As filed with the Securities and Exchange Commission on June 29, 2004.
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
Registration Statement
Under
The Securities Act of 1933
USA TECHNOLOGIES, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 7359 23-2679963
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(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355
(Address of principal executive offices and zip code)
George R. Jensen, Jr.
Chief Executive Officer
USA Technologies, Inc.
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355
(610) 989-0340
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Douglas M. Lurio, Esquire
Lurio & Associates, P. C.
One Commerce Square
2005 Market Street, Suite 2340
Philadelphia, PA 19103-7015
(215) 665-9300
Approximate date of proposed sale to the public:
From time to time after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, check the following box: [ ]
1
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH
CLASS OF PROPOSED PROPOSED
SECURITIES AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TO BE TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED PER UNIT(6) OFFERING PRICE FEE
- ---------- ------------ --------------- -------------- ------------
COMMON STOCK,
NO PAR VALUE 42,436,250 SHARES(1) $ .18 $ 7,638,525.00 $ 967.80
1,077,184 SHARES(2) $ .18 $ 193,893.12 $ 24.56
3,716,496 SHARES(3) $ .18 $ 668,969.28 $ 84.76
150,000 SHARES(4) $ .18 $ 27,000.00 $ 3.42
25,000,000 SHARES(5) $ .18 $ 4,500,000.00 $ 570.15
-------------- ----------
TOTAL 72,379,930 SHARES $13,028,387.40 $ 1,650.69
============== ==========
(1) REPRESENTS 28,290,833 SHARES AND 14,145,417 SHARES UNDERLYING WARRANTS
ISSUED TO INVESTORS IN OUR 2004-A PRIVATE PLACEMENT OFFERING.
(2) REPRESENTS 538,592 SHARES ISSUED TO, AND 538,592 SHARES UNDERLYING
WARRANTS GRANTED TO, THE HOLDERS OF OUR SENIOR NOTES WHO ELECTED TO
RECEIVE THESE SECURITIES IN LIEU OF CASH INTEREST PAYMENTS DUE FOR THE
CALENDAR QUARTER ENDED DECEMBER 31, 2003 AND SHARES AND WARRANTS
PERTAINING TO PRIOR QUARTERS NOT PREVIOUSLY REGISTERED.
(3) REPRESENTS SHARES UNDERLYING WARRANTS GRANTED TO THE HOLDERS OF OUR SENIOR
NOTES WHO PREVIOUSLY ELECTED TO RECEIVE WARRANTS IN LIEU OF CASH INTEREST
PAYMENTS.
(4) REPRESENTS 150,000 SHARES ISSUED TO CEOCAST, INC.
(5) REPRESENTS SHARES ISSUABLE TO STEVE ILLES PURSUANT TO A COMMON STOCK
PURCHASE AGREEMENT.
(6) PURSUANT TO RULE 457(C), THE REGISTRATION FEE HAS BEEN CALCULATED AT THE
AVERAGE OF THE BID AND ASKED PRICE WITHIN 5 DAYS PRIOR TO THE DATE OF THE
FILING OF THE REGISTRATION STATEMENT.
2
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission ("SEC") is effective. This prospectus is not
an offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
3
PROSPECTUS
USA TECHNOLOGIES, INC.
72,379,930 shares of Common Stock
THE OFFERING
The resale of up to 72,379,930 shares of common stock in the over-the- counter
market at the prevailing market price or in negotiated transactions. We will
receive no proceeds from the sale of the shares by the selling shareholders.
However, we will receive proceeds from the sale of shares issuable upon the
exercise of warrants by the selling shareholders or the purchase of shares from
us by Steve Illes, a selling shareholder, under an agreement with us. Because
the selling shareholders will offer and sell the shares at various times, we
have not included in this prospectus information about the price to the public
of the shares or the proceeds to the selling shareholders.
Our common stock is included for quotation on the over-the-counter bulletin
board under the symbol "USTT." The closing bid price for the common stock on
June 28, 2004, was $.18 per share.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES ONLY
IF YOU CAN AFFORD A COMPLETE LOSS. Please refer to Risk Factors beginning on
Page 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities or passed on the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is June 29, 2004.
TABLE OF CONTENTS
Prospectus Summary .......................................... 5
Risk Factors ................................................ 7
Use of Proceeds ............................................. 13
Managements Discussion And Analysis of
Financial Condition And Results
of Operations ............................................. 13
Business .................................................... 29
Management .................................................. 38
Principal Shareholders ...................................... 44
Certain Transactions ........................................ 48
Selling Shareholders ........................................ 49
Market for Common Stock ..................................... 56
Description of Securities ................................... 57
Plan of Distribution ........................................ 64
Legal Matters ............................................... 65
Experts ..................................................... 65
Financial Statements ........................................ F-1
4
PROSPECTUS SUMMARY
OUR COMPANY
USA Technologies, Inc., a Pennsylvania corporation (the "Company"), was founded
in January 1992. The Company is a developer and supplier of cashless payment and
control network systems and provider of related services. The Company's patented
technologies include networked cashless transaction solutions and point of
purchases devices. In May 2002, the Company completed the acquisition of Stitch
Networks Corporation, a Delaware corporation ("Stitch"), and operates Stitch as
a wholly owned subsidiary of the Company. Stitch also is a developer and
supplier of cashless payment and control network technologies. Through the
acquisition of substantially all of the assets of Bayview Technology Group, LLC
(Bayview) in July 2003, the Company now designs and manufactures patented energy
conservation devices for equipment such as laser printers, monitors, office
peripherals, refrigerated vending machines and glass front merchandisers
(referred to as slide or visi coolers).
OUR BUSINESS
The Company's point of purchase device, called e-Port or TransAct, facilitates
the monitor and control, the cashless payment of product and/or services and the
collection of sales and inventory data for the host equipment it is connected to
or embedded in. Examples of host equipment include copiers, faxes, personal
computers, printers, vending machines and kiosks. Our customers connect these
devices to a network, developed and operated by the Company, which further
facilitates the control and monitoring, the settlement of cashless payments and
the reporting of sales and inventory data collected at the point of purchase.
The Company's systems support multiple cashless payments methods, such as
payments via credit/debit cards, smart cards, Radio Frequency Identification
(RFID), Personal Identification Numbers (PINs), and cellular telephones.
Revenue from the sale of equipment is recognized on the terms of
freight-on-board shipping point, or upon installation and acceptance of the
equipment if installation services are purchased for the related equipment.
Transaction processing revenue is recognized upon the usage of the Company's
cashless payment and control services and network. Service fees for access to
the Company's equipment and network are recognized on a monthly basis. Product
revenues are recognized from the sale of products from the Company's vending
machines upon purchase and acceptance by the vending customer. Product revenues
recognized from the sale of energy conservation products are recognized when
shipped to the customer.
OUR MARKET
The Company has focused on the Vending, Kiosk and Office Equipment industries in
which to sell its networked, cashless payment systems, and has developed product
offerings in each of these channels. The Company markets and sells its product
and services directly to the owner, operator of the equipment and/or to
equipment distributors and resellers established in each of the respective
markets.
5
Vending/Kiosk: The Company offers several variations of e-Port to the vending or
kiosk industry such as an audit only device and an audit device coupled with
cashless payment capabilities. Audit only devices allow the operator of the
vending machine to remotely monitor the sales, inventory and diagnostic
information of the machine it is embedded into. In addition, our point of
purchase device allows the operator of the machine to offer their customers an
alternative payment method to cash when purchasing product. Another variation of
our e-Port product is our multi-media device. The multi-media e-Port client
product is equipped with both the audit and cashless payment features, referred
to above, but also includes the capability of displaying interactive advertising
and content via a LCD color touch screen. Information obtained at the vending
machine by our e-Port client device is transferred back to our network and made
available to the operator via the Internet or email.
Office Equipment: The TransAct can be sold separately and connected to office
equipment already owned by the purchaser or it can be coupled with office
equipment sold by the Company. The combined TransAct and office equipment
product is called the Business Express and is sold to hotels wishing to provide
their guests with 24x7x365 access to business center services. The same benefits
of remote sales and inventory data monitoring, as described above, are available
from the TransAct or Business Express product.
Energy Conservation Products
With the acquisition of Bayview in July 2003, the Company has acquired the
following additional products:
- - VendingMiser(TM) installs in a cold drink vending machine and reduces the
power consumption of the vending machine by an average of 46%;
- - CoolerMiser reduces the energy used by sliding glass or pull open
glass-front coolers that contain non-perishable goods;
- - SnackMiser reduces the amount of electricity used by non-refrigerated snack
vending machines;
- - MonitorMiser Plus is a computer monitor power controller. It works with all
operating systems and performs by powering down the monitor based upon
keyboard or mouse activity;
- - LaserMiser provides energy conservation to laser printers, shutting them
down when they are idle. It is a plug-and-play device that is software
transparent and capable of handling any laser printer with a parallel or
serial connection;
- - Internal VendingMiser (IVM) is the second generation of the VendingMiser in
development. It installs into cold drink vending machines and has the
capability to control the cooling system and the advertising lights
separately.
Research and Development Costs
6
The Company continuously pursues new product offerings related to our existing
technology and accordingly invests resources and capital in research and
development. For the years ended June 30, 2003 and 2002, the Company expensed
approximately $1,505,000 and $1,187,000, respectively for the development of our
proprietary technology and is reflected in general and administrative expense in
the accompanying consolidated financial statements.
ABOUT OUR OFFERING
Our selling shareholders are as of the date of this prospectus as follows:
* holders of 28,979,425 shares of common stock
* holders of unexercised warrants which if exercised would represent 18,400,505
shares (based upon the price of our shares of $.18 on June 28, 2004, all of
these warrants have exercise prices less than this share price)
* Steve Illes, who has agreed to purchase from us Common Stock for a purchase
price of up to $7,500,000( 25,000,000 shares are being registered in this
prospectus )
Based upon the shares outstanding as of May 31, 2004 of 339,453,012 if all of
these warrants are exercised, and all of these shares covered by this prospectus
were issued and outstanding, we would have 411,832,942 shares outstanding.
These shares would be offered by our selling shareholders at the market price at
the time of resale. Our selling shareholders may also sell their shares to other
investors in a transaction not on the open market. There is no requirement that
our selling shareholders sell their shares pursuant to this prospectus.
We will not receive any of the proceeds raised by the offering. We would receive
proceeds from the exercise by the selling shareholders of the warrants or the
purchase by Steve Illes from us of shares, as referred to above.
RISK FACTORS
An investment in our common stock is very risky. You should be aware that you
could lose the entire amount of your investment. Prior to making an investment
decision, you should carefully consider the following risk factors and the other
information contained in this prospectus.
1. We have a history of losses since inception and if we continue to incur
losses the price of our shares can be expected to fall.
We have experienced losses since inception. We expect to continue to incur
losses for the foreseeable future as we expend substantial resources on sales,
marketing, and research and development of our products. From our inception
through March 31, 2004, our cumulative losses are approximately $91.6 million.
For our fiscal years ended June 30, 2002 and 2003, and for the nine months ended
March 31, 2004, we have incurred net losses of $17,314,807, $21,965,499 and
$16,424,278, respectively. If we continue to incur losses, the price of our
common stock can be expected to fall.
2. Our existence is dependent on our ability to raise capital which may not be
available.
7
There is currently limited experience upon which to assume that our business
will prove financially profitable or generate more than nominal revenues. From
inception, we have generated funds primarily through the sale of securities.
There can be no assurances that we will be able to continue to sell additional
securities. We expect to raise funds in the future through sales of our debt or
equity securities until such time, if ever, as we are able to operate
profitably. There can be no assurance given that we will be able to obtain funds
in such manner or on terms that are beneficial to us. For the three months ended
March 31, 2004 we were using funds in our operations on a monthly basis of
approximately $700,000. Using that as a basis for estimating cash requirements
for the next twelve months, along with requirements for capital expenditures and
repayment of long term debt, the Company's cash needs would approximate
$9,000,000 through June 30, 2005. Our inability to obtain needed funding can be
expected to have a material adverse effect on our operations and our ability to
achieve profitability. If we fail to generate increased revenues or fail to sell
additional securities you may lose all or a substantial portion of your
investment.
3. We received an opinion from our auditor which raises substantial doubt about
our ability to continue as a going concern.
Our auditors, Ernst and Young, LLP, have included an explanatory paragraph in
their report on our June 30, 2003 consolidated financial statements indicating
that as of June 30, 2003, there is substantial doubt about our ability to
continue as a going concern. We will require additional funds in the future, and
there can be no assurance that any independent auditors` report on our future
financial statements will not include a similar explanatory paragraph if we are
unable to raise sufficient funds or generate sufficient cash from operations to
cover the cost of our operations. The existence of the explanatory paragraph may
adversely affect our relationship with prospective customers, suppliers and
potential investors, and therefore could have a material adverse effect on our
business, financial condition and results of operations.
4. We depend on our key personnel and if they would leave us, our business could
be adversely affected.
We are dependent on key management personnel, particularly the Chairman and
Chief Executive Officer, George R. Jensen, Jr. The loss of services of Mr.
Jensen or other executive officers would dramatically affect our business
prospects. Certain of our employees are particularly valuable to us because:
o they have specialized knowledge about our company and operations;
o they have specialized skills that are important to our operations; or
o they would be particularly difficult to replace.
We have entered into an employment agreement with Mr. Jensen that expires in
June 30, 2005. We have also entered into employment agreements with other
executive officers, each of which contain non-compete agreements. We have
obtained a key man life insurance policy in the amount of $2,000,000 on Mr.
Jensen, and a key man life insurance policy in the amount of $1,000,000 on our
Vice-President-Research and Development, Haven Brock Kolls, Jr.
We do not have and do not intend to obtain key man life insurance coverage on
any of our other executive officers. As a result, we are exposed to the costs
associated with the death of these key employees.
5. USA's dependence on proprietary technology and limited ability to protect our
intellectual property may adversely affect our ability to compete.
8
A successful challenge to our ownership of our technology could materially
damage our business prospects. Our technology may infringe upon the proprietary
rights of others. Our success is dependent in part on our ability to obtain
patent protection for our proprietary products, maintain trade secret protection
and operate without infringing the proprietary rights of others.
To date, we have 39 pending patent applications, and intend to file applications
for additional patents covering our future products, although there can be no
assurance that we will do so. In addition, there can be no assurance that we
will maintain or prosecute these applications. The United States Government and
other countries have granted us 49 patents as of May 31, 2004. See "Business -
Patents, Trademarks and Proprietary Information." There can be no assurance
that:
o any of the remaining patent applications will be granted to us;
o we will develop additional products that are patentable or do not
infringe the patents of others;
o any patents issued to us will provide us with any competitive
advantages or adequate protection for our products;
o any patents issued to us will not be challenged, invalidated or
circumvented by others; or
o any of our products would not infringe the patents of others.
If any of the products are found to have infringed any patent, there can be no
assurance that we will be able to obtain licenses to continue to manufacture and
license such product or that we will not have to pay damages as a result of such
infringement. Even if a patent application is granted for any of our products,
there can be no assurance that the patented technology will be a commercial
success or result in any profits to us.
6. Competition from others with greater resources could prevent USA from
increasing revenue and achieving profitability.
Competition from other companies which are well established and have
substantially greater resources may reduce our profitability. Many of our
competitors have established reputations for success in the development, sale
and service of high quality products. We face competition from the following
groups:
o companies offering automated, credit card activated control systems in
connection with facsimile machines, personal computers, debit card
purchase/revalue stations, and use of the Internet and e-mail which
directly compete with our products. See "Business-Competition";
o companies which have developed unattended, credit card activated
control systems currently used in connection with public telephones,
prepaid telephone cards, gasoline dispensing machines, or vending
machines and are capable of developing control systems in direct
competition with USA; and
o businesses which provide access to the Internet and personal computers
to hotel guests. Although these services are not credit card activated,
such services would compete with USA's Business Express(R).
Competition may result in lower profit margins on our products or may reduce
potential profits or result in a loss of some or all of our customer base. To
the extent that our competitors are able to offer more attractive technology,
our ability to compete could be adversely affected.
7. The termination of any of our relationships with third parties upon whom we
rely for supplies and services that are critical to our products could adversely
affect our business and delay achievement of our business plan.
9
We depend on arrangements with third parties for a variety of component parts
used in our products. We have contracted with RadiSys Corporation and Masterwork
Electronics to assist us to develop and manufacture our e-Port(TM) products. For
other components, we do not have supply contracts with any of our third-party
suppliers and we purchase components as needed from time to time. See
"Business-Procurement". We have contracted with IBM to develop our network
services so that these services are Internet capable as well as interact with
our proposed media capable e-Post(TM). We have contracted with IBM to host our
network in a secure, 24/7 environment to ensure reliability of our network
services. If these business relationships are terminated, the implementation of
our business plan may be delayed until an alternative supplier or service
provider can be retained. If we are unable to find another source or one that is
comparable, the content and quality of our products could suffer and our
business, operating results and financial condition could be harmed.
8. We do not expect to pay cash dividends in the foreseeable future and
therefore investors should not anticipate cash dividends on their investment.
The holders of our common stock and series A preferred stock are entitled to
receive dividends when, and if, declared by our board of directors. Our board of
directors does not intend to pay cash dividends in the foreseeable future, but
instead intends to retain any and all earnings to finance the growth of the
business. To date, we have not paid any cash dividends on the common stock or
series A preferred stock and there can be no assurance that cash dividends will
ever be paid on the common stock.
In addition, our articles of incorporation prohibit the declaration of any
dividends on the Common Stock unless and until all unpaid and accumulated
dividends on the Series A preferred stock have been declared and paid. Through
May 31, 2004, the unpaid and cumulative dividends on the series A preferred
stock equal $6,677,180. The unpaid and cumulative dividends on the series A
preferred stock are convertible into shares of common stock at the rate of
$10.00 per share at the option of the shareholder. Through May 31, 2004,
$2,684,444 of unpaid and cumulative dividends on the Series A Preferred Stock
were converted into 288,521 shares of common stock. See "Description of
Securities-Series A Convertible Preferred Stock."
9. We may fail to gain widespread market acceptance of our products and not
generate sufficient revenues or profit margins to become successful.
There can be no assurance that demand for our products will be sufficient to
enable us to become profitable. Likewise, no assurance can be given that we will
be able to install the TransActs and e-Ports at enough locations or sell
equipment utilizing our network to enough locations to achieve significant
revenues or that our operations can be conducted profitably. Alternatively, the
locations which would utilize the network may not be successful locations and
our revenues would be adversely affected. We may in the future lose locations
utilizing our products to competitors, or may not be able to install our
products at competitor's locations. In addition, there can be no assurance that
our products could evolve or be improved to meet the future needs of the market
place.
10
10. The lack of an established trading market may make it difficult to transfer
our stock and you may not be able to sell your shares on our trading market.
Our Common Stock is traded on the OTC Bulletin Board. Although there is limited
trading in the Common Stock, there is no established trading market. Until there
is an established trading market, holders of the common stock may find it
difficult to dispose of, or to obtain accurate quotations for the price of the
common stock. See "Description of Securities - Shares Eligible For Future Sale"
and "Market For Common Stock."
11. There are rules governing low-priced stocks that may make it more difficult
for you to resell your shares.
Our common stock is currently considered a "penny stock" under federal
securities laws since its market price is below $5.00 per share. Penny stock
rules generally impose additional sales practice and disclosure requirements on
broker-dealers who sell our shares to certain investors.
Broker-dealers who sell penny stock to certain types of investors are required
to comply with the SEC's regulations concerning the transfer of penny stock. If
an exemption is not available, these regulations require broker-dealers to:
- - make a suitability determination prior to selling penny stock to the
purchaser;
- - receive the purchaser's written consent to the transaction; and -
provide certain written disclosures to the purchaser.
- - These rules may affect the ability of broker-dealers to make a market
in or trade our shares. This, in turn, may affect your ability to
resell those shares in the public market.
12. The substantial market overhang of our shares and registered resales under
this prospectus will tend to depress the market price of our shares.
The substantial number of our shares currently eligible for sale in the open
market will tend to depress the market price of our shares. See "Description of
Securities--Shares Eligible for Future Sale" and "Market for Securities". As of
May 31, 2004, these shares consisted of the following:
- - 339,453,012 shares of Common Stock
- - 522,742 shares of Preferred Stock
- - 20,337,777 shares underlying Common Stock options and warrants; and
- - 49,276,805 shares underlying our Convertible Senior Notes.
13. Sales of shares eligible for future sale from exercise of warrants and
options could depress the market price of our common stock.
We presently have issued and outstanding options to purchase 2,134,232 shares of
our common stock and warrants to purchase 18,203,545 shares. The shares
underlying all of these options and warrants have been registered and may be
freely sold upon issuance. Market sales of large amounts of our common stock, or
the potential for those sales even if they do not actually occur, may have the
effect of depressing the market price of our common stock. In addition, if our
future financing needs require us to issue additional shares of common stock or
securities convertible into common stock, the supply of common stock available
for resale could be increased which could stimulate trading activity and cause
the market price of our common stock to drop, even if our business is doing
well.
11
14. We are obligated to make substantial principal and interest payments to the
holders of the Senior Notes which may not be available or would use our
available working capital.
As of the May 31, 2004 we have approximately $451,152 of unsecured senior notes
due on December 31, 2004, approximately $3,011,791 of unsecured senior notes due
on December 31, 2005, approximately $3,213,500 of unsecured notes due on
December 31, 2006, and approximately $3,404,490 of unsecured notes due on
December 31, 2007. These notes accrue cash interest at the rate of twelve
percent (12%) per year. We are required to make quarterly interest payments
totaling approximately $302,428 or $1,209,712 each year.
Until the Senior Notes have been paid by us, they will be reflected as a
liability on our financial statements, net of the related unamortized discount
and other issuance costs.
Our ability to satisfy the debt obligations is dependent on our future
performance, the success of our product lines and on our ability to raise
capital. Our performance is also subject to financial, business and market
factors affecting our business and operations.
We anticipate that the Senior Notes will be paid from cash from operations, as
well as proceeds from securities offerings. However, there can be no assurance
that we will meet our obligations to pay quarterly interest on or the principal
amount of the senior notes at maturity. The payment of the interest and
principal on these notes would utilize our available working capital which would
not be available for other purposes.
15. Our exchange of New Senior Notes to our 2004 Senior Note holders may have
been in violation of the registration provisions of the securities laws. As a
result, certain of our note holders may be granted the right to rescind the
exchange and demand the return of their old note to them by us which matures in
December 2004. The repayment of these notes in December 2004 would adversely
affect our liquidity.
12
The holders of $4,067,491 of our Senior Notes due December 31, 2007, may
have a right to rescind the exchange of these notes for notes originally due
December 31, 2004, and demand that we return to them the $4,067,491 of notes due
December 31, 2004. As of May 31, 2004, $3,404,490 of these notes remain
outstanding. During the period from March 2003 through December 2003, we granted
to each holder of the notes due December 31, 2004 the right to extend the notes
until December 31, 2007 and in such event agreed that the conversion rate of the
note would be reduced from $.40 to $.20. On April 14, 2003 we filed a
Registration Statement which included the shares underlying the 2007 notes.
Because the exchange offering was not completed prior to the filing of this
registration statement, the exchange offer may be deemed to have been in
violation of the registration requirements of Section 5 of the Act. As a result,
we removed all of the shares underlying the 2007 Notes from that registration
statement. Generally, the statute of limitations for this type of claim is one
year after the date of the alleged violations and if successful, would entitle
the Note holders to rescind the issuance of the new notes to them and demand a
return of the 2004 Senior Notes. If all of the note holders demanded the return
of their notes, we would be obligated to repay the $4,067,491 principal amount
on December 31, 2004 rather than on December 31, 2007. This repayment could
significantly exceed our cash reserves and require us to borrow funds (which may
not be available) and would materially and adversely affect our results of
operations and financial condition.
USE OF PROCEEDS
We will not receive any of the proceeds from the sales of our Common Stock by
the selling shareholders. The list of the selling shareholders entitled to
receive the net proceeds from any sales of our common stock begins on page 49 of
this prospectus. We will, however, receive proceeds from the exercise of any
warrants by the selling shareholders and from the purchase of shares from us by
Steve Illes pursuant to his agreement with us.
As of the date of this prospectus, we would receive $3,680,101 of proceeds from
the exercise of all these warrants at the stated exercise prices. Because all of
these warrants have exercise prices of $.20 per share, none of these warrants
are in the money as of the date of this prospectus. Based upon the current price
of our shares, we would receive $4,000,000 of proceeds from the purchase by
Steve Illes of all 25,000,000 shares issuable to him under his agreement with us
at $.16 per share. If our share price would be in excess of $.32, we would
receive $7,500,000 of proceeds from the purchase by Mr. Illes of all 25,000,000
shares issuable to him under his agreement with us at $.30 per share.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
GENERAL
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and the accompanying notes. Actual results could differ
from those estimates. We believe the policies and estimates related to revenue
recognition, software development costs, impairment of long-lived assets,
goodwill and intangible assets, and investments represent our critical
accounting policies and estimates. Future results may differ from our estimates
under different assumptions or conditions.
REVENUE RECOGNITION
Revenue from the sale of equipment is recognized on the terms of
freight-on-board shipping point, or upon installation and acceptance of the
equipment if installation services are purchased for the related equipment.
Transaction processing revenue is recognized upon the usage of the Company's
cashless payment and control network. Service fees for access to the Company's
equipment and network services are recognized on a monthly basis. Product
revenues are recognized from the sale of products from Company owned vending
machines when there is purchase and acceptance by the vending customer.
Customers have the ability to return vending products for a full refund. The
Company estimates an allowance of product returns at the date of sale. Product
revenue recognized from the sale of energy conservation products are recognized
when shipped to the customer.
13
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs pursuant to Statement of
Financial Accounting Standards No. 86 (SFAS No. 86), "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed", after
technological feasibility of the software is established and through the
product's availability for general release to the Company's customers. All costs
incurred in the research and development of new software and costs incurred
prior to the establishment of technological feasibility are expensed as
incurred. Amortization of software development costs commences when the product
becomes available for general release to customers. Amortization of software
development costs is calculated as the greater of the amount computed using (i)
the ratio that current gross revenues for a product bear to the total of current
and anticipated future gross revenues of that product or (ii) the straight-line
method over the remaining estimated economic life of the product. The Company
reviews the unamortized software development costs at each balance sheet date
and, if necessary, will write down the balance to net realizable value if the
unamortized costs exceed the net realizable value of the asset. During May 2000,
the Company reached technological feasibility for the development of the
multi-media e-Port client product and related enhanced network and, accordingly,
the Company commenced capitalization of software development costs related to
this product and network. Costs capitalized through 2002 were $5.3 million,
which included capitalized interest of approximately $493,000, pursuant to SFAS
No. 34, "Capitalization of Interest Costs".
During the fourth quarter of fiscal 2002, the multi-media e-Port(TM) client
product and enhanced network became available for general release to the
Company's customers. The multimedia e-port(TM) client product is equipped with
both the audit and cashless payment features, but also includes the capability
of displaying interactive advertising and content via a LCD screen. During this
quarter, Management performed an evaluation of the commercial success and
preliminary market acceptance of the multi-media e-Port(TM) client product and
enhanced network and as a result of this evaluation the Company determined that
the estimated future revenues less costs to complete and dispose of the
multi-media e-Port client product was zero. Therefore, the Company wrote down
$2,663,000 of software development costs related to the multi-media e-Port
client product. The unamortized balance of the software development costs after
the impairment charge is being amortized over an estimated useful life of two
years. Amortization expense was approximately $1,331,000 during the year ended
June 30, 2003, $2,996,000 during the year ended June 30, 2002 (including the
above impairment adjustment of $2,663,000) and $999,000 for nine months ended
March 31, 2004. Such amortization is reflected in cost of sales in the
accompanying consolidated statements of operations.
IMPAIRMENT OF LONG LIVED ASSETS
The Company adopted SFAS No. 144 on July 1, 2002. In accordance with SFAS No.
144, the Company reviews its long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. During the fourth quarter of fiscal year 2003, the Company reviewed
certain long-lived assets (vending machines) and determined that such assets
were impaired. These vending machines were used in the Company's Kodak Program
to sell disposable cameras and film. Management determined that it was more
likely than not that the vending machines would be disposed of before the end of
their previously estimated useful lives. The
14
estimated undiscounted cash flows for this group of assets was less than the
carrying value of the related assets. As a result, the Company recorded a charge
of approximately $321,000 representing the difference between the fair value as
determined from a quoted market price and carrying value of the group of assets.
Such amount is reflected in depreciation expense in the 2003 consolidated
statement of operations. During the nine months ended March 31, 2004, the
agreement for the Kodak Program was terminated as a result of the settlement of
a dispute among the parties to the agreement. The settlement provides, among
other things, that the Company will receive $300 for each of the vending
machines used in the Kodak Program which resulted in a further write down of
$290,000 in the carrying value of the vending machines. This charge is included
in gain on termination of contract in the consolidated statement of operations
for the nine months ended March 31, 2004.
GOODWILL AND INTANGIBLE ASSETS
On July 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142 (SFAS No. 142) "Goodwill and other Intangible Assets," under which
Goodwill is no longer permitted to be amortized to earnings, but instead is
subject to periodic testing for impairment. Intangible assets with finite lives
will continue to be amortized over their estimated useful lives. Although the
Company did not adopt Statement No. 142 until fiscal year 2003, the
non-amortization provisions of Statement No. 142 for combinations initiated
after June 30, 2001 were applicable for the Company effective July 1, 2001.
Under SFAS No. 142, the Company tested goodwill for impairment during fiscal
year 2003 using the transitional two-step process prescribed by SFAS No. 142.
The first step of the goodwill impairment test is used to identify potential
impairment by comparing the fair value of the Company with its net book value
(or carrying amount), including goodwill. If the fair value of the Company
exceeds its carrying amount, goodwill is considered not impaired and the second
step of the impairment test is unnecessary. If the carrying amount of the
Company exceeds its fair value, the second step of the goodwill impairment test
is performed to measure the amount of impairment loss, if any. The second step
of the goodwill impairment test compares the implied fair value of the Company's
goodwill with the carrying amount of that goodwill. If the carrying amount of
the Company's goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to that excess. Determining the
fair value of the Company under the first step of the goodwill impairment test
and determining the fair value of individual assets and liabilities of a the
Company (including unrecognized intangible assets) under the second step of the
goodwill impairment test is judgmental in nature and often involves the use of
significant estimates and assumptions. Similarly, estimates and assumptions are
used in determining the fair value of other intangible assets. These estimates
and assumptions could have a significant impact on whether or not an impairment
charge is recognized and also the magnitude of any such charge. To assist in the
process of determining goodwill impairment, the Company performed an internal
valuation and estimated fair value using a discounted cash flow analysis. This
approach uses significant estimates and assumptions, which include projected
future cash flows (including timing), discount rate reflecting the risk inherent
in future cash flows and a perpetual growth rate.
The Company performed an annual impairment test of goodwill as of April 1, 2003,
as prescribed by SFAS and concluded that there were no impairment indicators.
The Company will perform the impairment tests required under SFAS No. 142 on an
annual basis unless other indicators are present.
INVESTMENT
The Company accounts for investments in accordance with Statement of Financial
Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in
Debt and Equity Securities". Management determines the appropriate
classifications of securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Available for sale securities are
carried at fair value, with the unrealized gains and losses reported in a
separate component of stockholders' equity in other comprehensive income (loss).
15
A judgmental aspect of accounting for investments involves determining whether
an other-than-temporary decline in value of the investment has been sustained.
If it has been determined that an investment has sustained an
other-than-temporary decline in its value, the investment is written down to its
fair value, by a charge to earnings. Such evaluation is dependent on the
specific facts and circumstances. Factors that are considered by the Company
each quarter in determining whether an other-than-temporary decline in value has
occurred include: the market value of the security in relation to its cost
basis; the financial condition of the investee; and the intent and ability to
retain the investment for a sufficient period of time to allow for recovery in
the market value of the investment. In evaluating the factors above for
available-for-sale securities, management presumes a decline in value to be
other-than-temporary if the quoted market price of the security is below the
investment's cost basis for a period of six months or more. However, the
presumption of an other-than-temporary decline in these instances may be
overcome if there is persuasive evidence indicating that the decline is
temporary in nature (e.g., strong operating performance of investee, historical
volatility of investee, etc.).
During the fiscal year ended June 30, 2003, the Company invested in the Jubilee
Investment Trust, PLC (Jubilee), a United Kingdom investment trust whose shares
trade on the London Stock Exchange. The investment in Jubilee has been accounted
for as "available for sale". At June 30, 2003, the Company determined in
accordance with SFAS 115, that the decline in the market value of this
investment was "other than temporary", as the security's quoted market price was
below the investments's cost basis for a period of six months or more.
Accordingly, the Company wrote down the investment to its fair value of
$904,049, realizing an impairment loss of $1,945,951.
FORWARD LOOKING STATEMENTS
This prospectus contains certain forward looking statements regarding, among
other things, the anticipated financial and operating results of the Company.
For this purpose, forward looking statements are any statements contained herein
that are not statements of historical fact and include, but are not limited to,
those preceded by or that include the words, "believes," "expects,"
"anticipates," or similar expressions. Those statements are subject to known and
unknown risks, uncertainties and other factors that could cause the actual
results to differ materially from those contemplated by the statements. The
forward looking information is based on various factors and was derived using
numerous assumptions. Important factors that could cause the Company's actual
results to differ materially from those projected, include, for example (i) the
ability of the Company to generate sufficient sales to generate operating
profits, or to sell products at a profit, (ii) the ability of the Company to
raise funds in the future through sales of securities, (iii) whether the Company
is able to enter into binding agreements with third parties to assist in product
or network development, (iv) the ability of the Company to commercialize its
developmental products, or if actually commercialized, to obtain commercial
acceptance thereof, (v) the ability of the Company to compete with its
competitors to obtain market share, (vi) the ability of the Company to obtain
sufficient funds through operations or otherwise to repay its debt obligations,
including but not limited to Senior Notes, or to fund development and marketing
of its products; (vii) the ability of the Company to obtain approval of its
pending patent applications; or (viii) the ability of the Company to satisfy its
trade obligations included in accounts payable and accrued liabilities. Although
the Company believes that the forward looking statements contained herein are
reasonable, it can give no assurance that the Company's expectations will be
met.
16
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 2004:
The nine months ended March 31, 2004 resulted in a net operating loss of
$16,424,278 (approximately $9,500,000 non-cash) compared to a net loss of
$12,542,898 (approximately $3,100,000 million non-cash) for the comparable
period in the prior fiscal year.
Revenues for the nine months ended March 31, 2004 increased to $4,947,882
from $2,233,330 during the same period in the prior fiscal year, an increase of
$2,714,552 or 122%. This increase was primarily attributed to sales of the
Company's energy conservation equipment for the nine months ended March 31,
2004, as such revenues did not exist in the corresponding period of the prior
fiscal year since the acquisition of Bayview occurred in July 2003, as well as
increases in equipment sales of our cashless technologies and services. Revenues
are discussed in more detail as follows:
Equipment sales: Revenues from equipment sales increased to $3,741,359
from $880,545 in the corresponding period of the prior fiscal year, an increase
of $2,860,814 or 325%. This increase is mainly due to sales of the Company's
energy conservation equipment of approximately $2,751,000 for the nine months
ended March 31, 2004 as such revenues did not exist in the corresponding quarter
of the prior year, since the acquisition of Bayview occurred in July 2003. In
addition, sales of the Company's cashless technology, which includes e-Port,
e-Suds and Kiosk systems, increased to $521,000, approximately $225,000 or 76%
over the corresponding period of the prior fiscal year. The increases in sales
were offset by a decrease in Business Center equipment sales of approximately
$84,000.
Product sales and other: Revenues from product sales and other decreased
to $304,476 from $357,703, a decrease of $53,227 or 15% over the same period of
the prior fiscal year. This decrease was due to a decrease in camera and film
sales from Company owned vending machines of approximately $254,000 as a result
of the wind down of the Kodak Vending Placement Agreement, offset by $200,000 of
revenue recorded in the quarter ended December 31, 2003 relating to the
Strategic Alliance Agreement executed in October 2003 between the Company and
Conopco, Inc dba Unilever Home & Personal Care North America.
License and transaction fees: Revenues from license and transaction fees
decreased $93,035 or 9% from $995,082 to $902,047 for the nine months ended
March 31, 2003 and 2004, respectively. This decrease was due to a decrease in
fees earned from the Kodak Vending Placement Agreement of approximately $128,000
as a result of the wind down of the contract, offset by an increase in fees of
approximately $35,000 as a result of an increase in the number of devices
connected to the Company's network.
17
Cost of sales consisted of equipment, product and labor costs of
approximately $1,750,000 and $723,000 for the nine months ended March 31, 2004
and 2003, respectively, an increase of $1,027,000; software development
amortization of approximately $999,000 and $874,000 for the nine months ended
March 31, 2004 and 2003, respectively, an increase of $125,000; and network and
transaction related costs of $488,000 and $461,000 for the nine months ended
March 31, 2004 and 2003, respectively, a increase of $27,000. The increase of
$1,179,351 or 57% in total cost sales from $2,057,173 to $3,236,524 for the nine
months ended March 31, 2003 and 2004, respectively, was principally attributable
to the increase in equipment sales.
Gross profit for the nine months ended March 31, 2004 was $1,711,358,
compared to gross profit of $176,157 in the same period in the prior fiscal
year. The increase of $1,535,201 was due to increases in hardware sales,
particularly the addition of our higher margin, energy conservation equipment
sales that were not present in the same period in the prior fiscal year.
Total operating expenses for the nine months ended March 31, 2004 was
$15,306,671, (non-cash $7,200,000) an increase of $5,895,104 or 63% over the
same period from the prior fiscal year. The components of operating expenses
(General and administrative, Compensation, Depreciation and amortization and
Loss on debt modification) and the causes of this significant increase in each
category are explained further below:
General and administrative expenses increased from $4,951,021 for the nine
months ended March 31, 2003 to $5,096,447 for the nine months ended March 31,
2004, an increase of $145,426 or 3%. This increase is due to increases in
overall general and administrative expenses of approximately $1,001,000 related
to the acquired energy conservation operation, as such expenses did not exist in
the comparable period last fiscal year. This increase was offset by decreases of
$873,000 of professional fees, primarily related to business consulting,
promotion and public relations.
Compensation expense increased to $8,664,200 (non-cash $4,700,000) for the
nine months ended March 31, 2004, a $5,897,032 or 213% increase over the
comparable period last fiscal year. This increase is primarily due to the
issuance of 10,500,000 shares of Common Stock to the Company's Chief Executive
Officer in connection with the amendment of his employment agreement. This was a
one-time, non-cash payment valued at $4,620,000 representing 80% of the total
increase. Other components of this increase were due to approximately $554,000
increase in bonus expenses, primarily to the Company's executive officers and
approximately $662,000 of additional compensation, including employee benefits
and sales commissions, related to the acquired energy conservation operations in
July 2003, as such expenses did not exist in the comparable period last fiscal
year.
Depreciation and amortization expense for the nine months ended March 31,
2004 was $1,227,109, compared to $734,026 for the same period in the prior
fiscal year, a $493,083 or 67% increase. This increase was attributable to
amortization expense of intangible assets of $681,000 and depreciation expense
of property and equipment of $90,000 acquired from Bayview in July 2003, offset
by decreases in depreciation of existing assets that have reached the end of
their estimated useful life.
18
The Company incurred charges during the nine months ended March 31, 2004
and 2003 relating to the modification of debt terms for certain of the Senior
Notes in the amount of $318,915 and $959,352, respectively. This charge is for
the write-off of the unamortized debt discount remaining for Senior Notes
scheduled to mature in December 2003 and December 2004 whose conversion and
maturity terms were modified. The Company offered these note modifications to
the Note holders, and recognized the related non-cash charge to operations in
order to manage short-term cash flows.
During the nine months ended March 31, 2004, a gain of $509,244 was
recorded relating to the termination the Kodak Vending Placement Agreement. This
gain is comprised of the payment from Kodak of approximately $675,000 plus the
cancellation of Stitch's obligation to the supplier of the vending machines of
approximately $124,000 less a write down of the carrying value of vending
machines of approximately $290,000 to their realizable value of $300 per vending
machine. To the extent any costs are incurred by Stitch to fulfill its
obligations under the settlement agreement, these costs will be recorded as
incurred, as any additional costs cannot be reasonably estimated at this time.
During the nine months ended March 31, 2004, the Company sold 1,669,091
shares of its Jubilee investment for total net proceeds of $1,471,142, resulting
in a gain of $603,480. Proceeds of $762,130 were received subsequent to March
31, 2004 and are reflected as an other receivable as of that date.
Total interest expense increased from $3,319,444 to $3,971,688 for the
nine months ended March 31, 2003 and 2004, respectively, an increase of $652,244
or 20%. This increase was primarily attributable to charges incurred due to the
acceleration of unamortized debt discount and other issuance costs on the 12%
Senior Notes that were converted into Common Stock during the nine month period
ending March 31, 2004.
FISCAL YEAR ENDED JUNE 30, 2003:
The fiscal year ended June 30, 2003 resulted in a net operating loss of
$21,965,499 (approximately $12.6 million non-cash) compared to a net loss of
$17,314,807 (approximately $11.0 million non-cash) for the comparable period in
the prior fiscal year.
Revenues for the fiscal year ended June 30, 2003 were $2,853,068, an increase of
$1,170,367 or 70% from the fiscal year ended June 30, 2002. This increase in
revenues is primarily due the inclusion of a full year of product revenues and
service and transaction fees relating to Stitch Networks Corporation, which
accounted for approximately $1,136,000 of the revenue increase. The remaining
increase was due to increased equipment sales of e-Port and Business Express.
The Company is continually increasing its sales efforts to sell its e-Port and
Business Express products.
Overall, operating expenses for the fiscal year ended June 30, 2003 were
$17,912,707, representing a $886,842 or 5% increase over the prior period. The
significant changes in each category were as follows:
The decrease of $1,091,458 or 27% in cost of sales is due primarily to
amortization of software development costs of $1,331,000 in 2003 compared to
$2,996,000 in 2002. The 2002 amortization included a one-time impairment charge
of $2,663,000 that was non-recurring in fiscal year 2003. The remaining increase
in cost of sales is attributable to the increase in e-Port sales during fiscal
year 2003.
The decrease in general and administrative expenses was $673,380 or 9%. This
decrease is due to changes in the following expenses: consulting, advertising,
public relations and promotion expense decrease of $1,368,022 for reduced
corporate and investor relations services offset by increases in product
development and outside services of $926,395 for work on the network. We have
continued to utilize consultants for general business activities, including
network services, and have attempted whenever possible to pay for these services
on a non-cash basis through the issuance of debt and equity instruments.
Compensation expense increased $318,548 or 7% over last year. This increase is
due to the inclusion of salaries of $136,000 related to the Stitch operations as
well as an increase of approximately $200,000 in bonus expense during the fiscal
year ended June 30, 2003 versus fiscal year ended June 30, 2002.
Depreciation and amortization expense increased by $811,478 for the fiscal year
ended June 30, 2003, which is attributable to increased depreciation expense
resulting from assets acquired in the Stitch acquisition, as well as the
impairment loss of $321,476 recorded on a group of vending machines during the
fiscal year in accordance with SFAS No. 144.
19
The Company incurred a charge during the fiscal year ended June 30, 2003
relating to the modification of debt terms for certain 2000 and 2001 12%
Convertible Senior Notes in the amount of $1,521,654. There was no such
comparable charge in the prior year. This charge is for the unamortized debt
discount that remained on the Senior Notes that are scheduled to mature in
December 2003 and December 2004 whose terms were modified for those note holders
who agreed to extend the maturity of their notes in exchange for a reduction
in the conversion rate. The Company offered these note modifications (e.g.
extended maturity dates), and recognized the related non-cash charge to
operations in order to manage short-term cash flows.
In June 2003, the Company determined that the decline in the market value of the
investment in the Jubilee Investment Trust was "other than temporary."
Accordingly, the Company recorded a loss of $1,945,951, which is reflected as a
loss on investment in the 2003 Consolidated Statement of Operations. No such
comparable loss was recorded in the previous year.
Total interest expense increased by $2,991,166, due to the greater debt carried
by the Company to finance its operations. A significant portion of interest
expense is the amortization of non-cash debt discount.
FISCAL YEAR ENDED JUNE 30, 2002:
For the fiscal year ended June 30, 2002, the Company had a net loss of
$17,314,807 (approximately $11.0 million non-cash).
Revenues for the fiscal year ended June 30, 2002 were $1,682,701, an increase of
$231,699 or 16% from the prior year. This increase in revenues is directly
attributable to the acquisition of Stitch Networks Corporation, which accounted
for $210,068 of the increase. Other revenues remained flat with the prior year,
as the Company's sales efforts did not produce significant revenues due to
limited market acceptance, which was less than that anticipated by the Company.
The Company is continually increasing its sales efforts to sell its e-Ports and
its Business Express products.
Overall, operating expenses for the fiscal year ended June 30, 2002 were
$17,025,865, representing a $7,365,090 or 76% increase over the prior year. This
increase is due to the increases of $3,113,674 or 328% in cost of sales,
$2,332,938 or 42% in general and administrative expenses, $1,687,886 or 57% in
compensation expense, and $230,592 or 110% in depreciation and amortization
expense. The significant changes in each category are as follows:
The increase of $3,113,674 or 328% in cost of sales is due primarily to the
inclusion of amortization of software development costs and the cost of product
relating to Stitch Networks Corporation. In fiscal 2002, the Company recorded
software amortization of $2,996,000, including an impairment charge of
$2,663,000, in cost of sales as required by generally accepted accounting
principles. During the fourth quarter of fiscal year 2002, the Company
determined that the estimated future revenues less costs to complete and dispose
the enhanced e-Port client product was zero, and therefore recorded this
impairment charge to reflect software development costs at their net realizable
value. There was no amortization expense for software development costs in
fiscal year ended 2001. The remaining increase in cost of sales is attributable
to the increase in sales, primarily related to the Stitch revenues in fiscal
2002.
The increase in general and administrative expenses of $2,332,938 or 42% is due
primarily to the increase in non-cash (securities) compensation in the amount of
$555,482 paid to our investment banker, increase in the non-cash (securities)
compensation paid to our public relations consultants in the amount of
$1,601,915, and the increase in non-cash (securities) compensation in the amount
of $657,238 paid to our other business consultants. Although these expenses did
not result in increased revenues during the fiscal year, we believe that
increased revenues may occur in the future. Our investment banker provided us
with various financial advisory services during the fiscal year, including
identifying strategic acquisition opportunities. Our public relations
consultants assisted us to attempt to introduce the Company and its products as
well as communicate with our shareholders. Our other business consultants
assisted us during the fiscal year with technical development of and advice in
connection with our network and e-Port products. The increases in our general
and administrative expenses were offset by a substantial decrease in legal
expenses of $992,181, primarily associated with termination of the Mail Boxes
Etc. litigation, which was settled in fiscal year 2001.
20
The increase in compensation expense of $1,687,886 or 57% from the previous year
is mainly attributable to an increase in stock bonus expense to Company officers
and employees of $1,248,545, which was a non-cash expense. The stock bonuses
were issued in order to adequately compensate and attempt to retain the
Company's management team intact. Corporate salaries increased $342,921 or 113%,
due to increased headcount by 16% during the year, primarily due to the addition
of Stitch Network's personnel during the last one and one half months of 2002.
Depreciation and amortization expense of $440,238 increased by $230,592, which
is directly attributable to the increased depreciation expense of the assets
acquired in the Stitch acquisition.
Interest expense increased by $864,929, primarily as a result of the non-cash
amortization to interest expense relating to the debt discount and beneficial
conversion features on the Company's convertible Senior Notes.
PLAN OF OPERATIONS
Vending
In February 2004, the Company and Motient Corporation, owner and operator
of a two-way wireless data network, together launched a marketing program to
bring vending machines online using the Company's e-Port cashless payment system
and Motient's wireless data network. In December 2003, the Motient wireless
network became available to the current generation of e-Port, on-line, vending
technology. This connectivity capability has enabled customers to substantially
ramp up the adoption of solutions such as cashless vending and data delivery.
The targeted goal for the marketing program is to bring 10,000 units online by
December 31, 2004. As of March 31, 2004, there were 260 units on the Company's
network and Motient wireless network as result of this initiative.
Coinciding with the Motient initiative, described above, was the
identifying and pursuit of target markets where customers can be assured of
early success from the adoption of cashless technology. As a result of this
initiative, sales in the quarter ended March 31, 2004 increased over the
21
previous two quarters of the 2004 fiscal year, the largest ever increase in
e-Port sales, with shipments to 19 different bottlers and vending operators, of
which 11 were new accounts. Most notable were sales to an operator for the new
Pop Century Hotel at Disney in Orlando, Florida and to a vending operator in
Southern California, to address a growing problem of vandalism in their hotel
locations. The Company's e-Port cashless payment solution enabled this operator
to replace coins and bills completely, thus removing cash reserves in the
machines.
The following initiatives were launched during the fourth quarter of
fiscal year 2004. First, the availability of new combo readers (combined bill
validator and card reader in a single device) brought many joint selling
opportunities with MEI and Coinco, manufacturers of these devices. Second, the
Company began a campaign titled "Coca-Cola experience with cashless" aimed at
acquiring as customers, Coke bottlers throughout the U.S., based upon
experiences with current Coca-Cola customers. Lastly, the Company appointed John
Roughneen, a successful vending executive, as VP of Strategic Business
Development. Mr. Roughneen is well known within the vending industry, and his
reputation and prior successes within the vending industry is already having a
positive impact on our business.
Energy Management
With the acquisition of Bayview on July 11, 2003, the Company now designs
and manufactures patented energy conservation devices for equipment such as
laser printers, monitors, office peripherals, refrigerated vending machines and
glass front merchandisers (referred to as slide or visi coolers). These energy
conservation devices reduce power consumption of various types of equipment by
allowing the equipment to operate in power saving mode when full power mode is
not necessary. These devices, which include the VendingMiser, CoolerMiser,
SnackMiser, MonitorMiser and LaserMiser can use activity, occupancy,
temperature, timing or other various methods to determine which mode the
equipment should be in. Route to market for the energy conservation devices is
much the same as the Company's e-Port technology, with the notable addition of
governmental and utility rebate and give-away programs, where by part or all of
the cost of the energy management device is covered by government funds
allocated to energy conservation projects.
In April 2004, the Company launched "Project Get Green", an incentive
program developed and sponsored by the National Automatic Merchandiser
Association (NAMA) and the Company. This program is aimed at helping the vending
industry meet new ENERGY STAR(R) standards for energy consumption that were
announced in April 2004 by the Environmental Protection Agency (EPA). The EPA's
new standards represent a significant opportunity for the Company, as our
technology will render a non-conforming vending machine ENERGY STAR(R)
equivalent or compliant. The Company estimates that 4.6 million machines in the
U.S. market are candidates for our energy management technology. The joint NAMA
and Company initiative includes a 20 percent marketing allowance on the
Company's energy management solutions through June 30, 2004 and the Company
anticipates increased sales as a result of vending operators taking proactive
actions to become compliant with the new EPA standards.
In February 2004, in an effort to continue to strengthen its network of
government and utility entities offering rebates for the Company's energy
products, Eugene Water & Electric Board, a publicly owned electric utilities
company located in the State of Oregon, agreed to offer a $120 rebate per
22
installation of the VendingMiser. To date the Company has twenty-two (22) power
utility or government agencies currently offering rebates to customers who
install the Company's energy products.
In January 2004, the Company entered into an alliance with the EnergySmart
Grocer, an energy consultant to independent grocers, to bring an energy
conservation program, utilizing the Company's CoolerMiser and VendingMiser
solutions, to thousands of independent grocery stores in the state of
California. The program includes a rebate of $90 for every CoolerMiser and
VendingMiser installed. To date, 390 units or $54,000 has been sold under this
program.
The Company has also targeted local, state and federal government agencies
as customers for this product line. In order to increase the Company's reach in
this regard, the Company embarked on a campaign for General Services
Administration (GSA) approval, which would make these products available to all
government agencies. The Company is anticipating GSA approval in the near term.
Laundry
In April 2004, the Company and Caldwell and Gregory entered into a
five-year agreement, whereby the Company has granted Caldwell and Gregory
rights, subject to total minimum purchase requirements of 10,500 units by
September 2008, to exclusively provide e-Suds to colleges and universities in
Pennsylvania, Delaware, Maryland, Virginia, West Virginia, Tennessee and the
District of Columbia.
In March 2004, the Company installed its eSuds Internet connected laundry
system at Carnegie Mellon University, in Pittsburgh, Pennsylvania, on a limited
number of machines for a pilot phase working through Caldwell and Gregory, a
laundry service operator in the university and college laundry marketplace.
After only two weeks into the pilot phase, due to favorable student response,
Caldwell and Gregory and Carnegie Mellon University agreed to transition from
the pilot to full implementation for the fall semester 2004, giving the
universities 4,000 campus residents the ability to use the e-Suds laundry
services.
In October 2003, the Company signed a strategic alliance agreement with
Conopco, Inc. dba Unilever Home & Personal Care North America to be the
exclusive provider of laundry detergent for the e-Suds program to be used in
colleges and universities located in the United States. Under the terms of the
agreement, the Company agrees to be a reseller of Unilever Products that are
dispensed through the USA e-Suds System and the Company will also receive fees
from Unilever based on the number of injections of Unilever Products through the
USA e-Suds System.
American Sales Inc. (ASI) has signed a five-year agreement to purchase
units of Stitch's e-Suds laundry solution for their university locations in the
Midwest. In October 2003, the Company installed a system at ASI's facilities for
testing, which completed final testing in May 2004. In June 2004, the Company
realized unit sales.
ZiLOG Strategic Alliance
In October 2002, the Company signed a five-year Strategic Alliance with
ZiLOG Corporation, a semiconductor company, which is a supplier of
microprocessors to the retail point of sale and other industries. One of the
purposes of this alliance was to combine the Company's proprietary e-Port
software with ZiLOG's eZ80 line of microprocessors, such that the Company might
be able to improve price/performance of its product line, and allow ZiLOG to
market an e-Port enabled, network ready, eZ80 microprocessor. Since the signing
of this agreement, the Company has developed, commercialized and implemented,
for purchase by its customers, products and services utilizing the work-product
of this alliance. For example, in its e-Suds product line, the Company has
contracted with Caldwell and Gregory, and American Sales Inc. for up to 19,000
e-Suds "connections". Additionally, the Company has developed, and is beginning
to test, its new G-5 e-Port for the vending market.
The Company has also worked with ZiLOG to create an e-Port enabled eZ80
ZiLOG processor, which is intended to allow ZiLOG customers to engineer and
manufacture their products with the capability to attach to a network, and in
some cases, the Company's network. The e-Port enabled eZ80 ZiLOG processor has
been shown at various trade events, and has been demonstrated to a limited
number of potential customers.
The Company expects to gain market traction due to improved
price/performance - such as in e-Suds and the new G-5 e-Port for vending.
Additionally, the Company intends to license software embedded in the e-Port
enabled ZiLOG eZ80, as well as, possibly providing network services for ZiLOG
customers who engineer and manufacture the e-Port enabled eZ80 ZiLOG processor
into the products they bring to market.
Kodak Vending
In December 2003, the parties to the Kodak Vending Placement Agreement
agreed to terms of an early termination of the contract effective December 31,
2003. The settlement resulted in the termination of the vending agreement
pursuant to which the Company received a payment from Kodak of approximately
$675,000 and payments equal to $300 per vending machine from the supplier of the
vending machines as the machines are pulled from service at the supplier's sole
23
cost and expense. Upon receipt of the $300 per vending machine, title to the
vending machine will transfer to the supplier. The settlement agreement provides
that all machines are to be pulled from service no later than mid calendar year
2004. As of the date of this prospectus, substantially all of the machines are
no longer in service. In addition, the supplier agreed to cancel an obligation
for the purchase of vending machines in the approximate amount of $124,000.
The vending machines were used as collateral to secure a bank facility
used to purchase the machines under which $377,653 was outstanding as of March
31, 2004. Final payment of the debt will occur no later than the time title of
the machines is transferred to the supplier.
Revenues of the Company will be reduced as a result of the vending
contract termination. However, because the Kodak program is and has been
operating at a loss, the termination of the program would eliminate these
ongoing losses. Revenues related to the Kodak program through the fiscal year
ended June 30, 2003 were approximately $1,092,000 and approximately $124,000 and
$471,000 for the three and nine months ended March 31, 2004, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal year ended June 30, 2003, the Company completed several
financing transactions. Net proceeds of $9,930,879 were realized from private
placement offerings of Common Stock including the exercise of Common Stock
Purchase Warrants and Options. Proceeds of $1,833,841 were realized from private
placement offerings of 12% Convertible Senior Notes. As of June 30, 2003, the
Company had a working capital deficit of $791,532.
During the fiscal year ended June 30, 2003, net cash of $9,228,899 was used by
operating activities, primarily due to the net loss of $21,965,499 offset by the
following non-cash charges: $2,573,301 for Common Stock, Common Stock Warrants
and Senior Notes issued for services; $2,743,083 of non cash depreciation and
amortization; $2,955,158 of non-cash amortization of the debt discount relating
to the 12% Convertible Senior Notes; $1,945,951 for a realized loss on the
investment in the Jubilee Trust; $1,521,654 loss realized on the modifications
of the Senior Notes; and $860,250 of interest expense on the Senior Notes paid
through the issuance of Common Stock.
During the fiscal year ended June 30, 2003, net cash used in investing
activities was $186,895 principally due to the investment in computer equipment
and furniture and equipment of $149,000 (a reduction of over $2 million from
2002 for investments in property, equipment and software development costs). The
net cash provided by financing activities of $11,242,279 was attributable
primarily to net proceeds generated from the issuance of Common Stock through
private placements, exercise of Common Stock Purchase Warrants, and net proceeds
generated through the issuance of the 12% Convertible Senior Notes offset by the
payment of long-term debt and capital leases of $557,441.
In connection with the May 2002 Stitch acquisition (Note 4 to the Consolidated
Financial Statements), the Company assumed long term debt of $3,976,000, which
included a vending equipment borrowing facility and working capital loans. The
Company repaid $2,165,000 of the working capital loans in June 2002 leaving an
outstanding balance of $275,000. These loans are secured by certain assets of
Stitch. At June 30, 2003 $166,765 of working capital loans are outstanding which
bear interest at 6.75% per annum. Such loans were payable on July 8, 2002.
During fiscal year 2003 the bank extended the due date on these loans on several
occasions under forbearance agreements. At June 30, 2003, the Company was in
default under this working capital loan agreement.
At June 30, 2003 and March 31, 2004 the Company also has a bank facility
(the Facility), which was utilized to fund the purchase of vending machines
placed at locations where Kodak film products are sold. Borrowings were made
from time to time under the facility, with repayment schedules set at the time
of each borrowing, including equal monthly payments over 36 months and an
interest rate based upon 495 basis points over the three year U.S. Treasury
Notes. The Company has granted the bank a security interest in these vending
machines. Repayment of principal is also insured by a Surety Bond issued by a
third-party insurer in exchange for an initial fee paid by the Company.
For the nine months ended March 31, 2004, net cash of $7,653,857 was used
by operating activities, primarily due to the net loss of $16,424,278 offset by
non-cash charges aggregating approximately $9,500,000 for transactions involving
issuing Common Stock for services and in connection with the amendment to the
CEO's employment agreement, depreciation and amortization of assets,
amortization of debt discount, loss on debt modifications relating to the Senior
Notes and interest expense relating to the Senior Notes paid through the
issuance of Common Stock and Common Stock Warrants, offset by a gain on the sale
of investment and gain on the termination of a contract. In addition, the
Company's net operating assets increased by $778,969 (primarily inventory and
accounts receivable), a substantial portion of which relates to the addition of
the energy conservation equipment line from the Bayview acquisition.
For the nine months ended March 31, 2004, net cash used in investing
activities was $257,351, comprised of the cash component of the investment in
Bayview, purchases of property and equipment and the proceeds received from the
sale of a portion of the investment in the Jubilee Trust.
Proceeds from financing activities for the nine months ended March 31,
2004 provided $6,986,182 of funds, which was necessary to support cash used in
operating and investing activities. Proceeds of $7,544,590 were realized from
several private placement offerings of Common Stock, the exercise of Common
Stock Warrants and collection of Common Stock subscriptions receivable. Payments
of long-term debt and capital leases totaled $558,408.
Long-term debt obligations of the Company as of March 31, 2004 were as
follows:
Bank facility $377,653
Working capital loans 76,765
Other, including capital lease obligations 42,462
--------
496,880
Less current portion 479,070
--------
$ 17,810
========
24
The bank facility (the Facility) was utilized to fund the purchase of
vending machines placed at locations where Kodak film products are sold.
Borrowings were made from time to time under the Facility, with repayment
schedules set at the time of each borrowing, including equal monthly payments
over 36 months and an interest rate based upon 495 basis points over the three
year U.S. Treasury Notes. The Company granted the bank a security interest in
the vending machines. Repayment of principal is also insured by a Surety Bond
issued by a third-party insurer in exchange for an initial fee paid by the
Company. Final maturity, scheduled to extend into the fiscal year ending June
30, 2005, is anticipated to occur during the year ending June 30, 2004 due to
the termination of the vending placement agreement and the removal from service
and sale of the vending machines used as collateral for the bank facility. As
described above, the debt, with a balance outstanding at March 31, 2004 of
$377,653, will be repaid no later than the time Stitch returns the vending
machines to the supplier.
In connection with the Stitch acquisition, the Company assumed long-term
debt which included a working capital loan. This loan is secured by certain
assets of Stitch and bears interest at 6.75% per annum. On November 6, 2003, the
Company reached an agreement with the bank to make monthly installments that
will repay the remaining balance on the working capital loan by October 2004.
The Company has incurred losses since inception. For the nine months ended
March 31, 2004, the net loss was $16,424,278 of which approximately $9,500,000
related to non-cash charges. Cumulative losses through March 31, 2004 amounted
to approximately $91,600,000. The Company has continued to raise capital through
equity and debt offerings to fund operations.
The impact of the Bayview acquisition on cash flows for the nine months
ended March 31, 2004 was a net cash outflow of approximately $1,000,000 -
$300,000 of cash used in operations and $728,000 invested in assets and
liabilities connected with the purchase. The structure of the acquisition of the
energy conservation equipment line from Bayview did not include acquiring the
working capital required to support the business. The nine months' operating
cash flows reflected an investment for this working capital.
On March 31, 2004, the Company had approximately $1,500,000 of cash and
cash equivalents. As of June 30, 2004, the Company expects cash and cash
equivalents to be approximately $3,500,000. These cash balances result from the
proceeds generated from the various private placements of Common Stock that have
taken place during fiscal 2004, the most recent of which is the 2004-A offering.
The 2004-A offering was initiated in February 2004 and resulted in the sale of
28,290,833 shares at $0.15 per share. Through March 31, 2004, 550,000 shares
were sold under this offering resulting in proceeds of $82,500, and subsequent
to this data, 27,740,833 shares were sold under this offering resulting in
proceeds of $4,161,125. In addition, warrants were exercised during the three
months ending June 30, 2004 pursuant to which more than 17,000,000 shares of
Common Stock were issued providing proceeds of approximately $1,500,000.
On June 18, 2004, we entered into a Common Stock Purchase Agreement with
Steve Illes. During the one year period following the date of this prospectus,
Illes has agreed to purchase from USA shares of Common Stock, provided that the
aggregate purchase price can not exceed $7,500,000. Under the Agreement, Illes
is permitted to purchase Common Stock from USA at any time at the price per
share of $.30. In addition, USA has the right at any time to require Illes to
purchase Common Stock from USA at the lower of: (i) $.30; or (ii) 90% of the
closing bid price per share on the date prior to the date of the delivery by USA
to Illes of notice of his obligation to purchase. USA can require Illes to
purchase shares under the Agreement only if the shares have been registered by
the Company for resale by Illes under the Act. During any calendar month, Illes
is not permitted to purchase and can not be required by USA to purchase Common
Stock for an aggregate purchase price in excess of $700,000.
25
During the year ended June 30, 2003, cash used in operating activities was
approximately $750,000 per month. For the nine months ended March 31, 2004 cash
used in operating activities was approximately $850,000 per month. Operating
cash flows during the nine months ended March 31, 2004 were impacted by working
capital increases that were disproportionate to the increase in revenues, as
well as the investment made in working capital to support the energy management
equipment line acquired from Bayview. The nine-month period also absorbed cash
bonuses of approximately $600,000, primarily to the Company's executive
officers. The Company believes it can improve its management of working capital,
primarily related to accounts receivable, and reduce cash used in operating
activities to approximately $700,000 per month, which is comparable to cash used
in operating activities during the three months ended March 31, 2004. The
foregoing estimated monthly cash requirement assumes no significant increase in
revenues. Using that as a basis for estimating cash requirements for the next
twelve months, along with requirements for capital expenditures and repayment of
long-term debt, the Company's cash needs would approximate $9,000,000 through
June 30, 2005.
If cash requirements materialize over the next twelve months on the basis
described, the Company would expect that the cash resources currently available
and in place should be sufficient to provide funding for its operating needs
over that period considering cash on hand as of June 30, 2004 and funding of up
to $7,500,000 available under the Common Stock Purchase Agreement with Steve
Illes. Other sources of capital include (1) future exercises of warrants for
which there are "in the money" warrants with exercise prices below $0.11 per
share that would yield approximately $1,000,000 based on the warrants
outstanding as of May 31, 2004 and (ii) the capital markets which the Company
believes is available to raise funding if needed given its current product
offerings and the markets it is addressing.
26
The holders of $4,067,491 of our Senior Notes due December 31, 2007, may have a
right to rescind the exchange of these notes for notes originally due December
31, 2004, and demand that we return to them the $4,067,491 of Senior Notes due
December 31, 2004. As of May 31, 2004, $3,404,490 of these notes remain
outstanding. During the period from March 2003 through December 2003, we granted
to each holder of the Senior Notes due December 31, 2004 the right to extend the
notes until December 31, 2007 and in such event agreed that the conversion rate
of the note would be reduced from $.40 to $.20. On April 14, 2003 we filed a
registration statement which included all of the shares underlying the 2007
notes. Because the exchange offering was not completed prior to the filing of
that Registration Statement, the exchange offer may be deemed to have been in
violation of the registration requirements of Section 5 of the Act. As a result,
we removed all of the shares underlying the 2007 Notes from that registration
statement. Generally, the statute of limitations for this type of claim is one
year after the date of the alleged violations and if successful, would entitle
the note holders to rescind the issuance of the new notes to them and demand a
return of the 2004 notes. If all of the note holders demanded the return of
their notes, we would be obligated to repay the $4,067,491 principal amount on
December 31, 2004 rather than on December 31, 2007. This repayment could
significantly exceed our cash reserves and require us to borrow funds (which may
not be available) and would materially and adversely affect our results of
operations and financial condition. Because of the reduced conversion rate of
$.20 per share granted in connection with the extension of the maturity date of
these notes, we do not anticipate that a significant number of the noteholders,
if any, would demand the return of their old note.
Commitments
During March 2003, the Company entered into a lease through December 31, 2008
for 12,864 square feet of space in Malvern, Pennsylvania for its principal
executive office. The operating lease provides for escalating rent payments and
a period of free rent prior to the commencement of the monthly lease payment in
January 2004 of approximately $25,000 per month.
27
As a result of the acquisition of Bayview, the Company assumed two additional
operating leases for office space located in Denver Colorado, which expire in
June 2005. The Denver office space leases 6,742 square feet of space for
approximately $6,000 per month. The lease agreements generally require the
Company to pay certain operating expenses, maintenance and property taxes.
OTHER EVENTS
From February through June 2004, the Company sold 28,290,833 shares of Common
Stock to 34 accredited investors at $.15 per share for an aggregate of
$4,243,625. During June 2004, the Company granted to each investor in the
offering a warrant to purchase one-half of a share for each share subscribed for
by such investor in the offering. The Company issued warrants to purchase a
total of 14,145,417 shares. The warrants are exercisable at $.20 per share at
any time through December 31, 2004. We have agreed to register the shares and
the shares underlying the warrants under the Act for resale for a period of two
years. The offer and sales of the shares was exempt from registration under Rule
506 promulgated under Section 4(2) of the Act. All of the investors were either
pre-existing security holders or business associates. The offer and sale thereof
did not involve any general advertising or solicitation and the securities
contained appropriate restrictive legends under the Act.
In January 2004, we issued 538,592 shares and warrants to purchase up to 538,592
shares to the holders of our senior notes who elected to receive these
securities in lieu of the cash interest payment due for the quarter ended
December 31, 2003 and for shares and warrants pertaining to prior quarters not
previously registered. The shares were purchased at the rate of $.20 per share
and the warrants are exercisable at $.20 per share at any time through August
30, 2004. We have agreed to register the shares and the shares underlying the
warrants under the Act for resale for a period of 2 years. The securities were
offered and sold under the exemption from registration set forth in Rule 506
promulgated under the Act. All of the noteholders are accredited investors and
existing security holders, and there was no general solicitation or advertising.
In June 2004, we issued warrants to purchase up to 3,716,496 shares of Common
Stock to the holders of our senior notes who elected to receive shares and
warrants in lieu of the cash interest payment due for the quarters ended June
30, 2002, September 30, 2002, December 31, 2002, March 31, 2003, June 30, 2003,
September 30, 2003 and December 31, 2003. For each warrant previously issued to
the noteholder, the noteholder received an additional warrant. The warrants are
exercisable at $.20 per share at any time through December 31, 2004. We have
agreed to register the shares underlying the warrants under the Act for resale
for a period of 2 years. The securities were offered and sold under the
exemption from registration set forth in Rule 506 promulgated under the Act. All
of the noteholders are accredited investors and existing security holders of
USA, and there was no general solicitation or advertising.
In January 2004, we issued to CEOCAST, Inc. a total of 150,000 shares for
services to be rendered to the Company. The offer and sale of the shares was
exempt from registration under Section 4(2) of the Act. The Company agreed to
use its best efforts to register the shares for resale under the Act.
On June 18, 2004, we entered into a Common Stock Purchase Agreement with Steve
Illes. During the one year period following the date of this prospectus, Illes
agreed to purchase from USA shares of Common Stock, provided that the aggregate
purchase price can not exceed $7,500,000. Under the Agreement, Illes is
permitted to purchase Common Stock from USA at any time at the price per share
of $.30. In addition, USA has the right at any time to require Illes to purchase
Common Stock from USA at the lower of: (i) $.30; or (ii) 90% of the closing bid
price per share on the date prior to the date of the delivery by USA to Illes of
notice of his obligation to purchase. USA can require Illes to purchase shares
under the Agreement only if the shares have been registered by the Company for
resale by Illes under the Act. During any calendar month, Illes is not permitted
to purchase and can not be required by USA to purchase Common Stock for an
aggregate purchase price in excess of $700,000. Although we have registered
25,000,000 shares for resaled by Illes under this prospectus, we have the right
in the future, if necessary, to register additional shares in order to ensure
that a sufficient number of shares are available for purchase by Illes. We have
agreed to register for resale the shares issuable to Illes under the Agreement
for a period of one year from the date of this prospectus. We have agreed to pay
Illes a due diligence fee of $45,000. The securities were offered and sold to
Illes under the exemption from registration set forth under Rule 506 promulgated
under the Act. Mr. Illes is an existing shareholder and an accredited investor,
and there was no general solicitation or advertising.
28
BUSINESS
USA Technologies, Inc., a Pennsylvania corporation (the "Company"), was founded
in January 1992. Currently, the Company's core business is its cashless payment
and control network. The equipment component of the network consists of the
Company's client devices, e-Port and TransAct, and any associated equipment such
as copiers, computers or vending machines. When sold to hotels, the TransAct
plus office equipment is called the Business Express(R). The e-Port or TransAct
client device allows a consumer to use a credit card to make a purchase from
host equipment such as copiers, computers or vending machines and gathers
information about sales and operations of the host equipment. The e-Port client
products currently are targeted to the vending industry. USA Technologies has
historically generated some revenues from the direct sale of this equipment. A
second source of revenues is generated from product sales from our Kodak vending
machines. In addition, transaction processing revenue is recognized upon the
usage of the Company's cashless payment and control network. Service fees for
access to the Company's equipment and network services are recognized on a
monthly basis.
The Company's network brings additional benefits to the auditing and financial
services the Company provides its customers. The auditing feature of our e-Port
and TransAct client products, captures supply chain data (i.e. units sold,
product sold, price of units sold) and other machine diagnostic information, and
transmits this information back to either a customer's network or to the USA
network for reporting. The Company provides financial services consisting of
turnkey processing of unattended cashless transactions; 24x7x365 helpdesk
support for customer refunds and troubleshooting and the reporting of sales and
inventory data. This service generates monthly network fees, plus transaction
processing fees from the retention of a portion of the monies generated from all
credit card transactions conducted through its cashless payment and control
network.
Our cashless payment and control network operates as follows:
- - The consumer swipes a credit card through the e-Port or TransAct.
- - The e-Port or TransAct transmits the request to the credit card
processor.
- - The e-Port or TransAct activates the equipment for use by the consumer.
- - Once the consumer finishes using the e-Port or TransAct, the control
system transmits a record of the transaction to the credit card
processor.
- - The credit card processor electronically transfers the proceeds derived
from the transaction, less the credit card processor's charge (i.e.
transaction fees), to us.
- - Finally, we forward money (check or electronic) to each customer
representing its share of the proceeds.
29
CASHLESS PAYMENT PROCESSING
Each of the Company's cashless control systems records and transmits all
transaction data to the Company, which then forwards it to the credit card
processor and related system involving the banks and the credit card companies
such as Visa, MasterCard and American Express. Based on the transaction data,
the payment for services rendered or product purchased is then electronically
transferred to the Company's bank (less various financial charges). The Company
then forwards to the location it's agreed upon share of the funds, through check
or EFT. In hospitality, if the Company has sold the business center equipment to
the location, the portion retained by the Company is generally 5% 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 the Kodak program, charges
for product have been negotiated to give Stitch a reasonable margin. In addition
the Company charges a fixed monthly management fee which is generally $20-$25
per control system for existing hospitality locations.
PRODUCT LINES
30
THE E-PORT FOR VENDING
In general, our vending service enables:
- - cashless transactions including credit cards, smart cards, student Ids,
PDAs and cell phones;
- - real-time access to monitor inventory, sales, audit (cash and credit)
and machine maintenance via the Internet from any PC;
- - the potential of an added revenue stream with a LCD color touch
screen for displaying interactive advertising and content on our
multi-media e-Port client product.
The e-Port allows a consumer to use a credit card or other forms of cashless
payment to make a purchase, and also gathers information about sales and
operations of the host equipment. Additional capabilities can include Internet
connectivity and wireless communications. With some additional effort, our
multi-media e-Port client product could offer the capability for public access
electronic commerce and advertising. The multi-media e-Port client device has
had limited market acceptance to date.
For the years ended June 30, 2003, June 30 2002, and the nine months ended March
31, 2004 the Company has expensed approximately $1,505,000, $1,187,000, and
$474,000, 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 and is reflected in
compensation and general and administrative expense in the accompanying
consolidated financial statements. Through March 31, 2003 the Company
capitalized approximately $5.3 million for the services of IBM, to program the
enhancements to the Company's proprietary "USAlive" server network and for the
development of the e-Port client product containing multi-media capabilities.
During the fourth quarter of fiscal 2002, the multi-media e-Port product and the
enhanced network became available for general release and thus began marketing
it to the Company's customers. Management performed an evaluation of the
commercial success and preliminary market acceptance of the multi-media e-Port
client product and the enhanced network and as a result of this evaluation, due
mainly to the limited market acceptance of the multi-media e-Port(TR) client
product, the Company determined that the estimated future revenues less costs to
complete and dispose of the multi-media e-Port (TM) client product was zero.
Accordingly, the Company recorded an impairment charge of approximately $2.7
million of software development costs related to the multi-media e-Port client
product reflecting the software development costs at its net realizable value.
The Company continues to market the multi-media e-Port client product, and to
date, revenues generated from its sale have been insignificant. See Note 2 to
the Consolidated Financial Statements.
With the acquisition of Stitch Networks, the Company has acquired vending
business with Eastman Kodak. This consists of locating specially designed Kodak
vending machines in high profile venues across the United States such as
amusement parks, zoos, and sports stadiums. The vending machines dispense
disposable cameras and associated film. This agreement will terminate December
31, 2003, and after this date we will continue to receive on going revenues from
the approximately 286 placements in service. As discussed in Management's
Discussion and Analysis of Financial Condition and Results of Operations, the
Kodak agreement was terminated effective December 31, 2003.
THE BUSINESS EXPRESS (R) FOR HOTELS
The hotel/motel hospitality industry has become more competitive as chains
increase efforts to attract the most profitable customer: the business traveler
or conference attendee, who accounts for the majority of hotel occupancy, stays
longer and spends more per visit than the leisure traveler. For these reasons,
hotels have become responsive to the needs of the business traveler. The
Business Express enables a hotel to address some of these needs, while offering
the possibility of generating incremental revenue.
The Business Express utilizes the Company's existing applications for computers,
copiers, and facsimile equipment, and combines them into a branded product in a
functional kiosk type workstation. All devices are cashless, therefore
eliminating the need for an attendant normally required to provide such
services.
Our hotel service enables:
- - cashless transactions using credit cards and room cards for payment;
- - access to unattended 24/7 business center services for hotel guests;
- - access to vending machines for hotel guests with the use of their room
card.
E-SUDS (TM) FOR LAUNDRY
31
With the acquisition of Stitch Networks, the Company acquired additional product
line enhancements. One such enhancement is our university laundry services,
which enable:
- - students to go on-line and check the availability of laundry machines
and receive email or a page when their laundry cycles are complete;
- - students to charge the cost of their laundry to their credit card or
student account;
- - laundry operators to access inventory, sales, audit and maintenance via
the Internet from any PC;
- - laundry operators to benefit from additional revenue through the sale
of detergent automatically added to the wash cycle.
There are minimal revenues in the year ended June 30, 2003 for this product due
to it currently being under development.
Through the acquisition of substantially all of the assets of Bayview Technology
Group, LLC (Bayview) in July 2003, the Company now designs and manufactures
patented energy conservation devices for equipment such as laser printers,
monitors, office peripherals, refrigerated vending machines and glass front
merchandisers (referred to as slide or visi coolers). These energy conservation
products reduce power consumption of various types of equipment by allowing the
equipment to operate in power saving mode when full power mode is not necessary.
These devices, which include the VendingMiser, CoolerMiser, SnackMiser,
MonitorMiser and LaserMiser can use activity, occupancy, temperature, timing or
other various methods of determining which mode it should be in. Route to market
for the energy conservation products is much the same as for the Company's
e-Port technology, with the notable addition of governmental and utility rebate
and give-away programs where part or all of the cost of the energy management
products is covered by government funds available for energy conservation
projects.
ENERGY CONSERVATION PRODUCTS
With the acquisition of Bayview in July 2003, the Company has acquired the
following additional products:
- - VendingMiser(TM) installs in a cold drink vending machine and reduces
the power consumption of the vending machine by an average of 46%;
- - CoolerMiser reduces the energy used by sliding glass or pull open
glass-front coolers that contain non-perishable goods;
- - SnackMiser reduces the amount of electricity used by non-refrigerated
snack vending machines;
- - MonitorMiser Plus is a computer monitor power controller. It works with
all operating systems and performs by powering down the monitor based
upon keyboard or mouse activity;
- - LaserMiser provides energy conservation to laser printers, shutting
them down when they are idle. It is a plug-and-play device that is
software transparent and capable of handling any laser printer with a
parallel or serial connection;
- - Internal VendingMiser (IVM) is the second generation of the
VendingMiser in development. It installs into cold drink vending
machines and has the capability to control the cooling system and the
advertising lights separately.
MARKETING
As of May 31, 2004, the Company was marketing and selling its products through
its full time staff consisting of two people. The Company is primarily focused
on the vending, hospitality, kiosk and laundry industries.
32
Within the vending industry, our e-Port (TM) client product is being purchased
by soft drink bottlers and independent vending operators throughout the United
States. On the soft drink bottler side, heavy effort is being put into securing
initial distribution agreements with the top ten Coke and Pepsi bottlers, and
Dr. Pepper. Three of the premier national independent vending operators,
Compass, ARAMARK and Sodexho, have already installed e-Port (TM) in various
locations. One major vending operator, International Vending Management, has
signed a contract with the Company although nominal revenues have resulted to
date from this contract.
In March 2002, the Company signed an agreement with MEI (Mars Electronics), who
agreed to sell and distribute an MEI branded cashless payment system to be
developed by the Company, as part of its portfolio of vending solutions. By
contract, MEI has committed to buy a minimum of 10,000 units of the USA product
over the course of 24 month agreement or pay the Company $4.00 per unit for any
shortfall. Commercial availability is planned for winter 2003 and through the
date hereof no revenues have been generated from this arrangement.
The Company continues to work with the top vending machine manufacturers (OEM)
in order to incorporate our e-Port (TM) technology into newly manufactured
vending machines coming off the factory assembly line. In addition, the Company
continues to sell to and increase the number of authorized resellers for its
products. In the hospitality industry, Business Express continues to be one of
the premier solutions for automated business centers. The addition of e-Port
(TM) technology for vending machines located in hotels now offers a "one-stop
shopping" experience to hotels that have or are considering purchasing a USA
business center.
Within the laundry industry, American Sales Inc. (ASI) has signed a five-year
agreement to purchase units of Stitch's e-Suds laundry solution for their
university locations in the Midwest. Through the date hereof, the Company has
finalized product commercialization. In June 2004, the Company realized unit
sales under this contract.
In October 2002, the Company signed a Strategic Alliance Agreement with ZiLOG
Corporation, a semiconductor company that is a supplier of microprocessors to
the retail point of sale industry. The agreement allows the Company's
proprietary network software (USALive) to be embedded on a chip produced by
ZiLOG. The Company would license its software to the purchaser and would receive
a license fee. A second revenue stream could be generated when those who buy the
retail point of sales terminals begin to use them, because they could elect to
use the USA network which is embedded on the chip procurement. As of the date
hereof, no products have been available for commercial use and accordingly, no
revenues have been generated.
The Company utilizes independent third party companies for the manufacturing of
its e-Port(TM) product line. The Company purchases other components of its
business center (computers, printers, fax and copy machines) through various
manufacturers. Orders are regularly placed for expected orders weeks in advance.
COMPETITION
We are aware of three competitors who offer unattended business centers in the
hospitality industry in competition with the Business Express. We believe that
our products (currently located in over 400 locations) are in approximately
33
seventy-five percent of the locations currently utilizing unattended business
centers. We are aware of one competitor in regards to our e-Port control systems
for use in the beverage vending industry. There are at the present time very few
installations of this product.
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, might be capable of
developing products or utilizing their existing products in direct competition
with our e-port control systems targeted to the beverage vending industry. 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. 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 that make available use of the Internet and use of personal computers
to hotel guests in their hotel rooms. Such services might compete with the
Company's Business Express, and the locations may not order the Business
Express, or if ordered, the hotel guest may not use it.
TRADEMARKS, PROPRIETARY INFORMATION AND PATENTS
The Company received federal registration approval of the following trademarks:
Business Express, Express Solutions, C3X, TransAct, Public PC, PC Express, Copy
Express, Credit Card Copy Express, Credit Card Computer Express, Credit Card
Printer Express, Credit Card Microfiche Express, Credit Card Debit Express, The
Office That Never Sleeps, Intelligent Vending and e-Port(TM). The following
trademarks are pending federal registration: USALive, Dial-A-Vend, Dial-A-Snack,
Dial-A-Vend.com, e-Port The Next Generation in Vending and CineMachine. Through
its wholly owned subsidiary, Stitch Networks, the Company has secured one
registered trademark eVend.net and three trademarks that are pending
registration: eSuds.net, E-ppliance and Stitch Networks. In addition, due to the
July 2003 acquisition of Bayview, the Company has secured the VendingMiser
trademark and the trademark SnackMiser is pending federal registration.
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, that they will be recognized as
trade secrets by a court of law, or that others will not capitalize on certain
of the Company's technology.
Through May 31, 2004, 47 United States patents and 2 Canadian patents have been
issued to the Company (including 4 patents acquired in July 2003 from Bayview).
39 patents are pending (including 2 Canadian and 5 acquired from Bayview).
The list of issued patents is as follows:
o U.S. Patent No. 5,619,024 entitled "Credit Card and Bank Issued Debit Card
Operating System and Method for Controlling and Monitoring Access of
Computer and Copy Equipment";
34
o U.S. Patent No. 5,637,845 entitled "Credit and Bank Issued Debit Card
Operating System and Method for Controlling a Prepaid Card
Encoding/Dispensing Machine";
o U.S. Patent No. D423,474 entitled "Dataport";
o U.S. Patent No. D415,742 entitled "Laptop Dataport Enclosure";
o U.S. Patent No. D418,878 entitled "Sign Holder";
o U.S. Patent No. 6,056,194 entitled "System and Method for Networking and
Controlling Vending Machines";
o U.S. Patent No. D428,047 entitled "Electronic Commerce Terminal Enclosure";
o U.S. Patent No. D428,444 entitled "Electronic Commerce Terminal Enclosure
for a Vending Machine";
o U.S. Patent No. 6,119,934 entitled "Credit Card, Smart Card and Bank Issued
Debit Card Operated System and Method for Processing Electronic
Transactions";
o U.S. Patent No. 6,152,365 entitled "Credit and Bank Issued Debit Card
Operated System and Method for Controlling a Vending Machine";
o U.S. Patent No. D437,890 entitled "Electronic Commerce Terminal Enclosure
with a Hooked Fastening Edge for a Vending Machine";
o U.S. Patent No. D441,401 entitled "Electronic Commerce Terminal Enclosure
with Brackets";
o U.S. Patent No. 6,321,985 entitled "System and Method for Networking and
Controlling Vending Machines";
o U.S. Patent No. 6,505,095 entitled "System for Providing Remote Audit,
Cashless Payment, and Interactive Transaction Capabilities in a Vending
Machine";
o U.S. Patent No. 6,389,337 entitled "Transacting e-commerce and Conducting
e-business Related to Identifying and Procuring Automotive Service and
Vehicle Replacement Parts";
o U.S. Patent No. 6,021,626 entitled "Forming, Packaging, Storing, Displaying
and Selling Clothing Articles"; and
o U.S. Patent No. 6,152,845 entitled "Credit and Bank Issued Debit Card
Operated System and Method for Controlling a Prepaid Card
Encoding/Dispensing Machine";
o U.S Patent No. 6,622,124 entitled "Method of transacting an electronic mail,
an electronic commerce, and an electronic business transaction by an
electronic commerce terminal operated on a transportation vehicle";
35
o U.S. Patent No. 6,615,186 entitled "Communicating interactive digital
content between vehicles and internet based data processing resources for
the purpose of transacting e-commerce or conducting e-business";
o U.S. Patent No. 6,615,183 entitled "Method of warehousing user data entered
at an electronic commerce terminal";
o U.S. Patent No. 6,611,810 entitled "Store display window connected to an
electronic commerce terminal";
o U.S. Patent No. 6,609,103 entitled "Electronic commerce terminal for
facilitating incentive-based purchasing on transportation vehicles";
o U.S. Patent No. 6,609,102 entitled "Universal interactive advertising and
payment system for public access electronic commerce and business related
products and services";
o U.S. Patent No. D478,577 entitled "Transceiver base unit";
o U.S. Patent No. 6,606,605 entitled "Method to obtain customer specific data
for public access electronic commerce services";
o U.S. Patent No. 6,606,602 entitled "Vending machine control system having
access to the internet for the purposes of transacting e-mail, e-commerce,
and e-business, and for conducting vending transactions";
o U.S. Patent No. 6,604,087 entitled "Vending access to the internet, business
application software, e-commerce, and e-business in a hotel room";
o U.S. Patent No. 6,604,086 entitled "Electronic commerce terminal connected
to a vending machine operable as a telephone";
o U.S. Patent No. 6,604,085 entitled "Universal interactive advertising and
payment system network for public access electronic commerce and business
related products and services";
o U.S. Patent No. 6,601,040 entitled "Electronic commerce terminal for
wirelessly communicating to a plurality of communication devices";
o U.S. Patent No. 6,601,039 entitled "Gas pump control system having access to
the Internet for the purposes of transacting e-mail, e-commerce, and
e-business, and for conducting vending transactions";
o U.S. Patent No. 6,601,038 entitled "Delivery of goods and services resultant
from an electronic commerce transaction by way of a pack and ship type
company";
o U.S. Patent No. 6,601,037 entitled "System and method of processing credit
card, e-commerce, and e-business transactions without the merchant incurring
transaction processing fees or charges worldwide";
o U.S. Patent No. D477,030 entitled "Vending machine cashless payment
terminal";
o U.S. Patent No. D476,037 entitled "User interface bracket for a point of
sale terminal";
36
o U.S. Patent No. D476,036 entitled "Printer bracket for point of sale
terminal";
o U.S. Patent No. D475,751 entitled "User interface bracket for a point of
sale terminal";
o U.S. Patent No. D475,750 entitled "Paper guide for a point of sale
terminal";
o U.S. Patent No. D475,414 entitled "Printer bracket for point of sale
terminal";
o U.S. Patent No. 5,844,808 entitled "Apparatus and methods for monitoring and
communicating with a plurality of networked vending machines";
o U.S. Patent No. 6,581,396 entitled "Refrigerated vending machine exploiting
expanded temperature variance during power-conservation mode";
o U.S. Patent No. 6,389,822 entitled "Refrigerated vending machine exploiting
expanded temperature variance during power-conservation mode";
o U.S. Patent No. 6,243,626 entitled "External power management device with
current monitoring precluding shutdown during high current"; and
o U.S. Patent No. 5,477,476 entitled "Power conservation system for computer
peripherals";
o U.S. Patent No. 6,629,080 entitled "Transaction processing method of
fulfilling an electronic commerce transaction by an electronic commerce
terminal system";
o Canadian Patent No. D199-1014 entitled "Sign Holder";
o Canadian Patent No. D199-1038 entitled "Laptop Data Port Enclosure".
The Company believes that the U.S. patent No. 6,505,095 entitled "System for
providing remote audit, cashless payment, and interactive transaction
capabilities in a vending machine" is very important in protecting its
intellectual property used in its e-Port control system targeted to the vending
industry. The patent expires in July 2021.
Employees
On May 31, 2004, the Company had 46 full-time employees. In addition, as a
result of the purchase of Bayview on July 11, 2003, the Company currently
utilizes the services of 2 full-time independent contractors to Bayview.
Properties
During March 2003, the Company entered into a lease through December 31, 2008
for 12,864 square feet of space in Malvern, PA for its principal executive
office. The operating lease provides for escalating rent payments and a period
of free rent prior to the commencement of the monthly lease payment in January
2004 of approximately $25,000 per month.
37
As a result of the July 2003 acquisition of Bayview, the Company assumed two
additional operating leases for office space located in Denver, Colorado, which
expire in June 2005. The Denver office space leases 6,742 square feet of space
for approximately $6,000 per month. The lease agreements generally require the
Company to pay certain operating expenses, maintenance and property taxes.
Where to get more information
We file annual, quarterly and special reports and other information with the
SEC. You may read and copy any document we file with the SEC at the SEC`s Public
Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information on the operation of the public reference room by calling the SEC at
1-800-SEC-0330. The same information may be obtained at the following Regional
Office of the SEC: 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material can also be obtained from the Public Reference Section
of the SEC`s Washington, D.C. office at prescribed rates.
Our filings may also be accessed through the SEC`s web site
(http://www.sec.gov). We will provide a copy of any or all documents
incorporated by reference herein (exclusive of exhibits unless such exhibits are
specifically incorporated by reference therein), without charge, to each person
to whom this prospectus is delivered, upon written or oral request to USA
Technologies, Inc., 100 Deerfield Lane, Suite 140, Malvern, Pennsylvania 19355,
Attn: George R. Jensen, Jr., Chief Executive Officer (telephone (610) 989-0340).
We will furnish record holders of our securities with annual reports containing
financial statements audited and reported upon by our independent auditors,
quarterly reports containing unaudited interim financial information, and such
other periodic reports as we may determine to be appropriate or as may be
required by law.
MANAGEMENT
Directors and Executive Officers
Our Directors and executive officers, on May 31, 2004, together with their ages
and business backgrounds were as follows:
Name Age Position(s) Held
- ---- --- ----------------
George R. Jensen, Jr. 55 Chief Executive Officer,
Chairman of the Board of
Directors
Stephen P. Herbert 41 President, Director
Haven Brock Kolls, Jr. 37 Vice President - Research and
Development
Mary West Young 49 Chief Financial Officer
William W. Sellers (1)(2) 81 Director
William L. Van Alen, Jr. (1)(2) 69 Director
Steven Katz (1) 54 Director
Douglas M. Lurio (2) 47 Director
38
(1) Member of Compensation Committee
(2) Member of Audit Committee
Each Director holds office until the next Annual Meeting of shareholders and
until his successor has been elected and qualified.
George R. Jensen, Jr., has been our Chief Executive Officer and a Director since
our inception in January 1992. Mr. Jensen was Chairman, Director, and Chief
Executive Officer of American Film Technologies, Inc. ("AFT") from 1985 until
1992. AFT was in the business of creating color imaged versions of
black-and-white films. From 1979 to 1985, Mr. Jensen was Chief Executive Officer
and President of International Film Productions, Inc. Mr. Jensen was the
Executive Producer of the twelve hour miniseries, "A.D.", a $35 million dollar
production filmed in Tunisia. Procter and Gamble, Inc., the primary source of
funds, co-produced and sponsored the epic, which aired in March 1985 for five
consecutive nights on the NBC network. Mr. Jensen was also the Executive
Producer for the 1983 special for public television, "A Tribute to Princess
Grace". From 1971 to 1978, Mr. Jensen was a securities broker, primarily for the
firm of Smith Barney, Harris Upham. Mr. Jensen was chosen 1989 Entrepreneur of
the Year in the high technology category for the Philadelphia, Pennsylvania area
by Ernst & Young LLP and Inc. Magazine. Mr. Jensen received his Bachelor of
Science Degree from the University of Tennessee and is a graduate of the
Advanced Management Program at the Wharton School of the University of
Pennsylvania.
Stephen P. Herbert was elected a Director in April 1996, and joined USA on a
full-time basis on May 6, 1996. Prior to joining us and since 1986, Mr. Herbert
had been employed by Pepsi-Cola, the beverage division of PepsiCo, Inc. From
1994 to April 1996, Mr. Herbert was a Manager of Market Strategy. In such
position he was responsible for directing development of market strategy for the
vending channel and subsequently the supermarket channel for Pepsi-Cola in North
America. Prior thereto, Mr. Herbert held various sales and management positions
with Pepsi-Cola. Mr. Herbert graduated with a Bachelor of Science degree from
Louisiana State University.
Haven Brock Kolls, Jr., joined USA Technologies on a full-time basis in May 1994
and was elected an executive officer in August 1994. From January 1992 to April
1994, Mr. Kolls was Director of Engineering for International Trade Agency,
Inc., an engineering firm specializing in the development of control systems and
management software packages for use in the vending machine industry. Mr. Kolls
was an electrical engineer for Plateau Inc. from 1988 to December 1992. His
responsibilities included mechanical and electrical computer-aided engineering,
digital electronic hardware design, circuit board design and layout, fabrication
of system prototypes and software development. Mr. Kolls is a graduate of the
University of Tennessee with a Bachelor of Science Degree in Engineering.
39
Mary West Young joined USA in April 2004 and was named our Chief Financial
Officer in May 2004. From 2001 to 2003, Ms. Young served as Senior Vice
President-Finance, Controller and Chief Accounting Officer of RCN Corporation,
and from 1998 to 2000 she served as Vice President - Finance and Corporate
Controller for De Lage Landen Financial Services, Inc. Ms. Young held several
management positions in International, Treasury and Accounting with Verizon from
1984 to 1992 and 1994 to 1998. Ms. Young received her Bachelor of Science and
Masters of Business Administration degrees from La Salle University and is a
Certified Public Accountant.
William W. Sellers joined the Board of Directors of USA in May 1993. Mr. Sellers
founded The Sellers Company in 1949, which has been nationally recognized as the
leader in the design and manufacture of state-of-the-art equipment for the
paving industry. Mr. Sellers has been awarded five United States patents and
several Canadian patents pertaining to this equipment. The Sellers Company was
sold to Mechtron International in 1985. Mr. Sellers is Chairman of the Board of
Sellers Process Equipment Company, which sells products and systems to the food
and other industries. Mr. Sellers is actively involved in his community. Mr.
Sellers received his undergraduate degree from the University of Pennsylvania.
William L. Van Alen, Jr., joined the Board of Directors of USA in May 1993. Mr.
Van Alen is President of Cornerstone Entertainment, Inc., an organization
engaged in the production of feature films of which he was a founder in 1985.
Since 1996, Mr. Van Alen has been President and a Director of The Noah Fund, a
publicly traded mutual fund. Prior to 1985, Mr. Van Alen practiced law in
Pennsylvania for twenty-two years. Mr. Van Alen received his undergraduate
degree in Economics from the University of Pennsylvania and his law degree from
Villanova Law School.
Steven Katz joined the Board of Directors in May 1999. He is President of Steven
Katz & Associates, Inc., a management consulting firm specializing in strategic
planning and corporate development for technology and service-based companies in
the health care, environmental, telecommunications and Internet markets. Mr.
Katz`s prior experience includes five years with PriceWaterhouse & Co. in audit,
tax and management advisory services; two years of corporate planning with
Revlon, Inc.; five years with National Patent Development Corporation (NPDC) in
strategic planning, merger and acquisition, technology in-licensing and
out-licensing, and corporate turnaround experience as President of three NPDC
subsidiaries; and two years as a Vice President and General Manager of a
non-banking division of Citicorp, N.A.
Douglas M. Lurio joined the Board of Directors of USA in June 1999. Mr. Lurio is
President of Lurio & Associates, P.C., attorneys-at-law, which he founded in
1991. He specializes in the practice of corporate and securities law. Prior
thereto, he was a partner with Dilworth, Paxson LLP. Mr. Lurio received Bachelor
of Arts Degree in Government from Franklin & Marshall College, a Juris Doctor
Degree from Villanova Law School, and a Masters in Law (Taxation) from Temple
Law School.
40
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, 2001, June
30, 2002 and June 30, 2003 to each of the executive officers and employee of the
Company named below.
Summary Compensation Table
Fiscal
Name and Principal Position Year Annual Compensation Long Term Compensation
- ------------------------------ ------ ---------------------------------------- ---------------------------
Salary Bonus Other Restricted Securities
(1) Annual Stock Underlying
Compensation Awards Options (3)
- -------------------------------------------------------------------------------------------------------------------
George R. Jensen, Jr., 2003 $189,038 $250,000 $223,211(2) -- --
Chief Executive Officer, 2002 $135,000 $288,000 $ 80,000(2) -- 320,000
2001 $135,000 $140,000 -- -- 300,000
Stephen P. Herbert, 2003 $183,854 $225,000 $185,317(2) -- --
President 2002 $125,000 $270,000 $ 80,000(2) -- 300,000
2001 $125,000 $134,400 -- -- 80,000
Leland P. Maxwell, Chief 2003 $120,000 $ 85,845 $ 89,190(2) -- --
Financial Officer(4) 2002 $110,308 $151,200 -- -- 130,000
2001 $108,000 $ 44,240 -- -- 50,000
H. Brock Kolls, Senior Vice 2003 $150,000 $ 25,000 $ 64,493(2) -- --
President, Research & 2002 $125,769 $180,000 $ 50,000(2) -- 250,000
Development 2001 $120,000 $ 97,440 -- -- 80,000
Michael K. Lawlor, Senior 2003 $120,000 $103,252 $ 89,190(2) -- --
Vice President, Sales and 2002 $103,846 $151,200 -- -- 130,000
Marketing(4) 2001 $100,000 $ 38,640 -- -- 50,000
Adele H. Hepburn 2003 $ 91,000 $282,382 -- -- --
Director of Investor 2002 $ 91,000 $472,609 -- -- 500,000
Relations 2001 $ 91,000 $171,700 -- -- --
(1) For fiscal year 2001, represents shares of Common Stock issued to the
executive officers during the fiscal year valued at $1.12 per share, the closing
bid price on the date of issuance. For Mr. Lawlor, the bonus also includes
$1,265 sales commission. For fiscal year 2002, represents shares of Common Stock
issued to the executive officers valued at $0.45 per share, which was the market
value on the date of grant (Mr. Jensen-640,000 shares; Mr. Herbert-600,000
shares; Mr. Kolls-400,000 shares; Mr. Maxwell-260,000 shares; and Mr.
Lawlor-260,000 shares). For Mr. Maxwell and Mr. Lawlor in 2002, the bonus also
includes 90,000 shares of Common Stock valued at $0.38, which was the market
price on the day of grant. This stock was awarded to reimburse them for tax
payments incurred as a result of the award of a previous bonus. For Adele
Hepburn in fiscal 2002, the bonus includes $408,267 of non cash compensation, as
follows: 435,334 shares of Common Stock at $0.60; 384,334 shares at $0.10; and a
$108,834 2001 - D 12% Senior Notes due December 31, 2003. For fiscal year 2003,
includes a $100,000 Senior Note due 2005, including 200,000 shares valued at
$.20, and $150,000 cash bonus for Mr. Jensen and $100,000 Senior Note due 2005,
including 200,000 shares valued at $0.20 and $125,000 cash bonus for Mr. Herbert
and a $25,000 cash bonus for Mr. Kolls; and a $100,000 Senior Note due 2005,
including 200,000 shares valued at $.20 per share, a $41,095 Senior Note due
2004, and $100,000 cash bonus for Ms. Hepburn.
41
(2) Represents cash payments authorized to reimburse certain executive officers
for tax payments incurred from the award of a previous bonus as well as car
allowance payments.
(3) In July 1999, the Company extended the expiration dates until June 30, 2001
of the options to acquire Common Stock held by the following directors,
officers, and employee: Adele Hepburn - 77,000 options; H. Brock Kolls - 20,000
options; William Sellers - 15,500 options; and William Van Alen - 12,500
options. All of the foregoing options would have expired in the first two
calendar quarters of the year 2000 or the first calendar quarter of year 2001.
In February 2001, all these options were further extended until June 30, 2003,
and in addition the expiration dates of the following additional options were
also extended to June 30, 2003: H. Brock Kolls - 20,000 options; Stephen Herbert
- - 40,000 options; Michael Lawlor - 3,750 options; George Jensen - 200,000
options. In October 2000, the Company issued to George R. Jensen, Jr., fully
vested options to acquire up to 200,000 shares of Common Stock at $1.50 per
share. The options were exercisable at any time within two years following
issuance. In February 2001, the Company extended the expiration date of these
options until June 30, 2003. Effective December 31, 2002, all of the outstanding
options (whether vested or unvested) then held by each of Messrs. Jensen,
Herbert, Kolls, Maxwell, Sellers, Van Alen, Katz, Lurio and Boynton were
voluntarily canceled by each of the foregoing individuals.
(4) Employed by the Company through June 30, 2003.
During the fiscal year ended June 30, 2003, there were no grants of stock
options to the executive officers or the employee named above.
TOTAL OPTIONS EXERCISED IN FISCAL YEAR ENDED JUNE 30, 2003 AND YEAR END VALUES
The following table gives information for options exercised by each of the named
executive officers and an employee in fiscal year 2003, and the number of
options held by these executive officers and an employee at fiscal year end:
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the -Money
Options at Options at
FY-End (#) FY-End($)
Shares Acquired Exercisable/ Exercisable/
Name On Exercise (#) Value Realized ($) Unexersisabble Unexercisable
- --------------------------------------------------------------------------------------------------------
Adele H. Hepburn 0 0 77,000/0 0
- --------------------------------------------------------------------------------------------------------
During the fiscal year ended June 30, 2003, there were no options exercised by
the executive officers and there were no options held by executive officers at
fiscal year end.
EXECUTIVE EMPLOYMENT AGREEMENTS
42
The Company has entered into an employment agreement with Mr. Jensen which
expires June 30, 2005, and is automatically renewed from year to year thereafter
unless canceled by Mr. Jensen or the Company. The agreement provides for an
annual base salary of $250,000 effective January 1, 2004. 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 agreement also grants to Mr. Jensen in the event a "USA Transaction" (as
defined below) occurs after the date thereof an aggregate of 14,000,000 shares
of Common Stock subject to adjustment for stock splits or combinations ("Jensen
Shares"). Mr. Jensen is not required to pay any additional consideration for the
Jensen Shares. At the time of any USA Transaction, all of the Jensen Shares are
automatically deemed to be issued and outstanding immediately prior to any USA
Transaction, and are entitled to be treated as any other issued and outstanding
shares of Common Stock in connection with such USA Transaction.
The term USA Transaction is defined as (i) the acquisition of fifty-one percent
or more of the then outstanding voting securities entitled to vote generally in
the election of Directors of the Company by any person, entity or group, or (ii)
the approval by the shareholders of the Company of a reorganization, merger,
consolidation, liquidation, or dissolution of the Company, or the sale,
transfer, lease or other disposition of all or substantially all of the assets
of the Company. The Jensen Shares are irrevocable and fully vested, have no
expiration date, and will not be affected by the termination of Mr. Jensen`s
employment with the Company for any reason whatsoever. If a USA Transaction
shall occur at a time when there are not a sufficient number of authorized but
unissued shares of Common Stock, then the Company shall as a condition of such
USA Transaction promptly take any and all appropriate action to make available a
sufficient number of shares of Common Stock. In the alternative, the Company may
structure the USA Transaction so that Mr. Jensen would receive the same amount
and type of consideration in connection with the USA Transaction as any other
holder of Common Stock.
The Company has entered into an employment agreement with Mr. Herbert, which
expires on June 30, 2005, and 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 $230,000 per year effective January 1, 2004. Mr.
Herbert is entitled to receive such bonus or bonuses as the Board of Directors
may award to him. The Agreement 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. In the
event that a USA Transaction (as defined in Mr. Jensen's employment agreement)
shall occur, then Mr. Herbert has the right to terminate his agreement upon 30
days notice to USA.
Mr. Kolls has entered into an employment agreement with the Company, which
expires on June 30, 2005, 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 $165,000 per year effective January 1, 2004. Mr.
Kolls is entitled to a payment of $5,000 upon each of the following: (i) filing
of a new patent application by USA for which he is listed as the inventor; (ii)
granting of any such patent application; and (iii) issuance of a patent for any
patent application that had been filed prior to April 20, 2004. 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
43
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. In the
event that a USA Transaction (as defined in Mr. Jensen's employment agreement)
shall occur, then Mr. Kolls has the right to terminate his agreement upon 30
days notice to USA.
Ms. Hepburn has entered into an employment agreement with the Company, which
expires on June 30, 2005, and is automatically renewed from year to year
thereafter unless canceled by Ms. Hepburn or the Company. The agreement provides
for an annual base salary of $130,000 per year effective January 1, 2004. Ms.
Hepburn is also entitled to receive such bonus or bonuses as the Board of
Directors may award to her. The Agreement requires Ms. Hepburn to devote her
full time and attention to the business and affairs of the Company, and
obligates her 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.
Ms. Young has entered into an employment agreement with the Company which
expires on April 30, 2005, and is automatically renewed from year to year
thereafter unless canceled by Ms. Young or the Company. The agreement provides
for a base annual salary of $165,000 and a discretionary performance based bonus
of up to 35% of her base salary. Ms. Young also received a $30,000 payment that
she used to purchase from the Company 200,000 shares of restricted Common Stock
at $.15 per share. Ms. Young was also granted options to purchase up to 300,000
shares of Common Stock of the Company at $.30 per share. The options vest
ratably over a two-year period and are exercisable at any time during the
two-year period following vesting. The agreement requires Ms. Young to devote
her full-time and attention to the business and affairs of the Company, and
obligates her not to engage in any investments or activities which would compete
with the Company during the term of her agreement and for a period of one year
thereafter.
COMPENSATION OF DIRECTORS
Members of the Board of Directors receive cash and equity compensation for
serving on the Board of Directors.
In April 2002, the Company granted to each of the five outside Directors
(Messrs. Sellers, Van Alen, Katz, Lurio, and Boynton) options to purchase up to
100,000 shares of Common Stock at $0.40 per share as compensation for serving
the one-year term, which commenced March 21, 2002. The options are fully vested
and are exercisable at any time prior to April 12, 2005. Commencing on July 1,
2002 and at any and all times through June 30, 2003, each Director has been
granted the right, without the payment of the per share exercise price of such
options, to receive up to 50,000 shares represented by those options. In
September 2002, Edwin P. Boynton elected to receive 50,000 shares in lieu of the
above options.
In February 2001, the Company granted a total of 300,000 options to purchase
Common Stock at $1.00 per share to each of the then outside members of the Board
(Messrs. Sellers, Van Alen, Smith, Katz, Lurio, and Boynton). Of these, 120,000
options vested immediately; 90,000 options vested on June 30, 2001; and 90,000
vested on June 30, 2002. The options are exercisable at any time within five
years following the vesting.
On December 31, 2002, each of Messrs. Sellers, Van Alen, Katz, Lurio, and
Boynton voluntarily canceled all of the outstanding options then held by them.
During June 2003, we paid $50,000 to each of Messrs. Sellers, Van Alen, and Katz
for their services as Directors during the 2003 fiscal year. As a condition of
the cash payment, each of these Directors agreed to purchase from the Company
500,000 shares of Common Stock at $0.10 per share.
During June 2004, we paid $30,000 to each of Messrs. Sellers and Van Alen for
their services as Chairs of the Compensation Committee and the Audit Committee,
respectively, rendered during the two prior fiscal years. As a condition of the
payment, each agreed to purchase 200,000 shares of Common Stock at $.15 per
share in the 2004-A offering.
PRINCIPAL SHAREHOLDERS
Common Stock
The following table sets forth, as of May 31, 2004, the beneficial ownership of
the Common Stock of each of the Company's directors and executive officers, the
other employee named in the summary compensation table set forth above, as well
as by the Company's directors and executive officers as a group. Except as set
forth below, the Company is not aware of any beneficial owner of more than five
percent of the Common Stock. Except as otherwise indicated, the Company believes
that the beneficial owners of the Common Stock listed below, based on
information furnished by such owners, have sole investment and voting power with
respect to such shares, subject to community property laws where applicable:
44
Number of Shares
Name and Address of Common Stock Percent
of Beneficial Owner Beneficially Owned(1) of Class(2)
------------------- --------------------- --------
George R. Jensen, Jr. 10,821,000 shares(3) 2.63%
517 Legion Road
West Chester, Pennsylvania 19382
Stephen P. Herbert 1,986,050 shares(4) *
536 West Beach Tree Lane
Strafford, Pennsylvania 19087
Haven Brock Kolls, Jr. 707,325 shares(5) *
1573 Potter Drive
Pottstown, Pennsylvania 19464
Steven Katz 535,000 shares *
20 Rebel Drive
East Brunswick NJ 08116
Adele H. Hepburn 8,787,928 shares(6) 2.14%
208 St. Georges Road
Ardmore, Pennsylvania 19003
Douglas M. Lurio 921,463 shares(7) *
2005 Market Street, Suite 2340
Philadelphia, Pennsylvania 19103
William W. Sellers 2,333,812 shares(8) *
394 East Church Road
King of Prussia, Pennsylvania 19406
William L. Van Alen, Jr. 1,973,340 shares(9) *
Cornerstone Entertainment, Inc.
P.O. Box 727 Edgemont, Pennsylvania 19028
Mary West Young 237,500 shares (10) *
2175 Wyndtree Lane
Malvern, PA 19355
All Directors and Executive Officers
As a Group (8 persons) 19,515,490 shares(11) 4.75%
- ---------
* Less than one percent (1%)
45
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and derives from either voting or investment
power with respect to securities. Shares of Common Stock issuable upon
conversion of the Preferred Stock, shares issuable upon the conversion of
Convertible Senior Notes, or shares of Common Stock issuable upon exercise of
warrants and options currently exercisable, or exercisable within 60 days of
May 31, 2004, are deemed to be beneficially owned for purposes hereof.
(2) On May 31, 2004 there were 339,453,012 shares of Common Stock and 522,742
shares of Series A Preferred Stock issued and outstanding. For purposes of
computing the percentages under this table, it is assumed that all shares of
issued and outstanding Preferred Stock have been converted into 522,742 shares
of Common Stock, that all of the options to acquire Common Stock which have been
issued and are fully vested as of May 31, 2004 (or within 60-days of May 31,
2004) have been converted into 2,134,232 shares of Common Stock. For purposes of
computing such percentages it has also been assumed that all of the remaining
Purchase Warrants have been exercised for 18,203,545 shares of Common Stock;
that all of the Senior Notes have been converted into 49,276,805 shares of
Common Stock; and that all of the accrued and unpaid dividends on the Preferred
Stock have been converted, into 667,718 shares of Common Stock. Therefore, for
purposes of computing the percentages under this table, there are 410,258,054
shares of Common Stock issued and outstanding.
(3) Includes 511,000 shares of Common Stock beneficially owned by his spouse.
Does not include the right granted to Mr. Jensen under his Employment Agreement
to receive Common Stock upon the occurrence of a USA Transaction (as defined
therein). See "Executive Employment Agreements". Includes 6,000,000 shares owned
by George R. Jensen, Jr. Grantor Retained Unitrust dated July 14, 2003 over
which Mr. Jensen retains beneficial ownership.
(4) Includes 250,000 shares issuable to Mr. Herbert upon the conversion of
Senior Notes, 1,050 shares of Common Stock beneficially owned by his child,
600,000 shares of Common Stock beneficially owned by his spouse and 250,000
shares issuable upon the conversion of Senior Notes beneficially owned by his
spouse.
(5) Includes 12,000 shares of Common Stock owned by Mr. Kolls' spouse, 150,000
shares issuable to his spouse upon conversion of her Senior Note and 3,600
shares issuable upon the exercise of warrants beneficially owned by his spouse.
(6) Includes 473,044 shares of Common Stock owned by her spouse, 5,150 shares
underlying Series A Preferred Stock held by her and her spouse, 1,615,418 shares
issuable upon the conversion of her Senior Notes, 58,495 shares issuable to her
spouse upon the conversion of his Senior Notes, and 22,589 shares issuable upon
the exercise of her warrants.
46
(7) Includes 225,000 shares issuable upon conversion of Senior Notes.
(8) Includes 17,846 shares of Common Stock owned by the Sellers Pension Plan of
which Mr. Sellers is a trustee, 4,952 shares of Common Stock owned by Sellers
Process Equipment Company of which he is a Director, and 10,423 shares of Common
Stock owned by Mr. Seller's wife. Includes 408,334 shares issuable upon
conversion of his Senior Notes.
(9) Includes 116,670 shares of Common Stock issuable to Mr. Van Alen upon
conversion of his Senior Notes and 4,000 shares of Common Stock beneficially
owned by his spouse.
(10) Includes 37,500 shares of Common Stock issuable upon exercise of options.
(11) Includes all shares of Common Stock described in footnotes (3) through (5)
and (7) through (10) above.
Preferred Stock
The following table sets forth, as of May 31, 2004 the beneficial ownership of
the Preferred Stock by the Company's directors and executive officers, the other
employee named in the Summary Compensation Table set forth above, as well as by
the Company's directors and executive officers as a group. Except as set forth
below, the Company is not aware of any beneficial owner of more than five
percent of the Preferred Stock. Except as otherwise indicated, the Company
believes that the beneficial owners of the Preferred Stock listed below, based
on information furnished by such owners, have sole investment and voting power
with respect to such shares, subject to community property laws where
applicable.
Number of Shares
Name and Address of of Preferred Stock Percent
Beneficial Owner Beneficially Owned of Class(l)
- ------------------- ------------------ --------
Adele H. Hepburn
208 St. Georges Road
Ardmore, Pennsylvania 19003 5,150 shares *
All Directors and
Executive Officers
As a Group (8 persons) 0 *
- --------------
* Less than 1%.
(1) There were 522,742 shares of Preferred Stock issued and outstanding as of
May 31, 2004.
47
CERTAIN TRANSACTIONS
On December 31, 2000, Stitch Networks Corporation ("Stitch") executed a Vending
Placement, Supply and Distribution Agreement with Eastman Kodak Company, Maytag
Corporation and Dixie Narco, Inc., which formed a strategic alliance to market
and execute a national vending program for the sale of one-time use camera and
film products. The Agreement provides for an initial term of three years ending
December 31, 2003, with additional provisions for early termination and
extensions as defined. Furthermore, the Agreement also provides for exclusivity
among the parties for the term of the Agreement relating to the sale of camera
and film products from vending machines within the Continental United States.
Pursuant to this agreement, Stitch, the Company`s subsidiary, purchases vending
machines from Dixie-Narco, Inc. ("Dixie"). Dixie is owned by Maytag Corporation
which is the owner of the Company`s shareholder, Maytag Holdings, Inc. Mr.
Boyle, a former Director of the Company, is a Vice President of Maytag
Corporation. There were purchases from Dixie of $201,000 and $8,000 for the
fiscal year ended June 30, 2003 and for the period May 14, 2002 through June 30,
2002, respectively. There were no purchase during the nine months ended March
31, 2004. Amounts payable to Dixie remains approximately $130,000 and $124,000
and are included in accounts payable in the June 30, 2003 and 2002 consolidated
balance sheets of the Company.
During the fiscal years ended June 30, 2003 and June 30, 2002, the Company
incurred charges to Lurio & Associates, P.C., of which Mr. Lurio is President
and a shareholder, for professional fees of approximately $305,000 and $213,000
respectively, for legal services rendered to the Company by such law firm.
During the years ended June 30, 2003 and 2002, the Company accrued approximately
$22,000 and $30,000, respectively, for these services. Mr. Lurio is a Director
of the Company.
In October 2002, the Company approved the issuance to each of George R.
Jensen, Jr., our Chief Executive Officer, and Stephen P. Herbert, our President
and Chief Operating Officer, of $100,000 of the Senior Note offering. Pursuant
thereto, each of them received a $100,000 12% Senior Note due December 31, 2005,
and the related 200,000 shares of Common Stock. Both Mr. Jensen and Mr. Herbert
earned the Note and related shares in fiscal 2003 for services rendered. In
October 2002, the Company approved the issuance of $100,000 of the Senior Note
offering and 200,000 related shares of Common Stock to Adele Hepburn for
services rendered during the 2002 calendar year. Ms. Hepburn earned the Note and
related shares in fiscal 2003 for services rendered.
In April and May 2003, the Company authorized the payment of $420,000 over
the following six months to its five executive officers. The payments are to
assist in the 2002 tax liability incurred by the executives due to common stock
bonuses received by them during calendar year 2002.
During June 2003, the Company approved the following cash payments as a
bonus for services rendered to the Company by the named executive during the
2003 fiscal year: Mr. Jensen-$150,000; Mr. Herbert-$125,000; Ms.
Hepburn-$100,000; and Mr. Kolls- $25,000. The payment of the bonus was
conditioned upon the executive investing the entire cash bonus in common stock
of the Company at $.10 per share.
On July 10, 2003, USA and George R. Jensen, Jr., Chief Executive Officer and
Chairman of USA, agreed upon an amendment to Mr. Jensen's employment agreement.
Pursuant thereto, the number of shares of Common Stock of USA issuable to Mr.
Jensen by USA upon the occurrence of a "USA Transaction" (as such term is
defined in his employment agreement) was fixed at 14,000,000 shares rather than
48
seven percent of the then issued and outstanding shares as previously provided.
USA also agreed to issue to Mr. Jensen an aggregate of 10,500,000 shares of
restricted Common Stock, 2,500,000 shares of which will be issued as
compensation to Mr. Jensen for future services, and 8,000,000 shares of which
will be issued to Mr. Jensen in connection with the employment agreement
amendment. Mr. Jensen has agreed to enter into a lock up agreement pursuant to
which he shall not sell 2,500,000 of the shares for a one-year period and
8,000,000 of the shares for a two-year period.
The Company does not have any policy with respect to entering into future
related party transactions.
SELLING SHAREHOLDERS
Each of the selling shareholders listed below is, as of the date hereof, the
holder of our common stock or has the right to acquire the number of shares of
common stock or has agreed to purchase the number of shares of common stock set
forth opposite such selling shareholder`s name. The issuance of the common stock
to the selling shareholders as well as the issuance of the common stock to the
selling shareholders upon exercise of the warrants was or will be a transaction
exempt from the registration requirements of the Act and various state
securities laws.
We have agreed, at our expense, to register all of the common stock for resale
by the selling shareholders under the Act. We expect to incur expenses of
approximately $30,000 in connection with the registration statement of which
this prospectus is a part.
The number of shares that may be actually sold by the selling shareholder will
be determined by the selling shareholder. The selling shareholders are under no
obligation to sell all or any portion of the shares offered, nor are the selling
shareholders obligated to sell such shares immediately under this Prospectus.
Particular selling shareholders may not have a preset intention of selling their
shares and may offer less than the number of shares indicated. Because the
selling shareholder may sell all, some or none of the shares of common stock
that the selling shareholder holds, no estimate can be given as to the number of
shares of our common stock that will be held by the selling shareholder upon
termination of the offering. Shares of common stock may be sold from time to
time by the selling shareholders or by pledgees, donees, transferees or other
successors in interest.
The following tables set forth information with respect to each selling
shareholder and the respective amounts of common stock that may be offered
pursuant to this prospectus. None of the selling shareholders has, or within the
past three years has had, any position, office or other material relationship
with us, except as noted below. Except as specifically set forth below,
following the offering, and assuming all of the common stock offered hereby has
been sold, none of the selling shareholders will beneficially own one percent
(1%) or more of the common stock.
49
CEOCAST COMMON STOCK
Beneficial Ownership
Common Stock after Offering
Selling Shareholder Offered Hereby(24) Number Percent
- ------------------- ------------------ ------ -------
CEOCAST, INC.(1) 150,000 450,000 *
- ------------------
* Less than 1%
(1) CEOCAST IS OUR PUBLIC RELATIONS CONSULTANT. REPRESENTS SHARES ISSUED BY US
IN JANUARY 2004 AT $.22 PER SHARE FOR SERVICES RENDERED TO US. WE HAVE
AGREED TO REGISTER THESE SHARES FOR RESALE UNDER THE ACT AT OUR COST AND
EXPENSE THROUGH JUNE 30, 2005. THE NATURAL PERSONS WHO EXERCISES SOLE
AND/OR SHARED VOTING OR DISPOSITIVE POWERS WITH RESPECT TO THE SHARES IS
RACHEL GLICKSMAN AND GARY NASH.
2004-A OFFERING
Beneficial Ownership
Common Stock after Offering
Selling Shareholder Offered Hereby(15) Number Percent
- ------------------- ----------------- ------ -------
SUSAN H BOTHNER 750,000 0 *
WILLIAM L CARHART 311,250 0 *
CEOCAST INC (1) 450,000 150,000 *
FAROOQ A CHAUDHRY 75,000 0 *
SHERI-LYNN DEMARIS 2,000,000 0 *
SUKHDEV S & NONI P DHINDSA 1,000,000 0 *
FRIEDLAND CAPITAL INC (2) 600,000 0 *
CAPE MCKINNON INC. (3) 750,000 0 *
ROBERT C HECTOR JR 750,000 0 *
ADELE H HEPBURN (4) 500,000 6,184,623 1.50
STEPHEN P HERBERT (5) 750,000 1,100,000 *
STEVE ILLES (6) 7,500,000 33,520,000 8.15
BURTON JENSEN 1,100,000 0 *
DAVE JENSEN 1,100,000 0 *
RON JENSEN 1,100,000 0 *
LEONARDO CAPITAL FUND LTD (7) 4,500,000 0 *
GREGG NEWHUIS 1,500,000 0 *
MICHAEL J OBRIEN 450,000 0 *
GEORGE OCONNELL 1,500,000 0 *
PETER B PAKRADOONI 150,000 0 *
PALISADES MASTER FUND LP (8) 4,500,000 0 *
WILLIAM RECKTENWALD 300,000 0 *
YOMI RODRIG 3,000,000 0 *
JOHN ROUGHNEEN (9) 300,000 0 *
WILLIAM W SELLERS (10) 300,000 2,333,812 *
DANIEL E SPEALMAN 1,000,000
BB SECURITIES CUSTODIAN
FBO DANIEL E SPEALMAN IRA 1,250,000 0 *
STANDARD BANK LONDON (11) 1,500,000 0 *
LUCAS POST VAN ALEN 187,500 0 *
WILLIAM L VAN ALEN III 75,000 0 *
WILLIAM L VAN ALEN JR (12) 1,537,500 315,538 *
FRANCIS E. WOLFE 150,000 0 *
FRANCES YOUNG (13) 1,200,000 0 *
MARY WEST YOUNG (14) 300,000 37,500 *
Total 42,436,250
- ------------
* less than 1 %.
(1) CEOCAST IS OUR PUBLIC RELATIONS CONSULTANT. THE NATURAL PERSON WHO
EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE POWERS WITH RESPECT TO
SHARES HELD OF RECORD BY THE ENTITY, CEOCAST, INC. IS RACHEL GLICKSMAN AND
GARY NASH.
(2) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO SHARES HELD OF RECORD BY THE ENTITY, FRIEDLAND
CAPITAL INC IS JEFF FRIEDLAND.
(3) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED DISPOSITIVE POWERS
WITH RESPECT TO THE SHARES HELD OF RECORD BY THE ENTITY, CAPE MCKINNON
INC, IS STEVE FRYE.
(4) MS. HEPBURN IS AN EMPLOYEE OF THE COMPANY.
(5) MR. HERBERT IS A DIRECTOR AND OUR PRESIDENT AND CHIEF OPERATING OFFICER.
(6) MR. ILLES IS A CONSULTANT TO THE COMPANY.
(7) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO SHARES HELD OF RECORD BY THE ENTITY, LEONARDO
CAPITAL FUND LTD IS NEVIL DE TSCHARNER.
(8) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO SHARES HELD OF RECORD BY THE ENTITY, PAILSADES
MASTER FUND LP IS ANDY RUCKLESS.
(9) MR. ROUGHNEEN IS AN EMPLOYEE OF THE COMPANY.
(10) MR. SELLERS IS A DIRECTOR OF THE COMPANY.
(11) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO SHARES HELD OF RECORD BY THE ENTITY, STANDARD BANK
LONDON IS YOMI RODRIG.
(12) MR. VAN ALEN IS A DIRECTOR OF THE COMPANY.
(13) MS. YOUNG IS A FORMER EMPLOYEE OF THE COMPANY.
(14) MS. YOUNG IS CHIEF FINANCIAL OFFICER OF THE COMPANY.
(15) REPRESENTS 28,290,833 SHARES PURCHASED FOR $.15 PER SHARE AND 14,145,417
SHARES UNDERLYING WARRANTS EXERCISABLE AT $.20 PER SHARE AT ANY TIME PRIOR
TO DECEMBER 31, 2004 ISSUED TO INVESTORS IN OUR 2004-A PRIVATE PLACEMENT.
AS OF THE DATE HEREOF, NONE OF THESE WARRANTS HAVE BEEN EXERCISED. WE HAVE
AGREED TO REGISTER THESE SHARES FOR RESALE AT OUR COST AND EXPENSE THROUGH
JUNE 30, 2006.
DECEMBER 2003 INTEREST COMMON STOCK
Beneficial Ownership
Common Stock after Offering
Selling Shareholder Offered Hereby(16) Number Percent
- ------------------- ----------------- -------- ---------
DONALD T AANESTAD 9,000 0 *
VIJAY ALIMACHANDANI 1,500 0 *
JOHN P AYERS 4,500 0 *
CHARLES F BELLAVIA 4,500 0 *
BENJAMIN LEEBIRD 4,500 0 *
KATHLYNE K BIRDSALL 563 0 *
JOSEPH J BOLITSKY 30,000 0 *
EDWIN R BOYNTON(1) 14,625 0 *
DAVID G BRAY 900 0 *
DOUGLAS & CAROLYN BRITTAIN 9,000 0 *
BRITTAIN FAMILY TRUST (2) 3,000 0 *
GORDON L BRODINE 18,000 0 *
MICHAEL J BUDINETZ 6,413 0 *
CARLSON INVESTMENTS (3) 34,200 0 *
MICHAEL J CHIORDI 4,500 0 *
GERALD E CLARK JR 3,150 0 *
DIANE CLOUTIER 27,000 0 *
ROGER D COFFEY 4,500 0 *
MARC A COHEN 16,875 0 *
CORNERSTONE PUBLIC RELATIONS
GRP. (4) 422 0 *
JIM CROSS 1,500 0 *
WILLIAM R CROTHERS 2,813 0 *
LORRAINE CROW 450 0 *
CLIFTON B CURRIN TR FBO CLIFTON B
CURRIN TRUST UA MARCH 8, 1989 9,000 0 *
BENJAMIN DEACON 1,125 0 *
DELTA WESTERN COMPANY (5) 16,875 0 *
LOUIS E DI RENZO 2,250 0 *
ANEES T DIN 12,150 0 *
LEO J DOLAN 9,000 0 *
ROBERT F DRESS 3,300 0 *
HOWARD EFFRON 4,500 0 *
BENTLY ELLIOTT 450 0 *
ANTHONY J FANELLI 12,150 0 *
HELEN K FOX 4,500 0 *
SAMANTHA HARRIS FULMER 450 0 *
DOROTHY GALVIN 450 0 *
MARGARET R GEDDIS 1,125 0 *
ROBERT G GIDDENS 47,055 0 *
FREDERICK F GLOCKNER 450 0 *
WILLIAM M GOLDSTEIN 13,500 0 *
EDWARD HALDEMAN 9,000 0 *
PAULINE E HALDEMAN 9,000 0 *
IRA FBO ROBERT A HAMILTON (6) 1,890 101,752 *
JOHN E HAMILTON 1,350 0 *
ROBERT A HAMILTON (6) 4,095 104,713 *
PETER & DEBORAH HARRIS 2,250 0 *
JOYCE HODGES 2,250 0 *
MICHELLE HOLLENSHEAD 938 0 *
JAMES M HOLMWOOD 3,300 0 *
HRUBALA ASSOCIATES (7) 9,000 0 *
GORDON F HUDSON 9,000 0 *
CHRISTINE F HUGHES 1,125 0 *
WENDY JENKINS (8) 9,000 20,800 *
CHARLES T JONES 2,250 0 *
IRA FBO FRED KARAGOSIAN PERSHING
LLC C/F ROTH CONVERSION
ACCOUNT 7FP-001878 4,500 0 *
GLORIA & FRED KARN 450 0 *
MICHAEL KATCHUR 3,375 0 *
MAUDE WOOD KENT 4,500 0 *
THOMAS & MAUDE WOOD KENT 4,500 0 *
ROBERT A KILGORE 22,500 0 *
SHIRLEY K KNERR 4,050 0 *
GREGORY S KOBUS 4,500 0 *
PAUL G LANNI 4,500 0 *
WARREN D LEWIS 7,125 0 *
H MATHER LIPPINCOTT JR 4,500 0 *
ANTHONY F LOPEZ 9,000 0 *
ROBERT LOZOWSKI 900 0 *
DOUGLAS LURIO (9) 6,750 914,713 *
JAMES P MACCAIN 17,250 0 *
LEWIS F MADAN 900 0 *
KATHLEEN J MASON 39,000 0 *
BARRY N MCCABE 4,500 0 *
DUANE C MCCARTHY 450 0 *
G ELLARD MCCARTHY 2,250 0 *
JOHN F MCCORMICK 22,500 0 *
BOB MCGARRAH (10) 13,500 0 *
JOHN P MCGONIGLE 450 0 *
MARY C MCGONIGLE 450 0 *
MEDIATECH PARTNERS (11) 324,089 0 *
EILEEN MILLER 1,800 0 *
HARLEY & BROOK MILLER 9,488 0 *
GEORGE W MOFFITT JR 5,063 0 *
THOMAS MOLUMPHY 2,250 0 *
MOLUMPHY CAPITAL MGMT (12) 4,500 0 *
ROBERT H MONTGOMERY 12,000 0 *
MAC G MORRIS 2,250 0 *
JAMES MOSIER 9,000 0 *
ELIZABETH L NELSON 16,875 0 *
ROBERT F NEMETH 9,000 0 *
GREGG J NEWHUIS 49,500 0 *
JEFFREY M NEWHUIS 3,150 0 *
PATRICK NOLAN 10,564 0 *
PAUL NORDIN 1,500 0 *
GEORGE O'CONNELL 96,750 0 *
OLDOM & CO 4,500 0 *
ROBERT PADRICK 18,000 0 *
ROBERT PADRICK TRUSTEE FBO
KELLIE NICOLE PADRICK 4,500 0 *
50
ROBERT PADRICK TRUSTEE FOR
ROBERT G PADRICK 9,000 0 *
MICHAEL A PARKER 1,500 0 *
NEIL L PARKER 2,250 0 *
RICHARD & LAURA PARKER 11,250 0 *
JOSEPH PELLEGRINO 90,000 0 *
ROBERT H POTTS 4,500 0 *
CHARLES W PROCTOR III 188 0 *
ERNEST L RANSOME III 2,250 0 *
HARRY RENNER IV 37,688 0 *
JOHN B RETTEW III 6,000 0 *
GARDINER ROGERS 4,950 0 *
MARIE G ROPER 2,250 0 *
GERALD B ROSENTHAL 9,000 0 *
KARL F RUGART 12,375 0 *
JOHN S RUPP 4,500 0 *
VALENTINA SAS 900 0 *
EDWARD L SCHOENHUT 9,000 0 *
STEPHEN SCHWARTZ 11,250 0 *
MARY L SCRANTON 2,625 0 *
NICHOLAS SELLERS 4,500 0 *
RAYMOND K SHOTWELL 2,475 0 *
LEONARD H SICHEL JR 4,500 0 *
RICHARD SMITH 1,200 0 *
KATHY SMITLEY 2,250 0 *
TERRY W STANGLEIN 16,200 0 *
ELINOR STEINHILBER 4,500 0 *
MICHAEL & ELLEN STEIR 5,625 0 *
CPT ERIC W STETSON 2,250 0 *
GERTRUDE T STEVENS 15,625 0 *
HOMER N STEWART 4,500 0 *
PRISCILLA STITT 675 0 *
VIVIAN STROUD (13) 2,250 175,825 *
GEORGE E SZYCHOSKI 45 0 *
MICHAEL W SZYCHOSKI 113 0 *
CONSTANTINE TEOFIL SZYMBORSKI 4,500 0 *
ALFRED & SUSAN THOMPSON 1,238 0 *
ANDREW THOMPSON 225 0 *
WILLIAM E THOROUGHGOOD 1,125 0 *
GUILLERMO M TORRES 18,000 0 *
JAMES TURNER (14) 18,000 0 *
WILLIAM L VAN ALEN JR (15) 24,000 1,829,038 *
DAVID L WEAVER 2,340 0 *
DWANE M WEAVER 4,500 0 *
MICHAEL L WEAVER 450 0 *
WESLEY R WEAVER 6,750 0 *
ARTHUR & RUTH WIENER 7,602 0 *
J EDWARD WILLIARD 44,250 0 *
KENNETH B WILSON 2,250 0 *
CLAUDINE W WOLFE 1,350 0 *
C EDWIN & JANET LYN WRIGHT 2,250 0 *
JOHN D WRIGHT 4,500 0 *
CRAIG YOSHIMOTO 4,500 0 *
JOSEPH ZIRBES 2,250 0 *
RUTH ZWEIGBAUM 5,644 0 *
---------
1,615,776
* Less than 1%
51
(1) MR. BOYNTON IS A FORMER DIRECTOR OF THE COMPANY.
(2) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO SHARES HELD OF RECORD BY THE ENTITY, BRITTAIN
FAMILY TRUST, IS E. DOUGLAS BRITTAIN.
(3) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO SHARES HELD OF RECORD BY THE ENTITY, CARLSON
INVESTMENTS IS JIM CARLSON.
(4) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO THE SHARES HELD OF RECORD BY THE ENTITY,
CORNERSTONE PUBLIC RELATIONS GROUP, IS M. DARLENE HERBERT FELT.
(5) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO THE SHARES HELD OF RECORD BY THE ENTITY, DELTA
WESTERN COMPANY, IS GEORGE W MOFFITT.
(6) MR. HAMILTON IS AN EMPLOYEE OF USA.
(7) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO THE SHARES HELD OF RECORD BY THE ENTITY, HRUBALA
ASSOCIATES, A PARTNERSHIP, IS DAVID R MOLUMPHY.
(8) MS. JENKINS IS AN EMPLOYEE OF THE COMPANY.
(9) MR. LURIO IS A DIRECTOR AND HIS LAW FIRM, LURIO & ASSOCIATES, P.C., IS
GENERAL COUNSEL TO USA.
(10) MR. MCGARRAH WAS A CONSULTANT TO THE COMPANY.
(11) MEDIATECH CAPITAL IS THE SUCCESSOR TO TECHNOLOGY PARTNERS (HOLDINGS), LLC,
THE COMPANY'S FORMER INVESTMENT BANKER. THE NATURAL PERSON WHO EXERCISES
SOLE AND/OR SHARED VOTING OR DISPOSITIVE POWERS WITH RESPECT TO SHARES
HELD OF RECORD BY MEDIATECH CAPITAL IS PORTER BIBB.
(12) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO THE SHARES HELD OF RECORD BY THE ENTITY, MOLUMPHY
CAPITAL MGMT, IS DAVID R MOLUMPHY.
(13) MS. STROUD IS AN EMPLOYEE OF USA.
(14) MR. TURNER IS AN EMPLOYEE OF USA.
(15) MR. VAN ALEN IS A DIRECTOR OF USA.
(16) REPRESENTS 538,592 SHARES ISSUED AT THE RATE OF $.20 PER SHARE AND 538,592
SHARES UNDERLYING WARRANTS TO PURCHASE OUR SHARES AT $.20 PER SHARE AT ANY
TIME THROUGH AUGUST 30, 2004. THESE SHARES AND WARRANTS TO PURCHASE UP TO
538,592 SHARES WERE ISSUED TO OUR SENIOR NOTEHOLDERS WHO ELECTED TO
RECEIVE THESE SECURITIES IN LIEU OF CASH FOR THE DECEMBER 31, 2003
QUARTERLY INTEREST PAYMENTS AND FOR SHARES AND WARRANTS PERTAINING TO
PRIOR QUARTERS NOT PREVIOUSLY REGISTERED. ALSO REPRESENTS AN ADDITIONAL
538,592 SHARES UNDERLYING WARRANTS THAT WERE ISSUED IN JUNE 2004 THAT ARE
EXERCISABLE AT $.20 PER SHARE AT ANY TIME PRIOR TO DECEMBER 31, 2004. WE
HAVE AGREED TO REGISTER THESE SHARES FOR RESALE UNDER THE ACT AT OUR COST
AND EXPENSE THROUGH JUNE 30, 2006. AS OF THE DATE OF THIS PROSPECTUS, NONE
OF THESE WARRANTS HAVE BEEN EXERCISED.
52
INTEREST WARRANTS
Beneficial Ownership
Common Stock after Offering
Selling Shareholder Offered Hereby(27) Number Percent
- ------------------- ----------------- ------ -------
DONALD T AANESTAD 12,900 0 *
VIJAY ALIMACHANDANI 19,150 0 *
ALAN ALPERT 4,350 0 *
JOHN P AYERS 8,700 0 *
JOHN BACHICH 21,000 0 *
CHARLES F BELLAVIA 6,450 0 *
NANCY & EARL BESCH 8,700 0 *
GUNTER J BEYER 6,483 0 *
BENJAMIN LEE BIRD 8,700 0 *
KATHLYNE K BIRDSALL 1,090 0 *
DAVID C BLACKBURN 650 0 *
JOSEPH J BOLITSKY 58,000 0 *
EDWIN R BOYNTON (1) 28,275 0 *
JAMES R BOYNTON
ACCT# OUP-957361-M2 3,600 0 *
DAVID G BRAY 1,554 0 *
DOUGLAS & CAROLYN
BRITTAIN 13,933 0 *
BRITTAIN FAMILY TRUST (2) 5,800 0 *
GORDON L BRODINE 30,080 0 *
MICHAEL J BUDINETZ 9,688 0 *
VINCENT J CALVARESE 7,125 0 *
WILLIAM ACAMPBELL 1,350 0 *
RALPH A CARABASI MD 600 0 *
JULIE CARLSON 5,683 0 *
CARLSON INVESTMENTS (3) 11,400 0 *
GARY CELLA 1,360 0 *
MICHAEL J CHIORDI 8,700 0 *
GERALD E CLARK JR 6,090 0 *
ROBERT J CLARKE 8,697 0 *
DIANE CLOUTIER 52,200 0 *
ROGER D COFFEY 6,433 0 *
MARC A COHEN 50,025 0 *
Cornerstone Public Relations
Grp, M Darlene Herbert Felt (4) 725 0 *
JOHANNA CRAVEN 1,068 0 *
JIM CROSS 2,900 0 *
WILLIAM R CROTHERS 5,440 0 *
DUDLEY R CROW 83 0 *
LORRAINE CROW 791 0 *
CLIFTON B CURRIN
TRUST 9,000 0 *
DAMAR FAMILY TRUST
DTD 7-1-03 (5) 80,273 0 *
BENJAMIN DEACON 1,978 0 *
DELTA WESTERN COMPANY (6) 32,625 0 *
DAVID DEMEDIO (7) 9,975 250,624 *
LOUIS E DI RENZO 4,350 0 *
DILIGENT FINANCE COMPANY LTD (8) 178,134 0 *
ANEES T DIN 12,150 0 *
LEO J DOLAN 17,400 0 *
ROBERT F DRESS 6,300 0 *
HOWARD EFFRON 8,407 0 *
BENTLY ELLIOTT 7,913 0 *
ELLSHAY LLC (9) 1,500 0 *
ANTHONY J FANELLI 13,540 0 *
HENRY J FIELDMAN 3,600 0 *
JOHN S FOSTER 59,450 0 *
HELEN K FOX 8,509 0 *
SAMANTHA HARRIS FULMER 787 0 *
DOROTHY GALVIN 870 0 *
MARGARET R GEDDIS 2,175 0 *
ROBERT G GIDDENS 80,419 0 *
FREDERICK F GLOCKNER 870 0 *
WILLIAM M GOLDSTEIN 26,100 0 *
EDWARD HALDEMAN 6,000 0 *
PAULINE E HALDEMAN 6,000 0 *
IRA FBO ROBERT A HAMILTON (10) 3,486 100,156 *
JOHN E HAMILTON 2,610 100,891 *
ROBERT A HAMILTON (10) 7,917 0 *
PETER & DEBORAH HARRIS 350 0 *
GEORGE HARRUM (11) 417 0 *
JOHN HAY 3,600 0 *
HEALD FAMILY TRUST (12) 8,400 0 *
ANDREW B HEBENSTREIT 16,500 0 *
ADELE H HEPBURN (13) 22,679 6,661,945 1.62
JOYCE HODGES 4,350 0 *
MICHELLE HOLLENSHEAD 1,815 0 *
JAMES M HOLMWOOD 17,400 0 *
HRUBALA ASSOCIATES, A
PARTNERSHIP (14) 15,117 0 *
GORDON F HUDSON 16,375 0 *
CHRISTINE F HUGHES 2,175 0 *
STEVE ILLES (15) 90,000 39,430,000 9.58
WENDY JENKINS (16) 8,900 20,500 *
WILLIAM ROBERT JOHNSTON 4,350 0 *
CHARLES T JONES 4,350 0 *
ROTH IRA FBO FRED
KARAGOSIAN, PERSHING LLC
AS CUSTODIAN 8,700 0 *
GLORIA & FRED KARN 870 0 *
MICHAEL KATCHUR 6,525 0 *
THOMAS A KATCHUR 37,500 0 *
MAUDE WOOD KENT 8,700 0 *
THOMAS & MAUDE WOOD KENT 8,700 0 *
ROBERT A KILGORE 43,500 0 *
SHIRLEY K KNERR 7,830 0 *
GREGORY S KOBUS 8,700 0 *
CHRISTINE C KOLLS 3,600 0 *
PAUL G LANNI 8,700 0 *
WARREN D LEWIS 11,075 0 *
LEXINGTON VENTURES INC (17) 3,800 0 *
H MATHER LIPPINCOTT JR 7,500 0 *
ANTHONY F LOPEZ 11,700 0 *
ROBERT LOZOWSKI 1,287 0 *
LSP PARTNERS (18) 50 0 *
DOUGLAS LURIO (19) 11,250 910,213 *
JAMES P MACCAIN 21,800 0 *
LEWIS F MADAN 1,740 0 *
KATHLEEN J MASON 75,400 0 *
CHARLES MAYER 3,780 0 *
BARRY N MCCABE 6,217 0 *
DUANE C MCCARTHY 870 0 *
G ELLARD MCCARTHY 4,350 0 *
JOHN F MCCORMICK 3,750 0 *
BOB MCGARRAH (20) 13,500 462,500 *
JOHN P MCGONIGLE 870 0 *
MARY C MCGONIGLE 870 0 *
MEDIATECH CAPITAL PARTNERS (21) 304,602 0 *
JAMES F MERRIMAN 42,568 0 *
EILEEN MILLER 3,480 0 *
HARLEY & BROOK MILLER 17,584 0 *
WANDA S MOFFITT 2,700 0 *
GEORGE W MOFFITT JR 9,790 0 *
THOMAS MOLUMPHY 4,350 0 *
MOLUMPHY CAPITAL MGMT (22) 8,700 0 *
ROBERT H MONTGOMERY 23,200 0 *
MAC G MORRIS 4,350 0 *
JAMES H MOSIER 12,099 0 *
GARY NASH 480 0 *
ELIZABETH L NELSON 30,942 0 *
ROBERT F NEMETH 10,827 0 *
GREGG J NEWHUIS 58,148 0 *
JEFFREY M NEWHUIS 6,090 0 *
PATRICK NOLAN 19,139 0 *
PAUL NORDIN 2,900 0 *
GARY OAKLAND 4,850 0 *
GEORGE O'CONNELL 140,250 0 *
OLDOM & CO 4,500 0 *
ROBERT PADRICK 6,000 0 *
53
ROBERT PADRICK TRUSTEE FBO
KELLIE NICOLE PADRICK 1,500 0 *
ROBERT PADRICK TRUSTEE FOR
ROBERT G PADRICK 34,500 0 *
MICHAEL A PARKER 2,900 0 *
NEIL L PARKER 3,775 0 *
RICHARD & LAURA PARKER 15,792 0 *
JOSEPH PELLEGRINO 133,333 0 *
ROBERT H POTTS 7,500 0 *
CHARLES W PROCTOR III 321 0 *
ERNEST L RANSOME III 4,350 0 *
HARRY RENNER IV 41,363 0 *
JOHN B RETTEW III 9,500 0 *
GARDINER ROGERS 9,570 0 *
MARIE G ROPER 4,350 0 *
GERALD B ROSENTHAL 9,000 0 *
KARL F RUGART 23,925 0 *
JOHN S RUPP 6,696 0 *
VALENTINA SAS 1,740 0 *
EDWARD L SCHOENHUT 17,400 0 *
WILLIAM F SCHOENHUT JR 22,183 0 *
STEPHEN SCHWARTZ 20,150 0 *
VICKI S SCIFERS 1,950 0 *
MARY L SCRANTON 5,075 0 *
NICHOLAS SELLERS 8,700 0 *
William W Sellers tr ua 11/20/00
William W Sellers Rev Trust (23) 21,683 0 *
AMY T SEYMOUR 33 0 *
RAYMOND K SHOTWELL 3,668 0 *
LEONARD H SICHEL JR 8,700 0 *
RICHARD SMITH 98,320 0 *
KATHY SMITLEY 2,696 0 *
MELVIN G SNYDER 1,950 0 *
TERRY W STANGLEIN 26,642 0 *
ELINOR STEINHILBER 8,700 0 *
MICHAEL & ELLEN STEIR 9,633 0 *
CPT ERIC W STETSON 4,350 0 *
GERTRUDE T STEVENS 12,084 0 *
HOMER N STEWART 8,700 0 *
PRISCILLA STITT 3,450 0 *
VIVIAN K STROUD (24) 4,800 173,275 *
CLARK D & CAROLYN S STULL 8,610 0 *
GEORGE E SZYCHOSKI 87 0 *
MICHAEL W SZYCHOSKI 220 0 *
CONSTANTINE TEOFIL SZYMBORSKI 8,700 0 *
ALFRED & SUSAN THOMPSON 1,952 0 *
ANDREW THOMPSON 435 0 *
WILLIAM E THOROUGHGOOD 1,125 0 *
GUILLERMO M TORRES 3,000 0 *
JAMES TURNER (25) 26,467 0 *
ANTHONY B ULLMAN 3,600 0 *
WILLIAM L VAN ALEN JR (26) 14,533 1,838,505 *
C ANTHONY WAINWRIGHT 2,000 0 *
DAVID L WEAVER 780 0 *
DWANE M WEAVER 6,433 0 *
MICHAEL L WEAVER 870 0 *
WESLEY R WEAVER 9,999 0 *
ARTHUR L WHEELER 113,100 0 *
ARTHUR & RUTH WIENER 8,915 0 *
ARTHUR A WIENER 2,587 0 *
BERNARD WIENER 1,283 0 *
J EDWARD WILLIARD 52,000 0 *
KENNETH B WILSON 3,258 0 *
CLAUDINE W WOLFE 1,548 0 *
C EDWIN & JANET LYNN WRIGHT 3,108 0 *
JOHN D WRIGHT 7,525 0 *
CRAIG YOSHIMOTO 8,700 0 *
JOSEPH ZIRBES 2,250 0 *
RUTH ZWEIGBAUM 10,265 0 *
TOTAL 3,177,904 0 *
* Less than 1%
54
(1) MR. BOYNTON IS A FORMER DIRECTOR OF THE COMPANY.
(2) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO SHARES HELD OF RECORD BY THE ENTITY, BRITTAIN
FAMILY TRUST, IS E. DOUGLAS BRITTAIN.
(3) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO SHARES HELD OF RECORD BY THE ENTITY, CARLSON
INVESTMENTS IS JIM CARLSON.
(4) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO THE SHARES HELD OF RECORD BY THE ENTITY,
CORNERSTONE PUBLIC RELATIONS GROUP, IS M. DARLENE HERBERT FELT.
(5) THE NATURAL PERSONS WHO EXERCISE SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO THE SHARES HELD OF RECORD BY THE ENTITY, DAMAR
FAMILY TRUST ARE MARLENE AND DAVID WEAVER.
(6) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO THE SHARES HELD OF RECORD BY THE ENTITY, DELTA
WESTERN COMPANY, IS GEORGE W MOFFITT.
(7) MR. DEMEDIO IS AN EMPLOYEE OF USA.
(8) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO THE SHARES HELD OF RECORD BY THE ENTITY, DILLIGENT
FINANCE, IS RAI HAMILTON.
(9) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO THE SHARES HELD OF RECORD BY THE ENTITY, ELSHAY,
LLC, IS MARK ERLICH.
(10) MR. HAMILTON IS AN EMPLOYEE OF USA.
(11) MR. HARRUM IS AN EMPLOYEE OF USA.
(12) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO THE SHARES HELD OF RECORD BY THE ENTITY, HEALD
FAMILY TRUST, IS JACK HEALD.
(13) MS. HEPBURN IS AN EMPLOYEE OF THE COMPANY.
(14) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO THE SHARES HELD OF RECORD BY THE ENTITY, HRUBALA
ASSOCIATES, A PARTNERSHIP, IS DAVID R MOLUMPHY.
(15) MR. ILLES IS A CONSULTANT TO THE COMPANY.
(16) MS. JENKINS IS AN EMPLOYEE OF THE COMPANY.
(17) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO THE SHARES HELD OF RECORD BY THE ENTITY, LEXINGTON
VENTURES, IS LARRY GORDON.
(18) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO THE SHARES HELD OF RECORD BY THE ENTITY, LSP
PARTNERS, IS AARON LEHMAN.
(19) MR. LURIO IS A DIRECTOR AND HIS LAW FIRM, LURIO & ASSOCIATES, P.C., IS
GENERAL COUNSEL TO USA.
(20) MR. MCGARRAH WAS A CONSULTANT TO THE COMPANY.
(21) MEDIATECH CAPITAL PARTNERS IS THE SUCCESSOR TO TECHNOLOGY PARTNERS
(HOLDINGS), LLC, THE COMPANY'S FORMER INVESTMENT BANKER. THE NATURAL
PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE POWERS WITH
RESPECT TO SHARES HELD OF RECORD BY MEDIATECH CAPITAL PARTNERS IS PORTER
BIBB.
(22) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO THE SHARES HELD OF RECORD BY THE ENTITY, MOLUMPHY
CAPITAL MGMT, IS DAVID R MOLUMPHY.
(23) MR. SELLERS IS A DIRECTOR OF THE COMPANY.
(24) MS. STROUD IS AN EMPLOYEE OF USA.
(25) MR. TURNER IS AN EMPLOYEE OF USA.
(26) MR. VAN ALEN IS A DIRECTOR OF USA.
(27) REPRESENTS 3,177,904 SHARES UNDERLYING WARRANTS TO PURCHASE OUR SHARES AT
$.20 PER SHARE AT ANY TIME THROUGH DECEMBER 31, 2004. THESE WARRANTS WERE
ISSUED TO OUR SENIOR NOTEHOLDERS WHO HAD PREVIOUSLY ELECTED TO RECEIVE
WARRANTS IN LIEU OF CASH FOR INTEREST PAYMENTS ON ACCOUNT OF THE CALENDAR
QUARTERS ENDED JUNE 30, 2002, SEPTEMBER 30, 2002 DECEMBER 31, 2002, MARCH
31, 2003, JUNE 30, 2003, AND SEPTEMBER 30, 2003. THE 538,592 WARRANTS
ISSUED ON ACCOUNT OF THE NOTEHOLDERS WHO HAD PREVIOUSLY ELECTED TO RECEIVE
WARRANTS IN LIEU OF CASH FOR INTEREST FOR THE DECEMBER 2003 QUARTER ARE
REFLECTED IN THE PRIOR SELLING SHAREHOLDER'S TABLE. WE HAVE AGREED TO
REGISTER THESE SHARES FOR RESALE UNDER THE ACT AT OUR COST AND EXPENSE
THROUGH JUNE 30, 2006. AS OF THE DATE OF THIS PROSPECTUS, NONE OF THESE
WARRANTS HAVE BEEN EXERCISED.
STEVE ILLES COMMON STOCK
Beneficial Ownership
After Offering
Common Stock ------------------------
Selling Shareholder Offered Hereby Number Percent
STEVE ILLES(1) 25,000,000 14,520,000 3.53%
- ---------
(1) Represents shares that Illes may purchase from us under the Common Stock
Purchase Agreement during the one year period following the date of this
prospectus. Illes is permitted to purchase Common Stock at the price per
share of $.30. In addition, USA has the right to require Illes to purchase
Common Stock at the lower of: (i) $.30; or (ii) 90% of the closing bid
price per share on the applicable date. We have agreed to register these
shares for resale by Illes at our cost and expense for a period of one
year. As of the date of this prospectus, no shares have been purchased by
Illes from us.
55
MARKET FOR COMMON STOCK
The Common Stock is currently traded on the OTC Electronic Bulletin Board under
the symbol USTT.
The high and low bid prices on the OTC Electronic Bulletin Board for the Common
Stock were as follows:
Fiscal
2002 High Low
- ---- ---- ---
First Quarter (through September 30, 2001) $ 1.05 $ 0.60
Second Quarter (through December 31, 2001) $ 0.74 $ 0.34
Third Quarter (through March 31, 2002) $ 0.80 $ 0.39
Fourth Quarter (through June 30, 2002) $ 0.41 $ 0.20
2003
- ----
First Quarter (through September 30, 2002) $ 0.39 $ 0.14
Second Quarter (through December 31, 2002) $ 0.23 $ 0.13
Third Quarter (through March 31, 2003) $ 0.22 $ 0.16
Fourth Quarter (through June 30, 2003) $ 0.64 $ 0.17
2004
- ----
First Quarter (through September 30, 2003) $ 0.54 $ 0.34
Second Quarter (through December 31, 2003) $ 0.42 $ 0.12
Third Quarter (through March 31, 2004) $ 0.29 $ 0.15
Such quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not represent actual transactions.
At May 31, 2004, there were 2,134,232 shares of Common Stock issuable upon
exercise of outstanding options. The following table shows the number of options
outstanding and their exercise price:
56
Option
Options Outstanding Exercise Price
------------------- --------------
1,970,565 $ .165
125,000 $1.00
38,667 $2.00
------------------
Total 2,134,232
==================
All of the aforesaid options have been issued to our employees, former Stitch
option holders or consultants.
As of May 31, 2004, a total of 18,203,545 warrants were outstanding with
exercise prices ranging from $.07 per share to $1.25 per share.
As of May 31, 2004, there were 522,742 shares of Common Stock issuable upon
conversion of the outstanding Preferred Stock and 667,718 shares issuable upon
the conversion of cumulative preferred dividends.
As of May 31, 2004 there are $10,080,937 face value of Senior Notes outstanding,
which are convertible into 49,276,805 shares of Common Stock.
On May 31, 2004 there were 1,520 record holders of the Common Stock and 544
record holders of the Preferred Stock.
The holders of the Common Stock are entitled to receive such dividends as the
Board of Directors of the Company may from time to time declare out of funds
legally available for payment of dividends. Through the date hereof, no cash
dividends have been declared on the Company's securities. No dividend may be
paid on the Common Stock until all accumulated and unpaid dividends on the
Preferred Stock have been paid. As of May 31, 2004, such accumulated unpaid
dividends amount to $6,677,180.
During fiscal year 2003, certain holders of the Company's Preferred Stock
converted 4,790 shares into 4,790 shares of Common Stock. Certain of these
shareholders also converted cumulative preferred dividends of $56,050 into 5,605
shares of Common Stock.
DESCRIPTION OF SECURITIES
General
We are authorized to issue up to 475,000,000 shares of common stock, no par
value, and 1,800,000 shares of undesignated preferred stock. As of the date
hereof, 900,000 preferred shares have been designated as series A convertible
preferred stock, no par value. As of May 31, 2004, there were 339,453,012 shares
of common stock issued and outstanding and 522,742 shares of series A preferred
stock issued and outstanding which are convertible into 522,742 shares of common
stock. Through May 31, 2004, a total of 588,408 shares of preferred stock have
been converted into 664,852 shares of common stock and $2,684,444 of accrued and
unpaid dividends thereon have been converted into 288,521 shares of common
stock.
57
Common Stock
The holder of each share of common stock:
o is entitled to one vote on all matters submitted to a vote of the
shareholders of USA, including the election of directors. There is no
cumulative voting for directors;
o does not have any preemptive rights to subscribe for or purchase shares,
obligations, warrants, or other securities of USA; and
o is entitled to receive such dividends as the Board of Directors may from
time to time declare out of funds legally available for payment of
dividends.
No dividend may be paid on the common stock until all accumulated and unpaid
dividends on the series A preferred stock have been paid. Upon any liquidation,
dissolution or winding up of USA, holders of shares of common stock are entitled
to receive pro rata all of the assets of USA available for distribution, subject
to the liquidation preference of the series A preferred stock of $10.00 per
share and any unpaid and accumulated dividends on the series A preferred stock.
58
Series A Convertible Preferred Stock
The holders of shares of Series A preferred stock:
o have the number of votes per share equal to the number of shares of common
stock into which each such share is convertible (i.e., 1 share of series A
preferred stock equals 1 vote);
o are entitled to vote on all matters submitted to the vote of the
shareholders of USA, including the election of directors; and
o are entitled to an annual cumulative cash dividend of $1.50 per annum,
payable when, as and if declared by the Board of Directors.
The record dates for payment of dividends on the Series A Preferred Stock are
February 1 and August 1 of each year. Any and all accumulated and unpaid cash
dividends on the Series A Preferred Stock must be declared and paid prior to the
declaration and payment of any dividends on the Common Stock. Any unpaid and
accumulated dividends will not bear interest. As of May 31, 2004 the
accumulated and unpaid dividends were $6,677,180.
Each share of Series A Preferred Stock is convertible at any time into 1 share
of fully issued and non-assessable Common Stock. Accrued and unpaid dividends
earned on shares of Series A Preferred Stock being converted into Common Stock
are also convertible into Common Stock at the rate $10.00 per share of Common
Stock at the time of conversion and whether or not such dividends have then been
declared by USA. As of May 31, 2004 a total of 588,408 shares of series A
Preferred Stock have been converted into common stock and accrued and unpaid
dividends thereon have been converted into 288,521 shares of Common Stock. The
conversion rate of the Series A Preferred Stock (and any accrued and unpaid
dividends thereon) will be equitably adjusted for stock splits, stock
combinations, recapitalizations, and in connection with certain other issuances
of common stock by USA. Upon any liquidation, dissolution, or winding-up of USA,
the holders of Series A Preferred Stock are entitled to receive a distribution
in preference to the Common Stock in the amount of $10.00 per share plus any
accumulated and unpaid dividends.
We have the right, at any time, to redeem all or any part of the issued and
outstanding series A preferred stock for the sum of $11.00 per share plus any
and all unpaid and accumulated dividends thereon. Upon notice by USA of such
call, the holders of the series A preferred stock so called will have the
opportunity to convert their shares and any unpaid and accumulated dividends
thereon into shares of common stock. The $11.00 per share figure was the
redemption price approved by the Directors and shareholders of USA at the time
the series A preferred stock was created and first issued. We currently have no
plans to redeem the preferred stock.
12% Senior Notes
As of May 31, 2004, we had outstanding $3,404,490 of Senior Notes due December
31, 2007, $3,213,500 of Senior Notes due December 31, 2006, $3,011,791 of Senior
Notes due December 31, 2005 and $451,152 of Senior Notes due December 31, 2004.
The principal amount of each senior note which is not voluntarily converted
shall be payable on the maturity date thereof, at which time any unpaid and
accrued interest shall also become due. Interest shall accrue at the rate of 12%
per annum from and after the date of issuance and shall be payable quarterly in
arrears on December 31, March 31, June 30, and September 30 of each year until
maturity. The senior notes are senior to all existing equity securities of USA,
including the series A preferred stock.
59
Of the Senior Notes due December 31, 2003, a total of $3,823,000 were purchased
through the exchange of $3,823,000 of the old senior notes previously due
December 31, 2001. The principal amount of these notes is convertible at any
time into shares of common stock at the rate of $1.25 per share. The interest
paid on these notes is also convertible into shares of common stock at the rate
of $1.00 per share. For the quarters ended September 31, 2001 and December 31,
2001, the conversion rate relating to the interest payments was reduced to $.50
per share and for the quarter ended March 31, 2002 to $.40 per share and for the
quarters ended June 30, 2002, September 30, 2002, December 31, 2002, March 31,
2003, June 30, 2003, and September 30, 2003, to $.20 per share together with one
warrant at $.20 per share for each share issued with an exercise termination
date of August 30, 2004. We have agreed to use our best efforts to register
these shares as well as the shares underlying the warrants for resale under the
Act. These shares and shares underlying the warrants issued by us on account of
the December 31, 2003 quarter are included in this prospectus. In March 2003,
each holder of these senior notes was granted the right to have the conversion
rate reduced to $.20 in exchange for extending the maturity date for three
additional years or until December 31, 2006. A total of $5,024,000 of these
notes have been extended to December 31, 2006. In connection with any extensions
other than the reduction of the conversion rate, there were no other payments or
benefits exchanged between USA and the noteholders.
The principal amount of each Senior Note due December 31, 2004 is convertible at
any time into shares of Common Stock at the rate of $.40 per share. In January
2002, the Company agreed to provide the option to each holder of these senior
notes to elect to accept shares in lieu of receiving cash in satisfaction of the
interest payments otherwise due to them on account of the last three quarters of
fiscal 2002. The conversion rate for this interest payment due for the quarter
ended March 31, 2002 was $.40 per share. The Company continued this option at
$.20 per share for the quarters ended June 30, 2002, September 30, 2002,
December 31, 2002, March 31, 2003, June 30, 2003, September 30, 2003, and
December 31, 2003 together with one warrant at $.20 for each share issued with
an exercise termination date of August 30, 2004. We have agreed to register
these shares as well as the shares underlying the warrants for resale under the
Act. These shares and shares underlying the warrants issued by us on account of
the December 31, 2003 quarter are included in this prospectus. In March 2003,
each holder of these senior notes was granted the right to have the conversion
rate reduced to $.20 in exchange for extending the maturity date for three
additional years or until December 31, 2007. The noteholder was required to make
the election on or prior to December 31, 2003. A total of $4,191,350 of these
notes have been extended to December 31, 2007 and are convertible at $.20 per
share. In connection with any extensions other than the reduction of the
conversion rate, there were no other payments or benefits exchanged between USA
and the noteholders.
The principal amount of each Senior Note due December 31, 2005 is convertible at
any time into shares of Common Stock at the rate of $.20 per share. The Company
agreed to provide the option to each holder of these senior notes to elect to
accept shares in lieu of receiving cash in satisfaction of the interest payments
otherwise due to them on account of the last quarter of fiscal 2002 at the rate
of $.20 per share. The Company continued this option at $.20 per share for the
quarters ended September 30, 2002, December 31, 2002, March 31, 2003, June 30,
2003, September 30, 2003, and December 31, 2003 together with one warrant at
$.20 for each share issued with an exercise termination date of August 30, 2004.
We have agreed to register these shares as well as the shares underlying the
warrants for resale under the Act. These shares and shares underlying the
warrants issued by us on account of the December 31, 2003 quarter are included
in this prospectus.
During June 2004, we issued a warrant to purchase one share for each existing
warrant then held by the holders of the senior notes who had elected to receive
the warrant in lieu of a cash interest payment. The shares underlying these
warrants are included in this prospectus.
60
The indebtedness evidenced in the Senior Note is subordinated to the prior
payment when due of the principal of, premium, if any, and interest on all
"Senior Indebtedness", as defined herein, of USA as follows: Upon any
distribution of its assets in a liquidation or dissolution of USA, or in
bankruptcy, reorganization, insolvency, receivership or similar proceedings
relating to USA, the Lender shall not be entitled to receive payment until the
holders of Senior Indebtedness are paid in full. Until a payment default occurs
with respect to any Senior Indebtedness, all payments of principal and interest
due to Lender under the senior note shall be made in accordance with this senior
note. Upon the occurrence of any payment default with respect to any Senior
Indebtedness then, upon written notice thereof to USA and Lender by any holder
of such Senior Indebtedness or its representative, no payments of principal or
interest on the senior note shall be made by USA until such payment default has
been cured to the satisfaction of the holder of such Senior Indebtedness or
waived by such holder, provided, however, that if during the 180 day period
following such default, the holder of Senior Indebtedness has not accelerated
its loan, commenced foreclosure proceedings or otherwise undertaken to act on
such default, then USA shall be required to continue making payments under the
senior note, including any which had not been paid during such 180 day period.
In the event that any institutional lender to USA at any time so requires, the
Lender shall execute, upon request of USA, any intercreditor or subordination
agreement(s) with any such institutional lender on terms not materially more
adverse to the Lender then the subordination terms contained in this senior
note.
The term "Senior Indebtedness" shall mean (a) all direct or indirect, contingent
or certain indebtedness of any type, kind or nature (present or future) created,
incurred or assumed by USA with respect to any future bank or other financial
institutional indebtedness of USA or (b) any indebtedness created, incurred, or
assumed, by USA secured by a lien on any of our assets.
Notwithstanding anything herein to the contrary, Senior Indebtedness does not
include:
o unsecured accounts payable to trade creditors of USA incurred in the
ordinary course of business;
o any debt owed by USA to any officer, director or stockholder of USA;
o any obligation of Borrower issued or contracted for as payment in
consideration of the purchase by USA of the capital stock or substantially
all of the assets of another person or in consideration for the merger or
consolidation with respect to which USA was a party;
o any operating lease obligations of USA;
o any other indebtedness which by its terms is subordinated to the senior
note; or
o any "other indebtedness" which is subordinated to all indebtedness to which
the senior note is subordinated in substantially like terms as the senior
note; which such "other indebtedness" shall be treated as equal with the
indebtedness evidenced by the senior note.
Common Stock Purchase Warrants
As of May 31, 2004, there are outstanding warrants to purchase 7,142,858 shares
at $.07 per share, warrants to purchase 5,000,000 shares at $.10 per share,
warrants to purchase 750,000 shares at $.067 per share, warrants to purchase
3,654,859 shares at $.20 per share, warrants to purchase 1,200,000 shares at
$.91 per share, warrants to purchase 377,927 shares at $1.00 per share, warrants
to purchase 2,901 shares at $1.03 per share, and warrants to purchase 75,000
shares at $1.25 per share.
61
The exercise price of the warrants and the number of shares of Common Stock
issuable upon exercise of the warrants are subject to adjustment in certain
circumstances, including a stock split of, stock dividend on, or a subdivision,
combination or recapitalization of the common stock. Upon the merger,
consolidation, sale of substantially all the assets of USA, or other similar
transaction, the warrant holders shall, at the option of USA, be required to
exercise the warrants immediately prior to the closing of the transaction, or
such warrants shall automatically expire. Upon such exercise, the warrant
holders shall participate on the same basis as the holders of common stock in
connection with the transaction.
The warrants do not confer upon the holder any voting or any other rights of a
shareholder of USA. Upon notice to the warrant holders, USA has the right, at
any time and from time to time, to reduce the exercise price or to extend the
warrant termination date.
62
Shares Eligible for Future Sale
Of the 339,453,012 shares of common stock issued and outstanding on May 31,
2004, a total of approximately 31,771,925 are restricted securities which are
not currently eligible for sale under Rule 144 promulgated under the Act. As of
May 31, 2004, there were 522,742 shares of preferred stock issued and
outstanding, all of which are freely transferable without further registration
under the Act (other than shares held by "affiliates" of USA).
The shares of preferred stock issued and outstanding as of the date hereof are
convertible into 522,742 shares of common stock all of which would be fully
transferable without further registration under the Act (other than shares held
by "affiliates" of USA).
Shares of our common stock which are not freely tradeable under the Act are
known as "restricted securities" and cannot be resold without registration under
the Act or pursuant to Rule 144 promulgated thereunder.
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are required to be aggregated), including any affiliate of USA, who
beneficially owns "restricted securities" for a period of at least one year is
entitled to sell within any three-month period, shares equal in number to the
greater of (i) 1% of the then outstanding shares of the same class of shares, or
(ii) the average weekly trading volume of the same class of shares during the
four calendar weeks preceding the filing of the required notice of sale with the
SEC. The seller must also comply with the notice and manner of sale requirements
of Rule 144, and there must be current public information available about USA.
In addition, any person (or persons whose shares must be aggregated) who is not,
at the time of sale, nor during the preceding three months, an affiliate of the
USA, and who has beneficially owned restricted shares for at least two years,
can sell such shares under Rule 144 without regard to the notice, manner of
sale, public information or the volume limitations described above.
Limitation of Liability; Indemnification
63
As permitted by the Pennsylvania Business Corporation Law of 1988 ("BCL"), our
By-laws provide that Directors will not be personally liable, as such, for
monetary damages for any action taken unless the Director has breached or failed
to perform the duties of a Director under the BCL and the breach or failure to
perform constitutes self-dealing, willful misconduct or recklessness. This
limitation of personal liability does not apply to any responsibility or
liability pursuant to any criminal statute, or any liability for the payment of
taxes pursuant to Federal, State or local law. The By-laws also include
provisions for indemnification of our Directors and officers to the fullest
extent permitted by the BCL. Insofar as indemnification for liabilities arising
under the Act may be permitted to Directors, officers and controlling persons of
USA pursuant to the foregoing provisions, or otherwise, we have been advised
that in the opinion of the SEC such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our stock and warrants is American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005.
PLAN OF DISTRIBUTION
The selling shareholders are free to offer and sell the common shares at such
times, in such manner and at such prices as the selling shareholders may
determine. The types of transactions in which the common shares are sold may
include transactions in the over-the-counter market (including block
transactions), negotiated transactions, the settlement of short sales of common
shares, or a combination of such methods of sale. The sales will be at market
prices prevailing at the time of sale or at negotiated prices. Such transactions
may or may not involve brokers or dealers.
The selling shareholders may effect such transactions by selling common stock
directly to purchasers or through broker-dealers, which may act as agents or
principals. Such broker-dealers may receive compensation in the form of
discounts, concessions, or commissions from the selling shareholders. They may
also receive compensation from the purchasers of common shares for whom such
broker-dealers may act as agents or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions).
Steve Illes is an "underwriter" within the meaning of the Act in connection with
the sale of shares purchased from us under his agreement with us. The
ten-percent discount received by him in connection with his purchase of shares
from us will be an underwriting discount and the $45,000 due diligence fee paid
to him by us will be underwriting compensation. The other selling shareholders
and any broker-dealers or agents that are involved in selling the shares may
also be deemed to be "underwriters" within the meaning of the Act in connection
with such sales. In such event, any commissions received by such broker-dealers
or agents and profit on the resale of the shares purchased by them may be deemed
to be underwriting discounts under the Act.
The selling shareholders also may resell all or a portion of the common shares
in open market transactions in reliance upon Rule 144 under the Act, provided
they meet the criteria and conform to the requirements of such Rule. We have
agreed to bear all the expenses (other than selling commissions) in connection
with the registration and sale of the common stock covered by this prospectus.
In some circumstances, we have agreed to indemnify the selling shareholders
against certain losses and liabilities, including liabilities under the Act.
We have advised the selling shareholders that while they are engaged in a
distribution of the shares included in this prospectus they are required to
comply with Regulation M promulgated under the Securities Exchange Act of 1934,
as amended. With certain exceptions, Regulation M precludes the selling
shareholders, any affiliated purchasers, and any broker-dealer or other person
who participates in such distribution from bidding for or purchasing, or
attempting to induce any person to bid for or purchase any security which is the
subject of the distribution until the entire distribution is complete.
64
LEGAL MATTERS
The validity of the common stock has been passed upon for us by Lurio &
Associates, P.C., Philadelphia, Pennsylvania 19103.
EXPERTS
The consolidated financial statements of USA Technologies, Inc. at June 30, 2003
and 2002, and for each of the two years in the period ended June 30, 2003
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent registered public accounting firm, as set forth
in their report thereon (which contains an explanatory paragraph describing
conditions that raise substantial doubt about the Company's ability to continue
as a going concern as described in Note 2 to the consolidated financial
statements) appearing elsewhere herein, and are included in reliance upon such
reports given on the authority of such firm as experts in accounting and
auditing.
The financial statements of Bayview Technology Group, LLC as of December 31,
2002 and 2001 and for each of the periods in the two years ended December 31,
2002 included in this Prospectus and in the Registration Statement have been
audited by Anton Collins Mitchell LLP, independent registered public accounting
firm, as set forth in their report thereon (which contains an explanatory
paragraph regarding the Company's ability to continue as a going concern)
appearing elsewhere herein and are included upon the authority of said firms as
experts in auditing and accounting.
65
USA Technologies, Inc.
Consolidated Financial Statements
Years ended June 30, 2003 and 2002
Contents
Report of Independent Registered Public Accounting Firm.....................F-1
Consolidated Financial Statements
Consolidated Balance Sheets.................................................F-2
Consolidated Statements of Operations.......................................F-3
Consolidated Statements of Shareholders' Equity ............................F-4
Consolidated Statements of Cash Flows.......................................F-7
Notes to Consolidated Financial Statements..................................F-8
66
Report of Independent Registered Public Accounting Firm
USA Technologies, Inc.
Board of Directors and Shareholders
We have audited the accompanying consolidated balance sheets of USA
Technologies, Inc. as of June 30, 2003 and 2002, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
two years in the period ended June 30, 2003. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 consolidated financial position of USA Technologies,
Inc. at June 30, 2003 and 2002, and the consolidated results of its operations
and its cash flows for each of the two years in the period ended June 30, 2003,
in conformity with U.S. 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 has incurred recurring operating losses
and has a working capital deficiency at June 30, 2003. These conditions 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
September 12, 2003,
except for Note 17, as to which
the date is September 30, 2003
F-1
USA Technologies, Inc.
Consolidated Balance Sheets
June 30 March 31,
2003 2002 2004
--------------------------------- -------------
Assets (Restated) (Unaudited)
Current assets:
Cash and cash equivalents $ 2,384,455 $ 557,970 $ 1,459,429
Accounts receivable, less allowance for uncollectible accounts
of $167,000 (unaudited) at March 31, 2004 and
$65,000 and $37,000 in 2003 and 2002, respectively 414,796 340,293 1,315,958
Other receivable -- -- 762,130
Inventory 457,900 877,814 1,425,126
Prepaid expenses and other current assets 201,383 124,865 337,636
Subscriptions receivable 1,013,400 35,000 --
Investment 904,049 -- 88,206
Assets held for sale -- -- 93,300
--------------------------------- ------------
Total current assets 5,375,983 1,935,942 5,481,785
Property and equipment, net 943,784 1,932,427 670,488
Software development costs, at cost, less accumulated amortization
of $5,326,187 (unaudited) at March 31, 2004 and
$4,327,526 and $2,995,979 in 2003 and 2002, respectively 998,660 2,330,207 --
Goodwill 7,945,580 7,945,580 7,985,207
Intangibles, net 2,591,500 2,883,500 11,140,982
Other assets 37,174 29,117 8,544
--------------------------------- ------------
Total assets $ 17,892,681 $ 17,056,773 $ 25,287,006
================================= ============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 2,266,156 $ 3,081,495 $ 2,881,330
Accrued expenses 2,720,743 2,131,289 2,174,533
Current obligations under long-term debt 830,674 850,644 479,070
Convertible Senior Notes 349,942 -- 387,255
Deposits -- 480,000 --
--------------------------------- ------------
Total current liabilities 6,167,515 6,543,428 5,922,188
Convertible Senior Notes, less current portion 7,808,469 6,289,825 6,602,556
Long-term debt, less current portion 224,614 762,085 17,810
Convertible debenture -- 65,543 --
--------------------------------- ------------
Total liabilities 14,200,598 13,660,881 12,542,554
Shareholders' equity:
Preferred Stock, no par value:
Authorized shares--1,800,000
Series A Convertible Preferred--Authorized shares - 900,000
Issued and outstanding shares--523,442 (unaudited) at March
31, 2004 and 524,492 and 529,282 at June 30, 2003 and 2002,
respectively (liquidation preference of $11,920,670 (unaudited)
at March 31, 2004 and $11,158,027 at June 30, 2003) 3,715,246 3,749,158 3,707,812
Common Stock, no par value:
Authorized shares--475,000,000 at March 31, 2004 and
400,000,000 and 150,000,000 at June 30, 2003 and 2002, respectively
Issued and outstanding shares--300,151,941 (unaudited) at March
31, 2004 and 218,741,042 and 65,339,188 at
June 30, 2003 and 2002, respectively 78,790,405 56,588,503 104,236,037
Subscriptions receivable -- (149,750) --
Accumulated other comprehensive income -- -- 51,819
Accumulated deficit (78,813,568) (56,792,019) (95,251,216)
--------------------------------- ------------
Total shareholders' equity 3,692,083 3,395,892 12,744,452
--------------------------------- ------------
Total liabilities and shareholders' equity $ 17,892,681 $ 17,056,773 $ 25,287,006
================================= ============
See accompanying notes.
F-2
USA Technologies, Inc.
Consolidated Statements of Operations
Nine months ended
Year ended June 30 March 31,
2003 2002 2004 2003
------------------------------ ------------------------------
Revenues: (Unaudited)
Equipment sales $ 1,034,427 $ 795,938 $ 3,741,359 $ 880,545
License and transaction fees 1,373,573 778,906 902,047 995,082
Product sales and other 445,068 107,857 304,476 357,703
------------------------------ ---------------------------
Total revenues 2,853,068 1,682,701 4,947,882 2,233,330
Cost of sales (including amortization of software
development costs) 2,971,443 4,062,901 3,236,524 2,057,173
------------------------------ ---------------------------
Gross profit (118,375) (2,380,200) 1,711,358 176,157
Operating expenses:
General and administrative 7,194,684 7,868,064 5,096,447 4,951,021
Compensation 4,973,210 4,654,662 8,664,200 2,767,168
Depreciation and amortization 1,251,716 440,238 1,227,109 734,026
Loss on debt modification 1,521,654 -- 318,915 959,352
------------------------------ ---------------------------
Total operating expenses 14,941,264 12,962,964 15,306,671 9,411,567
------------------------------ ---------------------------
Operating loss (15,059,639) (15,343,164) (13,595,313) (9,235,410)
Other income (expense):
Interest income 18,691 15,791 29,999 11,956
Gain (loss) on investment (1,945,951) -- 603,480 --
Gain on termination of contract -- -- 509,244 --
Interest expense:
Coupon or stated rate (1,163,192) (966,974) (850,919) (924,582)
Non-cash interest and amortization of debt discount (3,815,408) (1,513,118) (3,120,769) (2,394,862)
Less: amount capitalized -- 492,658 -- --
------------------------------ ---------------------------
Total interest expense (4,978,600) (1,987,434) (3,971,688) (3,319,444)
------------------------------ ---------------------------
Total other income (expense) (6,905,860) (1,971,643) (2,828,965) (3,307,488)
------------------------------ ---------------------------
Net loss (21,965,499) (17,314,807) (16,424,278) (12,542,898)
Cumulative preferred dividends (793,586) (822,561) (786,513) (793,586)
------------------------------ ---------------------------
Loss applicable to common shares $ (22,759,085) $ (18,137,368) $(17,210,791) $(13,336,484)
============================== ===========================
Loss per common share (basic and diluted) $ (0.20) $ (0.50) $ (0.06) $ (0.15)
============================== ===========================
Weighted average number of common shares outstanding (basic and
diluted) 111,790,358 35,994,157 276,000,532 91,491,804
============================== ===========================
See accompanying notes.
F-3
USA Technologies, Inc.
Consolidated Statements of Shareholders' Equity
(Restated)
Series A
Convertible Deferred Subscriptions Accumulated
Preferred Stock Common Stock Compensation Receivable Deficit Total
-----------------------------------------------------------------------------------------
Balance, June 30, 2001 $ 3,933,253 $32,977,922 $(103,000) - $ (39,209,072) $(2,400,897)
Conversion of 26,002 shares of Preferred
Stock to 26,002 shares of Common Stock (184,095) 184,095 - - - -
Conversion of $268,140 of cumulative
preferred dividends into 26,814
shares of Common Stock at $10.00 per
share - 268,140 - - (268,140) -
Issuance of 2,784,134 shares of Common
Stock for professional services - 1,330,944 - - - 1,330,944
Issuance of 500,000 Common Stock
Warrants for professional services - 115,000 - - - 115,000
Issuance of 2,340,000 shares of Common
Stock for Officer compensation - 981,000 - - - 981,000
Issuance of 200,000 Common Stock Options
for professional services - 66,000 - - - 66,000
Issuance of 498,000 shares of Common
Stock from the conversion of $622,500
of the 2000 12% Senior Notes at $1.25
per share - 622,500 - - - 622,500
Exercise of 2,333,529 Common Stock
Warrants at exercise prices ranging from
$0.10 to $0.50 per share, net of
offering costs - 336,921 - - - 336,921
Issuance of 333,678 shares of Common Stock from the
conversion of $82,000 of a 9-3/4% Convertible
Debenture, and the related exercise of Common
Stock Warrants at varying prices per share to
purchase 3,336,780 shares of Common Stock, net
of offering costs - 886,250 - - - 886,250
Issuance of 8,772,724 shares of Common
Stock in connection with Private
Placement Offerings at varying
offering prices, net of offering
costs of $343,944 - 4,747,223 - (149,750) - 4,597,473
Issuance of 674,431 shares of Common
Stock in lieu of cash payments for
interest on the Convertible Senior
Notes and the related issuance of
303,829 Common Stock Warrants - 301,856 - - - 301,856
Debt discount relating to beneficial
conversion feature on the 2001 12%
Senior Notes and on the $325,000
9-3/4% Convertible Debenture - 4,067,813 - - - 4,067,813
Issuance of Common Stock in connection
with Stitch acquisition - 8,710,816 - - - 8,710,816
Issuance of Common Stock Options and
Common Stock Warrants in connection
with Stitch acquisition - 963,583 - - - 963,583
Compensation expense related to deferred
stock awards - - 103,000 - - 103,000
Other - 28,440 - - - 28,440
Net loss - - - - (17,314,807) (17,314,807)
----------------------------------------------------------------------------------------
Balance, June 30, 2002 3,749,158 56,588,503 - (149,750) (56,792,019) 3,395,892
See accompanying notes.
F-4
USA Technologies, Inc.
Consolidated Statements of Shareholders' Equity
Series A
Convertible Subscriptions Accumulated
Preferred Stock Common Stock Receivable Deficit Total
- --------------------------------------------------------------------------------------------------------------------------------
Conversion of 4,790 shares of Preferred
Stock to 4,790 shares of Common Stock (33,912) 33,912 - - -
Conversion of $56,050 of cumulative
preferred dividends into 5,605 shares
of Common Stock at $10.00 per share - 56,050 - (56,050) -
Issuance of 5,749,442 shares of Common
Stock for professional services - 1,245,631 149,750 - 1,395,381
Exercise of 17,686,489 Common Stock
Warrants at $0.10 per share - 1,768,650 - - 1,768,650
Issuance of 5,727,383 shares of Common
Stock from the conversion of 12%
Senior Notes - 1,145,442 - - 1,145,442
Issuance off 2,467,225 shares of Common Stock
from the conversion of $243,000 of 9-3/4%
debentures, and the related exercise of
Common Stock Warrants at varying prices per
share to purchase 7,206,893 shares of Common
Stock, net of offering costs - 873,000 - - 873,000
Issuance of 89,207,511 shares of Common
Stock in connection with various
Private Placement Offerings at varying
prices per share - 8,750,058 - - 8,750,058
Issuance of 2,315,000 shares of Common
Stock in lieu of cash payments for
interest on the Convertible Senior Notes
and the issuance of 2,315,000 Common
Stock Warrants - 860,250 - - 860,250
Debt Discount relating to beneficial
conversion feature on the various 12%
Senior Notes - 2,947,130 - - 2,947,130
Issuance of 8,031,516 shares of Common
Stock in connection with the issuance
of 12% Senior Notes - 1,664,819 - - 1,664,819
Issuance of 15,000,000 shares of Common
Stock for the investment in Jubilee - 2,850,000 - - 2,850,000
Other - 6,960 - - 6,960
Net loss - - - (21,965,499) (21,965,499)
-------------------------------------------------------------------------------------
Balance, June 30, 2003 $ 3,715,246 $78,790,405 $ - $ (78,813,568) $ 3,692,083
See accompanying notes.
F-5
Series A Accumulated
Convertible Other
Preferred Common Accumulated Comprehensive
Stock Stock Deficit Income Total
-----------------------------------------------------------------------
Balance, June 30, 2003 $ 3,715,246 $ 78,790,405 $(78,813,568) $ -- $ 3,692,083
Issuance of 1,050 shares of Common Stock
from the conversion of 1,050 shares
of Preferred Stock (Unaudited) (7,434) 7,434 -- -- --
Issuance of 1,337 shares of Common Stock
from the conversion of cumulative
preferred dividends at $10.00 per
share (Unaudited) -- 13,370 (13,370) -- --
Exercise of 12,053,218 Common Stock
Warrants and Options (Unaudited) -- 1,013,436 -- -- 1,013,436
Issuance of 10,743,154 shares of Common
Stock from the conversion of 12%
Senior Notes (Unaudited) -- 2,148,630 -- -- 2,148,630
Issuance of 1,443,070 shares of Common
Stock in exchange for salaries and
professional services (Unaudited) -- 387,155 -- -- 387,155
Issuance of 10,500,000 shares of Common
Stock to executive in connection with
employment agreement (Unaudited) -- 4,620,000 -- -- 4,620,000
Issuance of 25,437,036 shares of Common
Stock from various private
placement offerings at varying
prices per share (Unaudited) -- 5,517,754 -- -- 5,517,754
Issuance of 1,062,034 shares of
Common Stock and related Common Stock
Warrants in lieu of cash payment
for interest on the 12% Senior
Notes (Unaudited) -- 478,646 -- -- 478,646
Debt discount relating to beneficial
conversion feature on 12% Senior Notes
(Unaudited) -- 1,981,007 -- -- 1,981,007
Issuance of 20,170,000 shares of Common
Stock in connection with the Bayview
acquisition (Unaudited) -- 9,278,200 -- -- 9,278,200
Net loss (Unaudited) -- -- (16,424,278) -- (16,424,278)
Unrealized gain on investment (Unaudited) -- -- -- 51,819 51,819
------------
Total comprehensive loss (Unaudited) -- -- -- -- (16,372,459)
-----------------------------------------------------------------------
Balance, March 31, 2004 (Unaudited) $ 3,707,812 $104,236,037 $(95,251,216) $ 51,819 $ 12,744,452
=======================================================================
See accompanying notes.
F-6
USA Technologies, Inc.
Consolidated Statements of Cash Flows
Year ended Nine months ended
June 30 March 31
2003 2002 2004 2003
------------ ----------- ------------ ------------
(Restated) (Unaudited)
Operating activities:
Net loss $(21,965,499) $(17,314,807) $(16,424,278) $(12,542,898)
Adjustments to reconcile net loss to net cash
used in operating activities:
Charges incurred in connection with the
issuance of Common Stock, Common Stock
Warrants and Senior Notes 2,573,301 5,532,037 4,950,905 1,278,724
Interest expense on the Senior Notes paid
through the issuance of Common Stock 860,250 301,856 478,646 444,618
Interest amortization related to Senior
Notes and Convertible Debentures 2,955,158 1,513,699 2,642,123 1,950,244
Depreciation 1,119,536 403,738 373,347 632,182
Amortization 1,623,547 3,032,479 1,898,178 1,092,828
Gain on sale of investment -- -- (603,480) --
Loss on investment 1,945,951 -- -- --
Gain on contract settlement -- -- (509,244) --
Loss on debt modification 1,521,654 -- 318,915 959,352
Loss on property and equipment -- 195,722 -- --
Changes in operating assets and liabilities:
Accounts receivable (74,503) (232,653) (907,662) (104,142)
Other receivable -- -- 674,649 --
Inventory 419,914 (36,642) (967,226) 190,095
Prepaid expenses, deposits and other assets (38,325) 774,845 (68,469) 13,008
Accounts payable (759,337) (259,627) 746,015 1,361,218
Accrued expenses 589,454 (44,413) (256,276) 295,115
------------ ----------- ------------ ------------
Net cash used in operating activities (9,228,899) (6,133,766) (7,653,857) (4,429,656)
Investing activities:
Purchase of property and equipment (186,895) (102,917) (273,493) (200,741)
Cash acquired in connection with Stitch
acquisition, net of financing costs - 2,278,229 -- --
Cash paid in connection with Bayview acquisition -- -- (727,969) --
Increase in software development costs -- (2,238,771)
Cash received from sale of property and equipment -- -- 35,100 --
Cash received for sale of Jubilee shares -- -- 709,011 --
------------ ----------- ------------ ------------
Net cash used in investing activities (186,895) (63,459) (257,351) (200,741)
Financing activities:
Net proceeds from the issuance of Common Stock
and the exercise of Common
Stock Purchase Warrants and Options 9,930,879 3,912,765 6,531,190 3,274,805
Net proceeds from issuance of Senior Notes and
Convertible Debenture 1,833,841 4,269,223 -- 1,792,150
Repayment of long-term debt (557,441) (2,533,363) (558,408) (455,700)
Collection of subscriptions receivable 35,000 29,000 1,013,400 35,000
Proceeds received from deposits for future financings -- 500,000 -- --
Repayment of the Senior Notes -- (240,000) -- --
------------ ----------- ------------ ------------
Net cash provided by financing activities 11,242,279 5,937,625 6,986,182 4,646,255
------------ ----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents 1,826,485 (259,600) (925,026) 15,858
Cash and cash equivalents at beginning of period 557,970 817,570 2,384,455 557,970
------------- ------------ ------------ ------------
Cash and cash equivalents at end of period $ 2,384,455 $ 557,970 $ 1,459,429 $ 573,828
============= ============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 1,479,984 $ 603,312 $ 685,121 $ 642,842
============= ============ ============ ============
Conversion of Convertible Preferred Stock to
Common Stock $ 33,912 $ 184,095 $ 7,434 $ 10,266
============= ============ ============ ============
Conversion of Cumulative Preferred Dividends to
Common Stock $ 56,050 $ 268,140 $ 13,370 $ 15,970
============= ============ ============ ============
Subscriptions receivable $ 1,013,400 $ 35,000 $ -- $ 177,000
============= ============ ============ ============
Conversion of Senior Notes and Debenture to
Common Stock $ 1,388,442 $ 622,500 $ 2,148,630 $ 252,858
============= ============ ============ ============
Purchase of investment in Jubilee through the
issuance of Common Stock $ 2,850,000 $ -- $ -- $ 2,850,000
============= ============ ============ ============
Beneficial conversion feature related to Senior
Notes and Convertible Debenture $ 2,947,130 $ 4,067,813 $ 1,981,007 $ 1,037,920
============= ============ ============ ============
Issuance of Common Stock in connection with Senior
Note Conversions $ 1,664,819 $ -- $ -- $ --
============= ============ ============ ============
Issuance of Common Stock, Common Stock Options
and Warrants in connection with Stitch acquisition $ -- $ 9,674,399 -- $ --
============= ============ ============ ============
Capital lease obligations incurred $ -- $ 62,984 $ -- $ --
============= ============ ============ ============
Prepaid stock expenses through issuance of
Common Stock $ -- $ -- $ 56,250 $ 884,475
============= ============ ============ ============
Issuance of Common Stock in connection with the
Bayview acquisition $ -- $ -- $ 9,278,200 $ --
============= ============ ============ ============
See accompanying notes.
F-7
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2003
1. Business
USA Technologies, Inc., a Pennsylvania corporation (the Company), was
incorporated on January 16, 1992. The Company provides unattended cashless
payment/control systems and associated network and services for the copy, fax,
debit card, smart card personal computer, laundry, and vending industries. The
Company's devices make available credit and debit card and other payment methods
in connection with the sale of a variety of products and services. The Company's
customers are principally located in the United States and are comprised of
hotels, chains, consumer package goods companies, information technology and
vending operators.
The Company offers the Business Express(R) and Business Express(R) Limited
Service (LSS) principally to the hospitality industry. The Business Express(R)
and Business Express(R) Limited Service (LSS) combines the Company's business
applications for computers, copiers and facsimile machines into a business
center unit. The Company has developed its next generation of cashless
control/payment systems (e-Port(TM)), which includes capabilities for
interactive multimedia and e-commerce, acceptance of other forms of electronic
payments and remote monitoring of host machine data and is being marketed and
sold to operators, distributors and original equipment manufacturers (OEM)
primarily in the vending industry.
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 to recorded
asset values that might be necessary should the Company be unable to continue in
existence. The Company has incurred recurring operating losses of $22 million
and $17.3 million during each of the fiscal years ended June 30, 2003 and 2002,
respectively, and a loss of $16.4 million (unaudited) during the nine months
ended March 31, 2004. Cumulative losses from its inception through June 30, 2003
amount to approximately $75.2 million and the Company had a working capital
deficiency at June 30, 2003. Cumulative losses through March 31, 2004 amounted
to approximately $91.6 million (unaudited). Losses have continued through March
2004 and are expected to continue during fiscal year 2004. The Company's ability
to meet its future obligations is dependent upon the success of its products in
the marketplace. Until the Company's products can generate sufficient operating
revenues, the Company will be required to raise capital to meet its cash flow
requirements. These factors raise substantial doubt about the Company's ability
F-8
USA Technologies Inc.
Notes to Consolidated Financial Statements
2. Accounting Policies (continued)
to continue as a going concern. Management believes that actions presently being
taken will allow for the Company to continue as a going concern. Such actions
include the generation of revenues from operations, additional private placement
offerings (Note 17) and continued efforts to reduce costs.
Interim Financial Information
The consolidated financial statements and disclosures included herein for the
three and nine months ended March 31, 2004 and 2003 are unaudited. These
financial statements and disclosures have been prepared by the Company in
accordance with U.S. generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by U.S. 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 nine month period
ended March 31, 2004 are not necessarily indicative of the results that may be
expected for the fiscal year ending June 30, 2004.
Restatement
The Company restated the June 30, 2002 balance sheet, statement of shareholders'
equity and statement of cash flows to correct the valuation of the marketable
equity securities issued in connection with the Company's May 2002 acquisition
of Stitch Corporation (Note 4) in accordance with EITF 99-12: "Determination of
the Measurement Date for the Market Price of Acquirer Securities Issued in a
Purchase Business Combination". The Company originally valued the marketable
securities issued in connection with this acquisition at the market price a few
days before and a few days after May 14, 2002, which was the date the Company's
shareholders approved the increase in the Company's Common Stock to allow for
this transaction to close. The restated June 30, 2002 balance sheet, statement
of shareholders' equity and statement of cash flows reflect the marketable
securities issued in connection with this transaction at the market price a few
days before and a few days after April 10, 2002, the date the definitive
agreement was signed. The restated June 30, 2002 consolidated financial
statements reflect an increase in Goodwill from $6,800,827 to $7,945,580 and an
increase in Common Stock from $55,443,750 to $56,588,503. The restatement did
not impact the net loss or loss per common share reported during 2002 or 2003.
Reclassification
Certain amounts in the prior year financial statements have been reclassified to
conform to the current year presentation.
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States 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.
Consolidation
The accompanying consolidated financial statements include the accounts of
Stitch. All significant intercompany accounts and transactions have been
eliminated in consolidation.
F-9
USA Technologies Inc.
Notes to Consolidated Financial Statements
2. Accounting Policies (continued)
Cash Equivalents
Cash equivalents represent all highly liquid investments with original
maturities of three months or less. Cash equivalents are comprised of a money
market fund and certificates of deposit.
Inventory
Inventory, which principally consists of finished goods, components, and
packaging materials, is stated at the lower of cost (first-in, first-out basis)
or market.
Property and Equipment
Property and equipment is recorded at cost. Property and equipment is
depreciated on a straight-line basis over the estimated useful lives of the
related assets. Leasehold improvements are amortized on a straight-line basis
over the lesser of the estimated useful life of the asset or the respective
lease term.
Goodwill and Intangible Assets
Goodwill represents the excess of cost over fair value of the net assets
acquired in acquisitions. The Company adopted Statement of Financial Accounting
Standards No. 142 (SFAS No. 142), "Goodwill and Other Intangible Assets," on
July 1, 2002. Under SFAS No. 142, Goodwill is no longer permitted to be
amortized to earnings, but instead is subject to periodic testing for
impairment. The Company tests goodwill for impairment using the two-step process
prescribed by SFAS No. 142. The first step screens for potential impairment,
while the second step measures the amount of impairment, if any. The Company
uses a discounted cash flow analysis to complete the first step in this process.
The Company completed the transitional test of goodwill as of July 1, 2002, as
prescribed in SFAS No. 142, during the quarter ended December 31, 2002. The
Company concluded that there were no goodwill impairment indicators as a result
of the transitional test. The Company also performed an annual impairment test
of goodwill as of April 1, 2003 and concluded there was no goodwill impairment.
During the nine months ended March 31, 2004, no events or circumstances arose
indicating an impairment of goodwill may have occurred.
F-10
2. Accounting Policies (continued)
Goodwill and Intangible Assets (continued)
Intangible assets as of June 30, 2003 and 2002 include patents and trademarks
acquired in the Stitch acquisition. The aggregate amortization expense was
$292,000 and $36,500 during the years ended June 30, 2003 and 2002,
respectively. Intangible assets as of March 31, 2004 also include patents,
trademarks and a non-compete agreement acquired in the Bayview acquisition (Note
17). Aggregate amortization expense was $899,518 (unaudited) for the nine months
ended March 31, 2004. The intangible asset balance and related accumulated
amortization consists of the following:
June 30, 2003
---------------------------------------------------------------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Value
------------------------ -------------------------- -----------------------
Amortized intangible assets
Trademark $ 1,050,000 $ (118,125) $ 931,875
Patents 1,870,000 (210,375) 1,659,625
-------------------- ------------------- -------------------
Total $ 2,920,000 $ (328,500) $ 2,591,500
==================== =================== ===================
June 30, 2002
---------------------------------------------------------------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Value
------------------------ -------------------------- -----------------------
Amortized intangible assets
Trademark $ 1,050,000 $ (13,125) $ 1,036,875
Patents 1,870,000 (23,375) 1,846,625
-------------------- ------------------- -------------------
Total $ 2,920,000 $ (36,500) $ 2,883,500
==================== =================== ===================
March 31, 2004 (unaudited)
---------------------------------------------------------------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Value
------------------------ -------------------------- -----------------------
Intangible assets
Trademarks $ 2,064,000 $ (196,875) $ 1,867,125
Patents 9,294,000 (885,472) 8,408,528
Non-Compete Agreement 1,011,000 (145,671) 865,329
-------------------- ------------------- -------------------
Total $ 12,369,000 $ (1,228,018) $ 11,140,982
==================== =================== ===================
At June 30, 2003, the expected amortization of the intangible assets is as
follows: $292,000 per year in fiscal year 2004 through fiscal year 2011, and
$255,500 in fiscal year 2012. Considering the Bayview acquisition in July 2003,
approximate amortization (unaudited) of intangible assets is expected to be as
follows: $1,200,000 per year in fiscal year 2004 through fiscal year 2008,
$1,000,000 per year in fiscal year 2009 through fiscal year 2012, $740,000 in
fiscal year 2013 and $22,000 in fiscal year 2014. The weighted average useful
life of these intangibles is 10 years at June 30, 2003 and 9.55 (unaudited)
years at March 31, 2004.
Concentration of Credit Risk
Financial instruments that subject the Company to a concentration of credit risk
consist principally of cash and cash equivalents and accounts receivable. The
Company maintains cash and cash equivalents with various financial institutions.
The Company performs periodic evaluations of the relative credit standing of
those financial institutions, and the Company's policy is designed to limit
exposure to any one institution. The Company's accounts receivable is net of an
allowance for uncollectible accounts. The Company does not require collateral or
other security to support credit sales, but provides an allowance for
uncollectible accounts based on historical experience and specifically
identified risks. Accounts receivable are determined to be carried at fair value
and charged off against the allowance for uncollectible accounts when management
determines that recovery is unlikely and the company ceases collection efforts.
Approximately 57% and 41% of the Company's accounts receivable at June 30, 2003
and 2002, and 35% and 12% of the Company's revenues for the years ended June 30,
2003 and 2002, respectively, are concentrated with two customers.
F-11
USA Technologies Inc.
Notes to Consolidated Financial Statements
2. Accounting Policies (continued)
Revenue Recognition
Revenue from the sale of equipment is recognized on the terms of
freight-on-board shipping point, or upon installation and acceptance of the
equipment if installation services are purchased for the related equipment.
Transaction processing revenue is recognized upon the usage of the Company's
cashless payment and control network. Service fees for access to the Company's
equipment and network services are recognized on a monthly basis. Product
revenues are recognized from the sale of products from Company owned vending
machines when there is purchase and acceptance of product by the vending
customer. Customers have the ability to return vending products for a full
refund. The Company estimates an allowance of product returns at the date of
sale.
Investment
The Company accounts for investments in debt and equity securities under the
provisions of Statement of Financial Accounting Standards No. 115, (SFAS No.
115), "Accounting for Certain Investments in Debt and Equity Securities".
Management determines the appropriate classifications of securities at the time
of purchase and reevaluates such designation as of each balance sheet date.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses reported in a separate component of shareholders' equity in
other comprehensive income (loss). If the investment sustains an other than
temporary decline in fair value, the investment is written down to its fair
value by a charge to earnings.
Software Development Costs
The Company capitalizes software development costs pursuant to Statement of
Financial Accounting Standards No. 86 (SFAS No. 86), "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed", after
technological feasibility of the software is established and through the
product's availability for general release to the Company's customers. All costs
incurred in the research and development of new software and costs incurred
prior to the establishment of technological feasibility are expensed as
incurred. Amortization of software development costs commences when the product
becomes available for general release to customers. Amortization of software
development costs is calculated as the greater of the amount computed using (i)
the ratio that current gross revenues for a product bear to the total of current
and anticipated future gross revenues of that product or (ii) the straight-line
method over the remaining estimated economic life of the product. The Company
reviews the unamortized software development costs at each balance sheet date
and, if necessary, will write down the balance to net realizable value if the
unamortized costs exceed the net realizable value of the asset. During May 2000,
the Company reached technological feasibility for the development of the
multi-media e-Port client product and related enhanced network and, accordingly,
the Company commenced capitalization of software development costs related to
F-12
USA Technologies Inc.
Notes to Consolidated Financial Statements
2. Accounting Policies (continued)
Software Development Costs (continued)
this product and network. Costs capitalized through 2002 were $5.3 million,
which included capitalized interest of approximately $493,000, pursuant to SFAS
No. 34, "Capitalization of Interest Costs".
During the fourth quarter of fiscal 2002, the multi-media e-Port(TM) client
product and enhanced network became available for general release to the
Company's customers. The multimedia e-port(TM) client product is equipped with
both the audit and cashless payment features, but also includes the capability
of displaying interactive advertising and content via a LCD screen. During this
quarter, Management performed an evaluation of the commercial success and
preliminary market acceptance of the multi-media e-Port(TM) client product and
enhanced network and as a result of this evaluation the Company determined that
the estimated future revenues less costs to complete and dispose of the
multi-media e-Port client product was zero. Therefore, the Company wrote down
$2,663,000 of software development costs related to the multi-media e-Port
client product. The unamortized balance of the software development costs after
the impairment charge is being amortized over an estimated useful life of two
years. Amortization expense for the nine months ended March 31, 2004 was
$998,660 (unaudited). Amortization expense was approximately $1,331,000 during
the year ended June 30, 2003 and $2,996,000 during the year ended June 30, 2002
(including the above impairment adjustment of $2,663,000). Such amortization is
reflected in cost of sales in the accompanying consolidated statements of
operations.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable, other
current assets, accounts payable and accrued expenses reported in the
consolidated balance sheets equal or approximate fair value due to their short
maturities. The fair value of the Company's Senior Notes, Debenture, and other
Long-Term Debt approximates book value as such notes are at market rates
currently available to the Company.
Impairment of Long Lived Assets
The Company adopted Statement of Financial Accounting Standards No. 144 (SFAS
No. 144), "Accounting for the Impairment or Disposal of Long-Lived Assets" on
July 1, 2002. In accordance with SFAS No. 144, the Company reviews its
long-lived assets whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. During the fourth quarter
of fiscal year 2003, the Company reviewed certain long-lived assets (vending
machines) and determined that such assets were impaired. These vending machines
were used and intended for use in connection with the Company's Kodak Program to
sell disposable cameras and film. Management determined that it was more likely
than not that these vending machines would be disposed of before the end of
their previously estimated useful lives. The estimated undiscounted cash flows
for this group of assets was less than the carrying value of the related assets.
As a result, the Company recorded a charge of approximately $321,000
representing the difference between the fair value as determined from a quoted
market price and the carrying value of the group of assets. Such amount is
reflected in depreciation expense in the 2003 consolidated statement of
operations.
F-13
USA Technologies Inc.
Notes to Consolidated Financial Statements
2. Accounting Policies (continued)
Advertising Expenses
Advertising expenses for the years ended June 30, 2003 and 2002 were
approximately $72,000 and $429,000, respectively and were expensed as incurred.
Advertising expenses for the nine months ended March 31, 2004 and 2003 were
approximately $36,000 (unaudited) and $37,000 (unaudited), respectively.
Research and Development Expenses
Research and development expenses are expensed as incurred. Research and
development expenses, which are included in general and administrative and
compensation expense in the consolidated statements of operations, were
$1,505,000 and $1,187,000 for the years ended June 30, 2003 and 2002,
respectively and $474,000 (unaudited) and $1,274,000 (unaudited) for the nine
months ended March 31, 2004 and 2003, respectively.
Accounting for Stock Options
Statement of Financial Accounting Standards No. 123 (SFAS No.123), "Accounting
for Stock-Based Compensation", provides companies with a choice to follow the
provisions of SFAS No. 123 in determination of stock-based compensation expense
or to continue with the provisions of APB No. 25, "Accounting for Stock Issued
to Employees and Related Interpretations in Accounting for Stock-Compensation
Plans" and the related FASB Interpretation No. 44. The Company has elected to
follow the provisions of APB 25. Under APB 25, if 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 SFAS No. 123 to the Company's stock-based awards results
in the same net loss and net loss per common share for the year ended June 30,
2003 and for the nine months ended March 31, 2004 and 2003 on a pro-forma basis
under SFAS No. 123 and under APB 25. The effect of applying SFAS No. 123 to the
Company's stock-based awards resulted in a net loss and net loss per common
share for the year ended June 30, 2002 as follows:
Net loss applicable to common shares as reported
under APB 25 $(18,137,368)
Stock option expense per SFAS 123 (985,046)
------------
Pro forma net loss $(19,122,414)
============
Loss per common share as reported $ (0.50)
============
Pro forma net loss per common share $ (0.53)
============
The fair value for the Company's stock options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for fiscal year 2002: an expected life of 2 years;
no expected cash dividend payments on Common Stock, and a risk-free interest
rate of 4.5% to 5.5%, and volatility factors of the expected market price of the
Company's Common Stock, based on historical volatility of .85 to .95 for fiscal
2002.
F-14
USA Technologies Inc.
Notes to Consolidated Financial Statements
2. Accounting Policies (continued)
Accounting for Stock Options (continued)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. As noted above, the Company's stock options are vested over an
extended period. In addition, option models require the input of highly
subjective assumptions including future stock price volatility. Because the
Company's stock options have characteristics significantly different from those
of traded options, and because changes in the subjective assumptions can
materially affect the fair value estimates, in management's opinion, the
Black-Scholes model does not necessarily provide a reliable measure of the fair
value of the Company's stock options. The Company's pro forma information
reflects the impact of the reduction in price of certain stock options. The pro
forma results above are not necessarily reflective of the effects of applying
SFAS 123 in future periods.
Loss Per Common Share
Basic earnings per share is calculated by dividing income (loss) applicable to
common shares by the weighted average common shares outstanding for the period.
Diluted earnings per share is calculated by dividing income (loss) applicable to
common shares by the weighted average common shares outstanding for the period
plus the dilutive effect (unless such effect is anti-dilutive) of equity
instruments. No exercise of stock options, purchase rights, stock purchase
warrants, or the conversion of preferred stock, cumulative preferred dividends
or Senior Notes was assumed during fiscal year 2003 or 2002 or the nine months
ended March 31, 2004 and 2003, because the assumed exercise of these securities
would be antidilutive.
New Accounting Pronouncements
In December 2002, Statement of Financial Accounting Standards No. 148 (SFAS No.
148), "Accounting for Stock-Based Compensation-Transition and Disclosure-an
amendment of FASB Statement No. 123" (SFAS No. 123) was issued. SFAS No. 148
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provided
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 has provided the prescribed disclosure
format required by SFAS No. 148 during the year ended June 30, 2003.
3. Investment in Jubilee Investment Trust
During February 2003, the Company issued 15,000,000 shares of its Common Stock
($2,850,000) for an investment of 1,870,091 shares in the Jubilee Investment
Trust, PLC ("Jubilee"), a United Kingdom Investment Trust whose shares trade on
the London Stock
F-15
USA Technologies Inc.
Notes to Consolidated Financial Statements
3. Investment in Jubilee Investment Trust (continued)
Exchange. The Company agreed not to sell the Jubilee shares for a period of 90
days from January 24, 2003 and to sell a maximum of 10% of the Jubilee shares
during each month thereafter. Jubilee has agreed not to sell the Company's
shares of Common Stock for a period of two years from the date of issuance
unless agreed to by the Company. As the investment declined in value below its
cost basis for a period of six months or more, the Company determined that the
decline in the market value of this available for sale investment was "other
than temporary" and, accordingly, the Company wrote down the investment to its
fair value as of June 30, 2003 realizing an impairment loss of $1,945,951.
4. Acquisition of Stitch Networks Corporation
On May 14, 2002, USA Acquisition Corp., a wholly owned subsidiary of the Company
acquired Stitch pursuant to an Agreement and Plan of Merger by and among the
Company, USA Acquisition Corp., Stitch and the stockholders of Stitch.
Additionally, on May 14, 2002, the Company's shareholders voted to increase the
number of authorized shares of Common Stock to 150,000,000. The Company acquired
Stitch to strengthen its position as a leading provider of wireless remote
monitoring and cashless and mobile commerce solutions and to increase the
Company's revenue base. These revenues would include product revenues and
monthly service and transaction fees. Additionally, the acquisition of the
Stitch technology enhanced the Company's existing technology and complemented
the revenue and transaction processing revenue of the Company's existing
products. Certain Stitch personnel were believed to possess some key strengths
in several disciplines that the Company believed to be of great value in its
plans for growth.
Stitch became a wholly-owned subsidiary of the Company effective May 14, 2002.
The acquisition was accounted for using the purchase method and, accordingly,
the results of the operations of Stitch have been included in the accompanying
consolidated statements of operations since the acquisition date. The purchase
price consisted of the issuance of 22,762,341 shares of the Company's Common
Stock in exchange for the outstanding shares of Stitch, and the issuance of
warrants to purchase up to 7,587,447 shares of the Company's Common Stock at
$.40 per share at any time through June 30, 2002. The purchase price also
included the assumption of outstanding Stitch stock options that were converted
into options to purchase an aggregate of 2,475,318 shares of the Company's
Common Stock at $.165 per share at any time prior to May 14, 2007, warrants to
purchase up to 412,553 shares of the Company's Common Stock at $.40 per share at
any time through June 30, 2002 and other acquisition related expenses. None of
the warrants issued in connection with the acquisition were exercised as of June
30, 2003. A total of 4,800,000 shares of the Common Stock issued to the former
stockholders of Stitch are held in escrow to secure the former stockholder's
indemnification obligations under the Agreement and Plan of Merger. Such shares
are subject to cancellation if there is a breach of the indemnification (as
defined). The value of the marketable equity securities issued in connection
with this acquisition was determined based on the average market price of the
Company's Common Stock over a two-day period before and after April 10, 2002,
the date the definitive agreement to acquire Stitch was entered into. Such
valuation was in accordance with
F-16
USA Technologies Inc.
Notes to Consolidated Financial Statements
4. Acquisition of Stitch Networks Corporation (continued)
EITF 99-12: "Determination of the Measurement Date for the Market Price of
Acquirer Securities Issued in a Purchase Business Combination".
The Company's vending machines for the Kodak Program are purchased from
Dixie-Narco (Dixie) and the film and cameras are purchased directly from Eastman
Kodak Company. Product revenues through the fiscal year ended June 30, 2003 were
approximately $445,000. In May 2003, Stitch notified Maytag and Dixie-Narco that
they had breached the Kodak Agreement because Maytag had failed to create and
maintain during the term of the Kodak Agreement a customer focus team and Dixie
had failed to service, place and pick up the machines as required in the Kodak
Agreement. In June 2003, Maytag and Dixie-Narco indicated to Stitch that they
were not in breach of the Kodak Agreement and that Stitch had breached the
Agreement by failing to pay certain payments due thereunder. Maytag and Dixie
indicated that the customer focus team was terminated due to Stitch's breach of
the Kodak Agreement by failing to pay fees due thereunder and Stitch's not
taking delivery of vending machines ordered from Dixie. The parties have been
negotiating a resolution of this matter although no settlement has been
finalized. The Company believes that any settlement would involve the
termination of the Kodak Agreement. In such event, although related revenues
would be reduced, because the Kodak program is and has been operating at a loss,
the termination of the program would eliminate these losses. The Company also
believes that any settlement would involve the payment of the amount due by
Stitch to U.S. Bancorp by the other parties to the Kodak Agreement and the
forgiveness of the payments due by Stitch to Dixie of approximately $124,000
(Note 18).
During June 2002, the Company determined that it would vacate the office space
previously occupied by Stitch. Accordingly, the Company accrued the remaining
lease exit costs relating to this property in the amount of approximately
$354,000 as part of the cost of Stitch. While the Company is attempting to
sublease this space, no provision for recovery was estimated.
The following table summarizes the purchase price allocation of the fair value
of the assets and liabilities assumed at the date of acquisition:
Current assets $ 2,710,000
Property and equipment 1,700,000
Goodwill 7,946,000
Intangibles 2,920,000
Current liabilities (1,554,000)
Long-term debt (Note 9) (3,976,000)
-----------
$ 9,746,000
===========
Unaudited pro-forma combined results of the Company as if the Company acquired
Stitch on July 1, 2001 is as follows:
Year ended June 30
2002
------------
Revenues $ 2,869,466
============
Net loss (19,583,216)
Cumulative preferred dividends
(822,561)
------------
Loss applicable to common shares $(20,405,777)
============
Loss per common share (basic and diluted) $ (0.36)
============
Weighted average number of common shares outstanding
(basic and diluted) 56,676,823
============
F-17
USA Technologies Inc.
Notes to Consolidated Financial Statements
5. Property and Equipment
Property and equipment consist of the following:
Useful June 30 March 31,
Lives 2003 2002 2004
---------------------------------------------------------- --------------
(Unaudited)
Computer equipment and purchased
software 3 years $ 1,931,912 $ 1,855,459 $ 2,182,079
Vending machines and related components 7 years 688,284 1,050,220 4,427
Control systems 3 years 980,759 982,371 530,303
Furniture and equipment 5-7 years 532,570 503,110 750,474
Leasehold improvements Lease term 16,140 94,031 51,436
Vehicles 5 years 10,258 10,258 10,258
--------------------------------------- --------------
4,159,923 4,495,449 3,528,977
Less accumulated depreciation (3,216,139) (2,563,022) (2,858,489)
--------------------------------------- --------------
$ 943,784 $ 1,932,427 $ 670,488
======================================= ==============
6. Accrued Expenses
Accrued expenses consist of the following:
June 30 March 31
2003 2002 2004
--------------------------------------- --------------
(Unaudited)
Accrued professional fees $ 650,974 $ 628,372 $ 332,996
Accrued consulting fees 662,010 62,480 343,617
Accrued lease termination payments, net 344,934 344,934 --
Accrued compensation and related sales commissions 250,808 225,917 467,194
Accrued interest 291,315 209,885 366,923
Accrued software license and support costs 125,385 144,755 125,385
Accrued product warranty costs 104,406 85,827 105,612
Accrued taxes and filing fees 94,529 134,411 109,476
Advanced customer billings 62,540 30,190 62,919
Accrued other 133,842 264,518 260,411
--------------------------------------- --------------
$ 2,720,743 $ 2,131,289 $ 2,174,533
======================================= ==============
7. Related Party Transactions
During the years ended June 30, 2003 and 2002, the Company incurred
approximately $305,000 and $213,000, respectively, in connection with legal
services provided by a member of the Company's Board of Directors. During the
nine months ended March 31, 2004, the Company incurred approximately $309,000
(unaudited) in connection with legal services provided by this member of the
Company's Board of Directors. At June 30, 2003 and 2002, approximately $22,000
and $30,000,
F-18
USA Technologies Inc.
Notes to Consolidated Financial Statements
7. Related Party Transactions (continued)
respectively, of the Company's accounts payable and accrued expenses were due to
this Board member. At March 31, 2004 approximately $36,000 (unaudited) of the
Company's accounts payable and accrued expenses were due to this Board member.
During the years ended June 30, 2003 and 2002 and during the nine months ended
March 31, 2004, certain Board members participated in various debt or equity
offerings of the Company for a total investment of approximately $661,500,
$277,500 and $ -0- (unaudited) respectively. Stitch purchases parts and services
from Dixie-Narco, Inc. (Dixie), an affiliate of a shareholder (Maytag Holdings,
a subsidiary of Maytag Inc.) of the Company. There were purchases from Dixie of
$201,000 and $8,000, for the fiscal year ended June 30, 2003 and for the period
May 14, 2002 to June 30, 2002, respectively. Amounts payable to Dixie included
in accounts payable in the accompanying June 30, 2003 and 2002 consolidated
balance sheets were approximately $130,000 and $124,000, respectively. There
were no additional purchases from Dixie during the nine months ended March 31,
2004.
8. Commitments
o In July 2003 the Company and the Company's Chief Executive Officer (CEO)
amended the terms of his employment agreement (expiring June 2005). Under
the terms of the previous Executive Employment Agreement, the CEO would have
been granted seven percent (non-dilutive) of all the then issued and
outstanding shares of the Company's Common Stock in the event a "USA
Transaction" (as defined) occurs, which among other events includes a change
in control of the Company. The amended terms of the Executive Employment
Agreement, eliminates the seven percent (non-dilutive) right to receive
Common Stock upon a "USA Transaction" and now grants the CEO an aggregate of
14,000,000 shares of Common Stock subject to adjustment for stock splits or
combinations in the event a "USA Transaction" occurs. In exchange for the
amendment of these terms, the Company issued an aggregate of 10,500,000
shares of its Common Stock to the CEO valued at $4,620,000 (Unaudited) or
$0.44 per share representing the quoted market price of the Company's Common
Stock on the date the purchase agreement was entered into and the shares
were valued. In connection with this amendment, the CEO also entered into a
lock-up agreement pursuant to which he shall not sell 2,500,000 of these
shares for a one-year period and 8,000,000 of these shares for a two-year
period. The CEO will not be required to pay any additional consideration for
these shares of Common Stock. At the time of a "USA Transaction", all of the
14,000,000 shares to be issued to the CEO in connection with this amendment
are automatically deemed to be issued and outstanding, and will be entitled
to be treated as any other issued and outstanding shares of Common Stock.
These shares will be irrevocable and fully vested, and have no expiration
date and will not be affected by the termination of the CEO with the Company
for any reason whatsoever.
o The Company conducts its operations from various facilities under operating
leases. During March 2003, the Company entered into a lease agreement for
its new corporate headquarters. The lease provides for escalating rent
payments and a period of free rent prior to the commencement of the lease
payments in January 2004. The Company has provided for deferred rent expense
for the difference between the rent payments to be made and the straight
line allocation of total rent payments to be made over the lease term. In
connection with this lease agreement, the Company has provided the landlord
with a security deposit comprised of shares in the Jubilee Investment Trust
valued at $100,000.
F-19
USA Technologies Inc.
Notes to Consolidated Financial Statements
8. Commitments (continued)
Rent expense under such arrangements was approximately $292,000 and $220,000
during the years ended June 30, 2003 and 2002, respectively, and $335,000
(unaudited) and $201,000 (unaudited) for the nine months ended March 31, 2004
and 2003, respectively. The Company has $180,000 of equipment under capital
lease agreements. Capital lease amortization of approximately $46,000 and
$54,000 is included in depreciation expense for the years ended June 30, 2003
and 2002, respectively. Future minimum lease payments subsequent to June 30,
2003 under capital and noncancelable operating leases are as follows:
Capital Leases Operating Leases
---------------------------------------
2004 $ 15,960 $ 244,000
2005 1,779 346,000
2006 - 343,000
2007 - 313,000
2008 and thereafter - 480,000
---------------------------------------
Total minimum lease payments 17,739 $ 1,726,000
====================
Less amount representing interest 1,882
-------------------
Present value of net minimum lease payments 15,857
Less current obligations under capital leases 14,161
-------------------
Obligations under capital leases, less current portion $ 1,696
===================
9. Long-Term Debt
Long-term debt consists of the following:
June 30 March 31,
2003 2002 2004
---------------- ----------------- --------------
(Unaudited)
Bank facility $ 828,466 $ 1,255,113 $ 377,653
Working capital loans 166,765 275,000 76,765
Other, including capital lease obligations 60,057 62,984 42,462
IBM inventory financing -- 19,632 --
---------------- ----------------- --------------
1,055,288 1,612,729 496,880
Less current portion 830,674 850,644 479,070
---------------- ----------------- --------------
$ 224,614 $ 762,085 $ 17,810
================ ================= ==============
In connection with the Stitch acquisition (Note 4), the Company assumed
long-term debt of $3,976,000, which included a vending equipment borrowing
facility and working capital loans. The Company repaid $2,165,000 of the working
capital loans in June 2002 leaving an outstanding balance of $275,000 at June
30, 2002. These loans are secured by certain assets of Stitch. At June 30, 2003
$166,765 of the working capital loans are outstanding which bear interest at
6.75% per annum. Such loans were payable on July 8, 2002. During fiscal year
F-20
USA Technologies Inc.
Notes to Consolidated Financial Statements
9. Long-Term Debt (continued)
2003 the bank extended the due date on these loans on several occasions under
forbearance agreements. At June 30, 2003, the Company is in default under this
working capital loan agreement and has agreed to a satisfactory payment
arrangement.
The bank facility (the Facility) was utilized by Stitch to fund the purchase of
vending machines placed at locations where Kodak film products are sold.
Borrowings were made from time to time under the Facility, with repayment
schedules set at the time of each borrowing, including equal monthly payments
over 36 months and an interest rate based upon 495 basis points over the three
year U.S. Treasury Notes. The Company granted the bank a security interest in
the film products vending machines. Repayment of principal is also insured by a
Surety Bond issued by a third-party insurer in exchange for an initial fee paid
by the Company.
10. Income Taxes
At June 30, 2003 and 2002, the Company had net operating loss carryforwards of
approximately $76,211,000 and $54,769,000, respectively, to offset future
taxable income expiring through approximately 2023. At June 30, 2003 and 2002,
the Company recorded a net deferred tax asset of approximately $29,771,000 and
$20,546,000, respectively, which was reduced by a valuation allowance of the
same amount as the realization of the deferred tax asset is not certain,
principally due to the lack of earnings history.
The timing and extent in which the Company can utilize future tax deductions in
any year may be limited by provisions of the Internal Revenue Code regarding
changes in ownership of corporations. Stitch had net operating loss
carryforwards of approximately $10,985,000 at the acquisition date. Such net
operating loss carryforwards are limited under these provisions as to the amount
available to offset future taxable income.
The deferred tax assets arose primarily from the use of different accounting
methods for financial statement and income tax reporting purposes as follows:
June 30
2003 2002
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 28,431,000 $ 19,837,000
Deferred research and development costs 730,000 480,000
Software development costs 1,324,000 1,008,000
Other 338,000 392,000
------------ ------------
30,823,000 21,717,000
Deferred tax liabilities:
Intangibles (1,052,000) (1,171,000)
------------ ------------
29,771,000 20,546,000
Valuation allowance (29,771,000) (20,546,000)
------------ ------------
Deferred tax asset, net $ -- $ --
============ ============
F-21
USA Technologies Inc.
Notes to Consolidated Financial Statements
10. Income Tax (continued)
Amounts assigned to intangibles acquired in the Stitch acquisition exceeded the
tax basis. Such excess will increase taxable income as the intangibles are
amortized. The net operating loss carryforwards will be used to offset the
increase in taxable income. Accordingly, the Company recorded a deferred tax
liability of $1,171,000 and a deferred tax asset in the same amount related to
these intangibles at the acquisition date.
11. Senior Notes and Debentures
During June 2002, the Company commenced a $2,500,000 2002-A private placement
offering (subsequently increased to 430 units or $4,300,000), consisting of 12%
Convertible Senior Notes due December 31, 2005 ("2002 Senior Notes"). Each
$10,000 Senior Note is convertible into Common Stock at $.20 per share and
interest is payable quarterly. Each Note holder initially received 20,000 Common
Stock warrants, however subsequent to June 30, 2002, the Board of Directors
amended the offering to replace the warrants with 20,000 shares of the Company's
Common Stock. The fair value of the Common Stock issued and the intrinsic value
of the beneficial conversion feature aggregating $2,881,847 have been allocated
to equity. This resulting debt discount is being amortized to interest expense
through December 31, 2005. Through June 30, 2003, the Company issued a total of
401.5 units in this offering, of which 7.5 units are reflected in subscriptions
receivable at June 30, 2003. During the year ended June 30, 2003, $489,608 of
the 2002 Senior Notes were converted into 2,448,215 shares of the Company's
Common Stock. During the nine months ended March 31, 2004, $374,359 (unaudited)
of the 2002 Senior Notes were converted into 1,871,797 (unaudited) shares of
Common Stock.
During fiscal year 2002, the Company commenced a $2,500,000 2001-D private
placement offering (subsequently increased to 650 units or $6,500,000),
consisting of 12% Convertible Senior Notes due December 31, 2004 ("2001 Senior
Notes"). Each $10,000 Senior Note is convertible into Common Stock at $.40 per
share and interest is payable quarterly. Certain shareholders of the Company,
who held warrants to purchase Common Stock of the Company as part of an earlier
private placement at $.50 per share, were offered the opportunity to cancel a
portion of such warrants and to receive an equivalent number of new Common Stock
warrants at $.10 expiring on December 31, 2002 (subsequently extended to August
31, 2003), if they invested in the 2001-D offering. The original warrants were
scheduled to expire on December 31, 2001 or March 31, 2002 (according to their
original terms) (Note 13). The estimated fair value of the new warrants was
determined to be $1,787,084 (using the Black-Scholes method) and the intrinsic
value of the beneficial conversion feature of $1,623,352 have been allocated to
equity. This resulting debt discount is being amortized to interest expense
through December 31, 2004. During fiscal year 2002, the Company issued a total
of 481.4 units, resulting in the issuance of $4,814,000 of 2001 Senior Notes.
During fiscal year 2001, the Company authorized a $6,700,000 private placement
offering ("2000 Senior Notes") of 670 units at $10,000 per unit. Each unit
consisted of a $10,000 12% Convertible Senior Note, maturing December 31, 2003,
and 2,000 shares of Restricted Common Stock. Each Note is convertible
F-22
USA Technologies Inc.
Notes to Consolidated Financial Statements
11. Senior Notes and Debentures (continued)
into Common Stock at $1.25 per share anytime through December 31, 2003. The
Company issued 1,136,300 shares of Common Stock in connection with this
Offering. The fair value of the Common Stock on the date such shares were
granted of $1,215,843 and the intrinsic value of the beneficial conversion
feature in the 2000 Senior Notes of $409,104 was allocated to equity. This
resulting debt discount is being amortized to interest expense through December
31, 2003. Through June 30, 2003, $647,500 of such Notes were converted into
518,000 shares of Common Stock. There have been no conversions subsequent to
June 30, 2003.
In March 2003, the Company granted to the holders of the 2000 Senior Notes and
2001 Senior Notes the right to extend the maturity date of these Senior Notes to
December 31, 2006 and December 31, 2007, respectively, in exchange for reducing
the conversion rates from $1.25 to $0.20 per share for the 2000 Senior Notes and
from $0.40 to $0.20 per share for the 2001 Senior Notes. This offer has been
extended by the Company's Board of Directors until October 31, 2003 and then
further extended to December 31, 2003. Through June 30, 2003, $3,548,000 of the
2000 Senior Note holders and $3,363,397 of the 2001 Senior Note holders agreed
to this offer and exchanged their Notes. Subsequent to June 30, 2003 and through
September 12, 2003, an additional $456,000 of the 2000 Senior Notes and $276,701
of the 2001 Senior Notes have been exchanged for the 2006 Senior Notes and 2007
Senior Notes, respectively. From September 13, 2003 to December 31, 2003, an
additional $1,020,000 (unaudited) of the 2000 Senior Notes and $551,252
(unaudited) of the 2001 Senior Notes have been exchanged for the 2006 Senior
Notes and 2007 Senior Notes, respectively. For all 2000 Senior Note holders who
agreed to exchange their Notes, such amounts have been reflected as long-term in
the accompanying June 30, 2003 consolidated balance sheet. Senior Notes
scheduled to mature on December 31, 2004 are reflected as a current liability in
the accompanying March 31, 2004 consolidated balance sheet along with $10,000 of
Senior Notes scheduled to mature on December 31, 2003 that were not exchanged
for 2006 Senior Notes. The exchange of the 2000 Senior Notes and 2001 Senior
Notes to the 2006 Senior Notes and 2007 Senior Notes was deemed a significant
modification of the terms of the Senior Notes and, accordingly the 2000 and 2001
Senior Notes have been extinguished. Accordingly, at June 30, 2003 and for the
nine months ended March 31, 2004, the Company expensed $1,521,654 and $318,915
(unaudited) of unamortized debt discount and other issuance costs remaining on
the 2000 Senior Notes and 2001 Senior Notes. Such amounts have been reported as
loss on debt modification in the June 2003 and March 2004 statement of
operations.
As the share price was greater than the conversion rate in the fourth quarter of
fiscal year 2003, the Company recorded the intrinsic value of this beneficial
conversion feature of $1,318,500 and $590,710 for the Senior Notes due in 2006
and 2007, respectively. For the nine months ended March 31, 2004, an additional
$1,981,007 (unaudited) was recorded as beneficial conversion. Such amount has
been allocated to equity and the resulting debt discount is being amortized to
interest expense through the Notes maturity dates. During fiscal year 2003,
$332,500 and $323,334 of the Senior Notes maturing in 2006 and 2007,
respectively, were converted into 1,662,500 and 1,616,668, shares of the
Company's Common Stock. During the nine months ended March 31, 2004 $1,372,000
(unaudited) and $402,272 (unaudited) of the Senior Notes maturing in 2006 and
2007, respectively, were converted into 8,871,357 shares of the Company's Common
Stock.
F-23
USA Technologies Inc.
Notes to Consolidated Financial Statements
11. Senior Notes and Debentures (continued)
A summary of the various Senior Note activities is as follows:
Senior Notes Maturing December 31,
-----------------------------------------------------------------------------------
2003 2004 2005 2006 2007
-----------------------------------------------------------------------------------
(2000 Senior (2001 Senior (2002 Senior (2006 Senior (2007 Senior
Notes) Notes) Notes) Notes) Notes)
Outstanding at June 30, 2001 $ 5,656,500 $ -- $ -- $ -- $ --
Issued for cash and services -- 4,814,593 444,083 -- --
Converted into Common Stock (622,500) -- -- -- --
Repaid at maturity -- -- -- -- --
Less: Unamortized debt discount
and other issuance costs (750,295) (2,928,567) (323,989) -- --
-----------------------------------------------------------------------------------
Balance at June 30, 2002 4,283,705 1,886,026 120,094 -- --
Issued for cash and services/
(rescinded) -- (172,091) 3,571,675 -- --
Exchange of 2000 and 2001 Senior
Notes for 2006 and 2007
Senior Notes (3,548,000) (3,363,397) -- 3,548,000 3,363,397
Converted into Common Stock -- -- (489,608) (332,500) (323,334)
Less: Unamortized debt discount
and other issuance costs, net
of accretion 670,062 2,474,637 (1,829,234) (1,104,169) (596,852)
-----------------------------------------------------------------------------------
Balance at June 30, 2003 $ 1,405,767 $ 825,175 $ 1,372,927 $ 2,111,331 $ 2,443,211
Exchange of 2000 and 2001 Senior
Notes for 2006 and 2007
Senior Notes (Unaudited) (1,476,000) (827,953) -- 1,476,000 827,953
Converted into Common Stock
(Unaudited) -- -- (374,359) (1,372,000) (402,272)
Less: Unamortized debt discount
and other issuance costs, net
of accretion (Unaudited) 80,233 380,033 809,024 80,739 (370,000)
-----------------------------------------------------------------------------------
Balance at March 31, 2004
(Unaudited) $ 10,000 $ 377,255 $ 1,807,592 $ 2,296,070 $ 2,498,892
===================================================================================
The unamortized debt discount and other issuance costs represents fees paid in
connection with these financings, the estimated fair value of the detachable
equity instruments issued in connection with these financings, and any
beneficial conversion embedded in the debt at the commitment date. Such amounts
are being amortized over the remaining life of the respective debt instruments.
Debt discount amortization for the Senior Notes, which has been reflected as
interest expense in the consolidated statements of operations, was approximately
$2,690,000 and $1,513,000 for the years ended June 30, 2003 and 2002,
respectively. For the nine months ended March 31, 2004 and 2003, $2,642,123 and
$1,950,244, respectively, (unaudited) was charged to interest expense for the
amortization of debt discount on the Senior Notes.
During October 2002, the Company's Board of Directors approved that for the
quarterly interest payment payable by the Company on its 12% Convertible Senior
Notes (for all quarters in fiscal year 2003), at the option of the note holder,
the interest payment due can be used to purchase shares of the Company's Common
Stock at a rate of $.20 per share. Additionally, for each share purchased, the
note holder also received a warrant to purchase one share of the Company's
Common Stock at $.20 per share exercisable at any time prior to June 30, 2004.
During the years ended June 30, 2003 and 2002, 2,315,000 and 674,431 shares
respectively, were issued for the payment of the quarterly interest. A total of
2,315,000 and 303,831 warrants were also issued during the years ended June 30,
2003 and 2002, respectively. The estimated fair value of the
F-24
USA Technologies Inc.
Notes to Consolidated Financial Statements
11. Senior Notes and Debentures (continued)
warrants issued of approximately $279,000 and $43,000 was determined using a
Black-Scholes method and has been recorded as interest expense. The holders of
Senior Notes continued to have the option to use quarterly interest earned
through December 31, 2003 to purchase common shares at $.20 per share. For the
nine months ended March 31, 2004, 1,062,034 (unaudited) shares were issued
(along with an identical number of warrants) for the payment of quarterly
interest to those note holders accepting the offer. The fair value of the
warrants issued and the beneficial conversion feature related to the $.20 per
share rate used to convert the interest to Common Stock totaled $266,258
(unaudited) and has been recorded as additional interest expense for the period.
The Company executed a Securities Purchase Agreement with an investment company
for the purchase of $325,000 (as amended) of a 9.75% Convertible Debenture (the
Debenture) due August 2004. Interest on the Debenture was payable monthly in
arrears and the Debenture was convertible at a price equal to the lesser of
$1.00 or 72% (80% prior to June 18, 2002) of the lowest closing bid price of the
Company's Common Stock during the 20 day period prior to the conversion. The
Company reserved the right to prepay the portion of the Debenture that the
investment company elected to convert, plus interest, at 150% of such amount, if
the price of Common Stock is less than $0.40 per share. At the time of
conversion, the Company issued to the Debenture holder warrants to purchase an
amount of Common Stock equal to ten times the number of shares issued upon the
conversion of the Debenture. The warrants are exercisable at the same conversion
price as the Debenture. Due to the significance of the beneficial conversion
feature associated with this instrument, the entire $325,000 of proceeds was
allocated to the warrants and has been allocated to equity. This debt discount
is being amortized to interest expense over the term of the Debenture. During
the fiscal years ending June 30, 2003 and 2002, the investment company converted
$243,000 and $82,000, respectively of the Debenture, resulting in the issuance
of 2,467,225 and 333,678 shares, respectively of Common Stock. The investment
company also exercised warrants resulting in the issuance of 7,206,893 and
3,336,780 shares of Common Stock and generating net cash proceeds of $630,000
and $804,250 during the years ended June 30, 2003 and 2002, respectively. At
June 30, 2002, $280,000 of deposits represented funds advanced to the Company by
the investment company for future warrant exercises. Such funds were utilized
for this purpose during fiscal year 2003.
12. Series A Preferred Stock
The authorized Preferred Stock 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 one vote and is convertible at any time into one share of Common Stock.
Each share of Common Stock entitles the holder to one voting right. Series A
Preferred Stock provides for an annual cumulative dividend of $1.50 per share
payable to the shareholders of record in equal parts on February 1 and August 1
of each year. Cumulative unpaid dividends at June 30, 2003 and 2002 amounted to
$5,913,107 and $5,175,571, respectively and $6,686,250 (unaudited) at March 31,
2004. Cumulative unpaid dividends are convertible into common shares at $10.00
per common share at the option of the shareholder. During the years ended June
30, 2003 and 2002, certain holders of the Preferred Stock converted 4,790 and
26,002 shares, respectively, into 4,790 and 26,002 shares of Common Stock,
respectively. Certain of these shareholders also converted cumulative preferred
dividends of $56,050 and $268,140, respectively, into 5,605 and 26,814 shares of
Common Stock during the years ended June 30, 2003 and 2002, respectively. During
the nine months ended March 31, 2004, certain holders of the Preferred Stock
converted 1,050 (unaudited) shares into 1,050 (unaudited) shares of Common Stock
and converted cumulative preferred dividends of $13,370 into 1,337 (unaudited)
shares of Common Stock. 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
F-25
USA Technologies Inc.
Notes to Consolidated Financial Statements
12. Series A Preferred Stock (continued)
of all accrued and unpaid dividends. No such redemption has occurred as of June
30, 2003 or March 31, 2004. 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.
13. Common Stock Transactions
During the years ended June 30, 2003 and 2002, the Company's Board of Directors
authorized various Common Stock private placement offerings as follows:
o 2003-A Private Placement Offering to sell up to 15,000,000 restricted
shares of Common Stock (subsequently amended to 86,000,000 shares in
August 2003). Through June 30, 2003, the Company issued 78,636,082
shares of its Common Stock generating net proceeds of $7,792,133
($7,863,082 less offering costs of $71,475). Included in this amount are
subscriptions receivable totaling $937,830. Such subscriptions are
reflected in current assets in the 2003 balance sheet as such amounts
were collected by the Company as of September 12, 2003. The Company also
issued 1,854,390 shares from this offering for services rendered by
consultants in the amount of $397,889. Subsequent to June 30, 2003 and
through September 12, 2003, the Company issued an additional 2,228,390
shares of Common Stock in this offering generating gross cash proceeds
of $222,839.
o Five private placement offerings during fiscal year 2003 to individual
investors aggregating 10,571,429 shares of Common Stock generating net
proceeds of $957,925 as follows:
i.) 2,500,000 million shares to an accredited investor at
$0.10 per share generating proceeds of $250,000;
ii.) 1,000,000 shares to an accredited investor at $0.10 per
share generating proceeds of $100,000, plus warrants to
purchase up to 4,000,000 shares of the Company's Common
Stock at $0.10 per share at any time through November
28, 2003;
iii.) 1,500,000 shares to an accredited investor at $0.10 per
share generating proceeds of $50,000, plus warrants to
purchase 750,000 shares of Common Stock at $0.15 per
share through October 2007. This investor has also
agreed to purchase an additional 1,500,000 shares of
Common Stock at $0.10 per share and receive an
additional 750,000 warrants upon the effectiveness of a
registration statement to register the initial 1,500,000
million shares purchased;
F-26
USA Technologies Inc.
Notes to Consolidated Financial Statements
13. Common Stock Transactions (continued)
iv.) 3,571,429 shares to an accredited investor at $.07 per
share generating net proceeds of $244,925 ($250,000
less offering costs of $5075). This investor also
received a warrant to purchase 7,142,858 shares of the
Company's Common Stock at $.07 per share at any time
before October 26, 2007, and an additional warrant to
purchase 5,000,000 shares at $0.10 per share expiring
October 2003; and
v.) 2,000,000 shares to an accredited investor at $0.12 per
share generating proceeds of $240,000. The investor
also received a warrant to purchase 2,000,000 shares of
Common Stock at $.10 per share through May 31, 2003. No
warrants were exercised during fiscal year 2003.
o 2001-C Private Placement Offering for the issuance of 4,500,000 shares
of Common Stock at $.50 per share. For each share purchased the holder
received a warrant to purchase one share of Common Stock at $.50 per
share expiring in May 2002. During fiscal year 2002, the Company issued
4,046,684 shares of Common Stock generating net proceeds of $1,992,852
($2,077,124 less offering costs of $84,272).
o 2001-B Private Placement Offering for the issuance of 8,400,000 shares
of Common Stock at $.60 per share. For each dollar invested in this
offering the Company also issued a Common Stock Warrant to the investor
at $.50 per share (subsequently reduced to $.10 if the shareholder
invested in the 2001 D Senior Note Offering). Through June 30, 2001,
the Company issued 2,669,400 shares of Common Stock generating net
proceeds of $1,546,885 ($1,601,640 less offering costs of $54,755).
During fiscal year 2002, the Company issued an additional 4,726,040
shares of Common Stock generating net proceeds of $2,754,371
($3,014,043 less offering costs of $259,672).
Participants in the 2001-B offering exercised 3,375,761 and 1,684,504 warrants
during the years ending June 30, 2003 and 2002, respectively, generating
proceeds of $337,577 and $168,451, respectively. Participants in the 2001-C
offering exercised 284,934 and 122,358 warrants at $0.10 per share during the
years ending June 30, 2003 and 2002, respectively, generating proceeds of
$28,494 and $12,236, respectively.
The Company also issued 2,855,042 and 2,784,134 shares of Common Stock for
professional services during the years ended June 30, 2003 and 2002,
respectively. Such shares were valued based on the fair value of the Company's
Common Stock on the date the shares were granted. During the year ended June 30,
2003 and 2002, the Company also issued 1,040,000 and 2,340,000 shares of Common
Stock to certain employees and officers for services. These shares were fully
vested on the date of grant; accordingly, the Company recorded compensation
expense of $166,400 and $981,000 during the years ended June 30, 2003 and 2002,
respectively, based on the fair value of the Company's Common Stock on the date
the shares were granted.
F-27
USA Technologies Inc.
Notes to Consolidated Financial Statements
13. Common Stock Transactions (continued)
During October 2002, the Company's Board of Directors authorized granting to all
of the holders of the 12% Convertible Senior Notes (hereinafter referred to as
Investors), 10,306,026 Common Stock warrants to purchase the Company's Common
Stock at $0.10 per share. The total number of the warrants issued was equal to
75% of the dollar amount of the Senior Notes held by the then Investors. These
warrants were exercisable through November 30, 2002 (subsequently extended
through October 31, 2003). Upon the exercise of the warrant by the Investor, the
Company granted an identical number of warrants to that Investor with an
exercise price of $0.10 per share exercisable through October 31, 2003. Through
June 30, 2003, the Investors exercised a total of 7,127,508 Common Stock
warrants, generating gross proceeds to the Company of $712,751. At June 30,
2003, an additional 7,127,508 warrants were granted upon the exercise of the
initial warrant to these Investors. Of the additional warrants, 6,898,296 were
exercised as of June 30, 2003, generating gross proceeds to the Company of
$689,830.
During the year ended June 30, 2003, the Company's shareholders approved the
increase in the Company's authorized Common Stock on several occasions. At June
30, 2003, the Company's shareholders approved an increase in the authorized
shares of Common Stock to 400,000,000.
A summary of Common Stock Warrant activity for the years ended June 30, 2003 and
2002 and the nine months ended March 31, 2004 is as follows:
Warrants
-------------------
Outstanding at June 30, 2001 8,233,028
Issued 22,602,593
Exercised (1,833,529)
Cancelled (22,162,272)
-------------------
Outstanding at June 30, 2002 6,839,820
Issued 76,286,145
Exercised (18,894,241)
Cancelled (2,104,000)
-------------------
Outstanding at June 30, 2003 62,127,724
Issued (unaudited) 1,066,034
Exercised (unaudited) (11,934,356)
Cancelled (unaudited) (15,465,715)
-------------------
Outstanding at March 31, 2004 (Unaudited) 35,793,687
===================
F-28
USA Technologies Inc.
Notes to Consolidated Financial Statements
13. Common Stock Transactions (continued)
The exercise price and exercise dates of outstanding and exercisable warrants
outstanding at June 30, 2003 are as follows:
Outstanding and
Exercisable Exercise Price Expiration Date
---------------------------------------------------------------------
5,796,973 $ 0.10 September 30, 2003
7,142,858 0.07 October 26, 2007
7,142,858 0.07 To Be Determined
5,000,000 0.10 To Be Determined
4,000,000 0.10 November 28, 2003
2,480,150 0.10 April 18, 2005
3,472,220 0.10 April 24, 2005
11,513,006 0.10 June 2, 2005
1,500,000 0.15 November 15, 2007
2,618,831 0.20 June 30, 2004
150,000 0.70 August 2, 2003
650,000 0.70 November 23, 2003
1,200,000 0.91 August 29, 2010
377,927 1.00 April 24, 2011
2,901 1.03 April 30, 2011
75,000 1.25 June 30, 2006
5,000 4.00 August 17, 2003
9,000,000 0.10 To Be Determined
--------------------
62,127,724
====================
During the years ended June 30, 2003 and 2002, the Company's Board of Directors
amended the terms of certain outstanding Common Stock Warrants whereby the
exercise price was reduced and the expiration dates were extended. The above
table reflects the status of the warrants as of June 30, 2003. Certain of the
warrant expiration dates will be determined upon the registration of the shares
of Common Stock underlying such warrants.
The exercise price and exercise dates of outstanding and exercisable warrants
outstanding at March 31, 2004 are as follows (Unaudited):
Outstanding and
Exercisable Exercise Price Expiration Date
---------------------------------------------------------------------
3,571,429 $ 0.07 April 22, 2004
2,500,000 0.10 June 22, 2004
3,673,665 0.20 June 30, 2004
2,500,000 0.10 December 22, 2004
13,999,907 0.1008 December 1, 2005
75,000 1.25 June 30, 2006
7,142,858 0.07 October 26, 2007
750,000 0.067 November 15, 2007
1,200,000 0.906 August 29, 2010
377,927 1.00 April 24, 2011
2,901 1.03 April 30, 2011
--------------------
35,793,687
====================
14. Stock Options
The Company's Board of Directors has granted options to employees and its Board
members to purchase shares of Common Stock at or above fair market value. The
option term and vesting schedule are established by the contract that granted
the option.
The following table summarizes all stock option activity during the years ended
June 30, 2003 and 2002 and for the nine months ended March 31, 2004:
Common Shares Under Exercise Price Per
Options Granted Share
-----------------------------------------------
Balance at June 30, 2001 4,886,667 $ 0.50-$5.00
Granted 4,505,318 $ 0.165-$.70
Canceled or expired (4,101,500) $ 0.40-$5.00
-----------------------------------------------
Balance at June 30, 2002 5,290,485 $ 0.165-$5.00
Canceled or expired (2,383,000) $ 0.40-$5.00
-----------------------------------------------
Balance at June 30, 2003 2,907,485 $ 0.165-$2.50
Exercised (unaudited) (223,862) $ 0.165
Canceled or expired (unaudited) (549,391) $ 0.165-$2.50
-----------------------------------------------
Balance at March 31, 2004
(Unaudited) 2,134,232 $ 0.165-$2.00
===============================================
F-29
USA Technologies Inc.
Notes to Consolidated Financial Statements
14. Stock Options (continued)
The price range of the outstanding Common Stock options at June 30, 2003 is as
follows:
Weighted Average
Option Options Outstanding and Remaining Contract Life
Exercise Prices Exercisable (Yrs.)
- --------------------------------------------------------------------------------
$ .165 2,475,318 3.87
$ .70 150,000 0.09
$ 1.00 125,000 2.85
$ 1.50 42,000 0.10
$ 2.00 41,167 1.25
$ 2.50 74,000 0.04
---------------------------
2,907,485
===========================
The price range of the outstanding Common Stock options at March 31, 2004 is as
follows (Unaudited):
Weighted Average
Option Options Outstanding and Remaining Contract Life
Exercise Prices Exercisable (Yrs.)
- --------------------------------------------------------------------------------
$ .165 1,970,565 3.17
$ 1.00 125,000 2.12
$ 2.00 38,667 .53
---------------------------
2,134,232
===========================
As of June 30, 2003, the Company has reserved shares of Common Stock for the
following:
Exercise of Common Stock options 2,907,485
Exercise of Common Stock warrants 62,127,724
Conversions of Preferred Stock and cumulative Preferred Stock dividends 1,115,803
Conversions of Senior Notes 53,295,128
------------
119,446,140
============
As of March 31, 2004, the Company has reserved shares of Common Stock for the
following (Unaudited):
Exercise of Common Stock options 2,134,232
Exercise of Common Stock warrants 35,793,687
Conversions of Preferred Stock and cumulative Preferred Stock dividends 1,192,067
Conversions of Senior Notes 50,813,055
------------
89,933,041
============
15. Retirement Plan
The Company's Savings and Retirement Plan (the Plan) allows employees who have
attained the age of 21 and have completed six months of service to make
voluntary contributions up to a maximum of 15% of their annual compensation, as
defined in the Plan. Through June 30, 2000, the Plan did not provide for any
matching contribution by the Company, however, starting at the beginning of
fiscal year 2001, the Company has amended the Plan to include a Company matching
contribution up to 10% of an employee's compensation. Effective January 1, 2003,
the matching contribution changed to a dollar-for-dollar matching contribution
on salary deferrals up to 3% of the employee's compensation then a fifty-cents
on the dollar matching contribution on salary deferrals from 3% to 5%. The
Company contribution for the years ended June 30, 2003 and 2002 was
approximately $67,000 and $48,000, respectively and for the nine months ended
March 31, 2004 and 2003, the Company contribution was approximately $53,000
(unaudited) and $37,000 (unaudited), respectively.
F-30
USA Technologies Inc.
Notes to Consolidated Financial Statements
16. Contingencies
In the normal course of business, various legal actions and claims are pending
or may be instituted or asserted in the future against the Company. The Company
does not believe that the resolution of these matters will have a material
effect on the financial position or results of operations of the Company.
F-31
USA Technologies Inc.
Notes to Consolidated Financial Statements
17. Subsequent Events
BAYVIEW TECHNOLOGY GROUP, LLC
On July 11, 2003, the Company acquired substantially all of the assets of
Bayview Technology Group, LLC (Bayview). Under the terms of the asset purchase
agreement the Company issued to Bayview 20,000,000 shares of its restricted
Common Stock and cash of $631,247 (unaudited) to settle an obligation of
Bayview. The definitive agreement also provides for the Company to assume
certain obligations under a royalty agreement expiring May 31, 2006. In
connection with this transaction the Company also agreed to issue 170,000 shares
of its restricted Common Stock to a consultant who provided certain services to
the Company in connection with this acquisition.
The acquired energy control equipment reduces energy consumption in vending
machines, glass front coolers, laser printers, monitors and other office
peripherals throughout the United States. As a result of the acquisition, the
Company believes it will be a leading provider of end-to-end networked solutions
that includes wireless and internet connections, cashless transaction and
security/ID capability and interactive media functionality, and remote inventory
and auditing control and energy cost reductions and environmental emissions
reductions. The Company also expects to reduce costs through economies of scale.
The acquisition cost of Bayview was $10,030,894 (unaudited), which principally
was comprised of the issuance of 20,000,000 shares of restricted Common Stock
valued at $9,200,000 (unaudited) and a cash payment of $631,247 (unaudited). The
value of the 20,000,000 shares of Common Stock was determined based on the
average market price of the Company's Common Stock over the two-day period
before and after the definitive agreement date of July 11, 2003. The purchase
price also included acquisition related costs of $199,647 (unaudited).
The following table summarizes the fair values of the assets acquired and
liabilities assumed at the date of acquisition (Unaudited):
Current assets $ 7,628
Property and equipment 244,704
Intangible assets 9,449,000
Goodwill 329,562
------------
Total assets acquired $ 10,030,894
============
Of the $9,449,000 (Unaudited) of acquired intangible assets, $7,424,000
(Unaudited) was assigned to patents that are subject to amortization over a
10-year period, $1,011,000 (Unaudited) was assigned to non-compete agreements
that are subject to amortization over a 5-year period and $1,014,000 (Unaudited)
was assigned to trademarks and trade names that are not subject to amortization.
The acquisition was accounted for using the purchase method and, accordingly,
the results of operations of Bayview have been included in the accompanying
consolidated statements of operations since the date of acquisition. Results of
operations of the Company for the nine months ended March 31, 2004 would not
have been significantly different than reported had the acquisition taken place
July 1, 2003. Pro-forma combined results for the nine months ended March 31,
2003 would have been as follows had the acquisition taken place July 1, 2002 -
revenues of $6,306,838 (unaudited); net loss of $12,927,242 (unaudited); loss
applicable to common shares of $13,720,828 (unaudited); loss per common share
(basic and diluted) of $0.12 (unaudited).
OTHER SUBSEQUENT EVENTS
On September 26, 2003, the Company completed a sale of 20,000,000 shares of
Common Stock to accredited investors at $0.25 per share generating gross
proceeds of $5,000,000. Of these shares, Wellington Management Company, LLP
purchased 18,000,000 on behalf of their clients, and the balance of the shares
were purchased by other investors. An additional 10,000 shares (unaudited) of
Common Stock were sold to these investors generating proceeds of $2,500
(unaudited).
During September 2003, the Company issued 500,000 shares of Common Stock to an
existing investor in connection with provision from a fiscal year 2003 equity
transaction. The Company also reduced the exercise price on 750,000 Common Stock
Warrants previously issued to this investor from $0.10 per share to $0.0665 per
share. Such shares were viewed as an adjustment to the original shares issued in
connection with the original private placement offering.
On September 16, 2003 and September 24, 2003, the Company sold an aggregate of
700,000 shares of its investment in Jubilee realizing net cash proceeds of
approximately $395,000.
During September 2003, the Company's Board of Directors authorized the
establishment of the 2003-A Stock Compensation Plan whereby 500,000 shares of
the Company's Common Stock shall be available for future issuance to Company
employees, directors or consultants as compensation.
During the period from September 12, 2003 through September 30, 2003, an
additional $660,000 of the 2000 Senior Notes and $430,390 of the 2001 Senior
Notes have been exchanged for the 2006 and 2007 Senior Notes, respectively. For
the 2000 Senior Noteholders who agreed to exchange their notes, such amounts
have been reflected as long-term in the accompanying June 30, 2003 consolidated
balance sheet.
The following condensed consolidated pro forma balance sheet reflects the
effects of these subsequent events as if they have occurred as of June 30, 2003:
As Reported Proforma
Condensed Consolidated Proforma Balance Sheet June 30, 2003 Adjustments June 30, 2003
-----------------------------------------------------
Total current assets $ 5,375,983 $ 4,426,000 $ 9,801,983
Property and equipment 943,784 237,000 1,180,784
Intangibles, including goodwill 11,535,740 9,805,000 21,340,740
Other assets 37,174 -- 37,174
-----------------------------------------------------
Total assets $17,892,681 $14,468,000 $32,360,681
=====================================================
Current liabilities $ 6,215,108 $ 190,000 $ 6,405,108
Long-term liabilities 7,985,490 -- 7,985,490
Total shareholders' equity 3,692,083 14,278,000 17,970,083
-----------------------------------------------------
Total liabilities and shareholders' equity $17,892,681 $14,468,000 $32,360,681
=====================================================
The adjustment column reflects the recording of the operating assets of Bayview.
The purchase price is comprised of the issuance of 20,000,000 shares of the
Company's Common Stock valued at $9,200,000, a cash payment of $631,000, the
assumption of $40,000 of liabilities and the payment of acquisition related
expenses of $228,000. The adjustment column also reflects the issuance of
20,000,000 shares of the Company's Common Stock at $0.25 per share generating
gross proceeds of $5,000,000.
18. Subsequent Events (Unaudited)
In November 2003, Stitch and the lessor of the office space that Stitch had
occupied reached an agreement that required Stitch to pay the lessor $55,000 as
consideration to release Stitch from any further obligations under the lease. In
addition, a security deposit of approximately $9,000 was retained by the lessor.
Accordingly, the difference between estimated lease exit costs accrued of
$354,000 and actual consideration paid, was recorded as a reduction of goodwill
in the amount of $290,000 during the nine months ended March 31, 2004.
On November 6, 2003 the Company reached an agreement with the bank that provided
working capital loans to Stitch whereby the Company will make monthly
installments to repay the remaining balance ($76,765 as of March 31, 2004) by
October 2004.
Effective December 31, 2003, the parties to the Kodak Vending Placement
Agreement (Note 4) finalized a settlement of a dispute which resulted in the
termination of the vending agreement as of December 31, 2003. Under the
settlement agreement, the Company received a payment from Kodak of approximately
$675,000. The Company will also receive payments of $300 per vending machine
from the supplier of the vending machines, as the machines are pulled from
service at the supplier's sole cost and expense. Upon receipt of the $300 per
machine, title to the vending machine will transfer from Stitch to the supplier.
Through March 31, 2004 the Company received approximately $35,000 for these
machines. The settlement agreement provides that all machines are to be pulled
from service no later than mid calendar year 2004. Substantially all the
machines are no longer in service. The agreement also provides for the supplier
to cancel a $124,000 obligation of Stitch for the purchase of vending machines.
The vending machines were used as collateral to secure the bank facility used to
purchase the machines under which $377,653 was outstanding as of March 31, 2004.
The Company will repay this debt as the vending machines are returned to the
supplier.
This termination agreement resulted in gain of $509,244 during the nine months
ended March 31, 2004 and such amount is reflected as Other income in the March
31, 2004 Consolidated Statement of Operations. This gain is comprised of the
payment from Kodak of approximately $675,000 plus the cancellation of Stitch's
obligation to the supplier of the vending machines of approximately $124,000
reduced by a write down of the carrying value of vending machines of
approximately $290,000 to reflect the vending machines at their realizable value
of $300 per machine. The vending machines are reported as assets held for sale
in the Consolidated Balance Sheet, as it was determined that the plan of sale
criteria in FAS 144 was met in the termination agreement, at which time
depreciation of these assets ceased. To the extent any costs are incurred by
Stitch to fulfill its obligations under the settlement agreement, these costs
will be recorded as incurred.
In March 2004, the Company sold 969,091 (unaudited) of the Jubilee shares for
net proceeds of $1,075,891 (unaudited). Sale proceeds of $762,130 (unaudited)
were outstanding as of March 31, 2004 and are reflected as Other receivable in
the March 31, 2004 unaudited Balance Sheet. These proceeds were subsequently
received in April 2004. Gains realized in these sales during the nine months
ended March 31, 2004 totaled $603,480 (unaudited) and are reflected in Other
income (expense) in the March 31, 2004 consolidated statement of operations. An
unrealized gain of $51,819 (unaudited) on the remaining shares held by the
Company is reflected in shareholders' equity as Accumulated other comprehensive
income at March 31, 2004.
On April 21, 2004, the Company and La Jolla Cove Investors, Inc. reached an
agreement regarding La Jolla's letter claiming damages for failure to register
certain shares underlying La Jolla's warrants. Per this agreement, the Company
agreed to extend the expiration date of La Jolla's remaining 13,510,000 warrants
until December 1, 2005, La Jolla released all claims against the Company and La
Jolla agreed to limit the sale of our shares during any calendar month to an
amount not greater than seven percent of the prior month's share trading volume.
On May 11, 2004, the Company agreed to reduce the exercise price of La Jolla's
remaining warrants from $0.1008 to $0.0908. During May 2004, La Jolla exercised
all of their remaining warrants at $0.0908 per share generating net proceeds of
$1,215,900.
In June 2004 the Board of Directors took certain actions:
Each investor in the 2004-A private placement offering of Common Stock (an
offering for the issuance of up to 35,000,000 shares of Common Stock at
$.15 per share authorized by the Board of Directors in February 2004
resulting in sales through March 31, 2004 of 550,000 shares for proceeds
of $82,500 and an aggregate of 28,290,833 shares for proceeds of
$4,243,625 through June 29, 2004) will receive warrants to purchase shares
of the Company's Common Stock equal to 50% of the number of shares
purchased in the offering. These warrants will be exercisable at $.20 per
share and expire on December 31, 2004. As of June 29, 2004, 14,145,417
warrants were issued.
Warrants granted to holders of Senior Notes who opted to receive payment
of interest in Common Shares in lieu of cash had the expiration date of
their warrants extended to August 30, 2004 from June 30, 2004. As of June
29, 2004 there were warrants outstanding to purchase 3,716,496 shares of
Common Stock at $.20 per share. In addition, the holders of these warrants
were granted one additional warrant for each warrant previously granted
with the same exercise price and an expiration date of December 31, 2004.
A Common Stock Purchase Agreement with Steve Illes, an accredited
investor, was approved. Pursuant to the Agreement, Illes agreed to
purchase from USA up to 25,000,000 shares of Common Stock, provided that
the aggregate purchase price can not exceed $7,500,000. Under the
Agreement, Illes is permitted to purchase Common Stock from USA at any
time at the price per share of $.30. In addition, USA has the right at any
time to require Illes to purchase Common Stock from USA at the lower of:
(i) $.30; or (ii) 90% of the closing bid price per share on the date prior
to the date of the delivery by USA to Illes of notice of his obligation to
purchase. USA can require Illes to purchase shares under the Agreement
only if the shares have been registered by the Company for resale by Illes
under the Act. During any calendar month, Illes is not permitted to
purchase and can not be required by USA to purchase Common Stock for an
aggregate purchase price in excess of $700,000. Although we have
registered 25,000,000 shares for resale by Illes under this prospectus, we
have the right in the future, if necessary, to register additional shares
in order to ensure that a sufficient number of shares are available for
purchase by Illes. We have agreed to register for resale the shares
purchased by Illes under the Agreement for a period of one year from the
date of this prospectus. We have agreed to pay to Illes a due diligence
fee of $45,000.
F-32
Table of Contents
Report of Independent Registered Public Accounting Firm. F-34
Balance Sheets as of December 31, 2002 and 2001. F-35
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-36
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-37
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-38
Summary of Accounting Policies. F-39
Notes to Financial Statements. F-45
Unaudited Financial Statements:
Balance Sheet as of June 30, 2003 (Unaudited). F-53
Statements of Operations for the six months ended June 30, 2003
and 2002 (Unaudited). F-54
Statements of Member's Equity (Deficit) for the six months
ended June 30, 2003 and 2002 (Unaudited). F-55
Statements of Cash Flows for the six months ended June 30, 2003
and 2002 (Unaudited). F-56
Summary of Significant Accounting Policies for the six months
ended June 30, 2003 and 2002 (Unaudited). F-57
Selected Notes to Financial Statements for the six months
ended June 30, 2003 and 2002 (Unaudited). F-60
(b) Pro Forma Financial Information (Unaudited):
Pro Forma Consolidated Balance Sheet as of June 30, 2003 (Unaudited). F-65
Pro Forma Consolidated Statement of Operations for the year ended
June 30, 2003 (Unaudited). F-66
Pro Forma Consolidated Statement of Operations for the year ended
June 30, 2002 (Unaudited). F-67
Notes to Pro Forma Consolidated Financial Statements (Unaudited) F-68
F-33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 the standards of the Public Company
Accounting Oversight Board (United States). 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-34
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-35
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-36
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-37
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-38
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-39
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-40
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-41
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-42
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-43
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-44
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-45
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-46
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-47
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-48
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-49
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-50
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-51
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-52
BAYVIEW TECHNOLOGY GROUP, LLC
BALANCE SHEET
(Unaudited)
June 30,
2003
-------------
Assets
Current assets:
Cash $ 54,201
Accounts receivable 1,295,947
Inventories 381,486
Prepaid expenses and other current assets 16,324
-------------
Total current assets 1,747,958
Goodwill 1,820,758
Deposits 16,977
Long-Lived Assets Held for Sale
Property and equipment, net 223,820
Patents and trademarks, net of $106,689 of accumulated amortization 689,641
-------------
Total assets $ 4,499,154
=============
Liabilities and Members' Equity
Current liabilities:
Accounts payable and accrued expenses $ 737,569
Line of credit - related party 438,000
Commissions and royalties payable 259,401
Current maturities of long-term debt - related party 591,568
-------------
Total current liabilities 2,026,538
Long-term debt - related party, less current maturities 621,257
-------------
Total Liabilities 2,647,795
Members' Equity 1,851,359
-------------
Total liabilities and members' equity $ 4,499,154
=============
See accompanying notes.
F-53
BAYVIEW TECHNOLOGY GROUP, LLC
STATEMENTS OF OPERATIONS
(Unaudited)
Six months ended June 30
2003 2002
-------------------------------------
Revenues $ 2,514,735 $ 2,673,642
Cost of Sales 1,143,397 1,237,622
-------------------------------------
Gross Profit 1,371,338 1,436,020
Operating expenses:
Selling 692,049 490,518
General and administrative 642,755 688,373
Depreciation and amortization 69,932 53,388
-------------------------------------
Total operating expenses 1,404,736 1,232,279
-------------------------------------
Income (loss) from operations (33,398) 203,741
Other expense:
Interest expense (45,963) (54,959)
-------------------------------------
Net income (loss) $ (79,361) $ 148,782
=====================================
See accompanying notes.
F-54
BAYVIEW TECHNOLOGY GROUP, LLC
STATEMENTS OF MEMBERS' EQUITY
(Unaudited)
Six months ended June 30,
2003 2002
-------------------------------
Balance, beginning of period $ 1,930,720 $ 1,432,885
Net income (loss) for period (79,361) 148,782
-------------------------------
Balance, end of period $ 1,851,359 $ 1,581,667
===============================
See accompanying notes.
F-55
BAYVIEW TECHNOLOGY GROUP, LLC
STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30
2003 2002
------------------------------------
Cash flows from operating activities
Net income (loss) $ (79,361) $ 148,782
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 69,932 53,388
Decrease (increase) in current assets:
Accounts receivable (437,550) 183,617
Inventories (64,284) (65,856)
Prepaid expenses and other current assets 20,814 (23,209)
Increase in current liabilities:
Accounts payable and accrued expenses 279,095 105,510
Commissions and royalties payable 35,237 3,052
------------------------------------
Net cash provided by (used in) operating activities (176,117) 405,284
Cash flows from investing activities
Purchase of property and equipment (2,493) (9,640)
Investment in patents and trademarks (14,793) -
Deposit on software under development - (11,066)
------------------------------------
Net cash used in investing activities (17,286) (20,706)
Cash flows from financing activities
Borrowings of bank revolving line of credit - 415,000
Payments on bank revolving line of credit - (650,000)
Payments on long-term debt - (137,320)
Borrowings on Line of Credit-Related Party 693,000 -
Payments on Line of Credit-Related Party (500,000) -
------------------------------------
Net cash provided by (used in) financing activities 193,000 (372,320)
------------------------------------
Net increase (decrease) in cash (403) 12,258
Cash, beginning of period 54,604 3,242
------------------------------------
Cash, end of period $ 54,201 $ 15,500
====================================
Supplemental disclosures of cash flow information:
Interest paid $ 9,492 $ 121,141
====================================
See accompanying notes.
F-56
BAYVIEW TECHNOLOGY GROUP, LLC
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SIX MONTHS ENDED JUNE 30, 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 8, 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 six months ended June 30, 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-57
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 $26,911 and $25,000 for the
six months ended June 30, 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-58
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 $53,932 and $15,631 for the six months ended June 30, 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 $39,370 and $14,147 for the six
months ended June 30, 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 six months ended June 30, 2003
and 2002 would not have been materially different from the reported net income
(loss).
F-59
BAYVIEW TECHNOLOGY GROUP, LLC
SELECTED NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
1. PROPERTY AND EQUIPMENT
Property and equipment as of June 30, 2003 consisted of the following:
Equipment $ 248,547
Furniture and fixtures 98,197
-------------
346,744
Less accumulated depreciation 122,924
-------------
$ 223,820
=============
Depreciation expense was $43,021 and $28,388 for the six months ended June 30,
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.
Effective June 1, 2003, Bayview Ventures, Inc. agreed to extend the repayment
date of the line of Credit Agreement to November 8, 2003. At June 30, 2003, the
balance of the Line of Credit was $438,000 and the interest rate was 5.75%.
Interest expense recognized in connection with the line of credit - related
party, was $10,422 for the six months ended June 30, 2003.
F-60
3. LONG-TERM DEBT - RELATED PARTY
Long-term debt at June 30, 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 six months ended June 30, 2003,
the Company made no principal payments on this debt. Included in accounts
payable at June 30, 2003 is $81,536 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-61
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 six months ended June 30, 2003 and 2002, royalties earned by Bayview
Ventures, Inc. were $172,107 and $190,123, respectively. Royalties payable to
Bayview Ventures, Inc. as of June 30, 2003 totaled $153,462.
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 six months ended June 30, 2003 and
2002, the Company purchased $844,068 and $740,864, respectively from the entity.
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-62
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 June 30, 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-63
USA TECHNOLOGIES INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The Pro Forma Consolidated Balance Sheet as of June 30, 2003 and the Pro Forma
Consolidated Statements of Operations for the years ended June 30, 2003 and
2002, are based on the historical financial statements of USA Technologies, Inc.
(USAT) 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 June 30, 2003 has
been prepared assuming the Bayview acquisition was completed on June 30, 2003.
The Pro Forma Consolidated Statements of Operations for the years ended June 30,
2003 and 2002 have been prepared assuming that the Bayview acquisition was
completed on July 1, 2002 and July 1, 2001, respectively.
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 USAT's
actual financial position or results of operations would have been had the
acquisition of Bayview occurred as of such dates, or to project USAT'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 Consolidated Statements of Operations should be read in
conjunction with USAT's financial statements and notes thereto, and the
historical financial statements of Bayview which are included elsewhere herein.
F-64
USA Technologies Inc.
Pro Forma Consolidated Balance Sheet
June 30, 2003
(Unaudited)
Acquisition
Bayview USAT Adjustments Pro Forma
------- ---- ----------- ---------
Assets:
Current assets:
Cash and cash equivalents $ 54,201 $ 2,384,455 $ (833,448) $ 1,603,208
Accounts receivable, net 1,295,947 414,796 (1,295,947) 414,796
Inventory 381,486 457,900 (347,486) 497,900
Subscriptions receivable - 1,013,400 - 1,013,400
Prepaid expenses and other current assets 16,324 201,383 653 218,360
Investment - 904,049 - 904,049
-------------------------------------------------------------
Total current assets 1,747,958 5,375,983 (2,472,228) 4,651,713
Property and equipment, net 223,820 943,784 - 1,167,604
Software development costs - 998,660 - 998,660
Goodwill 1,820,758 7,945,580 (1,502,108) 8,264,230
Intangible assets 689,641 2,591,500 8,810,359 12,091,500
Other assets 16,977 37,174 (16,977) 37,174
-------------------------------------------------------------
Total assets $4,499,154 $17,892,681 $4,819,046 $27,210,881
=============================================================
Liabilities and shareholder's equity:
Current liabilities
Accounts payable $ 737,569 $ 2,266,156 $ (697,569) $ 2,306,156
Accrued expenses 259,401 2,720,743 (259,401) 2,720,743
Current portion of long-term debt 1,029,568 830,674 (1,029,568) 830,674
Convertible Senior Notes - 349,942 - 349,942
-------------------------------------------------------------
Total current liabilities 2,026,538 6,167,515 (1,986,538) 6,207,515
Convertible Senior Notes, less current portion - 7,808,469 - 7,808,469
Long-term debt, less current portion 621,257 224,614 (621,257) 224,614
-------------------------------------------------------------
Total liabilities 2,647,795 14,200,598 (2,607,795) 14,240,598
Shareholders'/Members' equity:
Series A convertible preferred stock, no par value;
1,800,000 shares authorized; 524,452 issued and
outstanding at June 30, 2003 - 3,715,246 - 3,715,246
Bayview Members' Equity, 95,000 units issued and outstanding at
June 30, 2003 1,851,359 - (1,851,359) -
USA Common Stock, no par value; 400,000,000 shares
authorized; 218,741,042 shares issued and outstanding shares at
June 30, 2003 - 78,790,405 9,278,200 88,068,605
Accumulated deficit - (78,813,568) - (78,813,568)
-------------------------------------------------------------
Total shareholders'/members' equity 1,851,359 3,692,083 7,426,841 12,970,283
-------------------------------------------------------------
Total liabilities and shareholders'/members' equity $4,499,154 $17,892,681 $ 4,819,046 $27,210,881
=============================================================
SEE NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
F-65
USA Technologies, Inc.
Pro Forma Consolidated Statement of Operations
For the year ended June 30, 2003
(Unaudited)
Acquisition
Bayview USAT Adjustments Pro Forma
------- ---- ----------- ---------
Revenue $ 5,634,122 $ 2,853,068 - $ 8,487,190
Operating expenses:
Cost of sales 2,406,578 2,971,443 - 5,378,021
General and administrative 1,407,380 7,194,684 - 9,903,041
Compensation 1,300,977 4,973,210 - 4,973,210
Depreciation and amortization 134,951 1,251,716 897,477 2,284,144
Loss on exchange of debt - 1,521,654 - 1,521,654
----------- ----------- ---------- ------------
Total operating expenses 5,249,886 17,912,707 897,477 24,060,070
----------- ----------- ---------- ------------
384,236 (15,059,639) (897,477) (15,572,880)
Other income (expense):
Interest income - 18,691 - 18,691
Loss on Investment - (1,945,951) - (1,945,951)
Interest expense (114,544) (4,978,600) 114,544 (4,978,600)
----------- ----------- ---------- ------------
Total other income (expense) (114,544) (6,905,860) 114,544 (6,905,860)
----------- ----------- ---------- ------------
Net income (loss) 269,692 (21,965,499) (782,933) (22,478,740)
Cumulative preferred dividends - (793,586) - (793,586)
----------- ----------- ---------- ------------
(Loss) income applicable to common shares $ 269,692 $(22,759,085) $(782,933) $(23,272,326)
=========== =========== ========== ============
Loss per common share (basic and diluted) $(0.20) $(0.18)
====== ======
Weighted average number of common shares
outstanding (basic and diluted) 111,790,358 20,170,000 131,960,358
=========== ========== ===========
F-66
USA Technologies, Inc.
Pro Forma Consolidated Statement of Operations
For the year ended June 30, 2002
(Unaudited)
Acquisition
Bayview USAT Adjustments Pro Forma
------- ---- ----------- ---------
Revenues $ 4,900,086 $ 1,682,701 - $ 6,582,787
Operating expenses:
Cost of sales 2,459,033 4,062,901 - 6,373,960
General and administrative 1,141,883 7,868,064 - 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 17,025,865 836,852 22,677,450
------------ ------------ ---------- ------------
58,966 (15,343,164) (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)
------------ ------------ ---------- ------------
Total other income (expense) (119,254) (1,971,643) 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-67
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 USAT 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 ($223,820),
inventory ($40,000), prepaid expenses ($16,977), intangibles assets ($9,500,000)
and goodwill ($318,650).
(2) The cash portion of the purchase price and costs associated with the
acquisition are assumed to have been paid from USAT cash as of June 30, 2003.
(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 and 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.
F-68
PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 24. Indemnification of Officers and Directors.
Section 1746 of the Pennsylvania Business Corporation Law of 1988, as amended
("BCL"), authorizes a Pennsylvania corporation to indemnify its officers,
directors, employees and agents under certain circumstances against expenses and
liabilities incurred in legal proceedings involving such persons because of
their holding or having held such positions with the corporation and to purchase
and maintain insurance of such indemnification. Our By-laws substantively
provide that we will indemnify our officers, directors, employees and agents to
the fullest extent provided by Section 1746 of the BCL.
Section 1713 of the BCL permits a Pennsylvania corporation, by so providing in
its By-laws, to eliminate the personal liability of a director for monetary
damages for any action taken unless the director has breached or failed to
perform the duties of his office and the breach or failure constitutes
self-dealing, willful misconduct or recklessness. In addition, no such
limitation of liability is available with respect to the responsibility or
liability of a director pursuant to any criminal statute or for the payment of
taxes pursuant to Federal, state or local law. Our By-laws eliminate the
personal liability of the directors to the fullest extent permitted by Section
1713 of the BCL.
Item 25. Other Expenses of Issuance and Distribution.
The following is an itemized statement of the estimated amounts of all expenses
payable by the Registrant in connection with the registration of the common
stock, other than underwriting discounts and commissions.
Securities and Exchange Commission - Registration Fee . $ 1,650.69
Printing and Engraving Expenses . . . . . . . . . . . $ 3,349.31
Accounting Fees and Expenses . . . . . . . . . . . $12,500.00
Legal Fees and Expenses . . . . . . . . . . . . . . . $12,500.00
----------
Total . . . . . . . . . . . . . . . . . . $30,000.00
==========
Item 26. Recent Sales of Unregistered Securities.
During the three years immediately preceding the date of the filing of this
registration statement, the following securities were issued by USA without
registration under the Securities Act of 1933, as amended ("Act"):
Private Placements.
67
During July 2001, the Company issued to La Jolla Cove Investors, Inc. a warrant
to purchase up to 500,000 shares of Common Stock. The warrant can be exercised
at any time in whole or in part within one year following the effectiveness of
the registration statement covering the resale of the shares issuable upon
exercise of the warrant. The exercise price of the warrant is the lower of $1.00
or 80% of the lowest closing bid price of the Common Stock during the 20 trading
days prior to exercise. The Company has agreed to prepare and file at its cost
and expense a registration statement covering the resale of La Jolla of the
shares underlying the warrant. At the time of the issuance of the warrant, La
Jolla paid to the Company a non-refundable fee of $50,000 to be credited towards
the exercise price under the warrant. A broker-dealer received a commission of
$3,500 in connection with this warrant. The offering of the warrant and the
underlying shares was exempt from registration pursuant to Section 4(2) of the
Act. La Jolla is an accredited investor and we obtained appropriate investment
representation and the securities contained appropriate restrictive legends
under the Act.
During August 2001, the Company issued to La Jolla a $225,000 Convertible
Debenture bearing 9 3/4 percent interest with a maturity date of August 2, 2003.
Interest is payable by the Company monthly in arrears. The Debenture is
convertible at any time after the earlier of the effectiveness of the
registration statement referred to below or 90 days following issuance at the
lower of $1.00 per share or 80% of the lowest closing bid price of the Common
Stock during the 20 days preceding exercise. If on the date of conversion the
closing bid price of the shares is $.40 or below, the Company shall have the
right to prepay the portion being converted at 150% of the principal amount
being converted. In such event, La Jolla shall have the right to withdraw its
conversion notice. At the time of conversion of the Debenture, the Company has
68
agreed to issue to La Jolla warrants to purchase an amount of Common Stock equal
to ten times the number of shares actually issued upon conversion of the
Debenture. The warrants are exercisable at any time for two years following
issuance and at the related conversion price of the Debenture. The Company has
agreed to prepare and file at its expense a registration statement covering the
resale of the shares of Common Stock underlying the Debenture as well as the
related warrants issuable upon conversion of the Debenture. La Jolla paid to the
Company the sum of $100,000 at the time of the issuance of the Debenture and has
agreed to pay $125,000 at the time of the effective date of the registration
statement. The convertible debenture was issued pursuant to the exemption from
registration set forth in Section 4(2) of the Act. La Jolla is an accredited
investor and we obtained appropriate investment representation and the
securities contained appropriate restrictive legends under the Act.
During the period from March 2001 through September 2001, we sold a total of
739.54 units in the 2001-B Private Placement Offering at a price of $6,000 per
unit. Each unit consisted of 10,000 shares of common stock and 20,000 2001-B
common stock purchase warrants. The offering was sold to 193 accredited
investors, and did not involve any general advertising or solicitation, and was
therefore exempt from registration under Rule 506 of Regulation D promulgated
under the Act.
During the period from September 2001 through October 19, 2001, we sold for our
2001-C offering an aggregate of 4,212,350 shares of common stock at $.50 per
share for a total of $2,106,175. For each share of common stock purchased, each
investor also received a 2001-C warrant. The offering was sold to 102 accredited
investors, and did not involve any general advertising or solicitation, and was
therefore exempt from registration under Rule 506 of Regulation D promulgated
under the Act.
During October 2001, the Company issued 200,000 shares to Ratner & Prestia,
P.C., an accredited investor. The offering did not involve any general
advertising or solicitation, and was therefore exempt from registration under
Section 4(2) of the Act. The proceeds from the sales of the shares will be
applied by Ratner & Prestia towards the unpaid professional fees due to them by
the Company. The investor is an accredited investor and we obtained appropriate
investment representation and the securities contained appropriate restrictive
legends under the Act.
During the period from November 2001 through June 30, 2002, the Company sold
$4,814,593 principal amount of 12% Convertible Senior Notes due December 31,
2004. Each Senior Note is convertible into shares of common stock at $.40 per
share anytime through maturity. The notes were sold to 230 accredited investors
and the offer and sale thereof did not involve any general advertising or
solicitation and the offer and sale was therefore exempt from registration under
Rule 506 of the Regulation D promulgated under the Act.
In January 2002, the Company issued shares of common stock to the following
executive officers as a bonus: George R. Jensen, Jr.- 320,000 shares; Stephen P.
Herbert- 300,000 shares; H. Brock Kolls-200,000 shares; Leland Maxwell-130,000
shares; and Michael Lawlor- 130,000 shares. The issuance of the shares was
exempt from registration under Section 4(2) of the Act. All of these investors
are accredited and we obtained appropriate investment representations and the
securities contained appropriate restrictive legends under the Act.
In May 2002, we acquired Stitch Networks Corporation. Pursuant to the
transaction, Stitch become our wholly-owned subsidiary. In exchange for their
Stitch stock, the Stitch stockholders received an aggregate of 22,762,341 of our
shares of common stock and warrants to purchase up to 8,000,000 of our shares of
common stock at $.40 per share at any time through June 30, 2002. We also issued
to the former option holders of Stitch options to purchase up to 2,475,318
shares at $.165 per share at any time for five years following closing. The
69
offer and sale of the shares, warrants, and options was exempt from registration
under Section 4(2) of the Act.
The Stitch stockholders acquiring our shares and warrants are all accredited
investors and we obtained appropriate investment representations and the
securities contained appropriate restrictive legends under the Act. The
thirty-three former option holders of Stitch receiving our options consisted of
directors, officers or key employees of Stitch, all of whom were sophisticated
investors. In connection with the issuance of the options, we obtained
appropriate investment representations and the securities contained appropriate
restrictive legends under the Act.
In April 2002, the Company agreed to issue 400,000 shares of Common Stock to
Alex Consulting, Inc., a consultant to the Company. The offer and sale of the
shares was exempt from registration under Section 4(2) of the Act. The investor
is an accredited investor and we obtained appropriate investment representation
and the securities contained appropriate restrictive legends under the Act.
In April 2002, the Company agreed to issue 90,000 shares of Common Stock to
Larry Gershman, a consultant to the Company. The offer and sale of the shares
was exempt from registration under Section 4(2) of the Act. The investor is an
accredited investor and we obtained appropriate investment representation and
the securities contained appropriate restrictive legends under the Act.
In April 2002, the Company agreed to issue to Technology Partners (Holdings)
LLC, our investment banker, a total of 150,000 shares of Common Stock. The
shares are to be issued at the rate of 25,000 per month under the six month
extension of their consultant agreement. The offer and sale of the shares was
exempt from registration under Section 4(2) of the Act. The investor is an
accredited investor and we obtained appropriate investment representation and
the securities contained appropriate restrictive legends under the Act.
During September 2002, the Company sold 2,000,000 shares of restricted Common
Stock at $.12 per share for aggregate proceeds of $240,000 to an investor. In
addition, in October 2002, the Company granted to the investor warrants to
purchase up to 2,000,000 shares at $.10 per share through November 30, 2002
(later extended to March 31, 2003), and if all of these warrants are exercised,
the investor has been granted another identical warrant for 2,000,000 shares
exercisable at any time through March 31, 2003. The offer and sale of the shares
was exempt from registration under Section 4(2) of the Act. The investor is an
accredited investor and we obtained appropriate investment representation and
the securities contained appropriate restrictive legends under the Act.
Commencing during June 2002 and through October 2002, the Company sold to 186
accredited investors $4,144,008 principal amount of 12% Senior Notes due
December 31, 2005 and 8,288,016 shares of Common Stock. For each $10,000
invested, the subscriber received a $10,000 note and 20,000 shares of Common
Stock. The Company has received signed subscription documents for the 2002-A
Private Placement of Senior Notes for $4,114,008, of which $2,585,000 has been
deposited and the remainder for services. The notes were sold to accredited
investors and the offer and sale thereof did not involve any general advertising
or solicitation and the offer and sale was therefore exempt from registration
under Rule 506 of the Regulation D promulgated under the Act.
70
La Jolla Cove Investors converted Debentures and exercised warrants. The
investor utilized previously remitted funds to the Company which was reflected
as a deposit in the June 30, 2002 consolidated financial statements.
Specifically, from inception through June 30, 2003, La Jolla converted $325,000
of 9 3/4 percent Convertible Debentures, for which the Company issued 2,800,903
shares of stock, and exercised 10,543,673 warrants to purchase Common Stock at
an average price of $.16 per share. The Company had previously executed a
Securities Purchase Agreement with La Jolla for the purchase of $225,000
(increased by $100,000 on June 18, 2002) of Convertible Debentures bearing 9 3/4
percent interest with a maturity date of August 3, 2003 (extended to August 2,
2004 on June 18, 2002). Interest is payable by the Company monthly in arrears.
The Debenture is convertible at any time after the earlier of the effectiveness
of the registration statement or 90 days following issuance, at the lower of
$1.00 per share or 80% (later lowered to 72%) of the lowest closing bid price of
the Common Stock during the 30 days preceding exercise. The offer and sale of
the shares was exempt from registration under Section 4(2) of the Act.
In July 2002 the Company agreed to issue an aggregate of 234,600 shares to
employees as part of those employees` severance payments at the time of and as
part of the employee`s termination of employment. The offer and sale of the
shares was exempt from registration under Section 4(2) of the Act. All of these
eight former employees were sophisticated and were afforded access to all public
filings as well as to any other information reasonably obtainable by USA. We
received investment representations from all of these investors and all the
securities contained appropriate restrictive legends under the Act.
In July 2002, the Company agreed to issue to Karl Mynyk, a former employee, an
aggregate of 125,000 shares in settlement of litigation between he and the
Company. The shares were valued at $.20 per share. The offer and sale of the
shares was exempt from registration under Section 4(2) of the Act. Mr. Mynyk is
a sophisticated investor, was afforded access to all public filings as well as
to any other information reasonably obtainable by USA. We received investment
representations from him and the securities contained appropriate restrictive
legends under the Act.
In October 2002 and January 2003, the Company issued 529,324 and 593,634 shares,
respectively, (valued at $.20 per share) to the holders of the senior notes in
lieu of the cash quarterly interest payments due for the quarters ended
September 2002 and December 2002, respectively. In addition, for these two
quarters the Company granted warrants to purchase up to 1,122,958 shares at $.20
per share at any time prior to December 31, 2004. The offer and sale of the
shares and warrants was exempt from registration under Rule 506 promulgated
under the Act. All of these securities were sold to accredited investors and the
offer and sale did not involve any general advertising or solicitation.
In October 2002, the Company issued to Edwin P. Boynton 50,000 shares in lieu of
the 100,000 options granted to him in April 2002. The offer and sale of the
shares was exempt from registration under Section 4(2) of the Act. Mr. Boyton is
an accredited investor and a Director of the Company, we obtained investment
representations from him and the securities contained appropriate restrictive
legends under the Act.
In October 2002, the Company sold to an investor, Kazi Management VI, Inc.
3,571,429 shares of Common Stock at $.07 per share and issued the following
warrants: (1) warrants to purchase up to 7,142,858 shares of Common Stock at
$.07 at any time for a five year period; and (2) warrants to purchase up to
7,142,858 shares at $.07 per share and up to 5,000,000 shares at $.10 per share,
exercisable over a one year period. The offer and sale of the shares was exempt
from registration under Section 4(2) of the Act. The investor is an accredited
investor and we obtained appropriate investment representations from the
investor and the securities contained appropriate restrictive legends under the
Act.
In October 2002, the Company sold to an investor, Alpha Capital
Aktiengesellscharft, 1,500,000 shares at $.10 per share and granted warrants to
purchase up to 750,000 shares at $.15 per share at any time for five years.
71
Within seven days following the effectiveness of the registration statement
covering these shares, and provided that a Non-Registration Event (as defined in
our agreement with Alpha) has not occurred, the Company has agreed to sell to
the investor an additional 1,500,000 shares at $.10 per share and grant warrants
to purchase up to 750,000 shares at the then closing price per share at any time
for five years. The securities were sold to an accredited investor and the offer
and sale thereof did not involve any general advertising or solicitation and the
offer and sale was therefore exempt from registration under Rule 506 of the
Regulation D promulgated under the Act.
In October 2002, the Company granted to the holders of the 12% senior notes
warrants to purchase that number of shares equal to 75% of the dollar amount of
the notes held by such holder. The total number of warrants issued was
10,360,025 and are exercisable at any time prior to October 31, 2003. If the
holder exercises all of such holder`s warrants, the holder shall receive another
identical warrant exercisable at any time prior to October 31, 2003. From
November 2002 through June 30, 2003, 14,025,804 of these warrants were exercised
at $.10 per share for a total of $1,402,851. The offer and sale of the warrants
and these shares was exempt from registration under Rule 506 promulgated under
the Act. All of the noteholders are accredited investors and already the holders
of our notes. The warrants and the shares all contained appropriate restrictive
legends under the Act.
On October 31, 2002, eight employees of and two consultants to USA entered into
subscription agreements with USA to receive an aggregate of 1,480,000 shares for
services to be rendered to USA. The shares were valued at $.125 per share and
were exempt from registration under Section 4(2) of the Act. All of the
employees and consultants were sophisticated investors, made appropriate
investment representations, were afforded access to all public filings and all
other information that USA could reasonably obtain, and the securities contained
appropriate restrictive legends under the Act.
During the 2003 fiscal year and through August 7, 2003, the Company issued an
aggregate of 85,601,130 shares to 398 accredited investors at $.10 per share for
an aggregate of $8,560,113. Of the $8,560,130, $8,345,674 were for cash proceeds
and $214,439 were for services rendered or to be rendered. The offer and sales
of the shares was exempt from registration under Rule 506 promulgated under
Section 4(2) of the Act. All of the investors were either pre-existing security
holders or business associates. The offer and sale thereof did not involve any
general advertising or solicitation and the securities contained appropriate
restrictive legends under the Act. In connection with the offering, we paid
$64,000 to Sloan Securities, Inc., a broker-dealer, in connection with the
8,000,000 shares sold by Sloan on our behalf. We have agreed to use our best
efforts to register all of these shares for resale under the Act for a period of
one year.
In February, 2003, Jubilee Investment Trust, PLC ("Jubilee"), a United Kingdom
investment trust made an equity investment in USA Technologies at U.S.$0.20 per
share. Jubilee is a newly established investment trust set up to invest in
securities traded on a range of public markets, primarily in the United Kingdom.
USA Technologies issued to Jubilee 15,000,000 shares of Common Stock of USA
Technologies at a price per share of U.S.$0.20 with an aggregate value of
U.S.$2,850,000. In full payment for the shares of USA Technologies, Jubilee
issued to USA Technologies an equivalent of their shares (1,870,091 shares of
Jubilee at a price per share valued at One British Pound which was the initial
public offering price per share for the Jubilee shares). The exchange rate used
72
by the parties for the transaction was One British Pound equals U.S.$1.6042. The
shares to be issued to Jubilee by USA Technologies will not be registered under
the Securities Act of 1933, as amended. Jubilee has agreed not to sell USA
Technologies` shares for a period of two (2) years from the date of issuance
unless USA Technologies agrees otherwise. The shares were issued to Jubilee by
USA pursuant to the exemption from registration set forth in Section 4(2) of the
Act.
In March 2003, we issued a warrant to La Jolla Cove Investors, Inc. to purchase
up to 9,000,000 shares at $.10 per share. The warrants expire as follows:
3,000,000 on the three month anniversary of the date of this prospectus;
3,000,000 on the 6 month anniversary of the date of this prospectus; and
3,000,000 on the 9 month anniversary of the date of this prospectus. The
warrants may not be exercised without our consent on any date on which the
closing price of our shares is less than $.40. We have agreed to register the
shares underlying the warrants for resale under the Act for a period of one
year. The warrants were offered and sold to La Jolla pursuant to the exemption
from registration set forth in Section 4(2) of the Act. During October 2003,
these warrants were rescinded and cancelled by agreement of USA and La Jolla.
In April 2003, we issued 530,818 shares and warrants to purchase up to 530,818
shares to the holders of our senior notes who elected to receive these
securities in lieu of the cash interest payment due for the quarter ended March
31, 2003. The shares were purchased at the rate of $.20 per share and the
warrants are exercisable at $.20 per share at any time through June 30, 2004. We
have agreed to register the shares and the shares underlying the warrants under
the Act for resale for a period of 2 years. The securities were offered and sold
under the exemption from registration set forth in Rule 506 promulgated under
the Act. All of the noteholders are accredited investors and existing
security holders of USA and there was no general solicitation or advertising.
During April 2003, we agreed to issue to Steve Illes, an existing shareholder,
an aggregate of 1,000,000 shares for $.10 per share and agreed to issue to him
warrants to purchase up to 4,000,000 shares at $.10 per share at any time
through August 31, 2003. The offer and sale of the shares and warrants was
exempt from registration under Section 4(2) of the Act. Mr. Illes is an
accredited investor, made appropriate investment representations, was afforded
access to all public filings and all other information that USA could reasonably
obtain, and the securities contained appropriate restrictive legends under the
Act. We have agreed to register the shares and the shares underlying the
warrants for resale under the Act for a period of one year.
During May 2003, we issued to Providence Investment Management, an accredited
investor, an aggregate of 2,500,000 shares for $.10 per share. The offer and
sale of the shares was exempt from registration under Section 4(2) of the Act.
Providence Investment Management is an accredited investor, made appropriate
investment representations, was afforded access to all public filings and all
other information that USA could reasonably obtain, and the securities contained
appropriate restrictive legends under the Act. Providence approached us about
the investment and we did not solicit Providence. We have agreed to register the
shares for resale under the Act for a period of one year.
During July 2003, we issued an aggregate of 10,500,000 shares to George R.
Jensen, Jr., our Chairman and Chief Executive Officer, as part of the amendment
to his employment agreement. The offer and sale of the shares was exempt from
73
registration under Section 4(2) of the Act. Mr. Jensen is an accredited
investor, made appropriate investment representations, was afforded access to
all public filings and all other information that USA could reasonably obtain,
and the securities contained appropriate restrictive legends under the Act. Mr.
Jensen has entered into a lock up agreement pursuant to which he shall not sell
2,500,000 of the shares for a one year period and 8,000,000 of the shares for a
two year period.
In July 2003, we issued 661,224 shares and warrants to purchase up to 661,224
shares to the holders of our senior notes who elected to receive these
securities in lieu of the cash interest payment due for the quarter ended June
30, 2003. The shares were purchased at the rate of $.20 per share and the
warrants are exercisable at $.20 per share at any time through June 30, 2004. We
have agreed to register the shares and the shares underlying the warrants under
the Act for resale for a period of 2 years. The securities were offered and sold
under the exemption from registration set forth in Rule 506 promulgated under
the Act. All of the noteholders are accredited investors and existing security
holders of USA, and there was no general solicitation or advertising.
On July 11, 2003, we issued 20,000,000 shares to Bayview Technology Group LLC,
as part of our purchase of substantially all of the assets of Bayview. The
securities were offered and sold under the exemption from registration set forth
in Rule 506 promulgated under the Act. Bayview was introduced to us through our
consultant Robert McGarrah, and there was no general solicitation or
advertising. Bayview has agreed not to sell any of the shares 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. USA has agreed to use its best efforts to register all of
the shares 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).
During September 2003, we issued to Wellington Management Company, LLP, on
behalf of several of its clients, an aggregate of 18,000,000 shares for $.25 per
share. The offer and sale of the shares was exempt from registration under
Section 4(2) of the Act. All of these clients are accredited investors. This
investor approached us regarding this investment and we did not solicit this
investor. We have agreed to register the shares for resale under the Act for a
period of one year.
During September 2003, we issued to George O'Connell, an accredited investor and
existing shareholder, an aggregate of 1,000,000 shares for $.25 per share. The
offer and sale of the shares was exempt from registration under Section 4(2) of
the Act. We have agreed to register the shares for resale under the Act for a
period of one year.
During September 2003, we issued to Prophecy Asset Management, an accredited
investor, an aggregate of 750,000 shares for $.25 per share. The offer and sale
of the shares was exempt from registration under Section 4(2) of the Act. This
investor approached us regarding this investment and we did not solicit this
investor. We have agreed to register the shares for resale under the Act for a
period of one year.
During September 2003, we issued to Fulcrum Global Partners, LLC, an accredited
investor, an aggregate of 260,000 shares for $.25 per share. The offer and sale
of the shares was exempt from registration under Section 4(2) of the Act. This
investor approached us regarding this investment and we did not solicit this
investor. We have agreed to register the shares for resale under the Act for a
period of one year.
In October 2003, we issued 577,457 shares and 577,457 warrants to purchase up to
shares to the holders of our senior notes who elected to receive these
securities in lieu of the cash interest payment due for the quarter ended
September 30, 2003. The shares were purchased at the rate of $.20 per share and
74
the warrants are exercisable at $.20 per share at any time through June 30,
2004. We have agreed to register the shares and the shares underlying the
warrants under the Act for resale for a period of 2 years. The securities were
offered and sold under the exemption from registration set forth in Rule 506
promulgated under the Act. All of the noteholders are accredited investors and
existing security holders, and there was no general solicitation or advertising.
In October 2003, we issued to Alpha Capital Atkiengesellschaft, a current
shareholder, an aggregate of 500,000 shares due to Alpha as a result of the
occurrence of a Non-Registration Event as defined under our agreement with Alpha
because we failed to register within 120 days of issuance the securities issued
to Alpha in November 2002. The securities were sold to an accredited investor
and the offer and sale thereof did not involve any general advertising or
solicitation and the offer and sale was therefore exempt from registration under
Section 4(2) under the Act.
During the quarter ended June 30, 2003, the Company issued an aggregate of
8,497,819 shares to 464 holders of warrants at $0.10 per share for an aggregate
of $849,783. The offer and sales of the shares was exempt from the registration
requirements of the Act under Rule 506 promulgated thereunder. In this regard,
the offer and sale thereof did not involve any general advertising or
solicitation and the securities contained appropriate restrictive legends under
the Act. The Company agreed to use its best efforts to register the shares for
resale under the Act.
During the quarter ended June 30, 2003, the Company issued an aggregate of
4,462,918 shares to 13 holders of its Convertible Senior Notes at the rate of
$0.20 per share for aggregate conversions of $892,584. The offer and sales of
the shares was exempt from the registration requirements of the Act under Rule
506 promulgated thereunder. In this regard, the offer and sale thereof was to
existing security holders and did not involve any general advertising or
solicitation and the securities contained appropriate restrictive legends under
the Act.
During the quarter ended June 30, 2003, 50 holders of $2,196,000 principal
amount of the Senior Notes maturing in December 2003 elected to extend these
notes until December 31, 2006 and to have the conversion rate reduced from $1.25
per share to $0.20 per share. The note exchange was exempt from the registration
requirements of the Act pursuant to Section 3(a)(9) thereof.
During the quarter ended June 30, 2003, 56 holders of $1,296,397 principal
amount of the Senior Notes maturing in December 2004 elected to extend these
notes until December 31, 2007 and to have the conversion rate reduced from $0.40
per share to $0.20 per share. The shares were issued solely in exchange for our
securities and we paid no commissions in connection with the transaction. The
note exchange was exempt from the registration requirements of the Act pursuant
to Section 3(a)(9) thereof.
During the quarter ended June 30, 2003, the Company issued 3,340 shares of
Common Stock upon the conversion of 3,340 shares of Series A Preferred Stock and
issued 4,008 shares of Common Stock upon the conversion of $40,080 of cumulative
dividends accrued and unpaid on these shares of Preferred Stock. The shares were
issued solely in exchange for our securities and we paid no commissions in
connection with the transaction. The shares of Common Stock were issued pursuant
to the exemption from registration set forth in Section 3(a)(9) of the Act.
During the quarter ended September 30, 2003, the Company issued an aggregate of
535,258 shares of Common Stock to 7 holders of warrants at $0.10 per share for
an aggregate of $53,526. The Company issued 105,000 shares for consulting
services rendered or to be rendered to the Company, to the following warrants
holders upon exercise of their warrants: Rachel Glicksman- 72,000 shares;
Charlotte Given-30,000 shares; and Gary Nash- 3,000 shares. These warrants were
exercised at $.10 per share and no cash payment was required in connection with
their exercise. The shares issued for services were recorded at the market price
on the date of grant. The offer and sales of the shares was exempt from the
registration requirements of the Act under Rule 506 promulgated thereunder. In
this regard, the offer and sale thereof was to existing security holders and did
not involve any general advertising or solicitation and the securities contained
appropriate restrictive legends under the Act. The Company agreed to use its
best efforts to register the shares for resale under the Act.
During the quarter ended September 30, 2003, the Company issued an aggregate of
7,500,834 shares of Common Stock to 31 holders of its Convertible Senior Notes
upon their conversion at the rate of $0.20 per share for an aggregate of
$1,500,167. The offer and sales of the shares was exempt from the registration
requirements of the Act under Rule 506 promulgated thereunder. In this regard,
the offer and sale thereof was to existing security holders and did not involve
any general advertising or solicitation and the securities contained appropriate
restrictive legends under the Act.
During the quarter ended September 30, 2003, 54 holders of $1,116,000 principal
amount of the Senior Notes maturing in December 2003 elected to extend these
notes until December 31, 2006 and to have the conversion rate reduced from $1.25
per share to $0.20 per share. The note exchange was exempt from the registration
requirements of the Act pursuant to Section 3(a)(9) thereof.
During the quarter ended September 30, 2003, 23 holders of $708,096 principal
amount of the Senior Notes maturing in December 2004 elected to extend these
notes until December 31, 2007 and to have the conversion rate reduced from $0.40
per share to $0.20 per share. The note exchange was exempt form the registration
requirements of the Act pursuant to Section 3(a)(9) thereof.
From February through June 2004, the Company sold 28,290,833 shares of Common
Stock to 34 accredited investors at $.15 per share for an aggregate of
$4,243,625. During June 2004, the Company granted to each investor in the
offering a warrant to purchase one-half of a share for each share subscribed for
by such investor in the offering. The Company issued warrants to purchase a
total of 14,145,417 shares. The warrants are exercisable at $.20 per share at
any time through December 31, 2004. We have agreed to register the shares and
the shares underlying the warrants under the Act for resale for a period of two
years. The offer and sales of the shares was exempt from registration under Rule
506 promulgated under Section 4(2) of the Act. All of the investors were either
pre-existing security holders or business associates. The offer and sale thereof
did not involve any general advertising or solicitation and the securities
contained appropriate restrictive legends under the Act.
In January 2004, we issued 542,592 shares and 542,592 warrants to purchase up to
shares to the holders of our senior notes who elected to receive these
securities in lieu of the cash interest payment due for the quarter ended
December 31, 2003. The shares were purchased at the rate of $.20 per share and
the warrants are exercisable at $.20 per share at any time through August 30,
2004. We have agreed to register the shares and the shares underlying the
warrants under the Act for resale for a period of 2 years. The securities were
offered and sold under the exemption from registration set forth in Rule 506
promulgated under the Act. All of the noteholders are accredited investors and
existing security holders, and there was no general solicitation or advertising.
In June 2004, we issued warrants to purchase up to 3,716,496 shares of Common
Stock to the holders of our senior notes who elected to receive warrants in lieu
of the cash interest payment due for the quarters ended June 30, 2002, September
30, 2002, December 31, 2002, March 31, 2003, June 30, 2003, September 30, 2003
and December 31, 2003. The warrants are exercisable at $.20 per share at any
time through December 31, 2004. We have agreed to register the shares underlying
the warrants under the Act for resale for a period of 2 years. The securities
were offered and sold under the exemption from registration set forth in Rule
506 promulgated under the Act. All of the noteholders are accredited investors
and existing security holders of USA, and there was no general solicitation or
advertising.
In January 2004, we issued to CEOCAST, Inc. a total of 150,000 shares for
services to be rendered to the Company. The offer and sale of the shares were
exempt from registration under Section 4(2) of the Act. The Company agreed to
use its best efforts to register the shares for resale under the Act.
On June 18, 2004, we entered into a Common Stock Purchase Agreement with Steve
Illes. During the one year period following the date of this prospectus, Illes
has agreed to purchase from USA shares of Common Stock, provided that the
aggregate purchase price can not exceed $7,500,000. Under the Agreement, Illes
is permitted to purchase Common Stock from USA at any time at the price per
share of $.30. In addition, USA has the right at any time to require Illes to
purchase Common Stock from USA at the lower of: (i) $.30; or (ii) 90% of the
closing bid price per share on the date prior to the date of the delivery by USA
to Illes of notice of his obligation to purchase. USA can require Illes to
purchase shares under the Agreement only if the shares have been registered by
the Company for resale by Illes under the Act. During any calendar month, Illes
is not permitted to purchase and can not be required by USA to purchase Common
Stock for an aggregate purchase price in excess of $700,000. We have agreed to
register for resale the shares purchased by Illes under the Agreement for a
period of one year from the date of the effectiveness of the initial
registration statement covering the shares to be purchased by Illes. We have
agreed to pay to Illes a due diligence fee of $45,000. The securities were
offered and sold to Illes under the exemption from registration set forth under
Rule 506 promulgated under the Act. Mr. Illes is an existing shareholder and an
accredited investor, and there was no general solicitation or advertising.
75
II. Stock Options
In August 2001, we issued to Larry Gershman, a marketing and financial
consultant, fully vested warrants to purchase an aggregate of 150,000 shares of
our common stock at $.70 per share exercisable at any time through August 2,
2003. In September 2001, we issued fully vested options to the following
employees or consultants: Adele Hepburn - 200,000 options; Frances Young -
100,000 options; and George O`Connell - 100,000 options. The options are
exercisable at $.70 per share at any time through June 30, 2003.
In November 2001, the Company authorized issuance of 1,080,000 fully vested
options to purchase its Common Stock to its Executive Officers, provided that
they were employed by the Company as of January 2, 2002. The amounts of options
authorized were: George R. Jensen, Jr. - 320,000 options; Stephen P. Herbert -
300,000 options; Haven Brock Kolls 200,000 options; Leland Maxwell - 130,000
options; and Michael Lawlor - 130,000 options. Each option is exercisable at
$.40 per share at any time and on or before June 30, 2003. These options vested
during March, 2002.
In November 2001, the Company issued the following fully vested options to
purchase an aggregate of 650,000 shares: Gary Oakland - 100,000 options; Adele
Hepburn - 300,000 options; and Frances Young - 250,000 options. These options
vested during March, 2002.
In April 2002, the Company granted to H. Brock Kolls an aggregate of fully
vested options to purchase up to 50,000 shares exercisable at $.40 per share for
a three year period following issuance.
76
On April 28, 2004 the Company issued to Mary West Young options to purchase
300,000 shares of Common Stock for $.30 per share which vest ratably over a two
year period.
The issuance of all of the foregoing options was made in reliance upon the
exemption provided by Section 4(2) of the Act as all of the options were issued
to officers, directors, employees or consultants of USA, each of such issuances
were separate transactions not part of any plan, and none of the issuances
involved any general solicitation or advertising.
Item 27. Exhibits.
Exhibit
Number Description
- --------------------------------------------------------------------------------
2.1 Asset Purchase Agreement dated July 11, 2003 by and between USA
and Bayview Technology Group LLC (Incorporated by reference to
Exhibit 2.1 to Form 8-K filed July 14, 2003)
77
3.1 Amended and Restated Articles of Incorporation of USA filed
January 26, 2004 (Incorporated by reference to Exhibit 3.1.19 to
Form 10-QSB filed on February 12, 2004).
3.2 By-Laws of USA (Incorporated by reference to Exhibit 3.2 to Form
SB-2 Registration Statement No. 33-70992).
4.1 Warrant Agreement dated as of June 21, 1995 between USA and
American Stock Transfer and Trust Company (Incorporated by
reference to Exhibit 4.1 to Form SB-2 Registration Statement No.
33-98808, filed October 31, 1995).
4.2 Form of Warrant Certificate (Incorporated by reference to Exhibit
4.2 to Form SB-2 Registration Statement, No. 33-98808, filed
October 31, 1995).
4.3 1996 Warrant Agreement dated as of May 1, 1996 between USA and
American Stock Transfer and Trust Company (Incorporated by
reference to Exhibit 4.3 to Form SB-2 Registration Statement No.
333-09465).
78
4.4 Form of 1996 Warrant Certificate (Incorporated by reference to
Exhibit 4.4 to Form SB-2 Registration Statement No. 333-09465).
4.5 Form of 1997 Warrant (Incorporated by reference to Exhibit 4.1 to
Form SB-2 Registration Statement No. 333-38593, filed February 4,
1998).
4.6 Form of 12% Senior Note (Incorporated by reference to Exhibit 4.6
to Form SB-2 Registration Statement No. 333-81591).
4.7 Warrant Certificate of I. W. Miller Group, Inc. (Incorporated by
reference to Exhibit 4.7 to Form SB-2 Registration Statement No.
84513).
4.8 Warrant Certificate of Harmonic Research, Inc. (Incorporated by
reference to Exhibit 4.8 to Form SB-2 Registration Statement No.
333-84513).
4.9 Registration Rights Agreement dated August 3, 2001 by and between
the Company and La Jolla Cove Investors, Inc. (Incorporated by
reference to Exhibit 4.9 to Form 10-KSB filed on October 1, 2001).
4.10 Securities Purchase Agreement dated August 3, 2001 between the
Company and La Jolla Cove Investors, Inc. (Incorporated by
reference to Exhibit 4.10 to Form 10-KSB filed on October 1,
2001).
4.11 Form of Conversion Warrants to be issued by the Company to La
Jolla Cove Investors, Inc. (Incorporated by reference to Exhibit
4.11 to Form 10-KSB filed on October 1, 2001).
4.12 $225,000 principal amount 9 3/4% Convertible Debenture dated
August 3, 2001 issued by the Company to La Jolla Cove Investors,
Inc. (Incorporated by reference to Exhibit 4.12 to Form 10-KSB
filed on October 1, 2001).
4.13 Warrant certificate dated July 11, 2001 from the Company to La
Jolla Cove Investors, Inc. (Incorporated by reference to Exhibit
4.13 to Form 10-KSB filed on October 1, 2001).
4.14 August 2, 2001 letter from La Jolla Cove Investors, Inc. to the
Company (Incorporated by reference to Exhibit 4.14 to Form 10-KSB
filed on October 1, 2001).
4.15 Subscription Agreement dated October 26, 2001 by and between the
Company and Ratner & Prestia, P.C. (Incorporated by reference to
Exhibit 4.15 to Form SB-2 Registration Statement No. 333-72302).
4.16 Subscription Agreement dated October 26, 2002 by and between the
Company and Ratner & Prestia, P.C. (Incorporated by reference to
Exhibit 4.16 to Form SB-2 Registration Statement No. 333-101032).
79
4.17 Stock Purchase Agreement dated October 26, 2002 by and between the
Company and Kazi Management VI, Inc. (Incorporated by reference to
Exhibit 4.17 to Form SB-2 Registration Statement No. 333-101032).
4.18 Warrant Certificate (no. 189) dated October 26, 2002 in favor of
Kazi Management VI, Inc. (Incorporated by reference to Exhibit
4.18 to Form SB-2 Registration Statement No. 333-101032).
4.19 Registration Rights Agreement dated October 26, 2002 by and
between the Company and Kazi Management, Inc. (Incorporated by
reference to Exhibit 4.19 to Form SB-2 Registration Statement No.
333-101032).
4.20 Warrant Certificate (no. 190) dated October 26, 2002 in favor of
Kazi Management VI, Inc. (Incorporated by reference to Exhibit
4.20 to Form SB-2 Registration Statement No. 333-101032).
4.21 Subscription Agreement dated November 4, 2002 by and between the
Company and Alpha Capital Aktiengesellschaft (Incorporated by
reference to Exhibit 4.21 to Form SB-2 Registration Statement No.
333-101032).
4.22 Form of Common Stock Purchase Warrant dated November 4, 2002 in
favor of Alpha Capital Aktiengesellschaft (Incorporated by
reference to Exhibit 4.22 to Form SB-2 Registration Statement No.
333-101032).
4.23 Warrant Certificate (No. 196) dated March 17, 2003 in favor of La
Jolla Cove Investors, Inc. (Incorporated by reference to Exhibit
4.23 to Form SB-2 Registration Statement No. 333-101032).
4.24 Form of 2004 Senior Note (Incorporated by reference to Exhibit
4.24 to Form SB-2 Registration Statement No. 333-101032).
4.25 Form of 2005 Senior Note (Incorporated by reference to Exhibit
4.25 to Form SB-2 Registration Statement No. 333-101032).
4.26 Stock Purchase Agreement dated May 2, 2003 by and between USA and
Providence Investment Management (Incorporated by reference to
Exhibit 4.26 to Form SB-2 Registration Statement No. 333-101032).
4.27 Stock Purchase Agreement dated March, 2003 by and between USA and
Steve Illes (Incorporated by reference to Exhibit 4.27 to Form
SB-2 Registration Statement No. 333-101032).
4.28 Stock Purchase Agreement dated September 23, 2003 by and between
USA and Wellington Management Company, LLC. (Incorporated by
reference to Exhibit 4.28 to Form 10-KSB filed on October 14,
2003).
4.29 Stock Purchase Agreement dated September 26, 2003 by and between
USA and George O'Connell. (Incorporated by reference to Exhibit
4.29 to Form 10-KSB filed on October 14, 2003).
4.30 Stock Purchase Agreement dated September 24, 2003 by and between
USA and Fulcrum Global Partners, LLC. (Incorporated by reference
to Exhibit 4.30 to Form 10-KSB filed on October 14, 2003).
80
4.31 Stock Purchase Agreement dated September 2003 by and between USA
and Prophecy Asset Management, Inc. (Incorporated by reference to
Exhibit 4.31 to Form 10-KSB filed on October 14, 2003).
4.32 Letter Agreement between USA and La Jolla Cove Investors dated
October 9, 2003. (Incorporated by reference to Exhibit 4.32 to
Form SB-2 Registration Statement No. 333-101032)
4.33 Letter Agreement between USA and Alpha Capital Atkiengesellschaf
dated October 3, 2003. (Incorporated by reference to Exhibit 4.33
to Form SB-2 Registration Statement No. 333-101032)
**4.34 Form of 2004-A Warrant Certificate.
**4.35 Common Stock Purchase Agreement between the Company and Steve
Illes dated June 18, 2004.
** 5.1 Opinion of Lurio & Associates, P.C.
10.1 Employment and Non-Competition Agreement between USA 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).
10.1.1 First Amendment to Employment and Non-Competition Agreement
between USA and Adele Hepburn dated as of February 4, 2004.
(Incorporated by reference to Exhibit 10.1.1 to Form 10-QSB filed
on February 12, 2004).
10.2 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).
10.3 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).
10.4 Employment and Non-Competition Agreement between USA 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).
10.4.1 First Amendment to Employment and Non-Competition Agreement
between USA and H. Brock Kolls dated as of May 1, 1994
(Incorporated by reference to Exhibit 10.13.1 to Form SB-2
Registration Statement No. 333-09465).
10.4.2 Third Amendment to Employment and Non-Competition Agreement
between USA and H. Brock Kolls dated February 22, 2000
(Incorporated by reference to Exhibit 10.3 to Form S-8
Registration Statement No. 333-341006).
10.4.3 Fourth Amendment to Employment and Non-Competition Agreement
between USA and H. Brock Kolls dated April 15, 2002.
(Incorporated by reference to Exhibit 10.4.3 to Form 10-QSB filed
on February 12, 2004).
**10.4.4 Fifth Amendment to Employment and Non-Competition Agreement
between USA and H. Brock Kolls dated April 20, 2004.
10.5 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).
10.5.1 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)
10.6 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).
10.7 Employment and Non-Competition Agreement between USA and Michael
Lawlor dated June 7, 1996 (Incorporated by reference to Exhibit
10.28 to Form SB-2 Registration Statement No. 333-09465).
81
10.7.1 First Amendment to Employment and Non-Competition Agreement
between USA and Michael Lawlor dated February 22, 2000
(Incorporated by reference to Exhibit 10.5 to Form S-8
Registration Statement No. 333-34106).
10.7.2 Separation Agreement between USA and Michael Lawlor dated May 13,
2003. (Incorporated by reference to Exhibit 10.7.2 to Form 10-KSB
filed on October 14, 2003).
10.8 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).
10.9 Employment and Non-Competition Agreement between USA and Stephen
P. Herbert dated April 4, 1996 (Incorporated by reference to
Exhibit 10.30 to Form SB-2 Registration Statement No. 333-09465).
10.9.1 First Amendment to Employment and Non-Competition Agreement
between USA and Stephen P. Herbert dated February 22, 2000
(Incorporated by reference to Exhibit 10.2 to Form S-8
Registration Statement No. 333-34106).
10.9.2 Second Amendment to Employment and Non-Competition Agreement
between Stephen P. Herbert and the Company dated April 15, 2002
(Incorporated by reference to Exhibit 10.9.2 to Form SB-2
Registration Statement No. 333-101032).
10.9.3 Third Amendment to Employment and Non-Competition Agreement
between Stephen P. Herbert and USA dated July 25, 2003
(Incorporated by reference to Exhibit 10.9.3 to Form SB-2
Registration Statement No. 333-101032).
10.9.4 Fourth Amendment to Employment and Non-Competition Agreement
between USA and Stephen P. Herbert dated February 4, 2004.
(Incorporated by reference to Exhibit 10.9.4 to Form 10-QSB filed
on February 12, 2004).
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 Employment and Non-Competition Agreement between USA and Leland P.
Maxwell dated February 24, 1997 (Incorporated by reference to
Exhibit 10.39 to Form SB-2 Registration No. 33-98808)
10.14.1 Second Amendment to Employment and Non-Competition Agreement
between USA and Leland P. Maxwell dated February 22, 2000
(Incorporated by reference to Exhibit 10.4 to Form S-8
Registration Statement No.
333-34106)
82
10.14.2 Separation Agreement between USA and Leland P. Maxwell dated May
9, 2003. (Incorporated by reference to Exhibit 10.14.2 to Form
10-KSB filed on October 14, 2003).
10.15 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).
10.16 Letter between USA and GEM Advisers, Inc. signed May 15, 1997
(Incorporated by reference to Exhibit 10.1 to Form 8-K filed on
May 22, 1997).
10.17 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 333-30853).
10.18 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).
10.19 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).
10.20 Joint Venture Agreement dated September 24, 1997 between USA and
Mail Boxes Etc. (Incorporated by reference to Exhibit 10.47 to
Form 10-KSB filed on September 26, 1997).
10.21 Employment and Non-competition Agreement between USA and George R.
Jensen, Jr. dated November 20, 1997 (Incorporated by reference to
Exhibit 10.1 to Form 8-K filed on November 26, 1997).
10.21.1 First Amendment to Employment and Non-Competition Agreement
between USA and George R. Jensen, Jr., dated as of June 17, 1999.
(Incorporated by reference to Exhibit 4.21.1 to Form SB-2
Registration Statement No. 333-94917)
10.21.2 Second Amendment to Employment and Non-Competition Agreement
between USA and George R. Jensen, Jr. dated February 22, 2000
(Incorporated by reference to Exhibit 10.1 to Form S-8
Registration Statement No. 333-34106).
10.21.3 Third Amendment to Employment and Non-Competition Agreement
between USA and George R. Jensen, Jr. dated January 16, 2002
(Incorporated by reference to Exhibit 10.21.3 to Form SB-2
Registration Statement No. 333-101032).
10.21.4 Fourth Amendment to Employment and Non-Competiton Agreement
between USA and George R. Jensen, Jr., dated April 15,
2002(Incorporated by reference to Exhibit 10.21.4 to Form SB-2
Registration Statement No. 333-101032).
10.21.5 Fifth Amendment to Employment and Non-Competiton Agreement between
USA and George R. Jensen, Jr., dated July 16, 2003(Incorporated by
reference to Exhibit 10.21.5 to Form SB-2 Registration Statement
No. 333-101032).
83
10.21.6 Sixth Amendment to Employment and Non-Competition Agreement
between USA and George R. Jensen, Jr. dated February 4, 2004.
(Incorporated by reference to Exhibit 10.21.6 to Form 10-QSB
filed on February 12, 2004).
10.22 Agreement between USA and Promus Hotels, Inc. dated May 8, 1997
(incorporated by reference to Exhibit 10.49 to Form SB-2
Registration Statement No. 333-38593, filed on February 4, 1998).
10.23 Agreement between USA and Choice Hotels International, Inc. dated
April 24, 1997 (Incorporated by reference to Exhibit 10.50 to Form
SB-2 Registration Statement No. 333-38593, filed on February 4,
1998).
10.24 Agreement between USA and PNC Merchant Services dated July 18,
1997 (Incorporated by reference to Exhibit 10.51 to Form SB-2
Registration Statement No. 333-38593, filed on February 4, 1998).
10.25 Separation Agreement between USA and Keith L. Sterling dated April
8, 1998 (Incorporated by reference to Exhibit to Exhibit 10.1 to
Form 10-QSB filed May 12, 1998).
10.26 Phillip A. Harvey Common Stock Option Certificate dated as of
April 22, 1999 (Incorporated by reference to Exhibit 10.35 to Form
SB-2 Registration Statement No. 333-81591).
10.27 Consulting Agreement between Ronald Trahan and USA dated November
16, 1998 (incorporated by Reference to Exhibit 28 to Registration
Statement No. 333-67503 on Form S-8 filed on November 18, 1998)
10.28 Consulting Agreement between Mason Sexton and USA dated March 10,
1999 (incorporated by reference to Exhibit 28 to Registration
Statement No. 333-74807 on Form S-8 filed on March 22, 1999).
10.29 Financial Public Relations Agreement between USA and I. W. Miller
Group, Inc. dated August 1, 1999 (Incorporated by reference to
Exhibit 10.38 to Form SB-2 Registration Statement No. 333-84513).
10.30 Consulting Agreement between Harmonic Research, Inc. and USA dated
August 3, 1999 (Incorporated by reference to Exhibit 10.39 to Form
SB-2 Registration Statement No. 333-84513).
10.31 Investment Agreement between USA and Swartz Private Equity, LLC
dated September 15, 2000 (incorporated by reference to Exhibit
10.1 to Form 8-K dated September 21, 2000).
10.32 Commitment Warrant issued to Swartz Private Equity LLC dated
August 23, 2000 (incorporated by reference to Exhibit 10.2 to Form
8-K dated September 21, 2000).
10.33 Warrant Anti-Dilution Agreement between USA and Swartz Private
Equity, LLC dated September 15, 2000 (incorporated by reference to
Exhibit 10.3 to Form 8-K dated September 21, 2000).
10.34 Registration Rights Agreement between USA and Swartz Private
Equity dated September 15, 2000 (incorporated by reference to
Exhibit 10.4 to Form 8-K dated September 21, 2000).
84
10.35 Agreement for Wholesale Financing and Addendum for Scheduled
Payment Plan with IBM Credit Corporation dated May 6, 1999
(incorporated by reference to Exhibit 10.40 to Form 10-KSB for the
fiscal year ended June 30, 1999).
10.36 Agreement and Plan of Merger dated April 10, 2002, by and among
the Company, USA Acquisitions, Inc., Stitch Networks Corporation,
David H. Goodman, Pennsylvania Early Stage Partners, L.P., and
Maytag Holdings, Inc. (Incorporated by reference to Exhibit 2.1 to
Form 10-QSB for the quarter ended March 31, 2002).
10.37 Cancellation of subscription Agreement between USA and Ratner &
Prestia, P.C. dated March 20, 2003 (Incorporated by reference to
Exhibit 10.37 to Form SB-2 Registration Statement No. 333-101032).
10.38 Agreement between USA and Mars Electronics, Inc. dated March 8,
2002 (Incorporated by reference to Exhibit 10.38 to Form SB-2
Registration Statement No. 333-101032).
10.39 Strategic Alliance Agreement between USA and ZiLOG Corporation
dated October 15, 2002 (Incorporated by reference to Exhibit 10.39
to Form SB-2 Registration Statement No. 333-101032).
10.40 Vending Placement, Supply and Distribution Agreement between
Stitch Networks Corporation, Eastman Kodak Company, Maytag
Corporation and Dixie-Narco, Inc. dated December 2000
(Incorporated by reference to Exhibit 10.40 to Form SB-2
Registration Statement No. 333-101032).
10.41 Design and Manufacturing Agreement between USA and RadiSys dated
June 27, 2000 (Incorporated by reference to Exhibit 10.41 to Form
SB-2 Registration Statement No. 333-101032).
10.42 Loan Agreement between Stitch Networks Corporation and US Bancorp
dated May 22, 2001 (Incorporated by reference to Exhibit 10.42 to
Form SB-2 Registration Statement No. 333-101032).
10.43 Letter dated October 16, 2003 from Lurio & Associates, P.C. to
Gary L. Blum, Esquire (Incorporated by reference to Exhibit 10.43
to Form SB-2 Registration Statement No. 33-101032).
10.44 Termination Agreement dated December 31, 2003 by and between
Eastman Kodak Company, Maytag Corporation, Dixie-Narco, Inc. and
Stitch Networks Corporation. (Incorporated by reference to
Exhibit 10.6 to Form 10-QSB filed on February 12, 2004).
**10.45 Option Certificate (No. 198) dated April 28, 2004 in favor of Mary
West Young.
**10.46 Employment and Non-Competition Agreement between USA and Mary
West Young dated April 28, 2004.
**23.1 Consent of Ernst & Young, LLP
**23.2 Consent of Anton Collins Mitchell, LLP
- -------------
** Filed Herewith
Item 28. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
85
(i) To include any prospectus required by section 10(a)(3) of the Securities Act
of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement. Provided,
however, that paragraphs (1)(i) and (1)(ii) do not apply if the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
For purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant`s annual report pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 that is incorporated by reference in this
registration statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
86
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing this Form SB-2 and has duly caused this
Registration Statement on Form SB-2 to be signed on its behalf by the
undersigned, thereunto duly authorized, in Malvern, Pennsylvania, on June 29,
2004.
USA TECHNOLOGIES, INC.
By: /s/ George R. Jensen, Jr.
------------------------------------
George R. Jensen, Jr.,
Chairman and Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints George R. Jensen, Jr. and Stephen P. Herbert, and
each of them, his or her true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him or her and in his or her name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the SEC, granting unto such attorneys-in-fact and agents, full
power and authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them or
their or his substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been duly signed below by the following persons in
the capacities and dates indicated.
Signatures Title Date
- ----------- ----- ----
/s/ George R. Jensen, Jr. Chairman of the Board, June 29, 2004
- ---------------------------- and Chief Executive
George R. Jensen, Jr. Officer (Principal and Chief
Executive Officer) Director
/s/ Mary West Young Chief Financial Officer June 29, 2004
- ---------------------------- (Principal Accounting
Mary West Young Officer)
/s/ Stephen P. Herbert President, Chief June 29, 2004
- ---------------------------- Operating Officer,
Stephen P. Herbert Director
/s/ William W. Sellers Director June 29, 2004
- -----------------------------
William W. Sellers
/s/ William L. Van Alen, Jr. Director June 29, 2004
- ----------------------------
William L. Van Alen, Jr.
/s/ Steven Katz Director June 29, 2004
- ----------------------------
Steven Katz
87
/s/ Douglas M. Lurio Director June 29, 2004
- ----------------------------
Douglas M. Lurio
88
Exhibit Index
Exhibit
Number Description
- ------------------------------------------------------------------------------
4.34 Form of 2004-A Warrant Certificate.
4.35 Common Stock Purchase Agreement between the Company and Steve
Illes dated June 18, 2004.
5.1 Opinion of Lurio & Associates, P.C.
10.4.4 Fifth Amendment to Employment and Non-Competition Agreement
between USA and M. Brock Kolls dated April 20, 2004
10.45 Option Certificate (No. 198) dated April 28, 2004 in favor of
Mary West Young
10.46 Employment and Non-Competition Agreement between USA and Mary
West Young dated April 28, 2004.
23.1 Consent of Ernst & Young, LLP
23.2 Consent of Anton Collins Mitchell, LLP
89
Exhibit 4.34
THESE WARRANTS AND THE COMMON STOCK ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAW. THESE WARRANTS AND THE COMMON STOCK ISSUABLE UPON THE EXERCISE
HEREOF MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE
OF A REGISTRATION STATEMENT IN EFFECT UNDER SUCH ACT AND SUCH LAWS WITH RESPECT
TO THESE WARRANTS AND THE COMMON STOCK ISSUABLE UPON THE EXERCISE HEREOF, OR AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED.
2004-A WARRANT CERTIFICATE __________ COMMON STOCK WARRANTS
NO. ___
USA TECHNOLOGIES, INC.
COMMON STOCK WARRANTS
(These Warrants will be void if not exercised by the
Termination Date specified below.)
1. Warrants. Subject to the terms and conditions hereof,
this certifies that _____________, or any subsequent holder hereof, is the owner
of _______ Warrants (the "Warrants") of USA Technologies, Inc., a Pennsylvania
corporation (the "Company"). Each Warrant entitles the holder hereof to purchase
from the Company at any time prior to 5:00 p.m. on December 31, 2004 (the
"Termination Date"), one fully paid and non-assessable share of the Company's
Common Stock, without par value (the "Common Stock"), subject to adjustment as
provided in Section 7 hereof.
2. Warrant Price. The Warrants shall be exercised by delivery to the
Company (prior to the Termination Date) of the Warrant price for each share of
Common Stock being purchased hereunder (the "Warrant Price"), this Certificate,
and the completed Election To Purchase Form which is attached hereto. The
Warrant Price shall be $.20 per share of Common Stock. The Warrant Price shall
be subject to adjustment as provided in Section 7 hereof. The Warrant Price is
payable either in cash or by certified check or bank draft payable to the order
of the Company.
3. Exercise. Upon the surrender of this Certificate and payment of
the Warrant Price as aforesaid, the Company shall issue and cause to be
delivered with all reasonable dispatch to or upon the written order of the
registered holder of this Warrant and in such name or names as the registered
holder may designate, a certificate or certificates for the number of full
shares of Common Stock so purchased upon the exercise of any Warrant. Such
certificate or certificates shall be deemed to have been issued and any person
so designated to be named therein shall be deemed to have become a holder of
record of such Common Stock on and as of the date of the delivery to the Company
of this Certificate and payment of the Warrant Price as aforesaid. If, however,
at the date of surrender of this Certificate and payment of such Warrant Price,
the transfer books for the Common Stock purchasable upon the exercise of any
Warrant shall be closed, the certificates for the Common Stock in respect to
which any such Warrant are then exercised shall be issued and the owner of such
Common Stock shall become a record owner of such Common Stock on and as of the
next date on which such books shall be opened, and until such date the Company
shall be under no duty to deliver any certificate for such Common Stock.
4. Partial Exercise. The rights of purchase represented by the
Warrants shall be exercisable, at the election of the registered holder hereof,
either as an entirety, or from time to time for any part of the Common Stock
specified herein and, in the event that the Warrants are exercised with respect
to less than all of the Common Stock specified herein at any time prior to the
Termination Date, a new Certificate will be issued to such registered holder for
the remaining number of Warrants not so exercised.
5. Termination Date. All of the Warrants must be exercised in
accordance with the terms hereof prior to the Termination Date. At and after the
Termination Date any and all unexercised rights hereunder shall become null and
void and all such unexercised Warrants shall without any action on behalf of the
Company become null and void.
6. Lost, Mutilated Certificate. In case this Common Stock Warrant
Certificate shall become mutilated, lost, stolen or destroyed, the Company shall
issue in exchange and substitution for and upon cancellation of the mutilated
certificate, or in lieu of and in substitution for the Certificate lost, stolen,
or destroyed, a new Certificate of like tenor and representing an equivalent
right or interest, but only upon receipt of evidence satisfactory to the Company
of such loss, theft or destruction of such certificate and indemnity, if
requested, also satisfactory to the Company.
7. Adjustments. Subject and pursuant to the provisions of this
Section 7, the Warrant Price and number of shares of Common Stock subject to the
Warrants shall be subject to adjustment from time to time only as set forth
hereinafter:
a. In case the Company shall declare a Common Stock dividend
on the Common Stock, then the Warrant Price shall be proportionately decreased
as of the close of business on the date of record of said Common Stock dividend
in proportion to such increase of outstanding shares of Common Stock.
b. If the Company shall at any time subdivide its outstanding
Common Stock by recapitalization, reclassification or split-up thereof, the
Warrant Price immediately prior to such subdivision shall be proportionately
decreased, and, if the Company shall at any time combine the outstanding shares
of Common Stock by recapitalization, reclassification, or combination thereof,
the Warrant Price immediately prior to such combination shall be proportionately
increased. Any such adjustment to the Warrant Price shall become effective at
the close of business on the record date for such subdivision or combination.
The Warrant Price shall be proportionately increased or decreased, as the case
may be, in proportion to such increase or decrease, as the case may be, of
outstanding shares of Common Stock.
c. Upon any adjustment of the Warrant Price as hereinabove
provided, the number of shares of Common Stock issuable upon exercise of the
Warrants remaining unexercised immediately prior to any such adjustment, shall
be changed to the number of shares determined by dividing (i) the appropriate
Warrant Price payable for the purchase of all shares of Common Stock issuable
upon exercise of all of the Warrants remaining unexercised immediately prior to
such adjustment by (ii) the Warrant Price per share of Common Stock in effect
immediately after such adjustment. Pursuant to this formula, the total sum
payable to the Company upon the exercise of the Warrants remaining unexercised
immediately prior to such adjustment shall remain constant.
d. (i) If any capital reorganization or reclassification of
the capital stock of the Company, or consolidation or merger of the Company with
another corporation, person, or entity, or the sale of all or substantially all
of its assets to another corporation, person, or entity, shall be effected in
such a way that holders of Common Stock shall be entitled to receive stock,
securities, cash, property, or assets with respect to or in exchange for Common
Stock, and provided no election is made by the Company pursuant to subsection
(ii) hereof, then, as a condition of such reorganization, reclassification,
consolidation, merger or sale, the Company or such successor or purchasing
corporation, person, or entity, as the case may be, shall agree that the
registered holder of the Warrants shall have the right thereafter and until the
Termination Date to exercise such Warrants for the kind and amount of stock,
securities, cash, property, or assets receivable upon such reorganization,
reclassification, consolidation, merger, or sale by a holder of the number of
shares of Common Stock for the purchase of which such Warrants might have been
exercised immediately prior to such reorganization, reclassification,
consolidation, merger or sale, subject to such subsequent adjustments which
shall be equivalent or nearly equivalent as may be practicable to the
adjustments provided for in this Section 7.
(ii) Notwithstanding subsection (i) hereof and in lieu
thereof, the Company may elect by written notice to the registered holder
hereof, to require such registered holder to exercise all of the Warrants
remaining unexercised prior to any such reorganization, reclassification,
consolidation, merger or sale. If the holder of this Warrant shall not exercise
all or any part of the Warrants remaining unexercised prior to such event, such
unexercised Warrants shall automatically become null and void upon the
occurrence of any such event, and of no further force and effect. The Common
Stock issued pursuant to any such exercise shall be deemed to be issued and
outstanding immediately prior to any such event, and shall be entitled to be
treated as any other issued and outstanding share of Common Stock in connection
with such event. If an election is not made by the Company pursuant to this
subsection (ii) in connection with any such event, then the provisions of
subsection (i) hereof shall apply to such event.
e. Whenever the Warrant Price and number of shares of Common
Stock subject to this Warrant is adjusted as herein provided, the Company shall
promptly mail to the registered holder of this Warrant a statement signed by an
officer of the Company setting forth the adjusted Warrant Price and the number
of shares of Common Stock subject to this Warrant, determined as so provided.
f. This form of Certificate need not be changed because of any
adjustment which is required pursuant to this Section 7. However, the Company
may at any time in its sole discretion (which shall be conclusive) make any
change in the form of this Certificate that the Company may deem appropriate and
that does not affect the substance hereof; and any Certificate thereafter
issued, whether in exchange or substitution for this Certificate or otherwise,
may be in the form as so changed.
8. Reservation. There has been reserved, and the Company shall at
all times keep reserved out of the authorized and unissued shares of Common
Stock, a number of shares of Common Stock sufficient to provide for the exercise
of the right of purchase represented by the Warrants. The Company agrees that
all shares of Common Stock issued upon exercise of the Warrants shall be, at the
time of delivery of the Certificates for such Common Stock, validly issued and
outstanding, fully paid and non-assessable.
9. Fractional Shares. The Company shall not issue any fractional
shares of Common Stock pursuant to any exercise of any Warrant and shall pay
cash to the holder of any Warrant in lieu of any such fractional shares.
10. No Right. The holder of any Warrants shall not be entitled to
any of the rights of a shareholder of the Company prior to the date of issuance
of the Common Stock by the Company pursuant to an exercise of any Warrant.
11. Securities Laws. As a condition to the issuance of any Common
Stock pursuant to the Warrants, the holder of such Common Stock shall execute
and deliver such representations, warranties, and covenants, that may be
required by applicable federal and state securities law, or that the Company
determines is reasonably necessary in connection with the issuance of such
Common Stock. In addition, the certificates representing the Common Stock shall
contain such legends, or restrictive legends, or stop transfer instructions, as
shall be required by applicable Federal or state securities laws, or as shall be
reasonably required by the Company or its transfer agent.
12. Registration Rights. No later than sixty days following the date
hereof, the Company shall prepare and file, at its sole cost and expense, and
thereafter use its best efforts to have declared effective, an appropriate
registration statement with the Securities and Exchange Commission registering
all of the shares of Common Stock underlying this Warrant certificate for resale
by the holder under the Act. The registration statement shall be prepared as a
"shelf" registration statement under Rule 415, and the Company shall use its
best efforts to have the registration statement maintained effective until the
earlier of (i) one year from the effective date thereof, or (ii) the date that
all of such Common Stock is resold pursuant to the registration statement or
otherwise.
13. Transferability. Subject to compliance with applicable
securities laws, the Warrants represented by this Certificate and this
Certificate shall inure to the benefit of and be exercisable by any holder's
heirs, personal representatives, successors and assigns, and shall be fully
assignable and transferable by any holder at any time and from time to time,
including by will, intestacy or otherwise. Any such assignee or transferee shall
be entitled to all the benefits hereof and shall be the holder hereof.
14. Applicable Law. The Warrants and this Certificate shall be
deemed to be a contract made under the laws of the Commonwealth of Pennsylvania
and for all purposes shall be construed in accordance with the laws thereof
regardless of its choice of law rules.
IN WITNESS WHEREOF, USA TECHNOLOGIES, INC., has executed and
delivered this Warrant Certificate as of the date written below.
USA TECHNOLOGIES, INC.
By:
--------------------------------------------
George R. Jensen, Jr.,
Chief Executive Officer
Attest:
----------------------------------------
Stephen P. Herbert,
Secretary
Dated: ________, 2004
USA TECHNOLOGIES, INC.
100 Deerfield Lane, Suite 140
Malvern, PA 19355
Attn: George R. Jensen, Jr.,
Chief Executive Officer
ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the attached Warrant Certificate No. of the Company. The
undersigned desires to purchase shares of Common Stock provided for therein and
tenders herewith full payment of the Warrant Price for the shares of Common
Stock being purchased, all in accordance with the Certificate. The undersigned
requests that a Certificate representing such shares of Common Stock shall be
issued to and registered in the name of, and delivered to, the undersigned at
the address set forth in the attached certificate. If said number of shares of
Common Stock shall not be all the shares purchasable under the Certificate, then
a new Common Stock Warrant Certificate for the balance remaining of the shares
of Common Stock purchasable shall be issued to and registered in the name of,
and delivered to, the undersigned at the address set forth in the attached
certificate.
Dated: ______________, 2004 Signature:_______________________________
Exhibit 4.35
THE COMMON STOCK ISSUABLE PURSUANT TO THIS AGREEMENT HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW. THE
COMMON STOCK ISSUABLE PURSUANT TO THIS AGREEMENT MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN
EFFECT UNDER SUCH ACT AND SUCH LAWS WITH RESPECT TO THE COMMON STOCK ISSUABLE
PURSUANT TO THIS AGREEMENT, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED.
USA TECHNOLOGIES, INC.
COMMON STOCK PURCHASE AGREEMENT
This COMMON STOCK PURCHASE AGREEMENT is made this 18th day of June 2004 by
and between USA TECHNOLOGIES, INC., a Pennsylvania corporation ("USA" or the
"Company"), and STEVE ILLES ("ILLES" or "Investor").
BACKGROUND
As more fully set forth herein, ILLES has agreed to purchase from the
Company shares of Common Stock of the Company ("Common Stock") for a purchase
price not to exceed Seven Million Five Hundred Thousand Dollars ($7,500,000)
(the "Commitment Amount").
AGREEMENT
NOW THEREFORE, intending to be legally bound hereby, the parties agree as
follows:
1. Commitment. Subject to the terms and conditions hereof, ILLES agrees to
purchase from USA shares of Common Stock with an aggregate purchase price not to
exceed the Commitment Amount. The aggregate number of shares of Common Stock to
be purchased by ILLES under this Agreement shall be as provided in Subsection D.
of this Section 1.
During the Purchase Period (as defined below), ILLES shall be permitted to
purchase Common Stock from the Company from time to time at his own election as
described in subsection A. below, and during the Put Commitment Period (as
defined below) ILLES shall be required to purchase Common Stock from USA from
time to time pursuant to the election of USA as described in subsection B.
below.
A. During the period of time from and after the date hereof and until the
first annual anniversary of the effectiveness of the Initial Registration
Statement (as defined referred in Section 7 hereof) ("Purchase Commitment
Period"), ILLES shall be permitted to purchase Common Stock from the Company at
any time and from time to time at the price per share of Thirty Cents ($.30)
(the "Base Per Share Price"). ILLES shall purchase Common Stock by delivery to
the Company (prior to expiration of the Purchase Commitment Period) of the
purchase price for the Common Stock being purchased hereunder (the "Purchase
Price"), and the completed Election To Purchase Form that is attached hereto.
The Purchase Price shall be paid by ILLES either in cash or by certified check
or bank draft payable to the order of the Company.
B. In addition to the right of ILLES to purchase Common Stock at the Base
Per Share Price, during the period of time from and after the effectiveness of
the Initial Registration Statement (as defined in Section 7 hereof) and for a
period of one year thereafter ("Put Commitment Period"), USA shall have the
right at any time and from time to time during the Commitment Period to require
ILLES to purchase Common Stock from the Company at the lower of the following
price: (i) the Base Per Share Price (i.e., $.30), or (ii) 90% of the closing bid
price per share on the date prior to the date of the delivery by USA to ILLES of
the Commitment To Purchase Form described below. For example, if the closing bid
price of the shares on the applicable date was $.50, then the exercise price
would be the Base Per Share Price (i.e., $.30), and if the closing bid price of
the shares on the applicable date was $.20, then the exercise price would be
$.18. USA shall require ILLES to purchase Common Stock from USA hereunder by
delivery to ILLES (prior to expiration of the Put Commitment Period) of the
completed Commitment To Purchase Form that is attached hereto setting forth the
purchase price of the Common Stock to be purchased by ILLES from USA
("Commitment Purchase Price") and the aggregate number of shares to be purchased
by ILLES. The Commitment Purchase Price shall be delivered to the Company by
ILLES within two business days after delivery to ILLES of the Commitment To
Purchase Form and shall be paid by ILLES either in cash or by certified check or
bank draft payable to the order of the Company. ILLES shall not be required by
USA to purchase any Common Stock from USA pursuant to this Section 1.B unless
the Common Stock being purchased by ILLES from USA hereunder has been registered
for resale by ILLES under the Act pursuant to an effective registration
statement, all in accordance with Section 7.
C. Notwithstanding anything else set forth herein during any calendar
month during the Commitment Period, or the Put Commitment Period, as the case
may be, ILLES shall not purchase(or be required by USA to purchase) under this
Agreement Common Stock with an aggregate
2
purchase price of more than Seven Hundred Thousand Dollars($700,000).
D. The initial number of shares of Common Stock subject to this Agreement
shall be 25,000,000. In order to ensure that ILLES shall purchase Common Stock
under this Agreement with a purchase price of up to the Commitment Amount, at
any time and from time to time during the Purchase Commitment Period, and
subject to the other terms and conditions of this Agreement, USA shall have the
right to increase the number of shares of Common Stock covered by this Agreement
by notice to ILLES.
E. USA shall pay to ILLES a due diligence fee in the amount of $45,000.
The due diligence fee shall be credited by USA against the price for initial
shares of Common Stock purchased by ILLES hereunder.
2. Share Issuance. Upon the payment of the Purchase Price or Commitment
Purchase Price as aforesaid, the Company shall issue and cause to be delivered
with all reasonable dispatch to ILLES and in the name of ILLES, a certificate or
certificates for the number of shares of Common Stock so purchased. Such
certificate or certificates shall be deemed to have been issued and ILLES shall
be deemed to have become a holder of record of such Common Stock on and as of
the date of the delivery to the Company of and payment of the Purchase Price or
Commitment Purchase Price as aforesaid. If, however, at the date of payment of
such Purchase Price or Commitment Purchase Price, the transfer books for the
Common Stock shall be closed, the certificates for the Common Stock shall be
issued and ILLES shall become a record owner of such Common Stock on and as of
the next date on which such books shall be opened, and until such date the
Company shall be under no duty to deliver any certificate for such Common Stock.
3. Representations by ILLES. ILLES represents and warrants to the Company
as follows:
(a) ILLES has received, read and understands the provisions of each
of the following: (i) the Company's Annual Report on Form 10-KSB for
the fiscal year ended June 30, 2003; (ii) the Company's Amendment No.
1 to Registration Statement on Form SB-2 filed with the Securities
and Exchange Commission on December 19, 2003 (File No. 333-110148);
(iii) the Risk Factors section incorporated by reference herein in
Section 3(i) hereof; (iv) the Company's Form 10-QSB for the quarter
ended September 30, 2003; (v) the Company's Form 10-QSB for the
quarter ended December 31, 2003; (vi) the definitive proxy statement
of the Company filed with the SEC on December 15, 2003, and (vii) the
Company's Form 10-QSB for the quarter ended March 31, 2004. All of
the foregoing together with this Agreement shall be referred to
herein as "Offering Materials".
3
(b) ILLES has relied only upon the information presented and
contained in the Offering Materials. ILLES has had the opportunity to
ask of the person or persons acting on behalf of the Company any and
all relevant questions in connection with any aspect of the Company
including, but not limited to, the Common Stock offered by the
Offering Materials and has received answers which ILLES considers to
be reasonably responsive to such questions. ILLES has had the
opportunity to verify the accuracy of the information contained in
the Offering Materials.
(c) ILLES understands that ILLES is subscribing for the Common Stock
without being furnished any literature or prospectus in connection
with the Offering other than the Offering Materials, and that the
Offering of the Common Stock presented in the Offering Materials will
not have been scrutinized by the securities administrator or similar
bureau, agency, or department of the state of my residence.
(d) ILLES understands (i) that the Common Stock has not been
registered under the Securities Act of 1933, as amended (the "Act"),
or registered or qualified under the securities laws of the state of
my residence, (ii) except as provided in Section 7 hereof, ILLES has
no right to require such registration or qualification, and (iii)
that therefore ILLES must bear the economic risk of the investment
for an indefinite period of time because the Common Stock may not be
sold unless so registered or qualified or unless an exemption from
such registration and qualification is available.
Although the Company has agreed to use its best efforts to register
for resale the Common Stock with the SEC, and to use its best efforts
to keep such registration statement current and effective, there can
be no assurance that such efforts will be successful. In any such
event, the Common Stock would not be registered for resale under the
Act, and could only be sold in reliance upon exemptions from
registration under the Act.
(e) The Common Stock is being purchased for ILLES' own account for
investment purposes only and not for the interest of any other person
and is not being purchased with a view to or for the resale,
4
distribution, subdivision or fractionalization thereof. Although the
Common Stock is currently traded on the OTC Bulletin Board under the
symbol USTT, ILLES also understands that there may not be any
established public trading market for the sale of such securities.
(f) ILLES is able to bear the economic risks related to purchase of
the Common Stock for an indefinite period of time (i.e., ILLES is
able to afford a complete loss of the Common Stock ILLES is
subscribing to purchase). ILLES' net worth and assets are sufficient
to enable him to purchase shares of Common Stock from USA in the
amount of the Commitment Amount pursuant to this Agreement.
(g) ILLES' overall commitment to investments which are not readily
marketable is not disproportionate to ILLES' net worth and my
investment in the Company will not cause such overall commitment to
become excessive.
(h) ILLES has adequate means of providing for ILLES' current needs
and possible personal contingencies. ILLES has no need for liquidity
of the Common Stock subscribed to be purchased hereby and has no
reason to anticipate any change in ILLES' personal circumstances,
financial or otherwise, which might cause or require any sale or
distribution of such Common Stock subscribed to be purchased.
(i) ILLES recognizes that the purchase of the Common Stock involves a
high degree of risk including those special risks set forth under the
caption "Risk Factors" and "Forward Looking Statements" in Amendment
No. 1 to the Form SB-2 Registration Statement of the Company filed
with the Commission on December 19, 2003 (No. 333-110148) all of
which are incorporated herein by reference.
(j) ILLES understand that ILLES' right to transfer the Common Stock
will be restricted as set forth on the certificate evidencing the
Common Stock. Such restrictions include provisions against transfer
unless such transfer is not in violation of the Act, or applicable
state securities laws (including investor suitability standards).
ILLES is familiar with Regulation M promulgated under the Act and
5
agrees to comply with his obligations thereunder including those
relating to his status as an underwriter of the Common Stock.
(k) All information which ILLES has provided to the Company
including, but not limited to, financial position, and status as an
accredited investor, and knowledge of financial and business matters
is true, correct and complete as of the date of execution of this
Agreement. I understand that the Company will rely in a material
degree upon the representations contained herein.
(l) ILLES understands that a legend may be placed on any stock
certificate representing the Common Stock substantially to the
following effect:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES STATUTES AND
REGULATIONS. SUCH SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD,
TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR SUCH SHARES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES STATUTES AND REGULATIONS, UNLESS, IN THE OPINION
(WHICH SHALL BE IN FORM AND SUBSTANCE SATISFACTORY TO THE CORPORATION) OF
COUNSEL SATISFACTORY TO THE CORPORATION, SUCH REGISTRATION IS NOT REQUIRED.
(m) ILLES is an "accredited investor" as defined in Rule 501
promulgated under the Act because ILLES' individual net worth (or ILLES joint
net worth with his spouse)on the date hereof exceeds $1,000,000.
4. Adjustments. Subject and pursuant to the provisions of this
Section 4, the Base Per Share Price shall be subject to adjustment from time to
time only as set forth hereinafter:
a. In case the Company shall declare a Common
Stock dividend on the Common Stock, then the Base Per Share Price shall be
proportionately decreased as of the close of business on the date of record of
said Common Stock dividend in proportion to such increase of outstanding shares
of Common Stock.
6
b. If the Company shall at any time subdivide its
outstanding Common Stock by recapitalization, reclassification or split-up
thereof, the Base Per Share Price immediately prior to such subdivision shall be
proportionately decreased, and, if the Company shall at any time combine the
outstanding shares of Common Stock by recapitalization, reclassification, or
combination thereof, the Base Per Share Price immediately prior to such
combination shall be proportionately increased. Any such adjustment to the Base
Per Share Price shall become effective at the close of business on the record
date for such subdivision or combination. The Base Per Share Price shall be
proportionately increased or decreased, as the case may be, in proportion to
such increase or decrease, as the case may be, of outstanding shares of Common
Stock.
c. Whenever the Base Per Share Price is adjusted
as herein provided, the Company shall promptly mail to ILLES a statement setting
forth the adjusted Base Per Share Price determined as so provided.
5. Reservation. There has been reserved, and the Company
shall at all times keep reserved out of the authorized and unissued shares of
Common Stock, a number of shares of Common Stock sufficient to provide for the
rights of purchase represented by this Agreement. The Company agrees that all
shares of Common Stock issued hereunder shall be, at the time of delivery of the
certificates for such Common Stock, validly issued and outstanding, fully paid
and non-assessable.
7
6. Securities Laws. As a condition to the issuance of any
Common Stock pursuant this Agreement, ILLES shall execute and deliver such
representations, warranties, and covenants, that may be required by applicable
federal and state securities law, or that the Company determines is reasonably
necessary in connection with the issuance of such Common Stock. In addition, the
certificates representing the Common Stock shall contain such legends, or
restrictive legends, or stop transfer instructions, as shall be required by
applicable Federal or state securities laws, or as shall be reasonably required
by the Company or its transfer agent.
7. Registration Provisions. No later than June 30, 2004,
the Company shall prepare and file, at its sole cost and expense, and thereafter
use its best efforts to have declared effective, an appropriate registration
statement with the Securities and Exchange Commission registering all of the
25,000,000 shares of Common Stock initially covered by this Agreement for resale
by ILLES under the Act (the "Initial Registration Statement"). As provided in
Section 1.D hereof, USA has the right from time to time to increase the number
of shares of Common Stock to be covered by this Agreement. Any such additional
shares may be included in an amendment or post-effective amendment to the
Initial Registration Statement, or in a separate additional registration
statement.
The term "registration statement" whenever and as used in
this Agreement shall mean and include for all purposes the Initial Registration
Statement and any amendment or post-effective amendment thereto as well as any
additional registration statement or amendment or post- effective amendment
thereto covering any Common Stock subject to this Agreement.
The registration statement shall be prepared as a "shelf"
registration statement under Rule 415, and the Company shall use its best
efforts to have the registration statement maintained effective until the
earlier of (i) one year from the effective date of the Initial Registration
Statement, or (ii) the date that all of the Common Stock covered by this
Agreement is resold by ILLES pursuant to the registration statement or
otherwise.
At the Company's request, ILLES shall furnish to the
Company such information regarding ILLES, the Common Stock held by ILLES, and
the intended method of disposition of such Common Stock to the extent required
to effect the registration of the Common Stock. The Company shall include all
information provided by ILLES pursuant hereto in the registration statement,
substantially in the form supplied, except to the extent such information is not
permitted by law. ILLES understands and agrees that ILLES will be listed and
disclosed in the registration statement as an underwriter of the Common Stock as
such term is defined in Section 2(a)(11) of the Act and as such ILLES will have
liability, among other things, under Section 11 of the Act.
All expenses (other than commissions and fees and expenses
of counsel to ILLES) incurred in connection with the registration statement,
including (without limitation) all registration, filing and qualification fees,
printers' and accounting fees, fees and disbursements of counsel for the
Company, shall be borne by the Company.
8
8. Binding Effect. This Agreement shall be binding upon the party's
respective heirs, personal representatives, successors and assigns; provided,
however, that this Agreement shall not be assignable by ILLES , including in
whole or in part, without the prior consent of the USA.
9. Indemnification. In the event any shares of Common Stock are
included in a registration statement under this Agreement:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless ILLES, against any losses, claims, damages, or
liabilities to which ILLES may become subject under the Act, the Securities
Exchange Act of 1934, as amended (the "Exchange Act")(or other federal or state
law, insofar as such losses, claims, damages, or liabilities (or actions in
respect thereof) arise out of or are based upon any of the following statements
or omissions: (i) any untrue statement or alleged untrue statement of a material
fact contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, or (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein not misleading, and the Company will reimburse ILLES for any legal or
other expenses reasonably incurred by ILLES in connection with investigating or
defending any such loss, claim, damage, liability, or action; provided, however,
that the indemnity agreement contained in this subsection 9(a) shall not apply
to amounts paid in settlement of any such loss, claim, damage, liability, or
action if such settlement is effected without the consent of the Company (which
consent shall not be unreasonably withheld), nor shall the Company be liable in
any such case for any such loss, claim, damage, liability, or action to the
extent that it arises out of or is based upon a violation which occurs in
reliance upon and in conformity with written information furnished expressly for
use in connection with such registration by ILLES; provided however, that the
above shall not relieve the Company from any other liabilities which it might
otherwise have.
9
(b) ILLES shall indemnify and hold harmless the Company,
its directors and officers, each underwriter and each other person, if any, who
controls (within the meaning of the Act) the Company or such other indemnified
party, against any liability, joint or several, to which any such indemnified
party may become subject under the Act or any other statute or at common law,
insofar as such liability (or actions in respect thereof) arises out of or is
based upon (i) any untrue statement or alleged untrue statement of any material
fact contained, on the effective date thereof, in any registration statement
under which securities were registered under the Act, any preliminary prospectus
or final prospectus contained therein, or any amendment or supplement thereto,
or (ii) any omission or alleged omission by ILLES to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in such registration statement, preliminary or final prospectus, amendment or
supplement thereto in reliance upon and in conformity with information furnished
in writing to the Company by ILLES specifically for use therein. ILLES shall
reimburse any indemnified party for any legal fees incurred in investigating or
defending any such liability.
(c) Promptly after receipt by an indemnified party under
this Section 9 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 9, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume, the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the reasonably incurred fees and
expenses of one such counsel to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential conflicting
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
10
indemnifying party within a reasonable time of the commencement of any such
action, if materially prejudicial to its ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified party under
this Section 9, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may have to any
indemnified party otherwise than under this Section 9.
(d) In the event that the indemnity provided in paragraphs
(a) and/or (b) of this Section 9 is unavailable to or insufficient to hold
harmless an indemnified party for any reason, the Company and ILLES agree to
contribute to the aggregate claims, losses, damages and liabilities (including
legal or other expenses reasonably incurred in connection with investigating or
defending same) (collectively "Losses") to which the Company and ILLES may be
subject in such proportion as is appropriate to reflect the relative fault of
the Company and ILLES in connection with the statements or omissions which
resulted in such Losses. Relative fault shall be determined by reference to
whether any alleged untrue statement or omission relates to information provided
by the Company or by ILLES. The Company and ILLES agree that it would not be
just and equitable if contribution were determined by pro rata allocation or any
other method of allocation that does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of this
paragraph (d), no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. For purposes of
this Section 9, each person who controls the Company within the meaning of
either the Act or the Exchange Act and each director and officer of the Company
shall have the same rights to contribution as the Company, subject in each case
to the applicable terms and conditions of this paragraph (d).
(e) The obligations of the Company and ILLES under this
Section 9 shall survive the resale, if any, of the Common Stock in a
registration statement under this Agreement, and otherwise.
10. Applicable Law. This Agreement shall be deemed to be a contract
made under the laws of the Commonwealth of Pennsylvania and for all purposes
11
shall be construed in accordance with the laws thereof regardless of its choice
of law rules.
11. Brokers and Finders. USA and ILLES hereby represent to each other
that no broker or finder has been employed or engaged by either of them in
connection with the transactions contemplated in this Agreement and that all
negotiations relative to this Agreement have been carried on directly between
the parties hereto without the intervention of any other person.
12. Survival of Representations and Warranties, and Remedies. All
representations and warranties contained in this Agreement shall survive the
execution and delivery of this Agreement.
13. Entire Agreement. This Agreement constitutes the entire
understanding and agreement between the parties hereto with respect to the
transactions contemplated herein, supersedes all prior and contemporaneous
agreements, understandings, negotiations and discussions, whether oral or
written, of the parties, and there have been no warranties, representations or
promises, written or oral, made by any of the parties hereto except as herein
expressly set forth herein.
14. Waiver, Modification, etc.. Any party to this Agreement may waive
any of the terms or conditions of this Agreement or agree to an amendment or
modification to this Agreement by an agreement in writing executed in the same
manner (but not necessarily by the same persons) as this Agreement. No amendment
or modification of this Agreement shall be binding unless in writing executed by
all of the parties to this Agreement. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provision
hereof (whether or not similar), nor shall any waiver constitute a continuing
waiver unless otherwise expressly provided.
15. Notice. Any notice or other communications required or permitted
hereunder shall be sufficiently given: (i) three (3) business days after if sent
by certified mail, return receipt requested, postage prepaid, or (ii) one (1)
business day after sent by Federal Express or other overnight courier providing
delivery confirmation for next business day delivery, or (ii) when delivered by
12
personal delivery, telecopier, or e-mail, in any event delivered to or addressed
as follows:
If to ILLES:
Mr. Steve Illes
8006 Southeast 167th Hilltop Loop
Villages, Florida 32162
If to USA:
USA Technologies, Inc.
Suite 140
100 Deerfield Lane
Malvern, Pennsylvania 19355
Attn: George R. Jensen, Jr., Chairman
16. Consent to Jurisdiction. Each of USA and ILLES irrevocably
consents and agrees that any legal action or proceeding whatsoever arising out
of or in any way connected with this Agreement or the transactions contemplated
hereby may be commenced, filed, instituted or brought in the state or federal
courts of the Commonwealth of Pennsylvania, and each of the parties hereto
irrevocably submits and accepts with regard to any such legal action or
proceeding to the jurisdiction of such courts. Each of the parties irrevocably
consents to service of process out of any of the aforementioned courts in any
such action or proceeding by the mailing of copies thereof by registered or
certified mail, postage prepaid, to the parties hereto, such service to become
effective upon mailing. Each of the parties hereto hereby irrevocably waive, to
the fullest extent permitted by law, any objection which any of them may now or
hereafter have to the laying of the venue of any suit, action or proceeding
arising out of or relating to this Agreement or the transactions contemplated
hereby, brought in such Pennsylvania courts, and hereby further irrevocably
waives any claim, that any such suit, action or proceeding brought in such
courts, has been brought in an inconvenient forum.
17. Counterparts. This Agreement may be signed in two or more
counterparts which counterparts shall constitute a single, integrated agreement
binding upon all the signatories to such counterparts. Delivery of an executed
13
counterpart of this Agreement by facsimile shall be equally as effective as
delivery of a manually executed counterpart of this Agreement.
18. Expenses. Except as specifically provided otherwise herein, each
party hereto shall pay its or his own expenses arising from this Agreement and
the transactions contemplated hereby, including, without limitation, all legal
and accounting fees and disbursements; provided, however, that nothing herein
shall limit or otherwise modify any right of the parties to recover such
expenses (including legal fees and costs of litigation) from the other in the
event any party hereto breaches this Agreement.
19. Further Assurances. Each of the parties hereto shall hereafter
execute and deliver such further documents and instruments and do such further
acts and things as may be required or useful to carry out the intent and purpose
of this Agreement and as are not inconsistent with the terms hereof.
14
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Common Stock Purchase Agreement on the date first written above.
USA TECHNOLOGIES, INC.
/s/ Steve Illes By: /s/ George R. Jensen, Jr.
- --------------- --------------------------------
STEVE ILLES George R. Jensen, Jr.,
Chief Executive Officer
15
USA TECHNOLOGIES, INC.
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355
Attn: George R. Jensen, Jr.,
Chief Executive Officer
ELECTION TO PURCHASE
STEVE ILLES hereby irrevocably elects to exercise the right of
purchase represented by the Common Stock Purchase Agreement between the Company
and ILLES. Pursuant thereto, ILLES desires to purchase _____________ shares of
Common Stock provided for therein and tenders herewith full payment of the Base
Per Share Price for the shares of Common Stock being purchased, all in
accordance with the Agreement. ILLES requests that a Certificate representing
such shares of Common Stock shall be issued to and registered in the name of,
and delivered to, ILLES at the address set forth in the Agreement.
Dated: , 2004
------------- ----------------------------
STEVE ILLES
16
Mr. Steve Illes
8006 Southeast 167th Hilltop Loop
Villages, Florida 32162
COMMITMENT TO PURCHASE
Pursuant to the Common Stock Purchase Agreement between USA and
ILLES, USA hereby irrevocably elects to require ILLES to purchase shares of
Common Stock provided for therein at the price of ___ per share, or an aggregate
of $_________, for ____________ shares of Common Stock. Pursuant to the
Agreement, ILLES shall deliver the purchase price for the shares within two
business days. The certificate representing such shares of Common Stock shall be
issued to and registered in the name of, and delivered to, the ILLES at the
address set forth in the Agreement.
Dated: , 2004 USA TECHNOLOGIES, INC.
-------------
By:
------------------------------
Title:
17
Exhibit 5.1
June 29, 2004
USA Technologies, Inc.
100 Deerfield Lane, Suite 140
Malvern, PA 19355
Attn: Mr. George R. Jensen, Jr., Chief Executive Officer
Re: USA Technologies, Inc. -
Registration Statement on Form SB-2
-----------------------------------
Dear Mr. Jensen:
We have acted as counsel to USA Technologies, Inc., a Pennsylvania
corporation (the "Company"), in connection with a Registration Statement on Form
SB-2, filed with the Securities and Exchange Commission on the date hereof (the
"Registration Statement"). The Registration Statement covers 72,379,930 shares
of Common Stock ("Common Stock") which are either currently outstanding,
issuable in the future, or issuable upon exercise of warrants.
In rendering this opinion, we have examined (i) the Articles of
Incorporation, as amended, and By-Laws of the Company; (ii) the resolutions of
the Board of Directors evidencing the corporate proceedings taken by the Company
to authorize the issuance of the Common Stock pursuant to the Registration
Statement; (iii) the Registration Statement (including all exhibits thereto);
and (iv) such other documents as we have deemed appropriate or necessary as a
basis for the opinion hereinafter expressed.
In rendering the opinion expressed below, we assumed the authenticity of
all documents and records examined, the conformity with the original documents
of all documents submitted to us as copies and the genuineness of all
signatures. We have also assumed that at all relevant times, the Company shall
have a sufficient number of authorized shares of Common Stock to cover the
issuance by the Company of all shares underlying warrants and all shares agreed
to be issued in the future.
Based upon and subject to the foregoing, and such legal considerations as
we deem relevant, we are of the opinion that when resold as contemplated by the
Registration Statement, and subject to effectiveness of the Registration
Statement and compliance with applicable state securities laws, the Common Stock
when issued will be legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to references made to this firm under the heading
"Legal Matters" in the Prospectus contained in the Registration Statement and
all amendments thereto.
Sincerely,
/s/ LURIO & ASSOCIATES, P.C.
- ---------------------------------
LURIO & ASSOCIATES, P.C.
Exhibit 10.4.4
FIFTH AMENDMENT TO EMPLOYMENT AND
NON-COMPETITION AGREEMENT
This Fifth Amendment is made on the 20 day of April 2004, by and between
HAVEN BROCK KOLLS, JR. ("Kolls"), and USA TECHNOLOGIES, INC., a Pennsylvania
corporation ("USA").
Background
USA and Kolls entered into an Employment And Non-Competition Agreement
dated May 1, 1994, a First Amendment thereto dated May 1, 1995, a Second
Amendment thereto dated March 20, 1996, a Third Amendment thereto dated February
22, 2000, and a Fourth Amendment thereto dated April 15, 2002 (collectively, the
"Agreement"). As more fully set forth herein, the parties desire to amend the
Agreement in certain respects.
Agreement
NOW, THEREFORE, in consideration of the covenants set forth herein, and
intending to be legally bound hereby, the parties agree as follows:
1. Amendments.
A. Subparagraph A. of Section 1. Employment. is hereby deleted and the
following new subparagraph A. is substituted in its place:
1
A. USA shall employ Kolls as Senior Vice President, Research &
Development, commencing on the date hereof and continuing through June 30,
2005 (the "Employment Period"), and Kolls hereby accepts such employment.
Unless terminated by either party hereto upon at least 60-days notice
prior to end of the original Employment Period ending June 30, 2005 or
prior to the end of any one year extension of the Employment Period, the
Employment Period shall not be terminated and shall automatically continue
in full force and effect for consecutive one year periods. The Company
will deliver to Kolls an incentive cash compensation payment of $60,000
upon Kolls' signing of this Fifth Amendment. If during the Employment
Period a USA Transaction (as such term is defined in the Employment
Agreement of George R. Jensen, Jr.) shall occur, then Kolls may upon
thirty days prior notice to the Company, terminate the Employment Period.
Upon such termination by Kolls, neither party shall have any further
duties or obligations hereunder, provided, however, that Kolls'
obligations under Sections 5 and 6 hereof shall survive any such
termination.
B. The following new subparagraph C. shall be added to Section 1.
Employment. of the Agreement:
C. In the event that Kolls shall agree to extend the Employment Period to
June 30, 2006 (provided that such extension is accomplished at anytime
between July 1, 2004 and December 31, 2004), Kolls shall receive from USA
an incentive cash compensation payment of $70,000.
C. Subparagraph A. of Section 2. Compensation and Benefits. of the
Agreement is hereby deleted and the following new subparagraph A. is hereby
substituted in its place:
A. In consideration of his services rendered, commencing January 1, 2004,
USA shall pay to Kolls a base salary of $165,000 per year during the
Employment Period, subject to any withholding required by law. Kolls" base
salary may be increased from time to time in the discretion of the Board
of Directors.
2
D. The following new subparagraph F. shall be added to Section 2.
Compensation and Benefits. of the Agreement:
F. From and after the date of this Fifth Amendment and during the
Employment Period, USA shall pay to Kolls (i) the sum of $5,000 for
any new patent application filed on behalf of USA during the
Employment Period for which Kolls is listed as the inventor; and
(ii) the further sum of $5,000 upon the grant and issuance during
the Employment Period of any such patent application; and (iii) the
sum of $5,000 upon the grant and issuance during the Employment
Period of any pending patent application that was filed on behalf of
USA at any time prior to the date of this Fifth Amendment and
whether or not Kolls is listed as the inventor. Any amount due to
Kolls by USA shall at the option of USA be payable in either cash or
USA Common Stock; provided that any such amount shall be subject to
and reduced by any applicable tax withholding. The issuance by USA
of any USA Common Stock to Kolls shall at the option of USA (i) be
registered under the Securities Act of 1933, as amended, pursuant to
a Form S-8 registration statement, all at the sole cost and expense
of USA; or (ii) represent restricted stock issued as part of a
private placement by USA and in such event Kolls shall participate
in the offering on the same terms as any other investor (including
any registration rights); or (iii) represent a separate private
placement of restricted Common Stock involving only Kolls, provided
that the stock shall have standard "piggyback" registration rights.
2. Modification. Except as otherwise specifically set forth in Paragraph
1, the Agreement shall not be amended or modified in any respect whatsoever and
shall continue in full force and effect.
3
3. Capitalized Terms. Except as specifically provided otherwise herein,
all capitalized terms used herein shall have the meanings ascribed to them in
the Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Fifth Amendment
on the day and year first above written.
USA TECHNOLOGIES, INC.
By: /s/ Stephen P. Herbert
-------------------------------------
Stephen P. Herbert,
President
/s/ Haven Brock Kolls, Jr.
-------------------------------------
HAVEN BROCK KOLLS, JR.
4
Exhibit 10.45
THESE OPTIONS AND THE COMMON STOCK ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAW. THESE OPTIONS AND THE COMMON STOCK ISSUABLE UPON THE EXERCISE
HEREOF MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE
OF A REGISTRATION STATEMENT IN EFFECT UNDER SUCH ACT AND SUCH LAWS WITH RESPECT
TO THESE OPTIONS AND THE COMMON STOCK ISSUABLE UPON THE EXERCISE HEREOF, OR AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED.
OPTION CERTIFICATE 300,000 COMMON STOCK OPTIONS
NO. 198
USA TECHNOLOGIES, INC.
COMMON STOCK OPTIONS
(These Options will be void if not exercised
by the Termination Dates specified below.)
1. Options. Subject to the terms and conditions hereof, this certifies
that MARY WEST YOUNG is the owner of 300,000 Options (the "Options") of USA
Technologies, Inc. (the "Company"), a Pennsylvania corporation. Each Option,
when vested in accordance with Section 3 hereof, entitles the owner hereof to
purchase from the Company at any time prior to 5:00 p.m. on the second annual
anniversary of the vesting of such Option (the "Termination Date"), one fully
paid and non-assessable share of the Company's Common Stock, without par value
(the "Common Stock"), subject to adjustment as provided in Section 8 hereof.
2. Option Price. The Options, when vested, shall be exercised by delivery
to the Company (prior to the Termination Date for such Options) of the option
price for each share of Common Stock being purchased hereunder (the "Option
Price"), this Certificate, and the completed Election To Purchase Form which is
attached hereto. The Option Price shall be $.30 per share of Common Stock to be
purchased pursuant to each Option issued pursuant hereto. The Option Price shall
be subject to adjustment as provided in Section 8 hereof. The Option Price is
payable either in cash or by certified check or bank draft payable to the order
of the Company.
1
3. Vesting of Options.
a. Notwithstanding anything contained herein to the contrary, and
subject to Section 8(d)(iii), the Options represented by this Certificate shall
only become vested and exercisable by YOUNG in accordance with the terms and
conditions set forth in this Section 3. If YOUNG is employed by the Company as
of the date set forth in Column "A" below, the number of Options set forth in
Column "B" below shall on such date become irrevocably and absolutely vested and
exercisable.
Column "A" Column "B"
Vesting Date Options Vested
July 31, 2004 37,500
October 31, 2004 37,500
January 31, 2005 37,500
April 30, 2005 37,500
July 31, 2005 37,500
October 31, 2005 37,500
January 31, 2006 37,500
April 30, 2006 37,500
-------
Total . . . . . . . . . 300,000
b. The Employment And Non-Competition Agreement dated April 28, 2004
between YOUNG and the Company, including any and all supplements, amendments, or
modifications thereto (the "Employment Agreement"), is hereby incorporated
herein by reference. The terms and conditions thereof shall be used to determine
whether YOUNG is employed by the Company on any particular vesting date.
Therefore, and as set forth in the Employment Agreement (as of the date hereof),
YOUNG's employment would be considered terminated upon her death or disability
under Section 4 thereof, or upon notice given to YOUNG by the Company under
Section 3 thereof, or upon notice given by the Company or YOUNG under Section
1(a) thereof.
c. If pursuant hereto YOUNG shall not become vested in any
particular Option or Options, she shall only forfeit the Option or Options not
so vested. Any Option or Options previously vested pursuant hereto shall
nevertheless remain fully vested and exercisable all in accordance with the
terms hereof.
2
4. Exercise. Upon the surrender of this Certificate and payment of the
Option Price as aforesaid, the Company shall issue and cause to be delivered
with all reasonable dispatch to or upon the written order of the registered
holder of this Option and in such name or names as the registered holder may
designate, a certificate or certificates for the number of full shares of Common
Stock so purchased upon the exercise of any Option. Such certificate or
certificates shall be deemed to have been issued and any person so designated to
be named therein shall be deemed to have become a holder of record of such
Common Stock on and as of the date of the delivery to the Company of this
Certificate and payment of the Option Price as aforesaid. If, however, at the
date of surrender of this Certificate and payment of such Option Price, the
transfer books for the Common Stock purchasable upon the exercise of any Option
shall be closed, the certificates for the Common Stock in respect to which any
such Option are then exercised shall be issued and the owner of such Common
Stock shall become a record owner of such Common Stock on and as of the next
date on which such books shall be opened, and until such date the Company shall
be under no duty to deliver any certificate for such Common Stock.
5. Partial Exercise. The rights of purchase represented by the Options
shall be exercisable, at the election of the registered holder hereof, either as
an entirety, or from time to time for any part of the Common Stock specified
herein and, in the event that the Options are exercised with respect to less
than all of the Common Stock specified herein at any time prior to the
Termination Date, a new Certificate will be issued to such registered holder for
the remaining number of Options not so exercised.
6. Termination Date. All of the Options must be exercised in accordance
with the terms hereof prior to the Termination Date relating to any such Option.
At and after the Termination Date relating to any such Option any and all
unexercised rights hereunder relating to such Option shall become null and void
and such Option shall without any action on behalf of the Company become null
and void.
3
7. Lost, Mutilated Certificate. In case this Common Stock Option
Certificate shall become mutilated, lost, stolen or destroyed, the Company shall
issue in exchange and substitution for and upon cancellation of the mutilated
certificate, or in lieu of and in substitution for the Certificate lost, stolen,
or destroyed, a new Certificate of like tenor and representing an equivalent
right or interest, but only upon receipt of evidence satisfactory to the Company
of such loss, theft or destruction of such certificate and indemnity, if
requested, also satisfactory to the Company.
8. Adjustments. Subject and pursuant to the provisions of this Section 8,
the Option Price and number of shares of Common Stock subject to the Options
shall be subject to adjustment from time to time only as set forth hereinafter:
a. In case the Company shall declare a Common Stock dividend on the
Common Stock, then the Option Price shall be proportionately decreased as of the
close of business on the date of record of said Common Stock dividend in
proportion to such increase of outstanding shares of Common Stock.
b. If the Company shall at any time subdivide its outstanding Common
Stock by recapitalization, reclassification or split-up thereof, the Option
Price immediately prior to such subdivision shall be proportionately decreased,
and, if the Company shall at any time combine the outstanding shares of Common
Stock by recapitalization, reclassification, or combination thereof, the Option
Price immediately prior to such combination shall be proportionately increased.
Any such adjustment to the Option Price shall become effective at the close of
business on the record date for such subdivision or combination. The Option
Price shall be proportionately increased or decreased, as the case may be, in
proportion to such increase or decrease, as the case may be, of outstanding
shares of Common Stock.
c. Upon any adjustment of the Option Price as hereinabove provided,
the number of shares of Common Stock issuable upon exercise of the Options
remaining unexercised immediately prior to any such adjustment, shall be changed
to the number of shares determined by dividing (i) the appropriate Option Price
payable for the purchase of all shares of Common Stock issuable upon exercise of
all of the Options remaining unexercised immediately prior to such adjustment by
(ii) the Option Price per share of Common Stock in effect immediately after such
adjustment. Pursuant to this formula, the total sum payable to the Company upon
the exercise of the Options remaining unexercised immediately prior to such
adjustment shall remain constant.
4
d. (i) If any capital reorganization or reclassification of the
capital stock of the Company, or consolidation or merger of the Company with
another corporation, person, or entity, or the sale of all or substantially all
of its assets to another corporation, person, or entity, shall be effected in
such a way that holders of Common Stock shall be entitled to receive stock,
securities, cash, property, or assets with respect to or in exchange for Common
Stock, and provided no election is made by the Company pursuant to subsection
(ii) hereof, then, as a condition of such reorganization, reclassification,
consolidation, merger or sale, the Company or such successor or purchasing
corporation, person, or entity, as the case may be, shall agree that the
registered holder of the Options shall have the right thereafter and until the
Termination Date to exercise such Options for the kind and amount of stock,
securities, cash, property, or assets receivable upon such reorganization,
reclassification, consolidation, merger, or sale by a holder of the number of
shares of Common Stock for the purchase of which such Options might have been
exercised immediately prior to such reorganization, reclassification,
consolidation, merger or sale, subject to such subsequent adjustments which
shall be equivalent or nearly equivalent as may be practicable to the
adjustments provided for in this Section 8.
(ii) Notwithstanding subsection (i) hereof and in lieu
thereof, the Company may elect by written notice to the registered holder
hereof, to require such registered holder to exercise all of the Options
remaining unexercised prior to any such reorganization, reclassification,
consolidation, merger or sale. If the holder of this Option shall not exercise
all or any part of the Options remaining unexercised prior to such event, such
unexercised Options shall automatically become null and void upon the occurrence
of any such event, and of no further force and effect. The Common Stock issued
pursuant to any such exercise shall be deemed to be issued and outstanding
immediately prior to any such event, and shall be entitled to be treated as any
other issued and outstanding share of Common Stock in connection with such
event. If an election is not made by the Company pursuant to this subsection
(ii) in connection with any such event, then the provisions of subsection (i)
hereof shall apply to such event.
5
(iii) Notwithstanding anything else contained herein,
including Section 3 hereof, immediately prior to any such reoganization,
reclassification, consolidation, merger or sale, which constitutes a Change In
Control, and provided that YOUNG is then employed by the Company, any Options
which have not become vested pursuant to Section 3 hereof, shall become fully
vested and exercisable immediately prior to any such event, and shall be subject
to subsection (i) or (ii) hereof, as the case may be.
For purposes hereof, the term "Change In Control" shall mean a sale,
transfer, assignment, or other disposition (including by reorganization, merger
or consolidation), of a controlling interest (i.e., at least 51% of the voting
power) of the then outstanding stock of the Company, or of all or substantially
all of the assets of the Company, or a liquidation or dissolution of the
Company. Other than in connection with a liquidation or dissolution, any such
transaction shall not, however, constitute a Change In Control if following such
transaction, the beneficial owners of the voting stock of the Company
immediately prior to such transaction beneficially own, directly or indirectly,
more than 51% of the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of Directors of the entity
or entities resulting from such transaction (including without limitation, an
entity which as a result of such transaction owns the Company, or all or
substantially all of the Company's assets, either directly or through one or
more subsidiaries).
e. Whenever the Option Price and number of shares of Common Stock
subject to this Option is adjusted as herein provided, the Company shall
promptly mail to the registered holder of this Option a statement signed by an
officer of the Company setting forth the adjusted Option Price and the number of
shares of Common Stock subject to this Option, determined as so provided.
f. This form of Certificate need not be changed because of any
adjustment which is required pursuant to this Section 8. However, the Company
may at any time in its sole discretion (which shall be conclusive) make any
change in the form of this Certificate that the Company may deem appropriate and
that does not affect the substance hereof; and any Certificate thereafter
issued, whether in exchange or substitution for this Certificate or otherwise,
may be in the form as so changed.
6
9. Reservation. There has been reserved, and the Company shall at all
times keep reserved out of the authorized and unissued shares of Common Stock, a
number of shares of Common Stock sufficient to provide for the exercise of the
right of purchase represented by the Options. The Company agrees that all shares
of Common Stock issued upon exercise of the Options shall be, at the time of
delivery of the Certificates for such Common Stock, validly issued and
outstanding, fully paid and non-assessable.
10. Fractional Shares. The Company shall not issue any fractional shares
of Common Stock pursuant to any exercise of any Option and shall pay cash to the
holder of any Option in lieu of any such fractional shares.
11. No Right. The holder of any Options shall not be entitled to any of
the rights of a shareholder of the Company prior to the date of issuance of the
Common Stock by the Company pursuant to an exercise of any Option.
12. Securities Laws. As a condition to the issuance of any Common Stock
pursuant to the Options, the holder of such Common Stock shall execute and
deliver such representations, warranties, and covenants, that may be required by
applicable federal and state securities law, or that the Company determines is
reasonably necessary in connection with the issuance of such Common Stock. In
addition, the certificates representing the Common Stock shall contain such
legends, or restrictive legends, or stop transfer instructions, as shall be
required by applicable Federal or state securities laws, or as shall be
reasonably required by the Company.
13. Applicable Law. The Options and this Certificate shall be deemed to be
a contract made under the laws of the Commonwealth of Pennsylvania and for all
purposes shall be construed in accordance with the laws thereof regardless of
its choice of law rules.
7
IN WITNESS WHEREOF, USA TECHNOLOGIES, INC., has executed and delivered
this Certificate and caused its corporate seal to be affixed hereto.
USA TECHNOLOGIES, INC.
By: /s/ George R. Jensen, Jr.
-------------------------------------
George R. Jensen, Jr.,
Chief Executive Officer
Attest: /s/ Stephen P. Herbert
---------------------------------
Stephen P. Herbert, Secretary
Dated: April 28, 2004
8
USA TECHNOLOGIES, INC.
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355
Attn: George R. Jensen, Jr.,
Chief Executive Officer
ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the attached Option Certificate No. of the Company. The
undersigned desires to purchase shares of Common Stock provided for therein and
tenders herewith full payment of the Option Price for the shares of Common Stock
being purchased, all in accordance with the Certificate. The undersigned
requests that a Certificate representing such shares of Common Stock shall be
issued to and registered in the name of, and delivered to, the undersigned at
the following address:______________________________________. If said number of
shares of Common Stock shall not be all the shares purchasable under the
Certificate, then a new Common Stock Option Certificate for the balance
remaining of the shares of Common Stock purchasable shall be issued to and
registered in the name of, and delivered to, the undersigned at the address set
forth above.
Dated: , 200 Signature:
-------------- - ------------------------------
9
Exhibit 10.46
EMPLOYMENT AND NON-COMPETITION AGREEMENT
Agreement made this 28th day of April, 2004, by and between MARY WEST
YOUNG, an individual residing at 2175 Wyndtree Lane, Malvern, Pennsylvania 19355
("Young"), and USA TECHNOLOGIES, INC., a Pennsylvania corporation ("USA"), with
a place of business at 100 Deerfield Lane, Suite 140, Malvern, Pennsylvania
19355.
BACKGROUND
USA desires to engage Young and Young desires to be engaged by USA as
Chief Financial Officer of USA. Because of, among other matters, the decreased
value of the business of USA that will result if Young would compete with USA or
use or divulge certain confidential information, Young has further agreed that
she will be subject to certain restrictions during and after her being an
employee of USA.
AGREEMENT
NOW, THEREFORE, in consideration of the covenants set forth herein, and
intending to be legally bound hereby, the parties agree as follows:
SECTION 1. EMPLOYMENT.
(a) USA shall employ Young for a period commencing on the date
hereof and continuing through April 30, 2005 (the "Employment Period"), and
Young hereby accepts such employment. Commencing on and after May 17, 2004,
Young shall be the Chief Financial Officer of USA. Unless terminated by either
party hereto upon at least 30-days notice prior to end of the original
Employment Period ending April 30, 2005, or prior to the end of any one year
extension of the Employment Period, the Employment Period shall not be
terminated and shall automatically continue in full force and effect for
consecutive one year periods.
(b) During the Employment Period, Young shall devote her full time,
energy, skills, and attention to the business of USA, and shall not be engaged
or employed in any other business activity whatsoever, whether or not such
activity is pursued for gain, profit or other pecuniary advantage. During the
Employment Period, Young shall perform and discharge well and faithfully such
executive management duties for USA as shall be necessary and as otherwise may
be directed by the President or Board of Directors of USA.
SECTION 2. COMPENSATION AND BENEFITS
(a) In consideration of her services rendered, USA shall pay to
Young a base salary of $165,000 per year during the Employment Period, subject
to any withholding required by law. Young's base salary may be increased from
time to time in the discretion of the Board of Directors.
(b) In addition to the base salary provided for in subparagraph (a),
Young shall be eligible to receive such bonus or bonuses as the Board of
Directors of USA may, in their discretion, pay to Young from time to time, in an
amount per year of up to thirty-five percent (35%) of her annual base salary,
based upon the performance of USA and/or Young.
(c) Young shall be entitled to be reimbursed by USA for all
reasonable expenses reasonably incurred by Young in connection with her
employment duties hereunder. Such expenses shall include but not be limited to
all reasonable business travel expenses such as tolls, gasoline and mileage.
Young shall reasonably document all requests for expense reimbursements.
2
(d) At the commencement of the Employment Period, USA shall deliver
to Young a payroll check in the net amount of $30,000, already reduced for
applicable withholding taxes such as FICA, medicare, and state tax (other than
for federal income taxes). The funds shall be used by Young to subscribe for
200,000 shares of restricted Common Stock of USA ("Common Stock") at $.15 per
share as part of the pending 2004-A private placement offering. As provided in
the subscription agreement for the 2004-A offering, USA shall prepare and file
(expected to be on or before June 30, 2004) a registration statement covering
the resale of the shares under the Securities Act of 1933, as amended ("Act").
(e) At the commencement of the Employment Period, USA shall issue to
Young nonvested options to acquire up to 300,000 shares of Common Stock for an
exercise price of $.30 per share. The vesting schedule of such options as well
as all the other terms and conditions thereof are set forth in the Option
Certificate evidencing such options which will be delivered to Young by USA at
the commencement of the Employment Period. The form of such Option Certificate
is attached hereto as Exhibit "A".
Young acknowledges that such options are not incentive stock options as
such term is defined in Section 422 of the Internal Revenue Code of 1986, as
amended, or part of an employee stock purchase plan as defined in Section 423
thereunder. As a result, among other things, taxable income will be realized by
Young at the time of the exercise of any such options.
3
Young also acknowledges that neither the options nor the Common Stock
underlying the options have been registered under the Act, or under any state
securities laws, and neither the options nor the Common Stock underlying the
options can be sold or transferred unless such options or Common Stock have been
registered under the Act or such state securities laws, or unless USA has
received an opinion of counsel that such registration is not required. Young
understands that except as provided below, USA has not agreed to register the
options or the underlying Common Stock under the Act or any state securities
laws.
USA shall at its sole cost and expense use its best efforts to register
under the Act the Common Stock underlying the options for resale by Young for a
period of two years from the date of vesting of such option.
SECTION 3. TERMINATION. Notwithstanding anything else contained herein,
USA may terminate the employment of Young at any time upon notice delivered to
Young in the event that (i) Young commits any criminal or fraudulent act; or
(ii) Young breaches any term or condition of this Agreement; or (iii) Young
willfully abandons her duties hereunder. Upon such termination neither party
hereto shall have any further duties or obligations hereunder whatsoever;
provided, however, that Young's obligations under Sections 5 and 6 hereof shall
survive any such termination.
4
SECTION 4. DEATH AND DISABILITY.
(a) If Young shall die during the Employment Period, this Agreement
shall terminate as of the date of such death and except for any base salary or
bonuses accrued as of such date USA shall have no further duties or obligations
hereunder whatsoever.
(b) If USA determines in good faith that Young is incapacitated by
accident, sickness or otherwise so as to render her mentally or physically
incapable of performing the services required of her hereunder for an aggregate
of ninety (90) consecutive days, upon the expiration of such period or at any
time thereafter, by action of USA, Young's employment hereunder may be
terminated immediately, upon giving her notice to that effect, and upon such
termination except for any base salary or bonuses accrued as of such date
neither party hereto shall have any further duties or obligations hereunder;
provided, however, that Young's obligations under Sections 5 and 6 hereof shall
survive any such termination. USA shall be entitled to rely upon the advice and
opinion of any physician of its choosing in making any determination with
respect to any such disability.
SECTION 5. BUSINESS SECRETS.
(a) Except in connection with her duties hereunder, Young shall not,
directly or indirectly, at any time from and after the date hereof, and whether
or not the Employment Period has terminated, or whether or not Young's
employment has terminated for any reason whatsoever, make any use of, exploit,
disclose, or divulge to any other person, firm or corporation, any trade or
business secret, customer or supplier information, documents, know-how, data,
marketing information, method or means, or any other confidential (i.e. not
already otherwise disseminated to or available to the public) information
concerning the business or policies of USA, that Young learned as a result of,
in connection with, through her employment with, or through her affiliation with
USA, whether or not pursuant to this Agreement.
5
(b) From and after the date hereof, except in connection with her
duties hereunder, and for a one (1) year period following the termination of the
Employment Period, or for a one (1) year period following the termination of
Young's employment hereunder if earlier, Young shall not solicit, or divert
business from, or serve, or sell to, any customer or account of USA of which
Young is or becomes aware, or with which Young has had personal contact as a
result of, in connection with, through her employment with, or through her
affiliation with USA, whether or not pursuant to this Agreement.
(c) All documents, data, know-how, designs, inventions, names,
marketing information, method or means, materials, software programs, hardware,
configurations, information, data processing reports, lists and sales analyses,
price lists or information, or any other materials or data of any kind furnished
to Young by USA, or developed by Young on behalf of USA or at USA's direction or
for USA's use, or otherwise devised, developed, created, or invented in
connection with Young's employment hereunder or her affiliation with USA, are
and shall remain the sole and exclusive property of USA, and Young shall have no
right or interest whatsoever thereto, including but not limited to any copyright
or patent interest whatsoever. If USA requests the return of any such items
(including all copies) at any time whatsoever, Young shall immediately deliver
the same to USA.
6
SECTION 6. RESTRICTIVE COVENANT. From and after the date hereof, and for a
one (1) year period following the termination of the Employment Period, or for a
one (1) year period following the termination of Young's employment hereunder if
earlier, Young shall be prohibited from competing in the United States with the
business of USA as presently or as hereinafter conducted, including but not
limited to the ownership and licensing of credit card activated control systems
in the vending, copying, debit card, or personal computer industries. For the
purposes hereof, the term "competing" shall mean acting, directly or indirectly,
as a partner, principal, stockholder, joint venturer, associate, independent
contractor, creditor of, consultant, trustee, lessor to, sublessor to, employee
or agent of, or to have any other involvement with, any person, firm,
corporation, or other business organization which is engaged in the businesses
described in this Section.
SECTION 7. REMEDIES. Young acknowledges that any breach by her of the
obligations set forth in Sections 5 or 6 hereof would substantially and
materially impair and irreparably harm USA's business and goodwill; that such
impairment and harm would be difficult to measure; and, therefore, total
compensation in solely monetary terms would be inadequate. Consequently, Young
agrees that in the event of any breach or any threatened breach by Young of any
of the provisions of Section 5 or 6 hereof, USA shall be entitled in addition to
monetary damages or other remedies, to equitable relief, including injunctive
relief, and to the payment by Young of all costs and expenses incurred by USA in
enforcing the provisions thereof, including attorneys' fees. The remedies
granted to USA in this Agreement are cumulative and are in addition to remedies
otherwise available to USA at law or in equity.
7
SECTION 8. WAIVER OF BREACH. The waiver by USA of a breach of any
provision of this Agreement by Young shall not operate or be construed as a
waiver of any other or subsequent breach by Young of such or any other
provision.
SECTION 9. NOTICES. All notices required or permitted hereunder shall be
in writing and shall be sent by certified or registered mail, return receipt
requested, postage prepaid, as follows:
To USA:
USA Technologies, Inc.
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355
Attn: George R. Jensen, Jr., Chairman
To Young:
Ms. Mary West Young
2175 Wyndtree Lane
Malvern, Pennsylvania 19355
or to such other address as either of them may designate in a written notice
served upon the other party in the manner provided herein. All notices required
or permitted hereunder shall be deemed duly given and received on the second day
next succeeding the date of mailing.
8
SECTION 10. SEVERABILITY. If any term or provision of this Agreement or
the application thereof to any person or circumstances shall, to any extent, be
invalid or unenforceable, the remainder of this Agreement or the application of
any such term or provision to persons or circumstances other than those as to
which it is held invalid or unenforceable, shall not be affected thereby, and
each term and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law. If any of the provisions contained in this
Agreement shall for any reason be held to be excessively broad as to duration,
scope, activity or subject, it shall be construed by limiting and reducing it,
so as to be valid and enforceable to the extent compatible with the applicable
law.
SECTION 11. GOVERNING LAW. The implementation and interpretation of this
Agreement shall be governed by and enforced in accordance with the laws of the
Commonwealth of Pennsylvania without regard to its conflict of laws rules.
SECTION 12. BINDING EFFECT AND ASSIGNABILITY. The rights and obligations
of both parties under this Agreement shall inure to the benefit of and shall be
binding upon their personal representatives, heirs, successors and assigns. This
Agreement, or any part thereof, may not be assigned by Young.
9
SECTION 13. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement with respect to the subject matter hereof between the parties hereto
and except as provided herein there are no other agreements between the parties
relating to the subject matter hereof. This Agreement may only be modified by an
agreement in writing executed by both USA and Young.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
USA TECHNOLOGIES, INC.
By: /s/ George R. Jensen
-------------------------------------
George R. Jensen, Jr., Chairman
and Chief Executive Officer
/s/ Mary West Young
-------------------------------------
MARY WEST YOUNG
10
Exhibit 23.1
CONSENT OF REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated September 12, 2003, except for Note 17, as to which the
date is September 30, 2003, to the Registration Statement (Form SB-2 No.
333-xxxxx) and related Prospectus of USA Technologies, Inc. for the
registration of 72,379,930 shares of its common stock.
/s/ Ernst & Young LLP
--------------------------------------------
Philadelphia, Pennsylvania
June 29, 2004
Exhibit 23.2
Consent of Registered Public Accounting Firm
USA Technologies, Inc.
Malvern, Pennsylvania
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated September 4, 2003, relating to the
financial statements of Bayview Technology Group, LLC, which is contained in
that Prospectus. Our report contains an explanatory paragraph regarding Bayview
Technology Group, LLC's ability to continue as a going concern.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ Anton, Collins, Mitchell LLP
- -----------------------------------
Denver, Colorado
June 29, 2004