SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Current Report Pursuant to Section 13 or 15(d) of
the Securities Act of 1934
Date of report (Date of earliest event reported): July 11, 2003
USA TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 33-70992 23-2679963
(State or other (Commission File Number) (I.R.S. Employer
jurisdiction of Identification No.)
incorporation)
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (610) 989-0340
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On July 11, 2003, USA Technologies, Inc. ("USA") purchased substantially all of
the operating assets of Bayview Technology Group, LLC ("Bayview"), a Colorado
limited liability company, pursuant to an asset purchase agreement. Bayview
designs and manufactures energy conservation devices for the vending industry.
The operating assets consist primarily of the patents and other intellectual
property relating to such devices and customer accounts.
The purchase price for Bayview's assets was 20,000,000 shares of restricted
Common Stock of USA (the "Stock") issued to Bayview, and a cash payment made by
USA in the amount of $631,247 to a creditor of Bayview (paid from USA's working
capital). The purchase price was determined as a result of an arms length
negotiation between Bayview and USA. To the best knowledge of USA, neither USA,
any affiliate, director, officer nor associate of any director or officer of USA
had any material relationship with Bayview prior to the transaction.
Bayview has agreed not to sell any of the Stock until July 11, 2004, at which
time Bayview shall be permitted to sell during each calendar month thereafter
(on a non-cumulative basis) the greater of (i) 250,000 shares of the Stock, or
(ii) that number of shares of the Stock equal to five percent (5%) of the
immediately prior calendar month's trading volume of the shares of Common Stock
of USA. Subject to the foregoing restrictions, USA has agreed to use its best
efforts to register all of the Stock for resale by Bayview under the Securities
Act of 1933, as amended, for a period of one year (from July 11, 2004 through
July 11, 2005).
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS:
(a) Financial Statements of Business Acquired (Bayview Technology Group, LLC
(1) Audited Financial Statements:
Independent Auditors' Report. F-1
Balance Sheets as of December 31, 2002 and 2001. F-2
Statements of Operations for year ended December 31, 2002 (Successor), period
from June 1, 2001 (Commencement of Operations) through December 31, 2001 (Successor)
and period from January 1, 2001 through May 31, 2001 (Predecessor) F-3
Statements of Members' Equity/Stockholders' Equity for year ended December 31, 2002 (Successor), period
from June 1, 2001 (Commencement of Operations) through December 31, 2001 (Successor), and period from
January 1, 2001 through May 31, 2001 (Predecessor). F-4
Statements of Cash Flows for year ended December 31, 2002 (Successor), period from June 1, 2001
(Commencement of Operations) through December 31, 2001 (Successor) and period from January 1, 2001
through May 31, 2001 (Predecessor). F-5
Summary of Accounting Policies. F-6
Notes to Financial Statements. F-12
(2) Unaudited Financial Statements:
Balance Sheet as of March 31, 2003 (Unaudited). F-20
Statements of Operations for the three months ended March 31, 2003
and 2002 (Unaudited). F-21
Statements of Stockholders' Equity (Deficit) for the three months
ended March 31, 2003 and 2002 (Unaudited). F-22
Statements of Cash Flows for the three months ended March 31, 2003
and 2002 (Unaudited). F-23
Summary of Significant Accounting Policies (Unaudited). F-24
Selected Notes to Financial Statements (Unaudited). F-27
(b) Pro Forma Financial Information (Unaudited):
Pro Forma Consolidated Balance Sheet as of March 31, 2003 (Unaudited). F-32
Pro Forma Consolidated Statement of Operations for the year ended
June 30, 2002 (Unaudited). F-33
Pro Forma Consolidated Statement of Operations for the nine months ended
March 31, 2003 (Unaudited). F-34
Notes to Pro Forma Consolidated Financial Statements (Unaudited) F-35
(c) Exhibits
2.1 Asset Purchase Agreement dated July 11, 2003 by and among USA Technologies, Inc. and Bayview Technology Group, LLC.
(Incorporated by reference to Exhibit 2.1 to Form 8-K filed on July 14, 2003).
INDEPENDENT AUDITORS' REPORT
Members
Bayview Technology Group, LLC
Denver, Colorado
We have audited the accompanying balance sheets of Bayview Technology Group, LLC
(the "Company" and "Successor") as of December 31, 2002 and 2001, and the
related statements of operations, members' equity and cash flows for the year
ended December 31, 2002 and for the period from June 1, 2001 (commencement of
operations) through December 31, 2001, and the statements of operations,
stockholders' equity and cash flows of Bayview Technology Group, Inc.
("Predecessor") as described in Summary of Accounting Policies - Organization,
Description of Business and Basis of Presentation for the period from January 1,
2001 to May 31, 2001. 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 auditing standards generally accepted
in the United States of America. 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 Successor financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2002 and 2001, and the results of its operations and cash flows for
the year ended December 31, 2002 and for the period from June 1, 2001
(commencement of operations) through December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
Further, in our opinion, the Predecessor financial statements referred to above
present fairly, in all material respects the results of operations and cash
flows of the Predecessor for the period January 1, 2001 to May 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Summary of Accounting Policies - Organization, Description of
Business and Basis of Presentation, the Successor purchased certain assets and
assumed certain liabilities of the Predecessor on May 31, 2001, in a business
combination accounted for as a purchase. As a result, the financial statements
of the Sucessor are presented on a new basis of accounting from the financial
statements of Predecessor and, therefore, are not comparable.
As discussed in Summary of Accounting Policies, the Company changed its method
of accounting for goodwill in 2002.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As more fully described in the Summary of
Accounting Policies - Going Concern and Management's Plans, the Company sold
substantially all of its revenue producing assets in 2003 and is dependent on
funding from its members for its continuing operations. These conditions give
rise to substantial doubt about the Company's ability to continue as a going
concern. Management's Plans are also described in the Summary of Accounting
Policies, Going Concern and Management's Plans. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Anton Collins Mitchell LLP
Denver, Colorado
September 4, 2003
F-1
BAYVIEW TECHNOLOGY GROUP, LLC
BALANCE SHEETS
December 31
2002 2001
---------------------------------------
Assets (Notes 3 and 4)
Current Assets:
Cash $ 54,604 $ 3,242
Accounts receivable (Note 10) 858,397 970,478
Inventories 317,202 437,840
Prepaid expenses and other current assets 37,138 13,468
---------------------------------------
Total current assets 1,267,341 1,425,028
Goodwill (Note 1) 1,820,758 1,820,758
Deposits 27,577 42,672
Property and equipment, net (Note 2 and 13) 253,748 229,398
Patents and trademarks, net of $79,779 and $29,167 of accumulated
amortization (Notes 1 and 13) 701,758 720,833
---------------------------------------
Total assets $ 4,071,182 $ 4,238,689
=======================================
Liabilities and Members' Equity
Current Liabilities:
Accounts payable and accrued expenses (Notes 4 and 8) $ 458,473 $ 483,447
Line of credit (Note 3) - 320,578
Line of credit - related party (Note 3) 245,000 -
Commissions and royalties payable (Note 7) 224,164 231,779
Current maturities of long-term debt - related party (Note 4) 591,568 553,983
---------------------------------------
Total current liabilities 1,519,205 1,589,787
Long-Term Debt - related party, less current maturities (Note 4) 621,257 1,216,017
---------------------------------------
Total liabilities 2,140,462 2,805,804
Commitments and Contingencies (Notes 5, 7, 8 and 11)
Members' Equity (Note 6 and 13) 1,930,720 1,432,885
---------------------------------------
Total liabilities and members' equity $ 4,071,182 $ 4,238,689
=======================================
See accompanying independent auditors' report, summary of accounting policies
and notes to financial statements.
F-2
BAYVIEW TECHNOLOGY GROUP, LLC
STATEMENTS OF OPERATIONS
Period from
June 1, 2001 Period from
(Commencement of January 1, 2001
Year Ended Operations) through through
December 31, 2002 December 31, 2001 May 31, 2001
(Successor) (Successor) (Predecessor)
--------------------------------------------------------
Revenues (Note 10) $ 5,793,029 $ 2,364,787 $ 785,836
Cost of Sales (Note 8) 2,500,803 1,288,412 223,017
--------------------------------------------------------
Gross Profit 3,292,226 1,076,375 562,819
Operating Expenses:
Selling (Note 7) 1,228,465 456,512 170,596
General and administrative 1,323,979 709,652 336,821
Depreciation and amortization 118,407 116,919 6,900
--------------------------------------------------------
Total operating expenses 2,670,851 1,283,083 514,317
--------------------------------------------------------
Income (loss) from operations 621,375 (206,708) 48,502
Other (expense):
Interest expense (123,540) (73,685) (6,911)
--------------------------------------------------------
Net income (loss) $ 497,835 $ (280,393) $ 41,591
========================================================
See accompanying independent auditors' report, summary of accounting policies
and notes to financial statements.
F-3
BAYVIEW TECHNOLOGY GROUP, LLC
STATEMENTS OF MEMBERS' EQUITY/STOCKHOLDER'S EQUITY
PERIOD FROM JANUARY 1, 2001 THROUGH MAY 31, 2001 (PREDECESSOR)
Common Stock
---------------------
Retained Stockholders'
Shares Amount Earnings Equity
---------------------------------------------------
Balance, January 1, 2001 250,000 $ 25,000 $ 93,602 $ 118,602
Net income for the period - - 41,591 41,591
---------------------------------------------------
Balance, May 31, 2001 250,000 $ 25,000 $ 135,193 $ 160,193
===================================================
PERIOD FROM JUNE 1, 2001 (COMMENCEMENT OF OPERATIONS) THROUGH DECEMBER 31, 2002
(SUCCESSOR)
Total
Members'
Equity
--------------
Balance, June 1, 2001 (Commencement of Operations) $ -
Cash received for 60,000 membership units issued
to founders (Note 6) 1,000
Issuance of 35,000 membership units, net of issuance
costs of $37,722 (Note 6) 1,712,278
Net loss for the period (280,393)
--------------
Balance, December 31, 2001 $ 1,432,885
Net income for the period 497,835
--------------
Balance, December 31, 2002 $ 1,930,720
==============
See accompanying independent auditors' report, summary of accounting policies
and notes to financial statements.
F-4
BAYVIEW TECHNOLOGY GROUP, LLC
STATEMENTS OF CASH FLOWS
Period from
June 1, 2001 Period from
(Commencement of January 1, 2001
Year Ended Operations) through through
December 31, 2002 December 31, 2001 May 31, 2001
(Successor) (Successor) (Predecessor)
--------------------------------------------------------
Cash flows from Operating Activities
Net income (loss) for the period $ 497,835 $ (280,393) $ 41,591
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 118,407 116,919 6,900
Decrease (increase) in current assets:
Accounts receivable 112,081 (954,592) 166,534
Inventories 120,638 (247,134) (25,463)
Prepaid expenses and other current assets (23,670) (13,468) (3,948)
Increase (decrease) in current liabilities:
Accounts payable and accrued expenses (24,974) 347,000 64,173
Commissions and royalties payable (7,615) 231,779 (47,875)
-------------------------------------------------------
Net cash provided by (used in) operating activities 792,702 (799,889) 201,912
Cash flows from Investing Activities
Purchases of property and equipment (92,145) (168,478) (812)
Acquisition of the assets of
Bayview Technology Group, Inc (Note 2) - (1,023,959) -
Investment in patents and trademarks (31,537) - -
Other deposits 15,095 (38,288) -
-------------------------------------------------------
Net cash used in investing activities (108,587) (1,230,725) (812)
Cash flows from Financing Activities
Borrowings of bank revolving line of credit 795,000 520,578 -
Payments on bank revolving line of credit (1,115,578) (200,000) (148,387)
Proceeds from issuance of membership units - 1,751,000 -
Payment of issuance costs - (37,722) -
Payments on long-term debt (557,175) - (79,657)
Borrowings on line of credit - related party 470,000 - -
Payments on line of credit - related party (225,000) - -
-------------------------------------------------------
Net cash provided by (used in) financing activities (632,753) 2,033,856 (228,044)
-------------------------------------------------------
Net (decrease) increase in cash 51,362 3,242 (26,944)
Cash, beginning of period 3,242 - 26,944
-------------------------------------------------------
Cash, end of period $ 54,604 $ 3,242 $ -
=======================================================
See accompanying independent auditors' report, summary of accounting policies
and notes to financial statements.
F-5
BAYVIEW TECHNOLOGY GROUP, LLC
SUMMARY OF ACCOUNTING POLICIES
ORGANIZATION, DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Bayview Technology Group LLC (the "Company" or "Successor") was organized as a
Limited Liability Company ("LLC") under the laws of the State of Colorado in
December 2000. In July 2003, The Company changed its name to BT LLC. The Company
acquired Bayview Technology Group, Inc. (the "Predecessor," subsequently
changing its name to Bayview Ventures, Inc.) on May 31, 2001 (effectively June
1, 2001) and began operations on June 1, 2001. The Company is engaged in the
sale and distribution of energy saving devices, more particularly, plug load
controllers. The accompanying financial statements reflect the results of
operations and cash flows of the Predecessor for the period January 1, 2001
through May 31, 2001.
GOING CONCERN AND MANAGEMENT'S PLANS
As more fully described in Note 13, the Company sold substantially all of its
long-lived assets in July 2003 and does not currently anticipate continuing its
operations. Based on projections, management currently estimates that the
Company will not have the ability to meet all of its obligations as they come
due. The Company is attempting to raise additional funds from its members to
meet this budgeted shortfall but has not received a firm commitment from any of
its members to provide the necessary funding. These conditions give rise to
substantial doubt about the Company's ability to continue as a going concern. In
response to this condition, management is actively trying to secure the
necessary additional funds from its members, reduce or eliminate all
non-essential costs, and negotiate extensions and reductions in the Company's
obligations with various creditors. No assurances can be provided that the
Company will be successful in executing its plans.
The financial statements do not include any adjustments relating to the
recoverability or classification of asset carrying amounts or the amounts and
classification of liabilities that may result should the Company be unable to
continue as a going concern.
INVENTORIES
Inventories are stated at the lower of cost (using the first in, first out
method) or market, and consist primarily of saleable finished goods including
electronic components and devices.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Provisions for depreciation are
computed using the straight-line method over estimated useful lives ranging from
3 to 7 years. Maintenance and repairs are charged to expense as incurred.
F-6
INCOME TAXES
There is no provision for income taxes because, as a limited liability company,
the Company's taxable income is passed through to its members who pay income
taxes on their proportionate share of the taxable income.
STATEMENTS OF CASH FLOWS
The Company considers all short-term investments purchased with maturity of
three months or less and money market accounts to be cash equivalents.
PATENTS AND TRADEMARKS
Patents and trademarks were recorded at cost less accumulated amortization, and
were amortized using the straight-line method over their estimated life of
fifteen years.
Amortization expense on patents and trademarks was $50,612 for the year ended
December 31, 2002 and $29,167 for the period from June 1, 2001 (Commencement of
Operations) through December 31, 2001.
GOODWILL
Goodwill represents the excess of the cost over the fair value of net assets
acquired at the date of acquisition (Note 1) and was being amortized on the
straight-line method over fifteen years through December 31, 2001. (See Summary
of Account Policies - Recent Accounting Pronouncements for treatment of goodwill
as of January 1, 2002). Goodwill amortization was $73,672 for the period ended
December 31, 2001.
F-7
LONG-LIVED ASSETS AND LONG-LIVED ASSETS FOR SALE
Long-lived assets, including property and equipment and patents and trademarks
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. If the expected future cash
flow from the use of the assets and its eventual disposition is less than the
carrying amount of the assets, an impairment loss is recognized and measured
using the asset's fair value.
In the period when the plan of sale criteria of Statement of Financial
Accounting Standards ("SFAS") No. 144 are met, long-lived assets are reported as
held for sale, depreciation and amortization cease, and the assets are reported
at the lower of carrying value or fair value less costs to sell.
USE OF ESTIMATES
The preparation of the Company's financial statements, in conformity with
accounting principles generally accepted in the United States of America,
requires the Company's management to make estimates and assumptions that effect
the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of credit
risk consist of cash and cash equivalent balances in excess of the insurance
provided by governmental insurance authorities. The Company's cash and cash
equivalents are placed with financial institutions and are primarily in demand
deposit accounts.
Concentrations of credit risk with respect to accounts receivable are associated
with many customers dispersed across geographic areas. The Company reviews a
customer's credit history before extending credit and establishes an allowance
for doubtful accounts based upon the credit risk of specific customers,
historical trends and other information. No allowance for doubtful accounts was
established at December 31, 2002 and 2001.
F-8
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs amounted
to $54,525 for the year ended December 31, 2002 and $13,080 for the period from
June 1, 2001 (Commencement of Operations) through December 31, 2001.
REVENUE RECOGNITION
The Company recognizes revenue when its products are shipped to its customers,
at which time title passes to the customer and the risks and rewards of
ownership are transferred. Revenue from certain sales programs with utility
organizations are not recognized until the product has been installed at
designated locations and the Company has no remaining performance obligation.
RESEARCH AND DEVELOPMENT
Research and development expenditures are expensed in the period in which
incurred. For the period from June 1, 2001 (Commencement of Operations) through
December 31, 2001, research and development expenses were $9,432 and for the
year ended December 31, 2002 they were $32,676.
STOCK OPTION PLAN
The Company has a stock-based employee compensation plan, which is described
more fully in Note 6. The Company accounts for this plan under the recognition
and measurement principles of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. No
stock-based employee compensation is reflected in the Company's net income
(loss), as all options granted under this plan had an exercise price equal to
the market value of the underlying common stock on the date of grant. Had the
Company employed the fair value method of accounting prescribed by SFAS No. 123,
Accounting for Stock-Based Compensation, the pro forma net income (loss) of the
Company would not be materially different than the reported net income (loss)
for any period presented.
F-9
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (the "FASB") finalized
SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 requires the use of the purchase method of
accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS No. 141
also requires that companies recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria and, upon
adoption of SFAS No. 142, that companies reclassify the carrying amounts of
intangible assets and goodwill based on the criteria in SFAS No. 141. SFAS No.
142 requires, among other things, that companies no longer amortize goodwill,
but instead test goodwill for impairment at least annually. In addition, SFAS
No. 142 requires that companies identify reporting units for the purposes of
assessing potential future impairments of goodwill, reassess the useful lives of
other existing recognized intangible assets, and cease amortization of
intangible assets with an indefinite useful life. An intangible asset with an
indefinite useful life should be tested for impairment in accordance with the
guidance in SFAS No. 142.
Effective January 1, 2002 the Company adopted SFAS No. 142. As of December 31,
2001 the Company had $1,820,758 in unamortized goodwill. Upon the adoption of
SFAS No. 142, goodwill is no longer amortizable and will be subject to
impairment testing. As a result, the Company has not amortized goodwill for the
year ended December 31, 2002. Had the Company not amortized goodwill during the
period ended December 31, 2001, amortization expense would have decreased by
$73,672 and net loss would have decreased by $73,672 to ($206,721).
In accordance with SFAS No. 142, the Company completed a transitional impairment
test and an annual impairment test of goodwill and has determined goodwill and
other intangible assets were not impaired. Goodwill will be tested annually and
whenever events and circumstances occur indicating that the asset may be
impaired.
Upon the adoption of SFAS No. 142, the Company evaluated the useful lives of
existing intangible assets and determined that the existing useful lives are
appropriate.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires the fair value of a liability for an asset
retirement obligation to be recognized in the period in which it is incurred if
a reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
SFAS No. 143 is effective for the Company for fiscal years beginning after June
15, 2002. The Company's adoption of this statement had no material impact on the
Company's financial statements.
F-10
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 requires that those long-lived assets be
measured at the lower of carrying amount or fair value, less cost to sell,
whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. SFAS
144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, is to be applied prospectively.
In April 2002, the FASB issued SFAS No. 145, Rescissions of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections. SFAS
No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of
Debt, and an amendment of that Statement, SFAS No. 64, Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146 requires companies to recognize costs
associated with exit or disposal activities when they are incurred that at the
date of commitment to an exit or disposal plan. Examples of such costs covered
by the standard include lease termination costs and certain employee severance
costs associated with a restructuring, discontinued operation, plant closing or
other exit or disposal activity. SFAS No. 146 is effective prospectively for
exit and disposal activities initiated after December 31, 2002. As the
provisions of SFAS No. 146 are to be applied prospectively after its adoption
date, the Company cannot determine the potential effects that adoption of SFAS
No. 146 will have on its future results of operations or financial position.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure-an Amendment of FASB Statement No. 123.
SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company adopted the
disclosure requirements effective December 31, 2002 in its financial statements.
F-11
BAYVIEW TECHNOLOGY GROUP, LLC
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS COMBINATIONS
On May 31, 2001 the Company acquired substantially all of the assets of Bayview
Ventures, Inc., a California corporation, for a purchase price of $2,906,447.
The acquisition has been accounted for using the purchase method and the results
of operations are reflected in the financial statements from the date of
acquisition. Pursuant to the purchase agreement, the Company paid $1,000,000 in
cash, assumed liabilities of $136,447 and executed a note to the seller in the
amount of $1,770,000 (see Note 4). The Company incurred costs of $23,959 in
connection with the acquisition. Amounts in excess of the fair market value of
the assets acquired are accounted for as goodwill. The following represents the
allocation of the purchase price:
Amount
---------------
Accounts receivable $ 15,886
Inventory 190,706
Deposits 4,384
Fixed assets 75,000
Patents and trademarks 750,000
Goodwill 1,894,430
---------------
$ 2,930,406
===============
F-12
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31
2002 2001
-----------------------------------
Equipment $ 237,425 $ 147,846
Furniture and fixtures 98,198 95,632
-----------------------------------
335,623 243,478
Less accumulated depreciation 81,875 14,080
-----------------------------------
$ 253,748 $ 229,398
===================================
Depreciation expense for the year ended December 31, 2002 and for the period
from June 1, 2001 (Commencement of Operations) through December 31, 2001 was
$67,795 and $14,080.
3. LINE OF CREDIT AND LINE OF CREDIT - RELATED PARTY
The Company had a $500,000 revolving line of credit with a bank. The line of
credit was entered into on August 3, 2001 and expired on August 3, 2002. The
line of credit bore interest at a variable rate that was calculated based on an
index, which is the Bank Base Rate plus 1.5%. During the period August 3, 2001
through December 31, 2001 the rates ranged from 6.5% to 8.5% per annum. The Line
of Credit had an outstanding balance of $320,578 at December 31, 2001 and was
secured by substantially all of the assets of the Company. In addition, two of
the Company's members (who were also executive officers of the Company)
guaranteed the line of credit and pledged personal assets as additional
security.
Effective September 30, 2002, the Company entered into a new $500,000 line of
credit agreement with Bayview Ventures, Inc. (Note 1). The line of credit
expired on June 1, 2003. The line of credit bears interest at the prime rate as
published in the Wall Street Journal, plus 1.75%. The line of credit is secured
by substantially all of the assets of the Company. In addition, one of the
Company's members (who is also an executive officer) has guaranteed the line of
credit and pledged personal assets as additional security. The balance of the
line of credit at December 31, 2002 was $245,000 and the interest rate was
6.259%.
Effective June 1, 2003, Bayview Ventures, Inc. agreed to extend the repayment
date of the Line of Credit Agreement to November 8, 2003.
Interest expense recognized in connection with the line of credit - related
party, was $6,493 for the year ended December 31, 2002. Accrued interest payable
in connection with the line of credit - related party was $1,282 at December 31,
2002.
F-13
4. LONG-TERM DEBT - RELATED PARTY
Long-term debt consists of a note payable to Bayview Ventures, Inc. (see Note
1). The sole stockholder of Bayview Ventures, Inc. is an employee of the
Company. The note was in the original amount of $1,770,000 and bears interest at
the rate of 6.9% per annum and was originally payable in three annual
installments plus accrued interest beginning on June 1, 2002. The note is
secured, subject to certain subordination, by all inventories, accounts
receivable, and substantially all of the assets acquired in the business
combination (Note 1).
Effective April 30, 2002, the terms of the note payable were amended. An initial
payment of $250,000 was made June 30, 2002. Subsequent payments are to be made
based on 50% of excess cash flow defined as earnings before interest, taxes,
depreciation and amortization less fixed charges (interest expense for the
period of determination plus minimum rent payments under operating leases) and
total capital expenditures. The calculation is to be completed by the tenth day
of the subsequent month and reviewed and agreed to by the note holder. Payments
will be made immediately thereafter. During the year ended December 31, 2002,
the Company made principal payments of $557,175. Included in accounts payable
and accrued interest at December 31, 2002 and 2001 is $43,807 and $65,730 of
accrued interest due on the note.
The term of the note agreement was modified in both May and June 2003, pursuant
to which the maturity date of the note payable was extended to July 14, 2003.
Bayview Ventures, Inc. agreed to modify the repayment terms of the principal and
accrued interest on the note payable in connection with the acquisition of
certain assets of the Company by USA Technologies, Inc. ("USAT").(See Note 13)
In accordance with the modified terms, in July 2003, the Company paid Bayview
Ventures, Inc. approximately $631,000 and 1,200,000 shares of USAT common stock
having an agreed upon value of $333,333. The remaining balance owed to Bayview
Ventures, Inc. (including both principal and accrued interest) of $333,333 is to
be repaid no later than November 8, 2003.
F-14
5. LEASE OBLIGATIONS
The Company leases office space under three operating lease agreements. The
lease agreements generally require the Company to pay certain operating
expenses, maintenance, and property taxes. The lease agreements are
noncancellable. Two agreements expire in June 2005 and one agreement expires in
October 2003.
Rent expense was $48,324 for the period from June 1, 2001 (Commencement of
Operations) through December 31, 2001 and $111,633 for the year ended December
31, 2002.
Future minimum lease payments under the noncancellable operating leases are as
follows:
Years Ending
December 31, Amount
-----------------------------------------
2003 $ 121,560
2004 101,172
2005 51,864
--------------
$ 274,596
==============
6. MEMBERS' EQUITY
The Company issued 60,000 units to its founding members, for $1,000 at the
formation of the Company.
Pursuant to the terms of a private placement memorandum ("PPM") in 2001, the
Company issued 35,000 membership units at a per unit price of $50 for total
proceeds of $1,750,000. Issuance expenses in connection with the offering were
$37,722. Under terms of the PPM, the Company guaranteed the investors that the
value of their units would appreciate at no less than a 20% cumulative return
over the three-year period following the issuance of the units. In the event
that the overall value (as determined by a calculation defined in the PPM) of
the Company in June 2004 or the value received by the Company upon the sale of
its assets prior to that time does not provide for the minimum return, the
investors are to receive additional units as determined by a calculation
contained in the PPM. The PPM also granted the investors the right, after the
payment of amounts due to Bayview Ventures, Inc. (see Note 4), to an annual
preferential right to distributions of $200,000. No such distributions have been
paid through 2002.
F-15
6. MEMBERS' EQUITY (CONTINUED)
Option Plan
Effective May 30, 2001, the Company adopted The Bayview Technology Group, LLC
2001 Membership Option Plan (the "Plan"). The purpose of the Plan is to provide
a benefit to key employees and management. Participants of the Plan shall be
recommended by the President and Chief Executive Officer of the Company, and the
issuance of unit options are to be approved by the Personnel and Compensation
Committee of the Board of Directors. The membership units, which may be
delivered under the Plan, shall not exceed an aggregate of 15,000 units. During
2002, options to purchase 4,750 membership units at a per unit price of $52.63
ware granted. In March 2003, 1,189 of the options vested and 132 options will
vest each month thereafter until all 4,750 become vested. The options expire in
June 2007. The aggregate fair value of the options granted (determined using the
Black-Scholes option pricing model and assuming no dividends or volatility, a
discount rate of 4.5% and an expected life of five years) was estimated to be
approximately $37,000. Upon a merger of the Company or the sale of substantially
all of its assets, any unvested options become immediately vested and
exercisable. The options became fully vested in July 2003 upon the closing of
the USAT transaction (see Note 13).
Pro forma results of operations, assuming the Company had used the fair value
method of accounting for the 2002 option grant, are not presented as they do not
differ materially from the Companys historical results.
F-16
7. EMPLOYMENT AGREEMENTS
The Company has an employment agreement with the sole stockholder of Bayview
Ventures, Inc. (Note 1). Under the terms of the agreement, the Company is
required to pay a royalty to Bayview Ventures, Inc., based upon the sale of its
devices. The Company is also required to pay the employee an annual base salary
of $126,240. During the period ended December 31, 2001, the Company paid Bayview
Ventures, Inc. $24,027 in royalties and at December 31, 2001 royalties payable
to Bayview Ventures, Inc. were $179,174. During the year ended December 31,
2002, the Company paid Bayview Ventures, Inc. $374,136 in royalties and at
December 31, 2002, royalties payable to Bayview Ventures, Inc. totaled $157,271.
Effective May 20, 2002, the Company entered into an employment agreement with an
employee. Under the terms of the agreement, the Company is required to pay the
employee a base salary of $116,000 during the initial one-year term of the
employment period (as defined in the agreement). Employment is to be reviewed
annually for renewal and/or renegotiation. The employee also is to receive a
commission of 1.25% of certain sales revenue as defined in the agreement.
8. SUPPLIER AGREEMENT
Effective July 1, 2001, the Company entered into an agreement with an unrelated
entity for the manufacture of the Company's electronic devices. The agreement's
initial term is two years, and the agreement automatically renews for subsequent
one-year periods unless either party provides written notification of
termination. At June 30, 2003, the agreement is still in effect. In connection
with the agreement, the Company is required to provide the entity with
thirteen-week production forecasts and the Company is obligated to purchase the
manufactured devices and reimburse the entity, under certain terms of the
agreement. During the period from June 1, 2001 (Commencement of Operations)
through December 31, 2001, the Company purchased $309,775 from the entity, and
at December 31, 2001, the Company owed the entity $197,169. During the year
ended December 31, 2002, the Company purchased $1,817,383 from the entity and at
December 31, 2002, the Company owed the entity $285,656.
9. AGREEMENTS WITH UTILITY ORGANIZATIONS
The Company has an agreement with the Bonneville Power Administration ("BPA")
that expired April 30, 2003 to provide and install BPA's electronic devices.
Under the terms of this agreement, the Company is to receive a negotiated price
per unit and installation fee per unit, for each device installed. The
Bonneville Power Administration contract provides for total purchase price and
fees of $3,000,000. The agreement was not renewed.
F-17
10. SIGNIFICANT CONTRACTS
The Company has received greater than 10% of its revenues from certain
customers. A summary of significant customers is as follows:
December 31
Revenues: 2002 2001
-------------------------
Customer A 36% 33%
Customer B 12% 11%
Customer C -% 13%
Customer D -% 16%
-------------------------
December 31
Accounts Receivable: 2002 2001
-------------------------
Customer A 2% 79%
Customer B 44% 4%
Customer C -% 9%
Customer D -% 7%
-------------------------
11. CONTINGENCIES
In February 2003, a fire occurred in a facility in Idaho, in which the Company's
product was installed days before the fire. The insurance company representing
the company that occupied the facility is investigating the cause of the fire.
The Company has informed their insurance carrier of the incident and the Company
is currently in the process of investigating the matter and to what extent, if
any, the Company may be held responsible. The outcome of this contingency is
currently unknown. Any potential liability may be covered by the Company's
insurance carrier. No liability for the outcome of this contingency has been
recorded in the accompanying financial statements.
The Company occupied premises in California through June 1, 2002, at which time
the premises were vacated. The landlord is seeking rent from the Company for the
period from June 2002 through October 2003 (lease termination date), in the
aggregate amount of approximately $62,000. The Company does not believe it is
responsible for this amount, as it never formally assumed the lease. Bayview
Ventures, Inc. was the original lessee. At December 31, 2002, the Company has
accrued $26,000, which represents the Company's best estimate of its expected
liability to settle the matter.
F-18
12. SUPPLEMENTAL CASH FLOW INFORMATION
Period from
June 1, 2001
(Commencement of
Year ended Operations) through
December 31, 2002 December 31, 2001
--------------------------------------
Cash paid for interest $ 142,928 $ 5,744
======================================
13. SALE OF OPERATIONS
On July 11, 2003, the Company sold substantially all of its fixed assets and
intellectual property (including patents and trademarks), as well as other
various assets, to USAT in exchange for 20,000,000 shares of USAT common stock.
Additionally, USAT paid approximately $631,000 to Bayview Ventures, Inc.,
representing the amount currently due to Bayview Ventures, Inc. pursuant to its
note payable from the Company (see Note 4). Pursuant to the sale agreement, the
shares of USAT common stock received by the Company cannot be sold for a
one-year period, after which time a monthly limitation will be placed on the
maximum number of shares, that may be sold.
In connection with the sale, the Company issued an additional 9,534 units to
investors in the Company's 2001 PPM pursuant to guaranteed return provisions
contained in the PPM (see Note 6). Additionally, the Company granted 10,250
units to two employees.
Management determined that the plan of sale criteria in SFAS No. 144 was met in
April 2003, at which time depreciation and amortization of these assets ceased
and the assets began to be reported at the lower of their carrying amount or
fair value less cost to sell.
F-19
BAYVIEW TECHNOLOGY GROUP, LLC
BALANCE SHEET
(Unaudited)
March 31,
2003
-------------
Assets
Current assets:
Cash $ 133,915
Accounts receivable 510,847
Inventories 300,488
Prepaid expenses and other current assets 52,489
-------------
Total current assets 997,739
Goodwill 1,820,758
Deposits 38,237
Long-Lived Assets Held for Sale
Property and equipment, net 237,051
Patents and trademarks, net of $93,200 of accumulated amortization 700,261
-------------
Total assets $ 3,794,046
=============
Liabilities and Members' Equity
Current liabilities:
Accounts payable and accrued expenses $ 368,062
Line of credit - related party 245,000
Commissions and royalties payable 189,930
Current maturities of long-term debt - related party 553,983
-------------
Total current liabilities 1,356,975
Long-term debt - related party, less current maturities 658,842
-------------
Total Liabilities 2,015,817
Members' Equity 1,778,229
-------------
Total liabilities and members' equity $ 3,794,046
=============
See accompanying notes.
F-20
BAYVIEW TECHNOLOGY GROUP, LLC
STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended March 31
2003 2002
-------------------------------------
Revenues $ 954,121 $ 1,280,885
Cost of Sales 431,048 569,074
-------------------------------------
Gross Profit 523,073 711,811
Operating expenses:
Selling 304,135 249,556
General and administrative 313,262 321,559
Depreciation and amortization 34,187 26,617
-------------------------------------
Total operating expenses 651,584 597,732
-------------------------------------
Income (loss) from operations (128,511) 114,079
Other expense:
Interest expense (23,980) (32,109)
-------------------------------------
Net income (loss) $ (152,491) $ 81,970
=====================================
See accompanying notes.
F-21
BAYVIEW TECHNOLOGY GROUP, LLC
STATEMENTS OF MEMBERS' EQUITY
(Unaudited)
Three months ended March 31,
2003 2002
-------------------------------
Balance, beginning of period $ 1,930,720 $ 1,432,885
Net income (loss) for period (152,491) 81,970
-------------------------------
Balance, end of period $ 1,778,229 $ 1,514,855
===============================
See accompanying notes.
F-22
BAYVIEW TECHNOLOGY GROUP, LLC
STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended March 31
2003 2002
------------------------------------
Cash flows from operating activities
Net income (loss) $ (152,491) $ 81,970
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 34,187 26,617
Decrease (increase) in current assets:
Accounts receivable 347,550 45,349
Inventories 16,714 (108,917)
Prepaid expenses and other current assets (15,351) (24,665)
Increase (decrease) in current liabilities:
Accounts payable and accrued expenses (90,411) 54,416
Commissions and royalties payable (34,234) 37,880
------------------------------------
Net cash provided by operating activities 105,964 112,650
Cash flows from investing activities
Purchase of property and equipment (4,069) (5,048)
Investment in patents and trademarks (11,924) -
Deposit on software under development (10,660) (11,066)
------------------------------------
Net cash used in investing activities (26,653) (16,114)
Cash flows from financing activities
Borrowings of bank revolving line of credit 350,000 215,000
Payments on bank revolving line of credit (350,000) (200,000)
------------------------------------
Net cash provided by financing activities - 15,000
------------------------------------
Net increase in cash 79,311 111,536
Cash, beginning of period 54,604 3,242
------------------------------------
Cash, end of period $ 133,915 $ 114,778
====================================
Supplemental disclosures of cash flow information:
Interest paid $ 5,209 $ 3,939
====================================
See accompanying notes.
F-23
BAYVIEW TECHNOLOGY GROUP, LLC
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
ORGANIZATION, DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Bayview Technology Group, LLC (the "Company" was organized as a Limited
Liability Company ("LLC") under the laws of the State of Colorado in December
2000. The Company is engaged in the sale and distribution of energy saving
devices, more particularly, plug load controllers.
GOING CONCERN AND MANAGEMENT'S PLANS
As more fully described in Note 13, the Company sold substantially all of its
long-lived assets in July 2003 and does not currently anticipate continuing its
operations. Based on projections, management currently estimates that the
Company will not have the ability to meet all of its obligations as they come
due. The Company is attempting to raise additional funds from its members to
meet this budgeted shortfall but has not received a firm commitment from any of
its members to provide the necessary funding. These conditions give rise to
substantial doubt about the Company's ability to continue as a going concern. In
response to this condition, management is actively trying to secure the
necessary additional funds from its members, reduce or eliminate all
non-essential costs, and negotiate extensions and reductions in the Company's
obligations with various creditors. No assurances can be provided that the
Company will be successful in executing its plans.
The financial statements do not include any adjustments relating to the
recoverability or classification of asset carrying amounts or the amounts and
classification of liabilities that may result should the Company be unable to
continue as a going concern.
INTERIM FINANCIAL INFORMATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 2003 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2003.
INVENTORIES
Inventories are stated at the lower of cost (using the first in, first out
method) or market, and consist primarily of saleable finished goods including
electronic components and devices.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Provisions for depreciation are
computed using the straight-line method over estimated useful lives ranging from
3 to 7 years. Maintenance and repairs are charged to expense as incurred.
Effective in April 2003, property and equipment was reflected as held for sale
and reported at the lower of carrying value or fair value, less cost to sell.
F-24
INCOME TAXES
There is no provision for income taxes because, as a limited liability company,
the Company's taxable income is passed through to its members who pay income
taxes on their proportionate share of the taxable income.
STATEMENTS OF CASH FLOWS
The Company considers all short-term investments purchased with maturity of
three months or less and money market accounts to be cash equivalents.
PATENTS AND TRADEMARKS
Patents and trademarks were recorded at cost less accumulated amortization, and
were amortized using the straight-line method over fifteen years.
Amortization expense on patents and trademarks was $13,421 and $12,500 for the
three months ended March 31, 2003 and 2002, respectively. Commencing in April
2003, patents and trademarks are considered to be held for sale and carried at
the lower of carrying value or fair value less costs to sell.
GOODWILL
Goodwill represents the excess of the cost over the fair value of net assets
acquired at the date of acquisition. Goodwill is not amortized but is tested
annually to determine whether there is any impairment to its carrying value.
Impairment testing is also done if events or circumstances arise indicating that
impairment may have occurred.
LONG-LIVED ASSETS AND LONG-LIVED ASSETS FOR SALE
Long-lived assets, including property and equipment and patents and trademarks
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. If the expected future cash
flow from the use of the assets and its eventual disposition is less than the
carrying amount of the assets, an impairment loss is recognized and measured
using the asset's fair value.
In the period when the plan of sale criteria of SFAS No. 144 are met, long-lived
assets are reported as held for sale, depreciation and amortization cease, and
the assets are reported at the lower of carrying value or fair value less costs
to sell.
F-25
USE OF ESTIMATES
The preparation of the Company's financial statements, in conformity with
accounting principles generally accepted in the United States of America,
requires the Company's management to make estimates and assumptions that effect
the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs amounted
to $23,479 and $14,716 for the three months ended March 31, 2003 and 2002,
respectively.
REVENUE RECOGNITION
The Company recognizes revenue when its products are shipped to its customers,
at which time title passes to the customer and the risks and rewards of
ownership are transferred. Revenue from certain sales programs with utility
organizations are not recognized until the product has been installed at
designated locations and the Company has no remaining performance obligation.
RESEARCH AND DEVELOPMENT
Research and development expenditures are expensed in the period in which
incurred. Research and development expenses were $19,690 and $4,976 for the
three months ended March 31, 2003 and 2002, respectively.
STOCK OPTION PLAN
The Company has a stock-based employee compensation plan. The Company accounts
for this plan under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation is reflected in
the Company's net income (loss), as all options granted under this plan had an
exercise price equal to the market value of the underlying membership units on
the date of grant. Had the Company employed the fair value method of accounting
prescribed by SFAS No. 123, Accounting for Stock-Based Compensation, the pro
forma net income (loss) of the Company for the three months ended March 31, 2003
and 2002 would not have been materially different from the reported net income
(loss). The fair value of the options granted (using the Black-Scholes option
pricing model) was estimated to be approximately $37,000.
F-26
BAYVIEW TECHNOLOGY GROUP, LLC
SELECTED NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
1. PROPERTY AND EQUIPMENT
Property and equipment as of March 31, 2003 consisted of the following:
Equipment $ 241,494
Furniture and fixtures 98,198
-------------
339,692
Less accumulated depreciation 102,641
-------------
$ 237,051
=============
Depreciation expense was $20,766 and $14,117 for the three months ended March
31, 2003 and 2002, respectively.
2. LINE OF CREDIT - RELATED PARTY
Effective September 30, 2002, the Company entered into a $500,000 line of credit
agreement with Bayview Ventures, Inc. The line of credit expired on June 1,
2003. The line of credit bears interest at the prime rate as published in the
Wall Street Journal, plus 1.75%. The line of credit is secured by substantially
all of the assets of the Company. In addition, one of the Company's members (who
is also an executive officer) has guaranteed the line of credit and pledged
personal assets as additional security. The balance of the line of credit at
March 31, 2003 was $245,000 and the interest rate was 6.00%.
Interest expense recognized in connection with the line of credit - related
party, was $5,209 for the three months ended March 31, 2003.
F-27
3. LONG-TERM DEBT - RELATED PARTY
Long-term debt at March 31, 2003 consists of a note payable to Bayview Ventures,
Inc. The sole stockholder of Bayview Ventures, Inc. is an employee of the
Company. The note was in the original amount of $1,770,000 and bears interest at
the rate of 6.9% per annum and was originally payable in three annual
installments plus accrued interest beginning on June 1, 2002. The note is
secured, subject to certain subordination, by all inventories, accounts
receivable, and substantially all of the assets acquired from Bayview Ventures,
Inc.
Effective April 30, 2002, the terms of the note payable were amended. An initial
payment of $250,000 was made June 30, 2002. Subsequent payments are to be made
based on 50% of excess cash flow defined as earnings before interest, taxes,
depreciation and amortization less fixed charges (interest expense for the
period of determination plus minimum rent payments under operating leases) and
total capital expenditures. The calculation is to be completed by the tenth day
of the subsequent month and reviewed and agreed to by the note holder. Payments
will be made immediately thereafter. During the three months ended March 31,
2003, the Company made no principal payments on this debt. Included in accounts
payable at March 31, 2003 is $62,578 of accrued interest due on the note.
The term of the note agreement was modified in both May and June 2003, pursuant
to which the maturity date of the note payable was extended to be July 14, 2003.
Bayview Ventures, Inc. agreed to modify the repayment terms of the principal and
accrued interest on the note payable in connection with the acquisition of
certain assets of the Company by USA Technologies, Inc. ("USAT").
In accordance with the modified terms, in July 2003, the Company paid Bayview
Ventures, Inc. approximately $631,000 and 1,200,000 shares of USAT common stock
having an agreed upon value of $333,333. The remaining balance owed to Bayview
Ventures, Inc. (including both principal and accrued interest) of $333,333 is to
be repaid no later than November 8, 2003.
F-28
4. EMPLOYMENT AGREEMENTS
The Company has an employment agreement with the sole stockholder of Bayview
Ventures, Inc. Under the terms of the agreement, the Company is required to pay
a royalty to Bayview Ventures, Inc., based upon the sale of its devices. The
Company is also required to pay the employee an annual base salary of $126,240.
During the three months ended March 31, 2003 and 2002, royalties earned by
Bayview Ventures, Inc. were $76,429 and $90,756, respectively. Royalties payable
to Bayview Ventures, Inc. as of March 31, 2003 totaled $153,006.
5. SUPPLIER AGREEMENT
Effective July 1, 2001, the Company entered into an agreement with an unrelated
entity for the manufacture of the Company's electronic devices. The agreement's
initial term is two years, and the agreement automatically renews for subsequent
one-year periods unless either party provides written notification of
termination. In connection with the agreement, the Company is required to
provide the entity with thirteen-week production forecasts and the Company is
obligated to purchase the manufactured devices and reimburse the entity, under
certain terms of the agreement. During the three months ended March 31, 2003 and
2002, the Company purchased $385,275 and $527,199, respectively from the entity,
and at March 31, 2003, the Company owed the entity $177,958.
6. AGREEMENTS WITH UTILITY ORGANIZATIONS
The Company has an agreement with the Bonneville Power Administration ("BPA")
that expired April 30, 2003 to provide and install BPA's electronic devices.
Under the terms of this agreement, the Company is to receive a negotiated price
per unit and installation fee per unit, for each device installed. The
Bonneville Power Administration contract provides for total purchase price and
fees of $3,000,000. The agreement was not renewed.
F-29
7. CONTINGENCIES
In February 2003, a fire occurred in a facility in Idaho, in which the Company's
product was installed days before the fire. The insurance company representing
the company that occupied the facility is investigating the cause of the fire.
The Company has informed their insurance carrier of the incident and the Company
is currently in the process of investigating the matter and to what extent, if
any, the Company may be held responsible. The outcome of this contingency is
currently unknown. Any potential liability may be covered by the Company's
insurance carrier. No liability for the outcome of this contingency has been
recorded in the accompanying financial statements.
The Company occupied premises in California through June 1, 2002, at which time
the premises were vacated. The landlord is seeking rent from the Company for the
period from June 2002 through October 2003 (lease termination date), in the
aggregate amount of approximately $62,000. The Company does not believe it is
responsible for this amount, as it never formally assumed the lease. Bayview
Ventures, Inc. was the original lessee. At March 31, 2003, the Company has
accrued $26,000, which represents the Company's best estimate of its expected
liability to settle the matter.
8. SALE OF OPERATIONS
On July 11, 2003, the Company sold substantially all of its fixed assets and
intellectual property (including patents and trademarks), as well as other
various assets, to USAT in exchange for 20,000,000 shares of USAT common stock.
Additionally, USAT paid approximately $631,000 to Bayview Ventures, Inc.,
representing the amount currently due to Bayview Ventures, Inc. pursuant to its
note payable from the Company. Pursuant to the sale agreement, the shares of
USAT common stock received by the Company cannot be sold for a one-year period,
after which time a monthly limitation will be placed on the maximum number of
shares, that may be sold.
The long-lived assets covered by the sales agreement have been reported in the
accompanying balance sheets as assets held for sale. Management determined that
the plan of sale criteria in SFAS No. 144 was met in April 2003, at which time
depreciation and amortization of these assets ceased and the assets began to be
reported at the lower of their carrying amount or fair value less cost to sell.
F-30
USA TECHNOLOGIES INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The Pro Forma Consolidated Balance Sheet as of March 31, 2003, the Pro Forma
Consolidated Statement of Operations for the nine months ended March 31, 2003,
and the Pro Forma Consolidated Statement of Operations for the year ended June
30, 2002, are based on the historical financial statements of USA Technologies,
Inc. (UST) and Bayview Technology Group, LLC (Bayview). The acquisition of the
operating assets of Bayview has been accounted for using the purchase method of
accounting. The Pro Forma Consolidated Balance Sheet as of March 31, 2003 has
been prepared assuming the Bayview acquisition was completed on March 31, 2003.
The Pro Forma Consolidated Statement of Operations for the nine months ended
March 31, 2003 has been prepared assuming the Bayview acquisition was completed
on July 1, 2002. The Pro Forma Consolidated Statement of Operations for the year
ended June 30, 2002 has been prepared assuming that the Bayview acquisition was
completed on July 1, 2001.
The Unaudited Pro Forma financial statement information is presented for
informational purposes only. The Pro Forma Consolidated Balance Sheet and
Consolidated Statements of Operations do not purport to represent what USA's
actual financial position or results of operations would have been had the
acquisition of Bayview occurred as of such dates, or to project USA's financial
position or results of operations for any period or date, nor does it give
effect to any matters other than those described in the notes thereto. In
addition, the allocations of purchase price to the assets and liabilities of
Bayview are preliminary and the final allocations may differ from the amounts
reflected herein. The Unaudited Pro Forma Consolidated Balance Sheet and
Unaudited Pro Forma Statements of Operations should be read in conjunction with
USA's financial statements and notes thereto, and the historical financial
statements of Bayview which are included elsewhere in this current report on
Form 8-K.
F-31
USA Technologies Inc.
Pro Forma Consolidated Balance Sheet
March 31, 2003
(Unaudited)
Acquisition
Bayview UST Adjustments Pro Forma
------- ---- ----------- ---------
Assets:
Current assets:
Cash and cash equivalents $ 133,915 $ 573,828 (1)(2) $ (707,743) $ -
Accounts receivable, net 510,847 444,435 (1) (510,847) 444,435
Inventory 300,488 687,719 (1) (260,488) 727,719
Subscriptions receivable - 137,000 - 137,000
Prepaid expenses and other current assets 52,489 121,580 (1) (35,512) 138,557
Prepaid Professional fees - 884,475 - 884,475
Investment - 2,081,559 - 2,081,559
-------------------------------------------------------------
Total current assets 997,739 4,930,596 (1,514,590) 4,413,745
Property and equipment, net 237,051 1,500,986 - 1,738,037
Software development costs - 1,456,379 - 1,456,379
Goodwill 1,820,758 6,800,827 (1) (1,515,339) 7,106,246
Intangible assets 700,261 2,664,500 (1) 8,799,739 12,164,500
Other assets 38,237 19,394 (1) (38,237) 19,394
-------------------------------------------------------------
Total assets $3,794,046 $17,372,682 $5,731,573 $26,898,301
=============================================================
Liabilities and shareholder's equity
Current liabilities:
Accounts payable $ 300,197 $ 4,442,713 (1) $ (260,197) $ 4,482,713
Accrued expenses 257,795 2,426,404 (1)(2) (50,376) 2,633,823
Deposits - 120,000 - 120,000
Current portion of long-term debt 798,983 782,405 (1) (798,983) 782,405
Convertible Senior Notes - 2,063,524 - 2,063,524
-------------------------------------------------------------
Total current liabilities 1,356,975 9,835,046 (1,109,556) 10,082,465
Convertible Senior Notes, less current portion - 7,537,951 - 7,537,951
Long-term debt, less current portion 658,842 374,624 (1) (658,842) 374,624
Convertible debentures, less current portion - 91,394 - 91,394
-------------------------------------------------------------
Total liabilities 2,015,817 17,839,015 (1,768,398) 18,086,434
Shareholders'/Members' equity:
Series A convertible preferred stock, no par value;
1,800,000 shares authorized; 527,832 issued and
outstanding at March 31, 2003 - 3,738,892 - 3,738,892
Bayview Members' Equity, 95,000 units issued and outstanding at
March 31, 2003 1,778,229 - (1) (1,778,229) -
USA Common Stock, no par value; 300,000,000 shares
authorized; 131,880,995 issued and outstanding shares at
March 31, 2003 - 65,714,460 (1) 9,278,200 74,992,660
Accumulated deficit - (69,350,887) - (69,350,887)
Accumulated other comprehensive loss - (568,798) - (568,798)
-------------------------------------------------------------
Total shareholders'/members' equity (deficit) 1,778,229 (466,333) 7,499,971 8,811,867
-------------------------------------------------------------
Total liabilities and shareholders'/members' equity $3,794,046 $17,372,682 $ 5,731,573 $26,898,301
=============================================================
SEE NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
F-32
USA Technologies, Inc.
Pro Forma Consolidated Statement of Operations
For the year ended June 30, 2002
(Unaudited)
Acquisition
Bayview UST Adjustments Pro Forma
------- --- ----------- ---------
Revenues $ 4,900,086 $ 1,682,701 - $ 6,582,787
Operating expenses:
Cost of sales 2,459,033 3,914,927 - 6,373,960
General and administrative 1,141,883 7,989,651 - 9,131,534
Compensation 1,085,481 4,654,662 - 5,740,143
Depreciation and amortization 154,723 440,238(5) 836,852 1,431,813
------------ ------------ ---------- ------------
Total operating expenses 4,841,120 16,999,478 836,852 22,677,450
------------ ------------ ---------- ------------
58,966 (15,316,777) (836,852) (16,094,663)
Other income (expense):
Interest income - 15,791 - 15,791
Interest expense (119,254) (1,987,434)(4) 119,254 (1,987,434)
Other, net - (26,387) - (26,387)
------------ ------------ ---------- ------------
Total other income (expense) (119,254) (1,998,030) 119,254 (1,998,030)
------------ ------------ ---------- ------------
Net loss (60,288) (17,314,807) (717,598) (18,092,693)
Cumulative preferred dividends - (822,561) - (822,561)
------------ ------------ ---------- ------------
Loss applicable to common shares $ (60,288) $(18,137,368) $ (717,598) $(18,915,254)
============ ============ ========== ============
Loss per common share (basic and diluted) $(0.50) $(0.34)
====== ======
Weighted average number of common shares
outstanding (basic and diluted) 35,994,157 20,170,000 56,164,157
=========== ========== ===========
F-33
USA Technologies, Inc.
Pro Forma Consolidated Statement of Operations
For the nine months ended March 31, 2003
(Unaudited)
Acquisition
Bayview UST Adjustments Pro Forma
------- --- ----------- ---------
Revenue $ 4,073,508 $ 2,233,330 - $ 6,306,838
Operating expenses:
Cost of sales 1,694,229 2,057,173 - 3,751,402
General and administrative 1,105,743 4,951,021 - 6,056,764
Compensation 885,207 2,767,168 - 3,652,375
Depreciation and amortization 99,206 734,026(3) 673,467 1,506,699
Loss on exchange of debt - 959,352 - 959,352
----------- ----------- ---------- ------------
Total operating expenses 3,784,385 11,468,740 673,467 15,926,592
----------- ----------- ---------- ------------
289,123 (9,235,410) (673,467) (9,619,754)
Other income (expense):
Interest income - 11,956 - 11,956
Interest expense (92,561) (3,319,444)(4) 92,561 (3,319,444)
----------- ----------- ---------- ------------
Total other income (expense) (92,561) (3,307,488) 92,561 (3,307,488)
----------- ----------- ---------- ------------
Net income (loss) 196,562 (12,542,898) (580,906) (12,927,242)
Cumulative preferred dividends - (793,586) - (793,586)
----------- ----------- ---------- ------------
(Loss) income applicable to common shares $ 196,562 $(13,336,484) $(580,906) $(13,720,828)
=========== =========== ========== ============
Loss per common share (basic and diluted) $(0.15) $(0.12)
====== ======
Weighted average number of common shares
outstanding (basic and diluted) 91,491,804 20,170,000 111,661,804
========== ========== ===========
F-34
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) To record the acquisition of the operating assets of Bayview as defined in
the asset purchase agreement consisting primarily of the patents and other
intellectual property relating to Bayview's energy conservation devices for the
vending industry and customer accounts. The purchase price is assumed to be paid
by the issuance of 20,000,000 shares of USA Technologies, Inc. Common Stock
($9,200,000) and payment of $631,247 in cash. Costs associated with the
acquisition include the issuance of 170,000 shares of USA Technologies, Inc.
Common Stock ($78,200) and an estimate of $150,000 for payment of services
rendered to UST in connection with the acquisition. The total estimated
investment of $10,059,447 plus an estimated liability of $40,000 assumed is
allocated among the assets acquired - property and equipment ($237,051),
inventory ($40,000), prepaid expenses ($16,977), intangibles assets ($9,500,000)
and goodwill ($305,419).
(2) The cash portion of the purchase price and costs associated with the
acquisition are assumed to have been paid from USA cash as of March 31, 2003
with the remainder reflected in accrued expenses.
(3) To eliminate amortization of intangible assets recorded by Bayview and to
record amortization of intangible assets acquired in the acquisition as if the
acquisition had occurred on July 1, 2002. Acquired intangible assets are
comprised of patents, non-compete and consulting agreements and trademark and
tradenames and are amortized over five to ten years.
(4) To eliminate interest expense recorded by Bayview as the related debt was
not assumed by USAT under the asset purchase agreement.
(5) To eliminate amortization of intangible assets recorded by Bayview and to
record amortization of intangible assets acquired in the acquisition as if the
acquisition had occurred on July 1, 2001. Also to eliminate amortization of
goodwill recorded by Bayview pertaining to periods prior to the adoption of
Financial Accounting Standards Board Statement No. 142, Goodwill and other
Intangible Assets, as to which goodwill is no longer amortized.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
USA TECHNOLOGIES, INC.
Dated: September 24, 2003 By: /s/ George R. Jensen, Jr.,
------------------------------
George R. Jensen, Jr.
Chief Executive Officer
F-35