------------------------------------------------------------------- April 1997 - conversion of $37,875 of cumulative preferred dividends into 45,633 shares of Common Stock at $.83 per share $ -- $ 37,874 $ (37,874) $ -- April 1997- issuance of 40,000 shares of Common Stock in exchange for consulting services -- 12,349 -- 12,349 May 1997 - 24.7 units (49,400 shares of Convertible Preferred Stock at $10,000 per unit, net of offering costs) 223,034 -- -- 223,034 May 1997 - conversion of 350 shares of Convertible Preferred Stock to 4,200 shares of Common Stock (2,986) 2,986 -- -- May 1997 - conversion of $11,625 of cumulative preferred dividends into 11,763 shares of Common Stock at $.83 and $1.00 per share -- 11,625 (11,625) -- May 1997 - issuance of 40,000 shares of Common Stock in exchange for consulting services -- 14,143 -- 14,143 June 1997 - 14.1 units (28,200 shares of Convertible Preferred Stock at $10,000 per unit, net of offering costs) 127,319 -- -- 127,319 June 1997 - conversion of 8,900 shares of Convertible Preferred Stock to 106,800 shares of (75,917) 75,917 -- -- Common Stock June1997 - conversion of $39,599 of cumulative preferred dividends into 47,711 shares of Common Stock at $.83 per share -- 39,599 (39,599) -- June 1997 - issuance of 182,000 shares of Common Stock in exchange for consulting services -- 68,006 -- 68,006 June 1997 - Common Stock options exercised - 150,000 at $.05 per share -- 7,500 -- 7,500 June 1997 - issuance of Common Stock, in connection with convertible security placement (Note 9), net of offering costs -- 451,169 -- 451,169 Net loss -- -- (3,120,712) (3,120,712) ------------ ------------ ------------ ------------ Balance, June 30, 1997 $ 7,024,811 $ 4,355,334 $(10,534,004) $ 846,141 ============ ============ ============ ============ USA Technologies, Inc. (A Development Stage Corporation) Statements of Cash Flows - continued - F-9
Year ended June 30 January 16, 1992 -------------------------- (date of inception) through 1997 1996 June 30, 1997 --------- -------- ---------------------------- Operating activities Net loss $(3,120,712) $(2,451,697) $(9,363,671) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 97,250 72,016 195,644 Provision for losses on equipment -- 44,100 383,756 Compensation charges incurred in connection with the issuance of Common Stock and Common Stock options 277,198 247,205 626,753 Changes in operating assets and liabilities: Accounts receivable (127,318) -- (127,318) Inventory 48,073 (426,391) (378,318) Prepaid expenses, deposits, and other assets 9,702 (38,746) (43,693) Accounts payable 172,797 150,252 574,918 Accrued expenses (8,332) 10,723 (2,529) ----------- ----------- ----------- Net cash used in operating activities (2,651,342) (2,392,538) (8,134,458) Investing activities Purchase of property and equipment (17,855) (112,443) (740,960) Proceeds from sale of property and equipment -- 3,539 3,539 ----------- ----------- ----------- Net cash used in investing activities (17,855) (108,904) (737,421) Financing activities Net proceeds from issuance of Common Stock 1,141,126 1,013,450 2,172,287 Net proceeds from issuance of Convertible -- -- -- Preferred Stock 394,688 2,940,449 7,350,771 Change in accounts payable and accrued expenses relating to the private placement offering -- (42,218) -- Repayment of principal on capital lease obligations (9,707) (8,908) (18,615) Repayment of note payable, net -- (4,166) (2,298) ---------- ----------- ----------- Net cash provided by financing activities 1,526,107 3,898,607 9,502,145 ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents (1,143,090) 1,397,165 630,266 Cash and cash equivalents at beginning of period 1,773,356 376,191 -- ----------- ----------- ----------- Cash and cash equivalents at end of period $ 630,266 $ 1,773,356 $ 630,266 =========== =========== =========== USA Technologies, Inc. (A Development Stage Corporation) Statements of Cash Flows (continued) See accompanying notes. F-10
January 16,1992 Year ended June 30 (date of inception) through 1997 1996 June 30, 1997 ----------- ----------- ---------------------------- Supplemental disclosure of cash flow information Cash paid during the year for interest $ 10,549 $ -- $ 103,032 ========== ========= ========== Conversion of Convertible Preferred Stock to Common Stock $ 206,009 $ 171,689 $ 385,960 ========== ========= ========== Conversion of Cumulative Preferred Dividends to Common Stock $ 117,149 $ 41,626 $ 158,775 ========== ========= ========== Common Stock dividend $ -- $ 230,709 $1,011,558 ========== ========= ========== Capital lease obligations incurred $ 22,200 $ 34,338 ========== ========= Stock subscription receivable $ 60,000 $ 106,350 ========== ========= USA Technologies, Inc. (A Development Stage Corporation) Notes to Financial Statements June 30, 1997 1. Business USA Technologies, Inc. a Pennsylvania corporation (the "Company"), was incorporated on January 16, 1992. The Company changed its name from USA Entertainment Center, Inc. to USA Technologies, Inc. on June 7, 1995 to more accurately reflect the nature of its business. The Company is in the development stage and is an owner and licensor of unattended, credit card activated control systems for use in connection with copying machines, debit card purchase/revalue stations, facsimile machines, personal computers and computer printers. During September 1996, the Company commenced offering its control systems under the name Business Express(TM). Substantially all of the Company's activities to date have been devoted to raising capital, developing markets, and starting up operations. The Company's customers are located in the United States and Canada and are comprised of hotels, retail locations, university libraries, and public libraries. The Company generates its revenues by the sale of equipment utilizing its control systems and retaining a percentage of the gross licensing fees generated by the control systems, plus a monthly administrative service fee. 2. Accounting Policies Basis of Financial Statement Presentation The financial statements of the Company have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, the financial statements do not include any adjustments that might be necessary should the Company be unable to continue in existence. The Company has been in the development stage since its inception in 1992 and has incurred substantial losses of $2.4 million in 1996, $3.1 million in 1997 and cumulative losses from its inception through June 30, 1997 amounting to $9.4 million. Losses have continued through August 1997. The Company's ability to meet its future obligations is dependent upon the success of its products in the marketplace and its ability to raise capital until the Company's products can generate sufficient operating revenues. These factors raise doubt about the Company's ability to continue as a going concern. Management believes that actions presently being taken will provide for the Company to continue as a going concern. Such actions include the generation of revenues from operations, raising capital from the exercise of Common Stock purchase warrants, and/or the deferral of anticipated expenditures in order to satisfactorily meet its obligations. F-11 USA Technologies, Inc. (A Development Stage Corporation) Notes to Financial Statements (continued) 2. Accounting Policies (continued) Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash Equivalents Cash equivalents represents all highly liquid investments with original maturities of three months or less. At June 30, 1997 and September 30, 1997 cash equivalents were comprised of a money market fund and certificate of deposit. Inventory Inventory is stated at the lower of cost (first-in, first-out method) or market. Property and Equipment Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over three to seven years for financial statement purposes and accelerated methods for income tax reporting purposes. Revenue Recognition Revenue from the sale of equipment is recognized upon installation and customer acceptance of the related equipment. License fee revenue is recognized upon the usage of the Company's credit card activated control systems. F-12 USA Technologies, Inc. (A Development Stage Corporation) Notes to Financial Statements (continued) 2. Accounting Policies (continued) Research and Development Research and development costs are charged to operations as incurred. Such research and development costs amounted to approximately $344,000 and $224,000 for the years ended June 30, 1997 and 1996, respectively, and approximately $737,000 for the period January 16, 1992 (date of inception) to June 30, 1997. These costs are reflected in general and administrative and compensation in the accompanying financial statements. Income Taxes The Company provides for income taxes using the asset and liability approach whereby deferred tax assets and liabilities are recorded based on the difference between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Such differences result from differences in the timing of recognition by the Company of certain accrued expenses, and the periods of amortization and depreciation of certain assets. Accounting for Stock Options Statement of Financial Accounting Standards No. 123 (FASB 123), "Accounting for Stock-Based Compensation" is effective for fiscal years beginning after December 15, 1995. FASB 123 provides companies with a choice to follow the provisions of FASB 123 in determination of stock-based compensation expense or to continue with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). The Company has elected to follow the provisions of APB 25. Under APB 25, because the exercise price of the Company's stock options equals or exceeds the market price of the underlying Common Stock on the date of grant, no compensation expense is recognized. The effect of applying FASB 123 to the Company's stock-based awards results in net loss and net loss per common share that are not materially different from amounts reported and, accordingly, the FASB 123 pro forma disclosures have not been provided. F-13 USA Technologies, Inc. (A Development Stage Corporation) Notes to Financial Statements (continued) 2. Accounting Policies (continued) Loss Per Common Share Loss per common share is calculated based on the weighted average number of common shares outstanding during the year, including the weighted average impact of the 2,500,000 common shares held in escrow in connection with the June 1997 Placement (Note 9). No exercise of stock options, purchase rights, stock purchase warrants, or the conversion of preferred stock and cumulative preferred dividends was assumed because the assumed exercise of these securities would be antidilutive. The President's 4,365,000 common shares held in escrow (Note 11) are not considered outstanding for purposes of calculating the loss per common share for all periods presented. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which is required to be adopted on December 31, 1997. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. The impact of Statement No, 128 on the calculation of the Company's primary and fully diluted earnings per share is not expected to be material. 3. Property and Equipment Property and equipment consist of the following: June 30 1997 1996 -------------- -------------- Control systems $ 269,590 $ 261,387 Furniture and equipment 73,437 55,582 Vehicles 10,259 10,259 -------------- -------------- 353,286 327,228 Less accumulated depreciation 174,829 92,014 -------------- -------------- $ 178,457 $ 235,214 ============== ============== F-14 USA Technologies, Inc. (A Development Stage Corporation) Notes to Financial Statements (continued) 4. Accrued Expenses Accrued expenses consist of the following: June 30 1997 1996 -------------- -------------- Accrued rent $ 10,341 $ 34,104 Accrued other 36,401 7,455 -------------- -------------- $ 46,742 $ 41,559 ============== ============== 5. Related Party Transactions At June 30, 1997 and 1996 approximately $27,000 and $14,000 respectively, of the Company's accounts payable are due to several shareholders for various legal and technical services performed. During July 1996, the Company formalized certain agreements with two Directors of the Company who performed consulting services during fiscal year 1996. During the year ended June 30, 1996, $98,600 was paid for such services performed. 6. Commitments The Company conducts its operations from various facilities under operating leases. Rental expense under such arrangements was approximately $94,000 and $69,000, respectively, during the years ended June 30, 1997 and 1996 and $327,000 for the period January 16, 1992 (date of inception) to June 30, 1997. During the years ended June 30, 1997 and 1996, the Company entered into agreements to lease $22,200 and $34,400, respectively, of computer equipment which has been accounted for as capital leases. This computer equipment is included in control systems at June 30, 1997 and 1996. Lease amortization of $17,600 and $5,700 is included in depreciation expense for the year ended June 30, 1997 and 1996, respectively. F-15 USA Technologies, Inc. (A Development Stage Corporation) Notes to Financial Statements (continued) 6. Commitments (continued) Future minimum lease payments subsequent to June 30, 1997 under capital and noncancelable operating leases are as follows: During August 1997, the Company entered into an agreement with a vendor whereby the Company committed to acquire 500 control systems for $242,325. The control systems are anticipated for delivery by the Company throughout fiscal year 1998. F-16
Capital Operating Leases Leases ----------------------------------- 1998 $ 26,055 $ 95,000 1999 26,055 75,000 2000 1,717 28,000 2001 - 3,000 ------------- ------------ Total minimum lease payments 53,827 $ 201,000 ============ Less amount representing interest (25% per annum) 11,077 ------------ Present value of net minimum lease payments 42,750 Less current obligation under capital leases 18,270 ------------ Obligation under capital leases, less current portion $ 24,480 ============ USA Technologies, Inc. (A Development Stage Corporation) Notes to Financial Statements (continued) 7. Income Taxes At June 30, 1997 and 1996, the Company had net tax operating loss carryforwards of approximately $8,181,000 and $5,176,000, respectively, to offset future taxable income expiring through 2012. At June 30, 1997 and 1996, the Company recorded a deferred tax asset of $3,402,000 and $2,537,000, respectively, which were reduced by a valuation allowance of the same amount as the realization of these deferred tax assets are not certain. The deferred tax assets arose primarily from the use of different accounting methods for financial statement and income tax reporting purposes as follows: As of June 30, 1993, the timing and manner in which the Company can utilize operating loss carryforwards and future tax deductions for capitalized items in any year was limited by provisions of the Internal Revenue Code regarding changes in ownership of corporations. The Company believes that such limitation will have an impact on the ultimate realization of its carryforwards and future tax deductions (generated through June 30, 1993). Cumulative losses generated for income tax purposes after June 30, 1993 through June 30, 1997, may be subject to similar limitation. F-17
June 30 1997 1996 ----------- ----------- Deferred tax asset: Net operating loss carryforwards $ 3,081,000 $ 2,174,000 Deferred research and development costs 226,000 159,000 Deferred pre-operating costs 84,000 158,000 Other temporary differences 20,000 64,000 ----------- ----------- 3,411,000 2,555,000 Deferred tax liabilities: Depreciation (9,000) (18,000) ----------- ----------- Deferred tax asset, net 3,402,000 2,537,000 Valuation allowance (3,402,000) (2,537,000) =========== =========== $ -- $ -- =========== =========== USA Technologies, Inc. (A Development Stage Corporation) Notes to Financial Statements (continued) 8. Preferred Stock The Preferred Stock authorized may be issued from time to time in one or more series, each series with such rights, preferences or restrictions as determined by the Board of Directors. Each share of Series A Preferred Stock shall have the right to ten votes and is convertible at any time into ten shares of Common Stock (each share of Common Stock entitles the holder to one voting right). For the period from March 24, 1997 to December 31, 1997, each share of Series A Preferred Stock is convertible into twelve shares of Common Stock. Series A Convertible Preferred Stock provides for an annual cumulative dividend of $1.50 per share payable to the shareholders of record on February 1 and August 1 of each year. Cumulative unpaid dividends at June 30, 1997 and 1996 amounted to $2,837,086 and $1,758,490 respectively. Cumulative unpaid dividends are convertible into common shares at $1.00 per common share at the option of the shareholder. For the period from March 24, 1997 to December 31, 1997, the cumulative unpaid dividends are convertible into common shares at $.83 per common share. During the years ended June 30, 1997 and 1996, certain holders of the Preferred Stock converted 24,170 and 20,175 shares, respectively, into 273,800 and 201,750 shares of Common Stock, respectively. Certain of these shareholders also converted cumulative preferred dividends of $117,149 and $41,626 respectively, into 133,158 and 41,626 shares of Common Stock at June 30, 1997 and 1996, respectively. The Series A Preferred Stock may be called for redemption at the option of the Board of Directors at any time on and after January 1, 1998 for a price of $11.00 per share plus payment of all accrued and unpaid dividends. In the event of any liquidation, the holders of shares of Series A Preferred Stock issued shall be entitled to receive $10.00 for each outstanding share plus all cumulative unpaid dividends. If funds are insufficient for this distribution, the assets available will be distributed ratably among the preferred shareholders. F-18 USA Technologies, Inc. (A Development Stage Corporation) Notes to Financial Statements (continued) 9. Common Stock Transactions The following is a summary of significant equity transactions: o On June 23, 1997, the Company closed on a private placement offering of Convertible Debentures (the Placement) resulting in net proceeds to the Company of $451,169 ($500,000 less offering costs of $48,831). The Placement was issued pursuant to Regulation S of the Securities Act of 1933 to five qualified purchasers, as defined, (Purchasers). The Placement is convertible by the Purchasers into Common Stock at any time after 45 days from issuance (August 7, 1997) and through the Placement's maturity of June 1, 2002 at the option of the Purchaser. The Company has the right to redeem the unconverted portion of the Placement at any time after June 23, 1998 through June 1, 2002. The conversion or redemption rate (hereinafter referred to as conversion rate) is equal to the lesser of 100% of the average closing bid price of the Common Stock for the five trading days immediately preceding June 23, 1997, or 65% of the average closing bid price of the Common Stock for the five trading days immediately preceding the date prior to the conversion or redemption date. Upon maturity (unless converted or redeemed prior thereto), the Placement would be automatically converted into shares of Common Stock at the conversion rate. As the terms and intent of the Placement were to raise equity for the Company through the issuance of Common Stock, and the terms of the Placement do not provide for the repayment of principal in cash, the substance of the Placement is that of an equity transaction and, accordingly, the net proceeds have been reflected as Common Stock in the accompanying financial statements. As a requirement to the closure of the Placement, the Company placed an aggregate of 2,500,000 shares of Common Stock in escrow to ensure such shares would be available upon conversion of the Placement by the Purchasers. As the 2,500,000 shares held in escrow were legally issued and outstanding at June 30, 1997, such shares are included in the common shares issued and outstanding in the accompanying balance sheet. Upon conversion by the Purchasers, the Placement and escrow shares will be canceled and the appropriate number of shares of Common Stock will be issued to the Purchasers. During August 1997, $375,000 of the Placement was converted (at varying prices) into 1,377,942 of common shares, and the escrowed shares were reduced to 625,000. F-19 USA Technologies, Inc. (A Development Stage Corporation) Notes to Financial Statements (continued) 9. Common Stock Transactions (continued) Certain affiliates of the placement agent were issued non-detachable Common Stock purchase warrants, exercisable immediately, to purchase up to 2,000,000 shares of the Company's Common Stock at $.20 per warrant at any time through June 22, 2002. No warrants were exercised at June 30, 1997. o During March 1997, the Company's Board of Directors authorized a $1,100,000 private placement offering of 110 units at a unit price of $10,000. Each unit included 2,000 shares of Convertible Preferred Stock and 40,000 1997 Common Stock warrants at an exercise price of $.20 through August 31, 1997 and $.40 thereafter for five years after the termination of the offering. During June 1997, the Company's Board of Directors authorized the reduction of this offering to a maximum of 40 units at an aggregate sales price of $400,000. As of June 30, 1997, 40 units were sold, generating net proceeds of $361,189 ($400,000 less offering costs of $38,811). The subscriptions receivable of $60,000 as of June 30, 1997, recorded in connection with this offering, were received in August, 1997. The Company terminated this offering on July 3, 1997. At June 30, 1997, all 1,600,000 1997 Common Stock purchase warrants are outstanding. o During March 1997, the Company's Shareholders approved an increase in the number of the Company's authorized common stock shares to 55,000,000; an increase in the number of designated shares of Series A Convertible Preferred Stock to 1,200,000; an increase in the number of shares of Common Stock into which each share of Series A Preferred Stock may be exchanged, from 10 to 12, for the period from March 24, 1997 to December 31, 1997; and a decrease in the price at which accrued but unpaid dividends on Series A Preferred Stock may be exchanged for shares of Common Stock, from $1.00 to $.83, for the period from March 24, 1997 to December 31, 1997. o During November 1996, the Company's Board of Directors authorized a $200,000 private placement offering 20 units at a price of $10,000. Each unit included 1,000 shares of Series A Convertible Preferred Stock and 40,000 1996-B Common Stock purchase warrants at an exercise price of $0.20 per share through August 31, 1997 and $0.30 per share through February 28, 2002. The offering closed during February 1997 resulting in the sale of 93.5 units generating proceeds of $93,500. At June 30, 1997, the 374,000 1996-B Common Stock purchase warrants are outstanding. F-20 USA Technologies, Inc. (A Development Stage Corporation) Notes to Financial Statements (continued) 9. Common Stock Transactions (continued) o During April 1996, the Company's Board of Directors authorized a $1,300,000 private placement offering of 130 units at a unit price of $10,000 and each unit included 40,000 1996 Common Stock purchase warrants and 1,000 shares of Series A Convertible Preferred Stock. As of June 30, 1996, all 130 units were sold, generating net proceeds of $1,249,264 ($1,300,000 less offering costs of $50,736). The 5,200,000 1996 warrants issued are exercisable at any time on or before May 31, 2001, unless such date is extended by the Company. Each warrant entitles the holder to purchase one share of Common Stock for $.40 through December 31, 1996 and for $.50 at any time thereafter through May 31, 2001. During November 1996, the exercise price of the 1996 warrants was reduced by the Company from $.40 to $.20 during the period November 1, 1996 through February 28, 1997, after which the exercise price will increase to $.50 (Note 12). During the year ended June 30, 1997, 3,202,000 warrants were exercised at $.20 per warrant generating gross proceeds of $640,400. At June 30, 1997, there are 1,998,000 1996 Common Stock purchase warrants outstanding. o During 1995, the Company issued Common Stock purchase warrants (the 1995 warrants) which are exercisable at any time on or before January 31, 2001, unless such date is extended by the Company. Each 1995 warrant entitles the holder to purchase one share of Common Stock for $.50. The exercise price of the 1995 warrants may be reduced by the Company at any time, or from time to time (Note 12). At June 30, 1997, the Company had 1,414,000 of 1995 Common Stock purchase warrants outstanding. o The Company has outstanding 157,300 Common Stock purchase rights at $1.00 per share which are exercisable through 1998. F-21 USA Technologies, Inc. (A Development Stage Corporation) Notes to Financial Statements (continued) 10. Stock Options The Company's Board of Directors has granted options to employees and consultants to purchase shares of Common Stock at or above fair market value. All options granted have 5 year terms and vest and become fully exercisable on the schedule established by the contract which granted the option. During November 1996 and June 1997, the Company's Board of Directors authorized the reduction in the exercise price of 650,000 options from $.65 to $.45 per share. These shares were previously issued during the periods March 1996 through November 1996. The new exercise price of these options was equal to or greater than the fair market value of the Common Stock on the date of such reduction. The following table summarizes all stock option activity: Exercise Common Shares Under Price Options Granted Per Share --------------- --------- Balance at June 30, 1993 - $ - Granted 875,000 $ .25 ---------- ----------- Balance at June 30, 1994 875,000 Canceled (100,000) $ .25 Granted 2,290,000 $ .05-.25 ---------- ----------- Balance at June 30, 1995 3,065,000 Granted 550,000 $ .65 Exercised (280,000) $ .05 ---------- ----------- Balance at June 30, 1996 3,335,000 $ .05-.65 Granted 815,000 $ .25-.65 Exercised (150,000) $ .05 Canceled (29,000) $ .45 ---------- ----------- Balance at June 30, 1997 3,971,000 $ .05-.50 ========== =========== F-22 The price range of outstanding and exercisable options at June 30, 1997 is as follows: Pro forma information regarding net loss and net loss per common share determined as if the Company had accounted for stock options granted under the fair value method of FASB 123 is as follows: June 30, 1997 1996 ---- ---- Net loss applicable to common shares as reported under APB 25: ($4,364,007) ($3,405,997) Stock option expense per FASB 123 ( 137,013) ( 17,776) ----------- ----------- Pro forma net loss ($4,501,020) ($3,423,773) Pro forma net loss per common share ($.21) ($.23) Loss per common share as reported ($.21) ($.23) The fair value for the Company's stock options granted was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for fiscal years 1997 and 1996; risk-free interest rate of 5.5%; an expected life of 2 years; no expected cash dividend payments on common stock and volatility factors of the expected market price of the Company's common stock, based on historical volatility of 0.765 and 0.978, respectively. The Company's pro forma information reflects the impact of the reduction in price of certain stock options. F-23
Option Options Weighted Average Weighted Options Weighted Average Exercise Outstanding Remaining Contract Exercise Exercisable at Exercise Prices at June 30, 1997 Life (Yrs.) Price June 30, 1997 Price ------ ---------------- ------------------ ------- ------------- --------------- $0.05 70,000 2.67 $0.05 70,000 $0.05 $0.25 2,565,000 2.13 $0.25 2,565,000 $0.25 $0.45 1,236,000 4.27 $0.15 461,000 $0.45 $0.50 100,000 4.24 $0.50 100,000 $0.50 --------- --------- Total 3,971,000 3,196,000 ========= ========= USA Technologies, Inc. (A Development Stage Corporation) Notes to Financial Statements (continued) 11. Escrow and Cancellation Arrangements At the request of the Pennsylvania Securities Commission, all of the executive officers and directors of the Company serving at the commencement of the initial public offering of the Company agreed to place in escrow 8,395,000 shares, as adjusted, beneficially owned by them until December 29, 1996. Under certain circumstances as outlined by the Pennsylvania Securities Commission, the President's shares may be held in escrow for an additional period of time, but not later than June 30, 1998. Any additional shares acquired by the executive officers and directors will also be held in escrow. The executive officers and directors have agreed not to sell, pledge, or transfer, directly or indirectly, any of the Common Stock held in escrow or any options to acquire stock they may own. Additionally, the President of the Company has agreed that his 4,365,000 escrowed common shares would be canceled by the Company and would no longer be issued and outstanding unless certain performance measures as specified by the Commission are achieved by June 30, 1998. If the performance measures are achieved, the common shares released from escrow will result in a compensatory charge to the Company's operations. The charge will be based on the fair value of the Company's common shares on the date the shares are released from escrow. During the years ended June 30, 1997 and 1996, there was no such charge to operations. The 4,365,000 shares of Common Stock held by the President are not considered outstanding for purposes of calculating the loss per common share for all periods presented. 12. Events (Unaudited) Subsequent to the Date of the Report of Independent Auditors During the first quarter of fiscal 1998, 1,529,200 and 224,000 of 1997 and 1996-B Common Stock warrants, respectively, were exercised at $.20 per warrant generating total gross proceeds to the Company of $350,640. During the first quarter of fiscal 1998, certain holders of the Company's Preferred Stock converted 131,220 shares into 1,574,640 shares of Common Stock. Certain of these shareholders also converted cumulative preferred dividends of $528,007 into 637,410 shares of Common Stock. During September 1997, the Company's Board of Directors reduced the exercise price of the 1995 Common Stock Purchase Warrants and the 1996 Common Stock Purchase Warrants from $.50 to $.25 through October 31, 1997. Thereafter the exercise price will be $.50. Further, the reduced $.20 exercise price of the 1996-B Common Stock Warrants and the 1997 Common Stock Warrants was extended through September 30, 1997. On November 13, 1997 the Company's Board of Directors extended the $.25 Common Stock Purchase Warrant price through October 31, 1997. Thereafter the exercise price will be $.50. During the period September 1, 1997 through December 1, 1997 an additional $100,000 of the Placement (Note 9) was converted into 396,391 shares of the Company's Common Stock. During November 1997, the Company entered into a new Employment and Non- Competition Agreement (the Employment Agreement) with the Company's President through June 30, 2000, and providing for a base annual salary of $100,000. The Employment Agreement is automatically renewed annually thereafter unless cancelled by either the President or the Company. In connection with the Employment Agreement, the President cancelled an aggregate of 4,365,000 shares of Common Stock held in escrow in accordance with the terms as described in Note 11. The Employment Agreement also granted the President in the event of a "USA Transaction", irrevocable and fully vested stock rights equal to that number of shares of Common Stock that when issued to him equals five percent of all of the then issued and outstanding shares of the Company's Common Stock. The President is not required to pay any additional compensation for such shares. The stock rights have no expiration and are not affected by the Presidents termination of employment. The term USA Transaction is defined as (i) the acquisition of fifty- one percent or more of the then outstanding voting securities of the Company or (ii) the approval by shareholders of the Company of a reorganization, merger, consolidation, liquidation, or dissolution of the Company, or the sale, transfer, or other disposition of all or substantially all of the assets of the Company. On January 16, 1998, the Board of Directors approved a private placement offering to be conducted pursuant to Regulation D promulgated under the Act for up to $700,000 of the Company's securities. The offering would consist of up to 70 units at $10,000 each, with each unit consisting of 2,000 shares of Preferred Stock and 50,000 1998-A Warrants. The 1998-A Warrants enable the holder to purchase one share of Common Stock for 5.15 on or before June 1, 1998, and for 5.40 thereafter. The Company anticipates the offering would commence on or about January 28, 1998, and would terminate on or before February 28, 1998. F-24 PART III Item 10. Executive Compensation The following table sets forth certain information with respect to compensation paid or accrued by the Company during the fiscal years ended June 30, 1995, June 30, 1996 and June 30, 1997 to the individual acting in the capacity of Chief Executive Officer of the Company. No individual who was serving as an executive officer of the Company at the end of the fiscal years ended June 30, 1995, June 30, 1996 or June 30, 1997 received salary and bonus in excess of $100,000 in any such fiscal year. Summary Compensation Table Fiscal Name and Principal Position Year Annual Compensation - --------------------------- ------ ------------------------- Salary Bonus ------ ----- George R. Jensen, Jr., 1997 $100,000 $0 Chief Executive Officer, 1996 $90,000 $0 President 1995 $90,000 $0 Executive Employment Agreements The Company has entered into an employment agreement with Mr. Jensen which expires June 30, 1998. The Agreement is automatically renewed from year to year unless canceled by Mr. Jensen or the Company. The agreement provides for an annual base salary of $100,000 per year. Mr. Jensen is entitled to receive such bonus or bonuses as may be awarded to him by the Board of Directors. In determining whether to pay such a bonus, the Board would use its subjective discretion. The Agreement requires Mr. Jensen to devote his full time and attention to the business and affairs of the Company, and obligates him not to engage in any investments or activities which would compete with the Company during the term of the Agreement and for a period of one year thereafter. The Company has entered into a one-year employment agreement with Mr. Herbert which expires on April 30, 1998. The agreement is automatically renewed from year to year thereafter unless canceled by Mr. Herbert or the Company. The Agreement provides for an annual base salary of $90,000 per year, provided, that Mr. Herbert's base salary shall never be less than ninety percent of that of the Chief Executive Officer of the Company. Mr. Herbert is entitled to receive such bonus or bonuses as the Board of Directors may award to him. The Agreement 11 requires Mr. Herbert to devote his full time and attention to the business and affairs of the Company and obligates him not to engage in any investments or activities which would compete with the Company during the term of the agreement and for a period of one year thereafter. Mr. Sterling has entered into a one-year employment agreement with the Company which expires on June 30, 1998. The agreement is automatically renewed from year to year thereafter unless cancelled by Mr. Sterling or the Company. The Agreement provides for an annual base salary of $90,000 per year and provides that Mr Sterling is entitled to receive such bonus or bonuses as the Board of Directors may award to him. The agreement requires Mr. Sterling to devote his full time and attention to the business and affairs of the Company, and obligates him not to engage in any investments or activities which would compete with the Company during the term of the agreement and for a period of one year thereafter. Mr. Kolls has entered into a one-year employment agreement with the Company which expires on April 30, 1998, and is automatically renewed from year to year thereafter unless canceled by Mr. Kolls or the Company. The agreement provides for an annual base salary of $90,000 per year. Mr. Kolls is also entitled to receive such bonus or bonuses as may be awarded to him by the Board of Directors. The Agreement requires Mr. Kolls to devote his full time and attention to the business and affairs of the Company, and obligates him not to engage in any investments or activities which would compete with the Company during the term of his agreement and for a period of one year thereafter. Mr. Maxwell has entered into a one-year employment agreement with the Company which expires on February 28, 1998, and is automatically renewed from year to year thereafter unless cancelled by Mr. Maxwell or the Company. The agreement provides for an annual base salary of $85,000 per year, provided, that Mr. Maxwell's base salary shall never be less than eighty-five percent of that of the Chief Executive Officer of the Company. Mr. Maxwell is also entitled to receive such bonus or bonuses as the Board of Directors may award to him. The Agreement requires Mr. Maxwell to devote his full time and attention to the business and affairs of the Company, and obligates him not to engage in any investments or activities which would compete with the Company during the term of the agreement and for a period of one year thereafter. Director Compensation and Stock Options Members of the Board of Directors do not currently receive any cash compensation for serving on the Board of Directors. In April 1993, Messrs. Kapourelos and Sellers each purchased 100,000 shares of Common Stock from the Company at a purchase price of $.001 per share. In June 1993, Mr. Van Alen purchased 100,000 shares of Common Stock from the Company at a purchase price of $.001 per share. 12 In July 1993, the Company issued to each of Messrs. Kapourelos, Sellers, and Van Alen fully vested options to purchase 100,000 shares of Common Stock at an exercise price of $.25 per share. The options must be exercised on or before June 30, 1998. In March 1995, the Company issued to Mr. Smith fully vested options to purchase 100,000 shares of Common Stock, to Mr. Sellers fully vested options to purchase 55,000 shares of Common Stock, to Mr. Kapourelos fully vested options to purchase 70,000 shares of Common Stock, and to Mr. Van Alen fully vested options to purchase 25,000 shares of Common Stock. The exercise price of these options is $.25 per share and they must be exercised on or before February 29, 2000. The Company paid to William W. Sellers the amount of $76,600 for consulting services rendered by Mr. Sellers to the Company during the fiscal year ended June 30, 1996. Mr. Sellers' consulting services consisted of advising and assisting the Company with a variety of business matters including but not limited to, general operations of the business, expansion of its product line, and identification of new business directions. The Company paid to Peter G. Kapourelos the amount of $22,000 for consulting services rendered by Mr. Kapourelos to the Company during the fiscal year ended June 30, 1996. Mr. Kapourelos' services consisted of assisting the Company in connection with investor and public relations. Executive Stock Options In July 1993, the Company issued to Keith L. Sterling and Edward J. Sullivan, a former officer of the Company, options to purchase shares of Common Stock at an exercise price of $.25 per share. The options must be exercised within five years of the vesting thereof. Mr. Sterling received options to acquire 200,000 shares of Common Stock, 100,000 of which vested on June 30, 1994, and 100,000 of which vested on June 30, 1995. Mr. Sullivan was granted options to acquire 100,000 shares of Common Stock, 50,000 of which vested on June 30, 1994, and 50,000 of which vested on June 30, 1995. In August 1994, the Company issued to Mr. Kolls options to acquire 50,000 shares of Common Stock at an exercise price of $.25 per share, 25,000 of which vested on April 30, 1995, and 25,000 of which vested on April 30, 1996. In August 1994, the Company issued to Mr. Barry Slawter, a former officer of the Company, options to acquire 200,000 shares of Common Stock at an exercise price of $.25 per share, 50,000 of which vested on February 1, 1995, 50,000 of which vested on May 1, 1995, 50,000 of which vested on August 1, 1995, and 50,000 of which vested on November 1, 1995. The options must be exercised within five years after vesting. 13 In March 1995, the Company issued to Mr. Sterling fully vested options to acquire 100,000 shares of Common Stock at $.25 per share exercisable on or before February 29, 2000. In March 1995, the Company issued to Mr. Kolls options to acquire 150,000 shares of Common Stock, at an exercise price of $.25 per share, 75,000 of which vested on April 30, 1995, and 75,000 of which vested on April 30, 1996. These options must be exercised within five years after vesting. In June 1995, the Company issued to Mr. Slawter fully vested options to acquire 10,000 shares of Common Stock at an exercise price of $.25 per share. Such options must be exercised within five years. In March 1996, the Company issued to Mr. Kolls options to acquire up to 50,000 shares of Common Stock at an exercise price of $.65 per share, all of which will vest if he is employed on April 30, 1997. In November 1996, the exercise price of the options was reduced to $.45. The options must be exercised within five years of vesting. In April 1996, the Company issued to Mr. Herbert options to acquire up to 400,000 shares of Common Stock at an exercise price of $.65 per share. In November 1996, the exercise price of the options was reduced to $.45. Subject to Mr. Herbert's continued employment with the Company, the options will become vested over a three year period, 200,000 during the first year, and 100,000 during each year thereafter, in quarterly intervals. The options must be exercised within five years of vesting. In May 1996, the Company issued to Mr. Sterling options to acquire up to 50,000 shares of Common Stock at an exercise price of $.65 per share, all of which vested on June 30, 1997. In November 1996, the exercise price of the options was reduced to $.45. The options must be exercised within five years of vesting. In May 1996, the Company issued to Mr. Sullivan, a former officer of the Company, options to acquire up to 50,000 shares of Common Stock at an exercise price of $.65 per share, all of which were to vest if he was employed by the Company on June 30, 1997. In December 1996, in conjunction with Mr. Sullivan's separation of employment with the Company, the Company agreed that 21,000 of these options became vested at such time and the remainder would be cancelled. See "Managment - Officer Terminations." The options must be exercised within five years of vesting. In February 1997, the Company issued to Mr. Maxwell options to acquire up to 200,000 shares of Common Stock at an exercise price of $.45 per share. Subject to Mr. Maxwell's continued employment with the Company, the options will become vested over a two year period at the rate of 25,000 options per quarter. The options must be exercised within five years of vesting. In June 1997, the Company issued to Mr. Kolls options to acquire up to 100,000 shares of Common Stock at an exercise price of $.45 per share. Subject to Mr. Kolls' continued employment with the Company, the options will become vested over a one year period at the rate of 25,000 options per quarter. In June 1997, the Company issued to Mr. Sterling options to acquire up to 100,000 shares of Common Stock at an exercise price of $.45 per share. Subject to Mr. Sterling's continued employment with the Company, the options will become vested over a one year period at the rate of 25,000 options per quarter. In June 1997, the Company issued to Mr. Herbert options to acquire up to 100,000 shares of Common Stock at an exercise price of $.45 per share. Subject to Mr. Herbert's continued employment with the Company, the options will become vested over a one year period at the rate of 25,000 options per quarter. The Board of Directors is responsible for awarding stock options. Such awards are made in the subjective discretion of the Board. The exercise price of all the above options represents on the date of issuance of such options an amount equal to or in excess of the market value of the Common Stock issuable upon the exercise of the options. All of the foregoing options are non-qualified stock options and not part of a qualified stock option plan and do not constitute incentive stock options as such term is defined under Section 422 of the Internal Revenue Code, as amended, and are not part of an employee stock purchase plan as defined in Section 423 thereunder. 14 Item 12. Certain Relationships and Related Transactions. During October 1994, Mr. Jensen canceled an aggregate of 900,000 shares of Common Stock owned by him and which had been held in escrow. During October 1994, Mr. Jensen resigned as custodian under the Uniform Gifts to Minors Act for his three minor children, over 15,000 shares of Preferred Stock and is no longer the beneficial owner of those shares. In March 1995, Mr. Jensen canceled an aggregate of 1,100,000 shares of Common Stock owned by him and which had been held in escrow. During March 1995, the Company issued to Keith L. Sterling options to purchase up to 100,000 shares of Common Stock, to Henry B. duPont Smith options to purchase up to 100,000 shares of Common Stock, to William W. Sellers options to purchase up to 55,000 shares of Common Stock, to Peter G. Kapourelos options to purchase up to 70,000 shares of Common Stock, and to Mr. Van Alen options to purchase up to 25,000 shares of Common Stock. During March 1995, the Company issued to Haven Brock Kolls, Jr., options to purchase up to 150,000 shares of Common Stock. This option agreement is exercisable at $.25 per common share. In June 1995, the Company issued to Barry Slawter, a former officer of the Company, options to purchase up to 10,000 share of Common Stock. This option agreement is exercisable at $.25 per common share. 15 In August 1995, pursuant to the special stock dividend paid by the Company to holders of Preferred Stock, the Company issued 48,000 shares of Common Stock to Mr. Jensen, 1, 500 shares of Common Stock to Mr. Kolls, 3,000 shares of Common Stock to Mr. Kapourelos, 11,175 shares of Common Stock to Mr. Sellers, and 30,000 shares of Common Stock to Mr. Smith. In February 1996, Mr. Jensen cancelled 305,000 shares of Common Stock owned by him and which had been held in escrow. In March 1996, the Company issued to Mr. Kolls options to acquire up to 50,000 shares of Common Stock at $.65 per share. In April 1996, the Company issued to Mr. Herbert options to acquire up to 400,000 shares of Common Stock at $.65 per share. In May 1996, the company issued to Mr. Sterling options to acquire up to 50,000 shares of Common Stock at $.65 per share and issued to Edward J. Sullivan, a former officer of the Company, options to acquire up to 50,000 shares of Common Stock at $.65 per share. At June 30, 1997 and 1996 and December 31, 1996, approximately $27,000, $14,000 and $30,000, respectively, of the Company's accounts payable are due to several shareholders for various legal and technical services performed. The several shareholders consisted of Lurio & Associates, Ratner and Prestia, and James Czeckner. The law firms (Lurio & Associates and Ratner & Prestia) provided legal services to the Company and Mr. Czeckner provided software consulting services to the Company. In June 1996, the Company refunded a total of $87,200 to the holders of the 1995 Warrants who had exercised the 1995 Warrants at $.40 per share. Of such refunded amount, $4,500 was refunded to William W. Sellers. During July 1996, the Company formalized certain agreements with William W. Sellers and Peter G. Kapourelos, two Directors of the Company, who performed consulting services during fiscal year 1996. During the year ended June 10, 1996, $98,600 was paid for such services performed. In November 1996, the Company reduced the exercise price of the 50,000 options issued to Mr. Kolls in March 1996, the 400,000 options issued to Mr. Herbert in April 1996 and the 50,000 issued to Mr. Sterling in May 1996 from $.65 to $.45. In December 1996, in conjunction with the cancellation of Mr. Sullivan's employment agreement, the Company agreed that 21,000 of the 50,000 options granted to Mr. Sullivan during May 1996 became vested as of December 1, 1996 and the balance thereof were cancelled. In February 1997, the Company issued to Mr. Maxwell options to purchase up to 200,000 shares of Common Stock at $.45 per share. In June 1997, the Company issued to Mr. Kolls options to acquire up to 100,000 shares of Common Stock at $.45 per share, to Mr. Sterling options to acquire up to 100,000 shares of Common Stock at $.45 per share, and to Mr. Herbert options to acquire up to 100,000 shares of Common Stock at $.45 per share. Mr. Jensen may be deemed a "promoter" of the Company as such term is defined under the Federal securities laws. Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K. a. Financial Statements filed herewith at Item 7 hereof includes balance sheets at June 30, 1997 and 1996 and statements of operations, shareholders' equity, and cash flows, for the years ended June 30, 1997 and 1996 and from the period January 16, 1992 (inception) through 16 June 30, 1997. All other schedules for which provision is made in regulation S-B of the Commission are not required under the related instruction or are not applicable and therefore have been omitted. b. A report on Form 8-K was filed by the Company on July 8, 1997. c. The Exhibits filed as part of, or incorporated by reference into this Form 10-KSB are listed below. Exhibit Number Description ------------------------------------------------------- 3.1 Articles of Incorporation of Company filed on January 16, 1992 (Incorporated by reference to Exhibit 3.1 to Form SB-2 Registration Statement No. 33-70992) 3.1.1 First Amendment to Articles of Incorporation of the Company filed on July 17, 1992 (Incorporated by reference to Exhibit 3.1.1 to Form SB-2 Registration Statement No. 33-70992) 3.1.2 Second Amendment to Articles of Incorporation of the Company filed on July 27, 1992 (Incorporated by reference to Exhibit 3.1.2 to Form SB-2 Registration Statement No. 33-70992) 3.1.3 Third Amendment to Articles of Incorporation of the Company filed on October 5, 1992 (Incorporated by reference to Exhibit 3.1.3 to Form SB-2 Registration Statement No. 33-70992) 3.1.4 Fourth Amendment to Articles of Incorporation of the Company filed on October 18, 1993 (Incorporated by reference to Exhibit 3.1.4 to Form SB-2 Registration Statement No. 33-70992) 3.1.5 Fifth Amendment to Articles of Incorporation of the Company filed on June 7, 1995(Incorporated by reference to Exhibit 3.1 to Form SB-2 Registration Statement No. 33-98808) 3.1.6 Sixth Amendment to Articles of Incorporation of the Company filed on May 1, 1996 (Incorporated by reference to Exhibit 3.1.6 to Form SB-2 Registration Statement No. 333-09465) 3.1.7 Seventh Amendment to Articles of Incorporation of the Company filed on March 24, 1997 (Incorporated by reference to Exhibit 3.1.7 to Form SB-2 Registration Statement No. 333-30853) 3.2 By-Laws of the Company (Incorporated by reference to Exhibit 3.2 to Form SB-2 Registration Statement No. 33-70992) 10.1 Amended and Restated Employment and Non-Competition Agreement between the Company and George R. Jensen, Jr., dated as of July 1, 1992 (Incorporated by reference to Exhibit 10.3 to Form SB-2 Registration Statement No. 33-70992) 17 10.1.2 First Amendment to Amended and Restated Employment and Non-Competition Agreement between the Company and George R. Jensen, Jr., dated as of April 29, 1996 (Incorporated by reference to Exhibit 10.1.2 to Form SB-2 Registration Statement No. 333-09465) 10.2 Employment and Non-Competition Agreement between the Company and Keith L. Sterling dated as of July 1, 1993 (Incorporated by reference to Exhibit 10.4 to Form SB-2 Registration Statement No. 33-70992) 10.2.1 First Amendment to Employment and Non-Competition Agreement between the Company and Keith L. Sterling dated as of April 29, 1996 (Incorporated by reference to Exhibit 10.2.1 to Form SB-2 Registration Statement No. 333-09465) 10.3 Employment and Non-Competition Agreement between the Company and Edward J. Sullivan dated as of July 1, 1993 (Incorporated by reference to Exhibit 10.5 to Form SB-2 Registration Statement No. 33-70992) 10.3.1 First Amendment to Employment and Non-Competition Agreement between the Company and Edward J. Sullivan dated as of April 29, 1996 (Incorporated by reference to Exhibit 10.3.1 to Form SB-2 Registration Statement No. 333-09465) 10.4 Employment and Non-Competition Agreement between the Company and Adele Hepburn dated as of January 1, 1993 (Incorporated by reference to Exhibit 10.7 to Form SB-2 Registration Statement No. 33-70992) 10.5 Robert L. Bartlett Common Stock Options dated as of July 1, 1993 (Incorporated by reference to Exhibit 10.9 to Form SB-2 Registration Statement No. 33-70992) 10.6 Edward J. Sullivan Common Stock Options dated as of July 1, 1993 (Incorporated by reference to Exhibit 10.10 to Form SB-2 Registration Statement No. 33-70992) 10.6.1 Edward J. Sullivan Common Stock Options dated as of April 29, 1996 (Incorporated by reference to Exhibit 10.6.1 to Form SB-2 Registration Statement No.333-09465) 10.7 Keith L. Sterling Common Stock Options dated July 1, 1993 (Incorporated by reference to Exhibit 10.11 to Form SB-2 Registration Statement No. 33-70992) 10.7.1 Keith L. Sterling Common Stock Options dated as of April 29, 1996 (Incorporated by reference to Exhibit 10.7.1 to Form SB-2 Registration Statement No. 333-09465) 18 10.8 Adele Hepburn Common Stock Options dated as of July 1, 1993 (Incorporated by reference to Exhibit 10.12 to Form SB-2 Registration Statement No. 33-70992) 10.9 Gregory C. Rollins Common Stock Options dates as of August 23, 1993 (Incorporated by reference to Exhibit 10.13 to Form SB-2 Registration Statement No. 33-70992) 10.10 Lease agreement for Principal Executive Office dated October 1, 1992 (Incorporated by reference to Exhibit 10.14 to Form SB-2 Registration Statement No. 33-70992) 10.10.1 First Amendment to Lease for Principal Executive Office dated July 13, 1993 (Incorporated by reference to Exhibit 10.14.1 to Form SB-2 Registration Statement No. 33-70992) 10.11 Application Sales Agreement of the Company to Card Establishment Services, Inc. and letter of acceptance thereof (Incorporated by reference to Exhibit 10.15 to Form SB-2 Registration Statement No. 33-70992) 10.12 Non-Disclosure Agreement between USA Entertainment Center, Inc. and Card Establishment Services, Inc. (Incorporated by reference to Exhibit 10.16 to Form SB-2 Registration Statement No. 33-70992) 10.13 Certificate of Appointment of American Stock Transfer & Trust Company as Transfer Agent and Registrar dated October 8, 1993 (Incorporated by reference to Exhibit 10.23 to Form SB-2 Registration Statement No. 33-70992) 10.14 Form of Escrow Agreement between the Company, Meridian Trust Company and various shareholders dated as of December 28, 1993 (Incorporated by reference to Exhibit 10.31 to Form SB-2 Registration Statement No. 33-70992) 10.14.1 Modification to Escrow Agreement dated as of October 6, 1994 between the Company, Meridian Trust Company, and George R. Jensen, Jr. (Incorporated by reference to Exhibit 10.31.1 to Form SB-2 Registration Statement No. 33-70992) 10.14.2 Joinder to Escrow Agreement dated as of February 14, 1996 by each of Haven Brock Kolls, Barry Slawter, and Henry B. DuPont Smith Incorporated by reference to Exhibit 10.14.2 to Form SB-2 Registration Statement No. 333-09465) 10.15 Employment and Non-Competition Agreement between the Company and H. Brock Kolls dated as of May 1, 1994 (Incorporated by reference to Exhibit 10.32 to Form SB-2 Registration Statement No. 33-70992) 10.15.1 First Amendment to Employment and Non-Competition Agreement between the Company and H. Brock Kolls dated as of May 1, 1994 (Incorporated by reference to Exhibit 10.15.1 to Form SB-2 Registration Statement No. 333-09465) 19 10.16 Agreement of Lease dated March 16,1994, by and between the Company and G.F. Florida Operating Alpha, Inc. (Incorporated by reference to Exhibit 10.33 to Form SB-2 Registration Statement No. 33-70992) 10.17 Megan N. Cherney Common Stock Options dated as of April 1, 1994 (Incorporated by reference to Exhibit 10.41 to Form SB-2 Registration Statement No. 33-70992) 10.18 H. Brock Kolls Common Stock Options dated as of May 1, 1994 (Incorporated by reference to Exhibit 10.42 to Form SB-2 Registration Statement No. 33-70992) 10.18.1 H. Brock Kolls Common Stock Options dated as of March 20, 1996 (Incorporated by reference to Exhibit 10.19 to Form SB-2 Registration Statement No. 33-70992) 10.19 Barry Slawter Common Stock Options dated as of August 25, 1994 (Incorporated by reference to Exhibit 10.43 to Form SB-2 Registration Statement No. 33-70992) 10.20 Employment and Non-Competition Agreement between the Company and Barry Slawter dated as of July 12, 1994 (Incorporated by reference to Exhibit 10.44 to FormSB-2 Registration Statement No. 33-70992) 10.21 Employment Agreement dated June 20, 1994 between the Company and Megan N. Cherney (Incorporated by reference to Exhibit 10.45 to Form SB-2 Registration Statement No. 33-70992) 10.22 First Amendment to Employment and Non-Competition Agreement dated September 2, 1994 between Barry Slawter and the Company (Incorporated by reference to Exhibit 10.46 to Form SB-2 Registration Statement No. 33-70992) 10.23 Consulting Agreement between Jerome M. Wenger and the Company dated March 24, 1995 (Incorporated by reference to Exhibit 28 to the Form S-8 Registration Statement No. 33-92038 filed on May 6, 1995) 10.24 Amendment to Consulting Agreement between Jerome M. Wenger and the Company dated May 19, 1995 (Incorporated by reference to Exhibit 28.2 to Form S-8 filed on November 1, 1995) 10.25 First Amendment to Employment and Non-Competition Agreement between the Company and Barry Slawter dated September 8, 1995 10.26 Remarketer/Integrator Agreement between the Company and Dell Computer Corporation dated February 8, 1996 (Incorporated by reference to Exhibit 10.26 to Form SB-2 Registration Statement No. 333-09465) 10.27 Letter Agreement between the Company and Diversified Corporate Consulting Group, L.P., dated February 7, 1996 (Incorporated by 20 reference to Exhibit 28.2 to Form S-8 Registration Statement No. 333-2614) 10.28 Employment and Non-Competition Agreement between the Company and Michael Lawlor dated June 7, 1996 (Incorporated by reference to Exhibit 10.28 to Form SB-2 Registration Statement No. 333-09465) 10.29 Michael Lawlor Common Stock Option Certificate dated as of June 7, 1996 (Incorporated by reference to Exhibit 10.29 to Form SB-2 Registration Statement No.333-09465) 10.30 Employment and Non-Competition Agreement between the Company and Stephen P. Herbert dated April 4, 1996 (Incorporated by reference to Exhibit 10.30 to Form SB-2 Registration Statement No. 333-09465) 10.31 Stephen P. Herbert Common Stock Option Certificate dated April 4, 1996 (Incorporated by reference to Exhibit 10.31 to Form SB-2 Registration Statement No. 333-09465) 10.32 Letter between the Company and William W. Sellers dated July 17, 1996 (Incorporated by reference to Exhibit 10.32 to Form SB-2 Registration Statement No. 333-09465) 10.33 Letter between the Company and Peter G. Kapourelos dated July 17, 1996 (Incorporated by reference to Exhibit 10.33 to Form SB-2 Registration Statement No. 333-09465) 10.34 RAM Group Common Stock Option Certificate dated as of August 22, 1996 (Incorporated by reference to Exhibit 10.34 to Form SB-2 Registration No. 33-98808) 10.35 RAM Group Common Stock Option Certificate dated as of November 1, 1996 (Incorporated by reference to Exhibit 10.35 to Form SB-2 Registration No. 33-98808) 10.36 Philip A. Harvey Common Stock Option Certificate dated as of November 1, 1996 (Incorporated by reference to Exhibit 10.36 to Form SB-2 Registration No. 33-98808) 10.37 Joseph Donahue Common Stock Option Certificate dated as of September 2, 1996 (Incorporated by reference to Exhibit 10.37 to Form SB-2 Registration No. 33-98808) 10.38 Separation and Consulting Agreement between the Company and Edward J. Sullivan dated December 17, 1996 (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on December 19, 1996) 10.39 Employment and Non-Competition Agreement between the Company and Leland P. Maxwell dated February 24, 1997 (Incorporated by reference to Exhibit 10.39 to Form SB-2 Registration No. 33-98808) 21 10.40 Leland P. Maxwell Common Stock Option Certificate dated February 24, 1997 (Incorporated by reference to Exhibit 10.40 to Form SB-2 Registration No. 33-98808) 10.41 Letter between the Company and GEM Advisers, Inc. signed May 15, 1997 (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on May 22, 1997) 10.42 Business Express Agreement between the Company and 1217909 Ontario Inc. dated May 20, 1997 (Incorporated by reference to Exhibit 10.42 to Form 8-K filed on May 22, 1997) 10.43 H. Brock Kolls Common Stock Option Certificate dated as of June 9, 1997 (Incorporated by reference to Exhibit 10.43 to Form SB-2 Registration Statement No. 333-30853) 10.44 Stephen Herbert Common Stock Option Certificate dated as of June 9, 1997 (Incorporated by reference to Exhibit 10.44 to Form SB-2 Registration Statement No. 333-30853) 10.45 Keith Sterling Common Stock Option Certificate dated as of June 9, 1997 (Incorporated by reference to Exhibit 10.45 to Form SB-2 Registration Statement No. 333-30853) 10.46 Michael Feeney Common Stock Option Certificate dated as of June 9, 1997 (Incorporated by reference to Exhibit 10.46 to Form SB-2 Registration Statement No. 333-30853) 10.47 Joint Venture Agreement dated September 24, 1997 between the Company and Mail Boxes Etc. 10.48 Employment and Non-Competition Agreement dated November 20, 1997 by and between the Company and George R. Jensen, Jr. (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on November 26, 1997). 10.49 Agreement between the Company and Promus Hotels, Inc. dated May 8, 1997. 10.50 Agreement between the Company and Choice Hotels International, Inc. dated April 24, 1997. 10.51 Agreement between the Company and PNC Merchant Services dated July 18, 1997. -------------------------------------------------------------------- ** -- Filed herewith. d. Schedules filed herewith include: None 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. USA TECHNOLOGIES, INC. By: /s/ George R. Jensen, Jr. -------------------------------------- George R. Jensen, Jr., President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. 23
Signatures Title Date - ---------- ----- ---- /s/ George R. Jensen, Jr. Chairman of the Board, February 11, 1998 - ---------------------------- President and Chief George R. Jensen, Jr. Executive Officer (Principal and Chief Executive Officer) /s/ Leland P. Maxwell Senior Vice President, Chief - ---------------------------- Financial Officer, February 11, 1998 Leland P. Maxwell Treasurer (Principal Accounting Officer) /s/ Stephen P. Herbert Executive Vice President-Chief Operating February 11, 1998 - ---------------------------- Officer, Director Stephen P. Herbert /s/ Keith L. Sterling Executive Vice President-Systems and February 11, 1998 - ---------------------------- Chief Information Officer, Keith L. Sterling Secretary Director /s/ William W. Sellers Director February 11, 1998 - ---------------------------- William W. Sellers /s/ Peter G. Kapourelos Director February 11, 1998 - ---------------------------- Peter G. Kapourelos Director February , 1998 - ---------------------------- Henry B. duPont Smith /s/ William L. Van Alen, Jr. Director February 11, 1998 - ---------------------------- William L. Van Alen, Jr.