SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2004
COMMISSION FILE NUMBER: __________
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ______ TO ______
USA TECHNOLOGIES, INC.
(Exact name of small business issuer)
PENNSYLVANIA 23-2679963
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 DEERFIELD LANE, SUITE 140, MALVERN, PA. 19355
(Address of principal executive offices)(Zip Code)
(610)-989-0340
(Issuer's telephone number)
NONE
(Securities registered under Section 12(b) of the Exchange Act)
COMMON STOCK, NO PAR VALUE
(Securities registered pursuant to Section 12(g) of the Exchange Act)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
periods that the registrant was required to for such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes |X| No |_|
Check if disclosure of delinquent filers pursuant to Item 405, of Regulation S-B
is not contained in this form, and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendments to
this Form 10-KSB. |_|
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT YES |_| NO |X|
Registrant's total revenues for its most recent fiscal year..........$5,632,815
The Company's voting securities are traded on the Over the Counter (OTC)
Electronic Bulletin Board. The aggregate market value of the voting common
equity securities held by non-affiliates of the Registrant was on $45,854,655
August 31, 2004 based upon the closing price of the Registrant's Common Stock on
that date.
As of August 31, 2004, there were 352,728,112 outstanding shares of Common
Stock, no par value.
TABLE OF CONTENTS
PART I PAGE
Item 1. Description of Business. 3
2. Description of Property. 16
3. Legal Proceedings. 17
4. Submission of Matters to a Vote of Security Holders. 17
PART II
Item 5. Market for Common Equity and Related Stockholder Matters. 17
6. Management's Discussion and Analysis or Plan of Operation. 20
7. Financial Statements. 30
8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure. 31
8A. Controls and Procedures. 31
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act. 31
10. Executive Compensation. 35
11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters. 40
12. Certain Relationships and Related Transactions. 43
13. Exhibits and Reports on Form 8-K. 44
14. Principal Accountant Fees and Services. 50
USA TECHNOLOGIES, INC.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
USA Technologies, Inc. ("USAT" or the "Company") was incorporated in the
Commonwealth of Pennsylvania in January 1992. The Company offers a suite of
networked devices and associated wireless non-cash payment, control/access
management, remote monitoring and data reporting services, as well as energy
management products. Our networked devices and associated services enable the
owners and operators of everyday, stand-alone, distributed assets, such as
vending machines, personal computers, copiers, faxes, kiosks and laundry
equipment, the ability to remotely monitor, control and report on the results of
these distributed assets, as well as the ability to offer their customers
alternative cashless payment options. As a result of the acquisition of the
assets of Bayview Technology Group, LLC ("Bayview") in July 2003, our Company
also manufactures and sells energy management products which reduce the power
consumption of various equipment, such as refrigerated vending machines and
glass front coolers, thus reducing the energy costs associated with operating
this equipment.
Our customers fall into the following categories; vending machine owners and/or
operators, business center operators which include hotels and audio visual
companies, commercial laundry operators servicing colleges and universities,
brand marketers wishing to provide their products or services via kiosks or
vending machines and equipment manufacturers such as consumer electronics,
appliances, building control systems, factory equipment and computer peripherals
that would like to incorporate the technological features of our networked
devices (i.e. remote monitoring, reporting and control as well as cashless
payments) into their products. Customers for our energy management products also
include energy utility companies, schools and operators of glass front coolers.
THE TECHNOLOGY
The Company offers an end-to-end solution for control/access management, remote
monitoring, turnkey cashless payment processing and data reporting for
distributed assets such as vending machines, office equipment and laundry
equipment. This solution consists of a device (thin-client hardware or firmware)
that controls the distributed asset, a connectivity medium, and our network that
includes server-based software applications for remote monitoring and cashless
transaction processing and a central database for web-based reporting of sales,
inventory, machine diagnostic and other supply chain data.
THE CLIENT DEVICES
As part of its end-to-end solution, the Company offers its customers several
different client devices. These client devices range from software, or dynamic
link libraries ("DLLs"), to hardware devices consisting of control boards,
magnetic strip card readers, barcode and RFID readers, LCD screen and/or receipt
printers. The client device can be embedded inside the host equipment, such as
software residing in the central processing unit of a Kiosk; it can be
integrated as part of the host equipment, such as our e-Port(TM) hardware that
can be attached to the door of a vending machine; or it can be a peripheral,
stand-alone terminal, such as our TransAct(TM) terminal for Business Express(R).
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e-Port(TM) is the Company's core client device, which is currently being
utilized in vending and commercial laundry applications. Our e-Port(TM) product
facilitates cashless payments by capturing the payment media and transmitting
the information to our network for authorization with the payment authority
(e.g. credit card processors). Additional capabilities of our e-Port(TM) consist
of control/access management by authorized users, collection of audit
information (e.g. product or service sold, date and time of sale and sales
amount), diagnostic information of the host equipment, and transmission of this
data back to our network for web-based reporting.
TransAct(TM) is the Company's original cashless, transaction-enabling device
developed for self-service business center equipment such as PC's, fax machines
and copiers. Similar to e-Port(TM), the TransAct(TM) capabilities include
control/access management, collection of sales data (e.g. date and time of sale,
sales amount and product or service purchased), and transmission back to our
network for reporting to customers.
THE NETWORK
USALive(TM) is the network component of our end-to-end solution to which the
Company's devices transmit their cashless payment information for processing as
well as the valuable sales and diagnostic data for storage and reporting to our
customers. Also, the network, through server-based software applications,
provides remote management information and enables control of the networked
device's functionality.
USALive(TM) is the enabler of turnkey cashless payment processing for our
customers. The network is certified with several cashless payment authorities,
such as credit card processors and property management systems, facilitating the
authorization and settlement of credit cards, debit cards, hotel room keys and
student ids. The network can also act as its own payment processing authority
for other cashless payment media, such as on-line stored value or employee
payroll deduction. The network authorizes transactions, occurring at the host
equipment, with the appropriate payment authority and sends approval or decline
responses back to the networked device to allow or terminate the transaction for
the purchase of the product or service. The network consolidates successfully
approved transactions from multiple devices, batches, and then transmits these
batched transactions to the payment authority for settlement. By bundling and
batching transactions from multiple networked devices and connecting to the
appropriate payment authorities through one central dedicated processing medium,
it reduces the fees charged by the payment authority.
USALive On-line(TM) is the web based reporting system that customers use to gain
access to the valuable business information collected from the networked
devices. The website's functionality includes: management of the distributed
assets deployed in the field, such as new activations and location
redeployments; user-defined reporting for miscellaneous payment types (e.g.
cash, credit, etc), date and time product sold, and sales amount; and detailed
bank account deposit information, by device, for easier bank reconciliation.
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THE CONNECTIVITY MEDIUMS
Connectivity of our client devices (e-Port(TM) and TransAct(TM)) to the
USALive(TM) network is another component of the Company's end-to-end solution.
The reliable, cost effective transfer of customer's business critical data is
paramount to the services we deliver. Due to the importance of connectivity, and
realizing that every customer's connectivity needs may be different (e.g.
access, or lack thereof, to phone lines, local area networks ("LAN"s), wide area
networks ("WAN"s) and wireless data networks), the Company offers multiple
connectivity solutions - phone line, Ethernet and wireless.
Increasing wireless connectivity options, coverage and reliability and
decreasing costs, over the past few years have allowed us to service a greater
number of customer locations, since many of our customer's host equipment,
particularly within the vending industry, do not have access to any other
communication medium. Additionally, we make it easy for our customers to deploy
wireless solutions by being a single point of contact. By aggregating different
wireless networks, we ensure our customers have reliable, cost effective
nationwide coverage without the hassles of certification and administration of
multiple wireless suppliers.
ENERGY MANAGEMENT PRODUCTS
With the acquisition of Bayview in July 2003, our Company offers energy
conservation products ("Miser"s) that reduce the power consumption of various
types of equipment, such as vending machines, glass front coolers and other
"always-on" appliances by allowing the equipment to selectively operate in a
power saving mode when the full power mode is not necessary. Each of the
Company's Miser products utilizes occupancy sensing technology to determine when
the surrounding area is vacant or occupied. The Miser then utilizes occupancy
data, room and product temperatures, and an energy saving algorithm to
selectively control certain high-energy components (e.g. compressor and fan) to
realize power savings over the long-term use of the equipment.
Customers of our VendingMiser(TM) product benefit from reduced energy
consumption and costs of up to 46% per machine, depending on regional energy
costs, machine type, and utilization of the machine. Our Misers also reduce the
overall stress loads on the equipment, helping to reduce associated maintenance
costs. In addition, customers could play an important role in helping to improve
our environment, since our Miser products have been demonstrated to reduce the
emission of Greenhouse gases of up to 2200 lbs. of CO2 and 3600g of NO, per
machine per year. The foregoing discussion of greenhouse gases assumes that the
energy savings, resulting from our product, resulted in a corresponding
reduction of energy produced by the energy production plant.
THE OPPORTUNITY
Everyday devices from vending machines and logistics equipment to steam valves,
refrigerators, security systems, and countless other devices can be better
managed by embedding thin-client computing technology with network connectivity
into each unit. Using wired and/or wireless networks and centralized,
server-based software applications, managers can remotely monitor, control, and
optimize a network of devices regardless of where they are located, resulting in
a host of benefits including lower maintenance costs, improved inventory and
transaction management, and increased operating efficiency.
5
This market opportunity is known by several different names, including
Machine-to-Machine ("M2M") networking, Device Relationship Management ("DRM"),
the Pervasive Internet and Device Networking. This industry is the convergence
of computer-enabled devices and embedded systems, the Internet or other
networking mediums, and centralized enterprise data-management tools. By
connecting stand-alone devices into large-scale networks, new opportunities
emerge between brand marketers, service providers, and their customers.
Networked devices enable remote monitoring, cashless transactions, sales
analysis, and optimized machine maintenance - all yielding higher return on
investment for operators while increasing consumer satisfaction with improved
and expanded services.
Brand marketers will be able to provide their products and services to customers
wherever and whenever the need arises. They will no longer be limited to
existing distribution channels and outlets. Just as beverage vending machines
bring bottlers' products beyond the supermarket to the location where and when
the customer wants them, a vast range of products and branding opportunities can
be made available to customers at the point-of-need. In laundry, makers of
detergent and fabric softener can have their products injected directly into a
consumer's laundry, again putting their products at the point-of-need.
The market for networked device solutions is projected to be large and growing
rapidly and includes a wide variety of segments such as the security and alarm,
automated meter reading, fleet and asset management, and consumer telemetry
markets. Networked devices will include personal devices (e.g. cell phones,
PDAs), vehicles, containers, supply chain assets, medical devices, HVAC units,
industrial machinery, home appliances, energy, accelerometers, pressure gauges,
flow control indicators, biosensors, and countless other applications. According
to an article, "Pervasive Internet", in M2M Magazine (Fall 2003), a minimum of
1.5 billion devices will be connected to the Internet worldwide by 2010. This
represents a $700 billion total opportunity including device enabling,
monitoring, and providing value-added services made available by the M2M
network, according to M2M Magazine.
We believe that an opportunity exists to combine our technology with world-class
partners in order to deliver a best-in-class solution and emerge as a leader in
the Device Networking industry. Our Company has begun addressing this
opportunity by working in several initial verticals, which include vending,
commercial laundry, self-service business centers and self-service kiosks. These
services share several key attributes, specifically, they are all self-service,
cash-based businesses that are distributed across broad geographic areas. We
address the extremely broad range of Device Networking opportunities by
licensing our technologies to equipment makers throughout a variety of market
segments. Equipment makers will be able to merge our technology with their
in-depth market expertise.
THE INDUSTRY
Our current customers are primarily in the vending, commercial laundry, business
center and kiosk industry sectors. While these industry sectors represent only a
small fraction of the total Device Networking market, these are the areas where
we have gained the most traction. In addition to being our primary markets,
these sectors serve as a compelling proof-of-concept for other Device Networking
industry applications.
VENDING
Annual worldwide sales in the vending industry sector are estimated to be
approximately $143.5 billion, according to Vending Times Census of the Industry
2002. According to this Census, there are an estimated 8 million vending
locations in the United States, and 30 million locations worldwide. The market
segment that can be addressed by our end-to-end solution consists primarily of
vended products retailing for $1 or greater, which represents a Company
estimated vended volume of approximately $28 billion. Per census statistics, the
overall market growth is 5% to 6% annually, while the addressable market segment
for our end-to-end solution is growing more rapidly at 9% annually. Our
VendingMiser(TM) energy conservation product can serve the entire vending
market.
6
COMMERCIAL LAUNDRY
The domestic commercial laundry industry is estimated to be $5 billion in annual
sales and 3.5 million commercial laundry machines in operation, according to
Coin Laundry Association, October 2000 edition. The average annual growth rate
for the commercial laundry sector is estimated to be between 10% and 12%. The
Company believes the inline sale of additives (i.e. push-button selections for
detergent and softener) may lead to a significant increase in this figure due to
larger net margins over traditional industry standards. The addressable market
is primarily the seven largest laundry operators, as well as several other small
operators. These operators own and manage the equipment that is installed in
multi-housing and college and university locations. The addressable market
excludes those who own single laundromats.
BUSINESS CENTERS
There are currently 52,000 hotels in the United States and 300,000 worldwide,
per American Hotel & Lodging Association's website, www.ahma.com. There is
demand for business center availability in hotels, with ever-greater percentages
of travelers needing and expecting use of computers, printers, fax machines,
copiers, and other business services. We believe that there are 5,900 hotels in
the primary addressable market - business oriented hotels with over 150 rooms -
and 13,900 in the secondary market, hotels with 75 to 150 rooms. The growth rate
for the overall market is 5% annually, with the addressable market gaining 8%
annually.
KIOSK
According to a report by Frost and Sullivan Consulting, Kiosks represent a $500
million market. Kiosks are becoming increasingly popular as self-service
"specialty" shops within larger retail environments. Value-added services, such
as photo enlargement and custom imaging are a prominent example, located within
many major retailers. Since pricing on these products is generally higher than
$1 or $2, cashless payment options are essential.
OUR SUITE OF PRODUCTS AND SERVICES
INTELLIGENT VENDING(TM)
Developed for the vending industry, Intelligent Vending(TM) is our end-to-end
vending solution. This system bundles e-Port(TM), USALive(TM), and its web-based
remote monitoring, management, reporting and turnkey payment processing. Our
latest improvement to Intelligent Vending(TM) is the introduction of our
e-Port(TM) G-5. This device is smaller due to its one-piece design and costs
less to manufacture, as compared to our e-Port(TM) G-4 device. These features
make it more affordable and easier to install, improving our customers' rate of
return.
7
Vending operators purchasing our Intelligent Vending(TM) products and services
will have the capability: to conduct cashless transactions via credit cards,
debit cards and other payment mediums such as employee/student ids and hotel
room keys; to offer improved and expanded customer services by utilizing
'real-time', web-based reporting to keep machine inventory at a desirable level
and consumer access to our 1-800 help-desk center for customer purchasing
inquiries, both providing the end-user a more consistent user experience; to
reduce operational costs through utilization of our remote monitoring
technology, thereby maximizing the scheduling of service visits and limiting
'out-of-stock' machines; and to reduce theft and vandalism by providing 100%
accountability of all sales transactions and reducing the cash reserves inside
the machine.
eSUDS(TM)
eSuds(TM) is our end-to-end solution developed for the commercial laundry
industry. The eSuds(TM) system bundles e-Port(TM) and USALive(TM) to offer a
cash-free payment option, web-based remote monitoring and management, an e-mail
alert system to notify users regarding machine availability, cycle completion,
and other events. The Company is also in the process of developing an injectable
detergent and fabric softener system which will allow users to inject and pay
for detergent and softener directly into their wash cycle, as well as allow
laundry operators to benefit from additional revenue through the sale of
detergent automatically added to the wash cycle. eSuds(TM) also supports a
variety of value-added services such as custom advertising or subscription-based
payments.
Laundry operators purchasing our eSuds(TM) system will have the capability: to
conduct cashless transactions via credit cards, debit cards and other payment
mediums such as student ids; to reduce operational costs through utilization of
our remote monitoring technology, thereby maximizing the scheduling of service
visits and increasing machine up-time. The system can also increase customer
satisfaction through improved maintenance, higher machine availability,
specialized services (i.e. email alerts to indicate that laundry cycle is
finished) and value-added services such as pay-injection laundry detergent and
fabric softener, and the convenience of non-cash transactions. Installations
have been completed at Carnegie Mellon University, Cedarville College, and
Bluffton College. We are working with distributors to install eSuds(TM) at other
colleges and universities based on the positive results of these installations.
TRANSACT(TM) AND BUSINESS EXPRESS(R)
TransAct(TM), our original payment technology system developed for self-service
business center devices, such as PCs, fax machines, and copiers, is a cashless
transaction-enabling terminal that permits customers to use office equipment
quickly and simply with the swipe of a major credit card. The TransAct(TM)
device can be sold as a stand-alone unit for customers wishing to integrate it
with their own office equipment.
Business Express(R) is a bundled solution comprised of the TransAct(TM) payment
terminal and a suite of office equipment (i.e. PC, fax and copier). Business
Express(R) enables hoteliers and others to offer unmanned business services
24/7/365. In addition, the Company offers the Public PC(TM), the Public Fax(TM)
and the Public Copier(TM) to customers wishing to purchase a specific
self-service product versus a complete bundled Business Center(R). The Company
also provides additional value-added service and revenue generating
opportunities with BEXPrint(TM), our proprietary technology that allows users,
without access to a printer, to send a document to a secure web-site for
storage, and then password retrieval of the document for printing at our
Business Center locations, and our Kinko's relationship, which gives our
Business Center users access to the nearest, convenient Kinko's center for their
more advance business center needs.
8
Although larger hotels are expected to provide business centers to its guests,
operation of the center can be costly. In addition to the cost of operating a
supervised business center, operating hours usually are limited due to staff
availability. Business Express(R) provides a cost-effective solution.
KIOSK
We provide an end-to-end solution that utilizes e-Port(TM) and USALive(TM) to
offer a cash-free payment option and web-based remote monitoring and management
for all kiosk types. Kiosks permit a host of new services to become available at
the point-of-demand, such as Sony's self-service, PictureStation kiosks, where
consumers can produce prints from their own digital media. Our solution also
enables Kiosks to sell a variety of more expensive items.
Sony's PictureStation kiosks, which use our e-Port(TM) software solution, have
been installed in approximately 60 locations across the US.
ENERGY MANAGEMENT PRODUCTS
The Miser family of energy-control devices, include:
VendingMiser(TM) - installs in a cold drink vending machine and can reduce the
power consumption of the vending machine by an average of 50%.
CoolerMiser(TM) - reduces the energy used by sliding glass or pull open
glass-front coolers that contain non-perishable goods.
SnackMiser(TM) - reduces the amount of electricity used by non-refrigerated
snack vending machines.
PlugMiser(TM) - reduces the amount of electricity used by all types of plug
loads including those found in personal or modular offices (printers, personal
heaters, and radios), video arcade games, and more.
The Company has completed the development of the Internal VendingMiser(TM) and
Internal CoolerMiser(TM). The second generation of these devices is installed
directly inside the machine and has the capability to control the cooling system
and the advertising lights separately.
SALES AND MARKETING
The Company's sales strategy includes both direct sales and channel development,
depending on the particular dynamics of each of our markets. Our marketing
strategy is diversified and includes media relations, direct mail, conferences
and client referrals. As of June 30, 2004, the Company was marketing and selling
its products through its full time staff consisting of thirteen people.
DIRECT SALES
We sell directly to the major operators in each of our target markets. Each of
our target markets is dominated by a handful of large companies, and these
companies comprise our primary customer base. In the vending sector,
approximately ten large operators dominate the sector; in the commercial laundry
sector, seven operators own the majority of the market. We also work directly
with hoteliers for our TransAct(TM) and Business Express(R) products.
9
Within the vending industry, our customers include 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. Three of the premier national independent vending operators, the
Compass Group (Canteen, Flik, Eurest, Restaurant Associates and other
affiliates), ARAMARK and Sodexho, have already installed approximately 140
e-Port(TM) devices.
CHANNEL SALES
We currently engage in channel sales for our TransAct(TM) and Business
Express(R) products. We have established traction by working with audio-visual
companies that service major hotels.
MARKETING
Our marketing strategy consists of building our brand by creating a company and
product presence at industry conferences and events, in order to raise
visibility within our industry, create opportunity to conduct product
demonstrations and consult with potential customers one-on-one; sponsoring of
education workshops with trade associations such as National Automated
Merchandiser Association (NAMA), to educate the industry on the importance and
benefits of our solution and establish our position as the industry leader;
develop several one-sheet case studies to demonstrate real-life success stories
to dramatically illustrate the value of our products; the use of direct mail
campaigns; advertising in vertically-oriented trade publications such as Vending
Times, Automatic Merchandiser and Energy User News; and cultivate a network of
State governments and utility companies to provide incentives or underwriting
for our energy management products.
STRATEGIC RELATIONSHIPS
IBM CORPORATION
We are an official "preferred" hardware, software, and services solution for IBM
Corporation. Together with IBM, we market and sell combined information
technology solutions to customers in the intelligent vending, retail point of
sale, and networked home applications markets. The proposed combined product
offerings include the e-Port(TM) terminal and related network, and IBM's
products and services, including but not limited to systems integration and
logistics support and delivery services.
ZiLOG, INC.
In October 2002, we signed a strategic alliance with ZiLOG, a leader in the
8-bit microprocessor market to co-develop an e-Port(TM) enabled chip, which the
Company currently uses in its eSuds(TM) and Intelligent Vending(TM) solutions,
and to co-market a joint product that combines ZiLOG's Web-enabled
microprocessor, the eZ80(R) Webserver, with the benefits of our wireless device
networking, cashless transactions processing, and remote control and monitoring
capabilities.
During August 2004, the Company and ZiLOG(R) announced the completion of the
combination of ZiLOG's ezAcclaim!(TM) Family of Flash microcontrollers and
e-Port(TM), enabling businesses to install networking capability into every day
commercial applications at an affordable price. Our new eSuds(TM) solution
incorporates this new microcontroller. As of September 2004, the Company has not
yet earned revenues from this agreement.
10
MARS ELECTRONICS INC. (MEI)
In March 2002, we signed an agreement with MEI, a world leader in the
manufacture of electronic dollar bill and coin mechanisms found in vending
machines, coin telephones, and other equipment, to jointly develop a cashless
payment system.
In September 2004, MEI and the Company signed a technology licensing and sales
agreement to bring a turnkey cash and credit card payment system to the vending
market. Under the agreement, MEI licensed our intellectual property so operators
can connect to USALive(TM), our network for services and credit card transaction
capability. As of September 2004, the Company has not yet earned revenues from
these agreements.
UNILEVER
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 eSuds(TM) 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 eSuds(TM) System and the Company will also receive fees from
Unilever based on the number of injections of Unilever Products through the USA
eSuds(TM) System. As of September 2004, the Company has not yet earned revenues
from product sales under this agreement.
AT&T WIRELESS
In July 2004, we signed an agreement to use AT&T Wireless' digital wireless wide
area network for transport of data, including credit card transactions and
inventory management data. AT&T Wireless is a provider of advanced wireless
voice and data services for consumers and businesses, operating one of the
largest digital wireless networks in North America and the fastest nationwide
wireless data network in the United States.
MANUFACTURING
The Company utilizes independent third party companies for the manufacturing of
its products. The Company purchases other components of its business center
(computers, printers, fax and copy machines) through various manufacturers and
resellers. Our manufacturing process mainly consists of quality assurance of
materials and testing of finished goods received from our contract
manufacturers. We have not entered into a long-term contract with our contract
manufacturers, nor have we agreed to commit to purchase certain quantities of
materials or finished goods beyond those submitted under routine purchase
orders, typically covering short-term forecasts.
11
COMPETITION
Although the industries we operate in are established, the technology we provide
is new and emerging. As such, we expect increasing competition in the future.
While there are a number of companies providing certain limited aspects of our
offering (i.e. raw network connectivity for client devices), few companies offer
an end-to-end solution similar to our suite of products and services. To be
successful, the Company must offer the highest quality products and services,
and maintain the following advantages over its competitors:
SUPERIOR PRODUCT OFFERING
While some companies offer either reporting systems or cashless transaction
processing capability, we believe we are the only provider offering both
capabilities. We have developed an efficient solution for facilitating cashless
payments for low cost vended goods and services and for transporting inventory
and machine data, both through wire and wireless means. Additionally, we believe
no reporting system provides the depth of functionality that our system
provides. Our system goes beyond simple data reporting to analyze, organize, and
streamline that data into actionable information.
RELATIONSHIPS WITH BEST-IN-CLASS STRATEGIC PARTNERS
We have established partnerships with leading providers in our industry such as
IBM, Mars Electronics, and ZiLOG. Our partnerships are designed to extend our
reach and enable us to service the largest industry segments.
MULTI-VERTICAL EXPERTISE
We believe that none of our competitors serve the broad range of industry
verticals that we do. As such, we are able to leverage insights and best
practices from one industry sector for use in a new sector.
We are aware of three competitors who offer unattended business centers in the
hospitality industry in competition with Business Express(TM). We are aware of
one competitor for our e-Port(TM) control system, which is being used in the
beverage vending industry. We believe that there are very few installations of
this product at the present time.
In addition, the businesses which have developed unattended, credit card
activated control systems currently in use in connection with gasoline
dispensing, public telephones, prepaid telephone cards, ticket dispensing
machines, vending machines, or facsimile machines, are capable of developing
products or utilizing their existing products in direct competition with 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.
12
CUSTOMER CONCENTRATIONS
Approximately 39% and 57% of the Company's accounts receivable at June 30, 2004
and 2003, respectively, were concentrated with two customers. Approximately 13%
and 35% of the Company's revenues for the years ended June 30, 2004 and 2003,
respectively, were concentrated with one and two customers, respectively.
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, e-Port, Dial-A-Vend,
Dial-A-Snack, and Dial-A-Vend.com. The following trademarks are pending federal
registration: USALive and e-Port The Next Generation in Vending. 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
aspects of the Company's technology.
Through July 28, 2004, 49 United States patents and 2 Canadian patents have been
issued to the Company (including 4 patents acquired in July 2003 from Bayview).
Thirty-four patents are pending (including 2 Canadian and 5 acquired from
Bayview) and 3 patents have received notices of allowance as of July 28, 2004.
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";
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";
13
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"
(Stitch);
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" (Stitch);
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";
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";
14
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";
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";
15
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 U.S. Patent No. D480,948 entitled "Mounting bracket for mounting a cashless
payment terminal to a vending machine";
o U.S. Patent No. 6,643,623 entitled "A method of transacting an electronic
mail, an electronic commerce, and an electronic business transaction by an
electronic commerce terminal using a gas pump";
o U.S. Patent No. 6,684,197 entitled "Method of revaluing a private label card
using an electronic commerce terminal (as amended)";
o U.S. Patent No. 6,763,336 entitled "Method of transacting an e-mail, an
e-commerce, and an e-business transaction by an electronic commerce terminal
using a wirelessly networked plurality of portable devices";
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(TM) control system targeted to the
vending industry. The patent expires in July 2021.
RESEARCH AND DEVELOPMENT
Research and development expenses, which are included in general and
administrative and compensation expense in the Consolidated Statements of
Operations, were $688,000 and $1,505,000 for the years ended June 30, 2004 and
2003, respectively.
EMPLOYEES
On June 30, 2004, the Company had 46 employees, all of whom were full-time.
ITEM 2. DESCRIPTION OF PROPERTY
In March 2003, the Company entered into a lease for 12,864 square feet of space
located in Malvern, Pennsylvania for its principal executive office and used for
general administrative functions, sales activities, and product development. The
lease term extends through December 31, 2008 and 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.
The Company also leases 9,084 square feet of space, located in Malvern,
Pennsylvania, on a month-to-month basis for a monthly payment of approximately
$8,000. During prior years, the facility was solely used to warehouse product.
All product warehousing, shipping and customer support was transferred to this
location from the executive office location during the first quarter of fiscal
year 2005.
16
In connection with the acquisition of the energy conservation product line in
July 2003 from Bayview Technology Group, LLC, the Company assumed leases for
6,384 square feet of space located in Denver, CO used for administrative
functions, sales activities and product warehousing associated with the our
Miser products. The lease terms extend through June 30, 2005 and provide for
escalating rent payments currently at $8,200 per month. The lease provides for
additional rent for a prorated share of operating costs for the entire facility.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company 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. These quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent actual
transactions.
Year ended June 30, 2003 High Low
- ------------------------ ---- ---
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
Year ended June 30, 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
Fourth Quarter (through June 30, 2004) $ 0.34 $ 0.17
On June 30, 2004 there were 1,510 record holders of the Common Stock and 544
record holders of the Preferred Stock.
17
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 Common Stock or Preferred Stock.
No dividend may be paid on the Common Stock until all accumulated and unpaid
dividends on the Preferred Stock have been paid. As of June 30, 2004, such
accumulated unpaid dividends amounted to $6,677,180.
As of June 30, 2004, equity securities authorized for issuance by the Registrant
with respect to compensation plans were as follows:
Number of
securities Weighted Number of
to be issued average securities
upon exercises exercise price remaining
of outstanding of outstanding available
options and options and for future
Plan category warrants warrants issuance
- ---------------- -------- -------- --------
Equity compensation
plans approved by
security holders None Not applicable None
Equity compensation
plans not approved
by security holders 1,897,472(a) $0.25 14,409,273(b)
a) Represents stock options outstanding as of June 30, 2004 for the purchase
of shares of Common Stock of the Company expiring at various times from
February 2006 through May 2007. These options were granted to employees and
directors of the Company, former option holders of Stitch Networks
Corporation and consultants to the Company. Exercise prices for all the
options outstanding were at prices that were either equal to or greater
than the market price of the Company's Common Stock on the dates the
options were granted.
b) Represents 14,000,000 shares of Common Stock issuable to the Company's
Chief Executive Officer under the terms of his employment agreement plus
409,273 shares of Common Stock issuable under the Company's 2004-A Stock
Compensation Plan.
18
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, eliminated the seven
percent (non-dilutive) right to receive Common Stock upon a "USA Transaction",
and granted the CEO an aggregate of 14,000,000 shares of Common Stock 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. 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.
The Company's Board of Directors established and authorized the 2004-A Stock
Compensation Plan in April 2004 for use in compensating employees, directors and
consultants through the issuance of shares of Common Stock of the Company. There
were 500,000 shares authorized under the Plan. The underlying shares for the
Plan have been registered with the Securities and Exchange Commission as an
employee benefit plan under Form S-8. As of June 30, 2004 there were 409,273
shares available for future issuance under the plan.
On April 28, 2004 the Company issued its Chief Financial Officer, 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 an executive officer and did not
involve any general solicitation or advertising.
As of June 30, 2004, shares of Common Stock reserved for future issuance were as
follows:
1,897,472 shares issuable upon the exercise of stock options at exercise
prices ranging from $.165 to $2.00 per share
33,457,191 shares issuable upon the exercise of common stock warrants at
exercise prices ranging from $.07 to $1.25 per share
522,742 shares issuable upon the conversion of outstanding Preferred Stock
667,718 shares issuable upon the conversion of unpaid cumulative preferred
dividends
47,351,320 shares issuable upon the conversion of Senior Notes having an
aggregate face value of $9,695,840
RECENT SALES OF UNREGISTERED SECURITIES
In February 2004, the Company initiated a private placement offering (the
"2004-A" offering), consisting of up to 35,000,000 shares of restricted Common
Stock at $0.15 per share to accredited investors. The securities were offered
and sold pursuant to the exemption from registration set forth in Section 4(2)
of the Act and Rule 506 promulgated thereunder. 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. The Company agreed at
its cost and expense to use its best efforts to register the Common Stock for
resale by the holder under the Act. During the quarter ended June 30, 2004, the
Company sold 27,740,833 shares to 34 accredited investors for gross proceeds of
$4,161,125. These shares were registered with the Securities and Exchange
Commission for resale under Form SB-2 that became effective August 11, 2004.
19
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 the Company. There was no general solicitation
or advertising involved.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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. License fees for access to the Company's
devices and network services are recognized on a monthly basis. Product revenues
are recognized for the sale of products from Company owned vending machines when
there is purchase and acceptance by the vending customer. The Company estimates
an allowance for product returns at the date of sale.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs pursuant to Statement of
Financial Accounting Standards 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.
20
Software development costs related to the development of the multi-media e-Port
drink product and related internal network were capitalized and have been
amortized over a useful life of two-years that ended during the year ended June
30, 2004. Amortization expense, reflected in cost of sales, was approximately
$999,000 and $1,331,000 during the years ended June 30, 2004 and 2003,
respectively.
IMPAIRMENT OF LONG LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-lived Assets" ("FAS 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. If the carrying amount of an asset or group of assets exceeds its
net realizable value, the asset will be written down to its fair value. In the
period when the plan of sale criteria of FAS 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.
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 connection with the Company's
program with Kodak to sell disposable cameras and film pursuant to the Kodak
Vending Placement Agreement. 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.
Effective December 31, 2003, the Kodak Vending Placement Agreement was
terminated. As a result, the carrying value of the vending machines were further
impaired and a charge of approximately $367,000 was recorded as a component of
the gain on contract settlement in the June 30, 2004 Consolidated Statement of
Operations to reflect these assets at their realizable value. The remaining
value of these vending machines is reported as assets held for sale in the
Consolidated Balance Sheet as of June 30, 2004.
GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of cost over fair value of the net assets
purchased in acquisitions. The Company accounts for goodwill in accordance with
Statement of Financial Accounting Standards No. 142, "Goodwill and other
Intangible Assets" ("FAS 142"). Under FAS 142, goodwill is not amortized to
earnings, but instead is subject to periodic testing for impairment. The Company
tests goodwill for impairment using a two-step process. The first step screens
for potential impairment, while the second step measures the amount of
impairment. The Company uses a discounted cash flow analysis to complete the
first step in this process. Testing for impairment is to be done at least
annually and at other times if events or circumstances arise that indicate that
impairment may have occurred. The Company has selected April 1 as its annual
test date. The Company has concluded there was no impairment of goodwill as a
result of its testing on July 1, 2002 (the transitional test date upon adopting
FAS 142), April 1, 2003 and April 1, 2004.
21
Intangible assets include patents, trademarks and non-compete arrangements
purchased in acquisitions. Amortization expense related to these intangible
assets was $1,208,668 and $292,000 during the years ended June 30, 2004 and
2003, respectively.
INVESTMENTS
The Company's accounts for investments in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("FAS 115"). 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 as a
separate component of stockholders' equity in other comprehensive income (loss).
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 FAS 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' 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. During fiscal year 2004,
the Company sold 1,669,091 of its Jubilee shares for net proceeds of $1,471,140
and realized a gain of $603,480 from these sales. An unrealized gain of $32,249
on the remaining shares held by the Company is reflected in shareholders' equity
as accumulated other comprehensive income at June 30, 2004.
22
FORWARD LOOKING STATEMENTS
This 10-KSB 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, (viii) the ability of the Company to satisfy its trade obligations
included in accounts payable and accrued liabilities, and (ix) the ability of
the Company to predict or estimate its future quarterly or annual revenues given
the developing and unpredictable market for its products and the lack of
established revenues. 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.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 2004
Revenues for the fiscal year ended June 30, 2004 were $5,632,815, an increase of
$2,779,747 or 97% from the fiscal year ended June 30, 2003. This increase was
primarily attributed to sales of the Company's energy management equipment
during the fiscal year ended June 30, 2004. Such revenues did not exist in
fiscal year ended June 30, 2003 since the acquisition of Bayview occurred in
July 2003. The increase was also due to increases in the sale of our networked
devices and related services. Revenues are discussed in more detail as follows:
Equipment sales: Revenues from equipment sales increased to $4,349,566 from
$1,034,427 in the prior fiscal year, an increase of $3,315,139 or 320%. This
increase is mainly due to sales of approximately $3,025,000 of the Company's
energy management equipment for the fiscal year ended June 30, 2004. As noted
above, such revenues did not exist in the prior fiscal year. In addition, sales
of the Company's cashless technology equipment, which includes e-Port, e-Suds
and Kiosk systems, increased to $736,000, approximately $349,000 or 90% over the
prior fiscal year. The increases in sales were offset by a decrease in Business
Center equipment sales of approximately $59,000.
23
License and transaction fees: Revenues from license and transaction fees
decreased $395,922 or 29% from $1,373,573 to $977,651 for the fiscal years ended
June 30, 2003 and 2004, respectively. This decrease was primarily due to a
decrease in fees earned from the Kodak Vending Placement Agreement of
approximately $387,000, which resulted from the termination of the contract on
December 31, 2003.
Product sales and other: Revenues from product sales and other decreased to
$305,598 from $445,068, a decrease of $139,470 or 31% from the prior fiscal
year. This decrease was due to a decrease in camera and film sales from Company
owned vending machines of approximately $340,000 as a result of the termination
of the Kodak Vending Placement Agreement. This decrease was offset by $200,000
of revenue relating to the Strategic Alliance Agreement executed in October 2003
between the Company and Conopco, Inc dba Unilever Home & Personal Care North
America.
Cost of sales consisted of equipment, product and labor costs of approximately
$2,503,000 and $1,085,000 for the fiscal years ended June 31, 2004 and 2003,
respectively, an increase of $1,418,000; software development amortization of
approximately $999,000 and $1,331,000 for the fiscal years ended June 30, 2004
and 2003, respectively, a decrease of $332,000; and network and transaction
related costs of $828,000 and $555,000 for the years ended June 30, 2004 and
2003, respectively, an increase of $273,000. The total increase of $1,358,249 or
46% in cost of sales from $2,971,443 to $4,329,692 for the years ended June 30,
2003 and 2004, respectively, was principally attributable to the increase in
equipment sales.
Gross profit for the fiscal year ended June 30, 2004 was $1,303,123, compared to
a gross loss of $118,375 for fiscal year ended June 30, 2003. The increase of
$1,421,498 was due to increases in hardware sales, particularly the addition of
energy management equipment sales, which yield a higher profit margin and were
not present in the prior fiscal year, as well as a decrease of approximately
$332,000 related to the amortization of software development costs, which were
fully amortized as of March 31, 2004.
Total operating expenses for the fiscal year ended June 30, 2004 was
$18,770,423, an increase of $3,829,159 or 26% over 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 increase are explained in further detail, below:
General and administrative expenses decreased from $7,194,684 for the fiscal
year ended June 30, 2003 to $6,747,824 for the fiscal year ended June 30, 2004,
a decrease of $446,860 or 6%. The decrease is due to decreases of $1,717,000 of
professional fees, primarily related to business consulting, promotion and
public relations and decreases of $134,000 in IT consulting fees, offset by
increases in overall general and administrative expenses of approximately
$1,184,000 related to the acquired energy management operations, as such
expenses did not exist in the prior fiscal year, an increase of $118,000 in
expenses related to the recruitment of executive personnel, and an increase of
$164,000 in bad debt expense related to an increase in the allowance for
uncollectible accounts as a result of the increase in sales and accounts
receivable.
24
Compensation expense increased to $10,071,354 for the fiscal year ended June 30,
2004, a $5,098,144 or 103% increase over the prior fiscal year. This increase is
primarily due to the one-time issuance of 10,500,000 shares of Common Stock,
valued at $4,620,000, to the Company's Chief Executive Officer in connection
with the amendment of his employment agreement. Additionally, approximately
$845,000 and $376,000 of this increase relates to additional compensation,
including salaries, employee benefits and sales commissions, from the Bayview
acquisition in July 2003 and existing operations, respectively. These increases
were offset by a $742,000 reduction in compensation expense due to a reduction
in bonuses awarded during the fiscal year ended June 30, 2004 as compared to the
prior year.
Depreciation and amortization expense for the fiscal year ended June 30, 2004
was $1,632,330, compared to $1,251,716 for the prior fiscal year, a $380,614 or
30% increase. This increase was attributable to amortization of intangible
assets of $917,000 and depreciation of property and equipment of $122,000
acquired from Bayview in July 2003, offset by a decrease in depreciation of
approximately $337,000 related to existing assets that have reached the end of
their estimated useful life. Additionally there was an impairment charge of
$321,476 recorded on a group of vending machines during fiscal year 2003.
The Company incurred charges during the fiscal year ended June 30, 2004 and 2003
relating to the modification of debt terms for certain of the Senior Notes in
the amount of $318,915 and $1,521,654, respectively. This charge reflects the
write-off of the unamortized debt discount remaining for Senior Notes scheduled
to mature in December 2003 and December 2004, for which the conversion and
maturity terms were modified. The Company offered these note modifications to
manage short-term cash flows, which resulted in a non-cash charge.
During the fiscal year ended June 30, 2004, the Company sold 1,669,091 shares of
its investment in the Jubilee Investment Trust for net proceeds of $1,471,140,
resulting in a gain of $603,480. During the fiscal year ended June 30, 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 on the investment during fiscal year 2003.
During the fiscal year ended June 30, 2004, a gain of $429,204 was recorded
relating to the termination of 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 $367,000 and a net write-off of amounts due to and
from Kodak of $3,000.
Total interest expense increased from $4,978,600 to $5,032,351 for the fiscal
year ended June 30, 2003 and 2004, respectively, an increase of $53,751 or 1%.
Although the average principal balances were lower on the Company's 12% Senior
Notes during fiscal year ended June 30, 2004 versus 2003, as the result of
conversions of the Senior Notes into shares of the Company's Common Stock by
Senior Note Holders, interest expense increased due to the accelerated
amortization of debt discount charged to interest expense at the time of the
conversion of the Senior Notes.
25
The fiscal year ended June 30, 2004 resulted in a net loss of $21,426,178
(approximately $10.9 million of non-cash charges) compared to a net loss of
$21,965,499 (approximately $12.6 million of non-cash charges) for the prior
fiscal year.
FISCAL YEAR ENDED JUNE 30, 2003
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 to 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. Revenues are discussed
in more detail as follows:
Equipment sales: Revenues from equipment sales increased to $1,034,427 from
$795,938 in the prior fiscal year, an increase of $238,489 or 30%. This increase
was directly due to the increase in sales of the Company's e-Port equipment.
License and transaction fees: Revenues from license and transaction fees
increased $594,667 or 76% from $778,906 to $1,373,573 for the fiscal year ended
June 30, 2002 and 2003, respectively. This increase was due to the inclusion of
a full year of service fees earned on Company owned vending machines during
fiscal year ended June 30, 2003, as the acquisition of Stitch occurred in May
2002, the fourth quarter of fiscal year ended June 30, 2002.
Product sales and other: Revenues from product sales and other increased to
$445,068 from $107,857, an increase of $337,211 or 313% from the prior fiscal
year. This increase was due to the inclusion of a full year sales of camera and
film from Company owned vending machines during fiscal year ended June 30, 2003,
as the acquisition of Stitch occurred in May 2002, the fourth quarter of fiscal
year ended June 30, 2002.
Cost of sales consisted of equipment, product and labor costs of approximately
$1,085,000 and $695,000 for the fiscal years ended June 30, 2003 and 2002,
respectively, an increase of $390,000; software development amortization of
approximately $1,331,000 and $2,996,000 for the fiscal years ended June 30, 2003
and 2002, respectively, a decrease of $1,665,000; and network and transaction
related costs of $555,000 and $372,000 for the years ended June 30, 2003 and
2002, respectively, an increase of $183,000. The total decrease of $1,091,458 or
27% in cost of sales from $4,062,901 to $2,971,443 for the years ended June 30,
2002 and 2003, respectively, was principally attributable to the decrease in
software development amortization, offset by a full year of product costs
related to the Kodak Vending Placement Agreement acquired with Stitch.
Total operating expenses for the fiscal year ended June 30, 2003 was $14,941,264
(approximately $11.6 million of non-cash charges), an increase of $1,978,300 or
15% over 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 increase are explained in further detail,
below:
26
General and administrative expenses decreased from $7,868,064 for the fiscal
year ended June 30, 2002 to $7,194,684 for the fiscal year ended June 30, 2003,
a decrease of $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.
Compensation expense increased to $4,973,210 for the fiscal year ended June 30,
2003, a $318,548 or 7% increase over the prior fiscal 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 compared to the fiscal year ended June 30, 2002.
Depreciation and amortization expense for the fiscal year ended June 30, 2003
was $1,251,716, compared to $440,238 for the prior fiscal year, an $811,478 or
184% increase. This increase was 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.
The Company incurred charges during the fiscal year ended June 30, 2003 relating
to the modification of debt terms for certain of the Senior Notes in the amount
of $1,521,654. There was no such comparable charge in the prior year. This
charge was 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.
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. 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.
The fiscal year ended June 30, 2003 resulted in a net loss of $21,965,499
(approximately $12.6 million of non-cash charges) compared to a net loss of
$17,314,807 (approximately $11.0 million of non-cash charges) for the prior
fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended June 30, 2004, net cash of $12,557,456 was used by operating
activities, primarily due to the net loss of $21,426,178 offset by non-cash
charges totaling $10,858,101 for transactions involving the issuance of Common
Stock (for services and in connection with the amendment to the CEO's Executive
Employment Agreement), depreciation and amortization of assets, amortization of
debt discount, loss on the Senior Note modifications, and Senior Note interest
expense paid through the issuance of Common Stock and Common Stock Warrants,
offset by a gain on the sale of investment and a gain on contract settlement. In
addition to these non-cash charges, the Company's net operating assets increased
by $1,989,379 (primarily inventory and accounts receivable), a substantial
portion of which relates to the Bayview acquisition.
27
For the year ended June 30, 2004, net cash provided from investing activities
was $1,101,186, comprised of the proceeds received from the sales of
substantially all of the investment in the Jubilee Trust and proceeds from the
settlement of the Kodak Vending Placement Agreement, offset by purchases of
property and equipment and cash used in connection with the Bayview acquisition.
Proceeds from financing activities for the year ended June 30, 2004 provided
$12,091,029 of funds, which were necessary to support cash used in operating
activities. Proceeds of $12,903,135 were realized from several private placement
offerings of Common Stock, the exercise of Common Stock Warrants and the
collection of Common Stock subscriptions receivable. These proceeds were reduced
by payments of long-term debt and capital leases totaling $812,106.
The Company has incurred losses since inception. Cumulative losses through June
30, 2004 amounted to approximately $97,500,000. 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 year ended June 30,
2004 was a net cash outflow of approximately $2,100,000 - $1,330,000 of cash
used in operations and $728,000 invested in assets and liabilities connected
with the purchase. The Bayview acquisition was structured such that it did not
include the working capital required to support future operations.
During the year ended June 30, 2004, cash used in operating activities was
approximately $1,050,000 per month. These cash flows were impacted by working
capital increases that were disproportionate to the increase in revenues. The
Company believes it can improve its management of working capital, specifically
as it relates to accounts receivable and inventory. Excluding the working
capital requirements related to the Bayview acquisition (approximately
$1,200,000) and existing operations (approximately $800,000), cash used in
operating activities would have been approximately $850,000 per month in fiscal
year 2004. Using that as a basis for estimating cash requirements for the year
ending June 30, 2005 (which assumes a static level of revenues), cash
requirements for fiscal year 2005, including requirements for capital
expenditures and repayment of long-term debt, would be approximately
$10,500,000.
As of June 30, 2004, the Company had approximately $3,000,000 of cash and cash
equivalents on hand, primarily as a result of proceeds from several private
placements of Common Stock during fiscal year 2004.
On August 6, 2004, the Company entered into a Common Stock Purchase Agreement
with an accredited investor to purchase shares of the Company's Common Stock,
provided that the aggregate purchase price does not exceed $7,500,000. Under
this agreement, the Company has the right at any time to require the investor to
purchase Common Stock from the Company at the lower of: (i) $0.30 per share; or
(ii) 90% of the closing bid price per share on the date prior to the date of the
delivery by the Company to the investor of notice of his obligation to purchase.
The Company can require the investor to purchase shares under this agreement
only if the shares have been registered by the Company for resale under the Act.
35,000,000 shares were registered, effective August 13, 2004. Additionally, the
shares are only available for purchase for a period of one year from the date
the shares are registered under the Act. During any calendar month, the investor
cannot be required by the Company to purchase Common Stock for an aggregate
purchase price in excess of $700,000. Subsequent to year end, the Company issued
5,632,275 shares under this agreement for total gross proceeds of $647,000.
28
Funding sources in place to meet the Company's cash requirements for the year
ending June 30, 2005 are primarily comprised of approximately $3,000,000 in cash
and cash equivalents on hand as of June 30, 2004 and the proceeds that are
available under the Common Stock Purchase Agreement detailed above. In order to
provide funds for substantially all of the cash needs as described above, the
market price for the Company's Common Stock will have to increase to $0.23 per
share and remain at that level, or higher, from a price of $0.15 per share as of
September 15, 2004, to maximize the proceeds available under the Common Stock
Purchase Agreement, without registering additional shares for resale under the
Act and increasing the number of authorized shares.
Other sources of capital include (i) future exercises of warrants for which
there are "in the money" warrants with exercise prices below $0.15 per share
that would yield approximately $800,000 (other warrants are outstanding with an
exercise price of $0.20 per share that would yield approximately $4,300,000 if
exercised) and (ii) the capital markets, which the Company believes are
available to raise funding as needed given its current product offerings and the
markets the Company addresses.
FUTURE REVENUE GUIDANCE
The Company is expecting and focused on increasing revenues over the long term.
We believe that we should measure progress as it is achieved, instead of
focusing on the establishment and attainment of public forecasts. Therefore, the
Company will no longer provide any quarterly or annual revenue guidance or
forecasts. Further, the Company will not update annual revenue forecasts for the
2005 fiscal year as the year progresses and any such forecasts are hereby
disclaimed.
29
ITEM 7. FINANCIAL STATEMENTS
USA TECHNOLOGIES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2004 AND 2003
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-6
Notes to Consolidated Financial Statements................................F-7
30
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, 2004 and 2003, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
two years in the period ended June 30, 2004. 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, 2004 and 2003, and the consolidated results of its operations
and its cash flows for each of the two years in the period ended June 30, 2004,
in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that USA
Technologies, Inc. will continue as a going concern. As more fully described in
Note 2 to the financial statements, the Company has an accumulated deficit and
has incurred recurring operating losses. 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 10, 2004
F-1
USA TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30
2004 2003
------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,019,214 $ 2,384,455
Accounts receivable, less allowance for uncollectible accounts
of $240,000 and $65,000 in 2004 and 2003, respectively 1,075,858 414,796
Inventory 1,707,684 457,900
Prepaid expenses and other current assets 234,448 201,383
Subscriptions receivable 300,000 1,013,400
Investment 68,636 904,049
Assets held for sale 46,200 --
------------------------------
Total current assets 6,452,040 5,375,983
Property and equipment, net 602,953 943,784
Software development costs, net -- 998,660
Intangibles, net 10,831,832 2,591,500
Goodwill 7,985,208 7,945,580
Other assets 8,544 37,174
------------------------------
Total assets $ 25,880,577 $ 17,892,681
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,929,491 $ 2,266,156
Accrued expenses 1,569,368 2,720,743
Current obligations under long-term debt 240,764 830,674
Convertible Senior Notes 401,887 349,942
------------------------------
Total current liabilities 5,141,510 6,167,515
Convertible Senior Notes, less current portion 6,617,987 7,808,469
Long-term debt, less current portion 12,418 224,614
------------------------------
Total liabilities 11,771,915 14,200,598
Shareholders' equity:
Preferred Stock, no par value:
Authorized shares--1,800,000
Series A Convertible Preferred--Authorized shares - 900,000
Issued and outstanding shares--522,742 and 524,492 at June 30,
2004 and 2003, respectively (liquidation preference of
$11,904,600 at June 30, 2004) 3,702,856 3,715,246
Common Stock, no par value:
Authorized shares--475,000,000 and 400,000,000 at
June 30, 2004 and 2003, respectively
Issued and outstanding shares--351,654,131 and 218,741,042 at
June 30, 2004 and 2003, respectively 110,635,743 78,790,405
Accumulated other comprehensive income 32,249 --
Accumulated deficit (100,262,186) (78,813,568)
------------------------------
Total shareholders' equity 14,108,662 3,692,083
------------------------------
Total liabilities and shareholders' equity $ 25,880,577 $ 17,892,681
==============================
See accompanying notes.
F-2
USA TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30
2004 2003
------------------------------
Revenues:
Equipment sales $ 4,349,566 $ 1,034,427
License and transaction fees 977,651 1,373,573
Product sales and other 305,598 445,068
------------------------------
Total revenues 5,632,815 2,853,068
Cost of sales (including amortization of software
development costs) 4,329,692 2,971,443
------------------------------
Gross profit (loss) 1,303,123 (118,375)
Operating expenses:
General and administrative 6,747,824 7,194,684
Compensation 10,071,354 4,973,210
Depreciation and amortization 1,632,330 1,251,716
Loss on debt modification 318,915 1,521,654
------------------------------
Total operating expenses 18,770,423 14,941,264
------------------------------
Operating loss (17,467,300) (15,059,639)
Other income (expense):
Interest income 40,789 18,691
Gain (loss) on investment 603,480 (1,945,951)
Gain on contract settlement 429,204 --
Interest expense:
Coupon or stated rate (1,179,322) (1,163,192)
Non-cash interest and amortization of debt discount (3,853,029) (3,815,408)
------------------------------
Total interest expense (5,032,351) (4,978,600)
Total other income (expense) (3,958,878) (6,905,860)
------------------------------
Net loss (21,426,178) (21,965,499)
Cumulative preferred dividends (786,513) (793,586)
------------------------------
Loss applicable to common shares $ (22,212,691) $ (22,759,085)
==============================
Loss per common share (basic and diluted)
$ (0.08) $ (0.20)
==============================
Weighted average number of common shares outstanding
(basic and diluted) 288,476,158 111,790,358
==============================
See accompanying notes.
F-3
USA TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SERIES A
CONVERTIBLE SUBSCRIPTIONS ACCUMULATED
PREFERRED STOCK COMMON STOCK RECEIVABLE DEFICIT TOTAL
------------------------------------------------------------------------------------
Balance, June 30, 2002 $ 3,749,158 $ 56,588,503 $ (149,750) $(56,792,019) $ 3,395,892
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 and total comprehensive 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-4
USA TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
ACCUMULATED
SERIES A OTHER
CONVERTIBLE COMPREHENSIVE ACCUMULATED
PREFERRED STOCK COMMON STOCK INCOME DEFICIT TOTAL
-----------------------------------------------------------------------------------------
Issuance of 1,750 shares of Common
Stock from the conversion of 1,750
shares of Preferred Stock $ (12,390) $ 12,390 $ -- $ -- $ --
Stock from the conversion of
cumulative preferred dividends at
$10.00 per share -- 22,440 -- (22,440) --
Exercise of 32,179,321 Common Stock
Warrants and Options -- 2,800,472 -- -- 2,800,472
Issuance of 14,204,894 shares of Common
Stock from the conversion of 12%
Senior Notes -- 2,840,978 -- -- 2,840,978
Issuance of 1,615,727 shares of Common
Stock in exchange for salaries and
professional services -- 422,092 -- -- 422,092
Issuance of 10,500,000 shares of Common
Stock to executive in connection
with employment agreement -- 4,620,000 -- -- 4,620,000
Issuance of 53,177,869 shares of Common
Stock from various private placement
offerings at varying prices per share,
less issuance costs of $253,071 -- 9,389,263 -- -- 9,389,263
Issuance of 1,061,284 shares of Common
Stock and related Common Stock
Warrants in lieu of cash payment for
interest on the 12% Senior Notes -- 478,496 -- -- 478,496
Debt discount relating to beneficial
conversion feature on 12% Senior
Notes -- 1,981,007 -- -- 1,981,007
Issuance of 20,170,000 shares of Common
Stock in connection with the Bayview
acquisition -- 9,278,200 -- -- 9,278,200
Comprehensive loss:
Net loss (21,426,178) (21,426,178)
Unrealized gain on investment 32,249 32,249
------------
Total comprehensive loss (21,393,929)
-----------------------------------------------------------------------------------------
Balance, June 30, 2004 $ 3,702,856 $ 110,635,743 $ 32,249 $(100,262,186) $ 14,108,662
=========================================================================================
See accompanying notes.
F-5
USA TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED JUNE 30
2004 2003
------------------------------
OPERATING ACTIVITIES:
Net loss $(21,426,178) $(21,965,499)
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 5,042,092 2,573,301
Interest expense on the Senior Notes paid through the issuance of
Common Stock 478,496 860,250
Interest amortization related to Senior Notes and Convertible Debentures 3,374,533 2,955,158
Depreciation 469,418 1,119,536
Amortization 2,207,329 1,623,547
Loss (gain) on sale of investment (603,478) 1,945,951
Gain on contract settlement (429,204) --
Loss on debt modification 318,915 1,521,654
Changes in operating assets and liabilities:
Accounts receivable (785,201) (74,503)
Inventory (1,249,784) 419,914
Prepaid expenses and other assets (1,732) (38,325)
Accounts payable 843,680 (759,337)
Accrued expenses (796,342) 589,454
------------------------------
Net cash used in operating activities (12,557,456) (9,228,899)
INVESTING ACTIVITIES:
Purchase of property and equipment (358,033) (186,895)
Cash paid in connection with Bayview acquisition (727,970) --
Cash received from the sale of investment 1,471,140 --
Cash received from contract settlement 674,649 --
Cash received from the sale of assets held for sale 41,400 --
------------------------------
Net cash provided by (used in) investing activities 1,101,186 (186,895)
FINANCING ACTIVITIES:
Net proceeds from the issuance of Common Stock and the exercise of Common
Stock Purchase Warrants and Options 11,889,735 9,930,879
Collection of subscriptions receivable 1,013,400 35,000
Net proceeds from issuance of Senior Notes and Convertible Debenture -- 1,833,841
Repayment of long-term debt and Senior Notes (812,106) (557,441)
------------------------------
Net cash provided by financing activities 12,091,029 11,242,279
------------------------------
Net increase in cash and cash equivalents 634,759 1,826,485
Cash and cash equivalents at beginning of year 2,384,455 557,970
------------------------------
Cash and cash equivalents at end of year $ 3,019,214 $ 2,384,455
==============================
Supplemental disclosures of cash flow information:
Cash paid for interest $ 1,098,727 $ 1,479,984
==============================
Conversion of Convertible Preferred Stock to Common Stock $ 12,390 $ 33,912
==============================
Conversion of Cumulative Preferred Dividends to Common Stock $ 22,440 $ 56,050
==============================
Subscriptions receivable $ 300,000 $ 1,013,400
==============================
Conversion of Senior Notes and Debenture to Common Stock $ 2,840,978 $ 1,388,442
==============================
Issuance of Common Stock in connection with Bayview acquisition $ 9,278,200 $ --
==============================
Beneficial conversion feature related to Senior Notes and Convertible
Debenture $ 1,981,007 $ 2,947,130
==============================
Purchase of investment through the issuance of Common Stock $ -- $ 2,850,000
==============================
Issuance of Common Stock in connection with Senior Note Conversions $ -- $ 1,664,819
==============================
See accompanying notes
F-6
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
1. BUSINESS
USA Technologies, Inc. ("USAT" or the "Company") was incorporated in the
Commonwealth of Pennsylvania in January 1992. The Company offers a suite of
networked devices and associated wireless non-cash payment, control/access
management, remote monitoring and data reporting services, as well as energy
management products. Our networked devices and associated services enable the
owners and operators of everyday, stand-alone, distributed assets, such as
vending machines, personal computers, copiers, faxes, kiosks and laundry
equipment, the ability to remotely monitor, control and report on the results of
these distributed assets, as well as the ability to offer their customers
alternative cashless payment options. As a result of the acquisition of the
assets of Bayview Technology Group, LLC ("Bayview") in July 2003(Note 4), our
Company also manufactures and sells energy management products which reduce the
power consumption of various equipment, such as refrigerated vending machines
and glass front coolers, thus reducing the energy costs associated with
operating this equipment.
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 $21.4 million
and $21.9 million during each of the fiscal years ending June 30, 2004 and 2003,
respectively, and recorded cumulative losses from its inception through June 30,
2004 amounting to approximately $97.6 million. Losses have continued through
September 2004 and are expected to continue during fiscal year 2005. 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 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, the
issuance of Common Stock (Note 12), the exercise of outstanding Common Stock
warrants, and raising funds in the capital markets, as needed.
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Stitch Networks Corporation ("Stitch").
All significant intercompany accounts and transactions have been eliminated in
consolidation.
F-7
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
2. ACCOUNTING POLICIES (CONTINUED)
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 U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH EQUIVALENTS
Cash equivalents represent all highly liquid investments with original
maturities of three months or less. Cash equivalents are comprised of
certificates of deposit and a money market fund, of which $80,000 is on deposit
to support Automated Clearing House banking transactions and $30,000 to support
a letter of credit issued to a vendor as of June 30, 2004, and is therefore
restricted as to use.
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 are recorded at cost. Property and equipment are
depreciated on the straight-line basis over the estimated useful lives of the
related assets. Leasehold improvements are amortized on the straight-line basis
over the lesser of the estimated useful life of the asset or the respective
lease term.
F-8
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
2. ACCOUNTING POLICIES (CONTINUED)
GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of cost over fair value of the net assets
purchased in acquisitions. The Company accounts for goodwill in accordance with
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("FAS 142"). Under FAS 142, goodwill is not amortized to
earnings, but instead is subject to periodic testing for impairment. The Company
tests goodwill for impairment using a two-step process. The first step screens
for potential impairment, while the second step measures the amount of
impairment. The Company uses a discounted cash flow analysis to complete the
first step in this process. Testing for impairment is to be done at least
annually and at other times if events or circumstances arise that indicate that
impairment may have occurred. The Company has selected April 1 as its annual
test date. The Company has concluded there has been no impairment of goodwill as
a result of its testing on July 1, 2002 (the transitional test date upon
adopting FAS 142), April 1, 2003 and April 1, 2004.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs pursuant to Statement of
Financial Accounting Standards 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.
Software development costs related to the development of the multi-media e-Port
product and related internal network were fully amortized during the year ended
June 30, 2004. Accumulated amortization was $5,326,186 and $4,327,526 at June
30, 2004 and 2003, respectively. Amortization expense, reflected in cost of
sales, was approximately $999,000 and $1,331,000 during the years ended June 30,
2004 and 2003, respectively.
F-9
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
2. ACCOUNTING POLICIES (CONTINUED)
INVESTMENT
The Company accounts for investments in accordance with Statement of Financial
Accounting Standards 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 as a separate component of
shareholders' equity in accumulated other comprehensive income. 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.
IMPAIRMENT OF LONG LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-lived Assets" ("FAS 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. If the carrying amount of an asset or group of assets exceeds its
net realizable value, the asset will be written down to its fair value. In the
period when the plan of sale criteria of FAS 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.
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 program with Kodak to sell disposable cameras and film
pursuant to the Kodak Vending Placement Agreement. 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.
Effective December 31, 2003, the Kodak agreement was terminated (Note 14). As a
result, the carrying value of the vending machines were further impaired and a
charge of approximately $367,000 was recorded as a component of the gain on
contract settlement in the June 30, 2004 Consolidated Statement of Operations to
reflect these assets at their realizable value. The remaining value of these
vending machines is recorded as assets held for sale in the Consolidated Balance
Sheet as of June 30, 2004.
F-10
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
2. ACCOUNTING POLICIES (CONTINUED)
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 and Long-Term Debt
approximates book value as such notes are at market rates currently available to
the Company.
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 are 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 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
39% and 57% of the Company's accounts receivable at June 30, 2004 and 2003,
respectively, were concentrated with two customers. Approximately 13% and 35% of
the Company's revenues for the years ended June 30, 2004 and 2003, respectively,
were concentrated with one and two customers, respectively. The Company's
customers are principally located in the United States.
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. License fees for access to the Company's
devices and network services are recognized on a monthly basis. Product revenues
are recognized for the sale of products from Company owned vending machines when
there is purchase and acceptance of product by the vending customer. The Company
estimates an allowance for product returns at the date of sale.
F-11
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
2. ACCOUNTING POLICIES (CONTINUED)
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
approximately $688,000 and $1,505,000 for the years ended June 30, 2004 and
2003, respectively.
ACCOUNTING FOR STOCK OPTIONS
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), provides companies with a choice to follow the
provisions of FAS 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" ("APB 25") 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 granted to employees and directors equals or
exceeds the market price of the underlying Common Stock on the date of grant, no
compensation expense is recognized. All stock options granted by the Company
have been at prices equal to the market price of the Company's Common Stock on
the date of grant. Under FAS 123, the fair value of stock options is estimated
at the date of grant using an option pricing model such as Black-Scholes and the
value determined is amortized to expense over the option vesting period.
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 senior notes, debentures, preferred stock, or
cumulative preferred dividends was assumed during the fiscal year 2004 or 2003
because the assumed exercise of these securities would be anti-dilutive.
F-12
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
3. INVESTMENT IN JUBILEE INVESTMENT TRUST, PLC
During the year ended June 30, 2003, the Company issued 15,000,000 shares of its
Common Stock ($2,850,000) for an investment in 1,870,091 shares in the Jubilee
Investment Trust, PLC ("Jubilee"), a United Kingdom Investment Trust whose
shares trade on the London Stock 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
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 this
investment declined in value below its cost basis for a period of six months or
more as of June 30, 2003, 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, realizing
an impairment loss of $1,945,951 during fiscal year 2003.
During fiscal year 2004, the Company sold 1,669,091 of the Jubilee shares for
net proceeds of $1,471,140 and realized a gain of $603,480, with the cost of the
securities calculated by the specific identification method. An unrealized gain
of $32,249 on the remaining shares held by the Company is reflected in
shareholders' equity as accumulated other comprehensive income at June 30, 2004.
The 70,000 remaining shares have been provided as a security deposit for the
lease of the Company's corporate headquarters and are recorded at their fair
value of $68,636 at June 30, 2004.
4. ACQUISITIONS
BAYVIEW TECHNOLOGY GROUP, LLC
On July 11, 2003, the Company acquired substantially all of the assets of
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 to
settle an obligation of Bayview. The definitive agreement also provided for the
Company to assume certain obligations under a royalty agreement expiring May 31,
2006. Approximately $169,000 of royalty expense was recorded during fiscal year
2004 in connection with this agreement. 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 acquisition allows the Company to offer energy conservation products that
reduce the power consumption of various types of equipment, such as vending
machines, glass front coolers and other "always-on" appliances by allowing the
equipment to operate in power saving mode when the full power mode is not
necessary.
F-13
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
4. ACQUISITIONS (CONTINUED)
The acquisition cost of Bayview was $10,030,894, which principally was comprised
of the issuance of 20,000,000 shares of restricted Common Stock valued at
$9,200,000 and a cash payment of $631,247. 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.
The following table summarizes the final purchase price allocation to reflect
the fair values of the assets acquired and liabilities assumed at the date of
acquisition.
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 of Bayview acquired intangible assets, $7,424,000 was assigned
to patents that are subject to amortization over a 10-year period, $1,011,000
was assigned to a non-compete agreement that is subject to amortization over a
5-year period and $1,014,000 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 year ended June 30, 2004 would not have been
significantly different than reported had the acquisition taken place July 1,
2003 as the acquisition occurred on July 11, 2003. Pro-forma combined results
for the year ended June 30, 2003 would have been as follows had the acquisition
taken place July 1, 2002 - revenues of $8,487,190; net loss of $22,478,740; loss
applicable to common shares of $23,272,326; loss per common share (basic and
diluted) of $0.18.
STITCH NETWORKS CORPORATION
In connection with the acquisition of Stitch in May 2002, the Company determined
that it would vacate office space previously occupied by Stitch. Accordingly, in
connection with this acquisition, the Company accrued the remaining lease exit
costs relating to the lease in the amount of approximately $354,000 as part of
the cost of purchasing Stitch. In November 2003, Stitch and the lessor of the
office space 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 recorded
in conjunction with the acquisition and actual consideration paid was recorded
as a reduction of goodwill in the amount of $290,000 during the year ended June
30, 2004.
F-14
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
4. ACQUISITIONS (CONTINUED)
Amortization expense relating to all acquired intangible assets was $1,208,668
and $292,000 during the years ended June 30, 2004 and 2003, respectively. The
intangible asset balance and related accumulated amortization consisted of the
following:
JUNE 30, 2004
----------------------------------------------
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION VALUE
----------------------------------------------
Intangible assets:
Trademarks $ 2,064,000 $ (223,125) $ 1,840,875
Patents 9,294,000 (1,117,822) 8,176,178
Non-Compete agreement 1,011,000 (196,221) 814,779
----------------------------------------------
Total $12,369,000 $(1,537,168) $ 10,831,832
==============================================
June 30, 2003
----------------------------------------------
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION VALUE
----------------------------------------------
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
==============================================
At June 30, 2004, the expected amortization of the intangible assets is as
follows: $1,200,000 per year in fiscal year 2005 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 intangible assets is 9.55 years at June 30, 2004.
F-15
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
USEFUL JUNE 30
LIVES 2004 2003
----------------------------------------------------
Computer equipment and purchased
software 3 years $ 2,206,759 $ 1,931,912
Vending machines and related components 7 years 4,427 688,284
Control systems 3 years 479,530 980,759
Furniture and equipment 5-7 years 745,341 532,570
Leasehold improvements Lease term 59,575 16,140
Vehicles 5 years -- 10,258
------------------------------------
3,495,632 4,159,923
Less accumulated depreciation (2,892,679) (3,216,139)
------------------------------------
$ 602,953 $ 943,784
====================================
Assets under capital lease totaled approximately $113,000 and $180,000 as of
June 30, 2004 and 2003, respectively. Capital lease amortization of
approximately $20,000 and $46,000 is included in depreciation expense for the
years ended June 30, 2004 and 2003, respectively.
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
JUNE 30
2004 2003
-----------------------------------
Accrued compensation and related sales commissions $ 444,302 $ 250,808
Accrued interest 376,350 291,315
Accrued professional fees 192,633 650,974
Accrued taxes and filing fees 108,362 94,529
Accrued consulting fees 104,438 662,010
Accrued rent 66,662 15,572
Advanced customer billings 58,811 62,540
Accrued lease termination payments, net -- 344,934
Accrued software license and support costs -- 125,385
Accrued other 217,810 222,676
-----------------------------------
$ 1,569,368 $ 2,720,743
===================================
F-16
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
7. RELATED PARTY TRANSACTIONS
During the years ended June 30, 2004 and 2003, the Company incurred
approximately $391,000 and $305,000, respectively, in connection with legal
services provided by a member of the Company's Board of Directors. At June 30,
2004 and 2003, approximately $32,000 and $22,000, respectively, of the Company's
accounts payable and accrued expenses were due to this Board member. During the
years ended June 30, 2004 and 2003, certain Board members participated in
various debt or equity offerings of the Company for total investments of
approximately $266,250 and $661,500, respectively.
Stitch had purchased 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 during the year ended June
30, 2003 and approximately $130,000 in payables to Dixie included in accounts
payable in the accompanying June 30, 2003 consolidated balance sheet. There were
no such purchases from Dixie during the year ended June 30, 2004 and no payables
to Dixie at June 30, 2004.
8. LONG-TERM DEBT
Long-term debt consists of the following:
JUNE 30
2004 2003
-------------------------
Bank facility $ 170,987 $ 828,466
Working capital loans 46,765 166,765
Other, including capital lease obligations 35,430 60,057
-------------------------
253,182 1,055,288
Less current portion 240,764 830,674
-------------------------
$ 12,418 $ 224,614
=========================
The bank facility (the "Facility") was assumed as part of the fiscal year 2002
acquisition of Stitch and was used to fund the purchase of vending machines
placed at locations where Kodak film products were 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 was insured by a Surety Bond issued by a third-party
insurer in exchange for an initial fee paid by the Company. The Facility matures
during the year ending June 30, 2005, due to the termination of the vending
placement agreement and the sale of the vending machines (Note 14).
F-17
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
8. LONG-TERM DEBT (CONTINUED)
The Company also assumed working capital loans in connection with of the Stitch
acquisition. These loans are secured by certain assets of Stitch and bear
interest at 6.75% per annum. The working capital loans were payable on July 8,
2002, however, during fiscal year 2003, the bank extended the due date on these
loans on several occasions under forbearance agreements. On November 6, 2003,
the Company reached an agreement with the bank to repay these loans in monthly
installments through October 2004.
9. INCOME TAXES
At June 30, 2004 and 2003, the Company had net operating loss carryforwards of
approximately $84,097,000 and $76,211,000, respectively, to offset future
taxable income expiring through approximately 2024. In addition, the Company had
a capital loss carryforward of approximately $1,264,000 as of June 30, 2004 that
expires in 2009. At June 30, 2004 and 2003, the Company recorded a net deferred
tax asset of approximately $34,365,000 and $29,771,000, respectively, which was
reduced by a valuation allowance of the same amount as the realization of the
deferred tax asset is not likely, principally due to the lack of earnings
history.
The timing and extent to 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 $11,800,000 at the acquisition date. Such net
operating loss carryforwards are limited under the same provisions as to the
amount available to offset future taxable income and to the extent used in any
given year, will result in decreases to goodwill as opposed to income tax
expense.
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
2004 2003
------------------------------
Deferred tax assets:
Net operating loss and capital loss
carryforwards $ 32,447,000 $ 28,431,000
Deferred research and development costs 548,000 730,000
Software development costs 1,513,000 1,324,000
Other 790,000 338,000
------------------------------
35,298,000 30,823,000
Deferred tax liabilities:
Intangibles (933,000) (1,052,000)
------------------------------
34,365,000 29,771,000
Valuation allowance (34,365,000) (29,771,000)
------------------------------
Deferred tax assets, net $ -- $ --
==============================
F-18
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
10. SENIOR NOTES
The Company has issued five series of Senior Notes each with an annual interest
rate of 12% and are convertible into shares of the Company's Common Stock. The
Senior Notes were scheduled to mature on December 31, 2003 ("2003 Senior
Notes"), December 31, 2004 ("2004 Senior Notes"), December 31, 2005 ("2005
Senior Notes"), December 31, 2006 ("2006 Senior Notes"), and December 31, 2007
("2007 Senior Notes").
The 2003 Senior Notes were issued pursuant to a private placement offering
authorized during the year ended June 30, 2001 that included the issuance of
2,000 shares of Common Stock for each $10,000 of face amount of notes issued.
The 2003 Senior Notes were convertible into shares of Common Stock at $1.25 per
share at any time through December 31, 2003. The fair value of the Common Stock
issued and the intrinsic value of the beneficial conversion feature associated
with the 2003 Senior Notes created debt discount that was allocated to equity
and was amortized to interest expense through December 31, 2003.
The 2004 Senior Notes were issued pursuant to a private placement offering
authorized during the year ended June 30, 2002. The 2004 Senior Notes are
convertible into shares of Common Stock at $.40 per share at any time through
December 31, 2004. Certain shareholders of the Company who held warrants to
purchase shares of Common Stock exercisable at $.50 per share were offered the
opportunity to cancel those warrants and receive an equivalent number of new
warrants exercisable at $.10 per share if they invested in the 2004 Senior Note
offering. The fair value of the new warrants issued and the intrinsic value of
the beneficial conversion feature associated with the 2004 Senior Notes created
debt discount that was allocated to equity and is being amortized to interest
expense through December 31, 2004.
The 2005 Senior Notes were issued pursuant to a private placement offering
authorized during the year ended June 30, 2002 that included the issuance of
20,000 shares of Common Stock for each $10,000 of face amount of notes issued.
The 2005 Senior Notes are convertible into shares of Common Stock at $.20 per
share at any time through December 31, 2005. The fair value of the Common Stock
issued and the intrinsic value of beneficial conversion feature associated with
the 2005 Senior Notes created debt discount that was allocated to equity and is
being amortized to interest expense through December 31, 3005. During the years
ended June 30, 2004 and 2003, $514,359 and $489,608, respectively, of the 2005
Senior Notes converted into 2,571,797 and 2,448,215 shares of Common Stock,
respectively.
F-19
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
10. SENIOR NOTES (CONTINUED)
In March 2003, the Company granted to the holders of the 2003 Senior Notes and
2004 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 2003 Senior Notes and
from $0.40 to $0.20 per share for the 2004 Senior Notes. This offer expired on
December 31, 2003. During the years ended June 30, 2004 and 2003, Senior Note
holders agreed to exchange an aggregate of $2,303,953 and $6,911,397,
respectively, of 2003 Senior Notes and 2004 Senior Notes for new notes maturing
in 2006 and 2007. The exchange of the 2003 Senior Notes and 2004 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 exchanged
2003 Senior Notes and 2004 Senior Notes have been extinguished. The unamortized
debt discount and other issuance costs remaining on the 2003 Senior Notes and
2004 Senior Notes exchanged and extinguished were expensed ($318,915 and
$1,521,654 for the years ended June 30, 2004 and 2003, respectively) and have
been reported as a loss on debt modification in the Consolidated Statements of
Operations.
During fiscal year 2003 and 2004, the Company's share price was often greater
than the conversion price at times when Senior Note holders exchanged their 2003
and 2004 Senior Notes for 2006 and 2007 Senior Notes. The intrinsic value of
this beneficial conversion feature created debt discount that was allocated to
equity and is being amortized to interest expense through December 31, 2006 and
2007, respectively.
During the years ended June 30, 2004 and 2003, $1,478,000 and $332,500,
respectively, of the 2006 Senior Notes were converted into 7,390,000 and
1,662,500 shares of Common Stock, respectively, and $848,619 and $323,334,
respectively, of the 2007 Senior Notes were converted into 4,243,097 and
1,616,668 shares of Common Stock, respectively.
F-20
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
10. SENIOR NOTES (CONTINUED)
A summary of the activity for the Senior Notes for the years ended June 30, 2004
and 2003 follows:
Senior Notes Maturing December 31,
-------------------------------------------------------------------------------
2003 2004 2005 2006 2007
(2003 Senior (2004 Senior (2005 Senior (2006 Senior (2007 Senior
Notes) Notes) Notes) Notes) Notes)
-------------------------------------------------------------------------------
Face amount of Senior Notes
Balance, June 30, 2002 $ 5,034,000 $ 4,814,593 $ 444,083 $ -- $ --
Issued (rescinded) for cash and services -- (172,091) 3,571,675 -- --
2003 and 2004 Senior Notes exchanged
for 2006 and 2007 Senior Notes (3,548,000) (3,363,397) -- 3,548,000 3,363,397
Conversions to Common Stock -- -- (489,608) (332,500) (323,334)
-------------------------------------------------------------------------------
Balance, June 30, 2003 1,486,000 1,279,105 3,526,150 3,215,500 3,040,063
Repayment (10,000) -- -- -- --
2003 and 2004 Senior Notes exchanged
for 2006 and 2007 Senior Notes (1,476,000) (827,953) -- 1,476,000 827,953
Conversions to Common Stoc -- -- (514,359) (1,478,000) (848,619)
-------------------------------------------------------------------------------
Balance, June 30, 2004 $ -- $ 451,152 $ 3,011,791 $ 3,213,500 $ 3,019,397
===============================================================================
Debt discount and other issuance costs
Unamortized costs at June 30, 2002 $ (750,295) $(2,928,567) $ (323,988) $ -- $ --
Debt discount (created) reduced for
(issuances) rescissions (2) 169,365 (2,933,392) (1,287,749) (621,459)
Amortization and write-off of unamortized
costs upon conversions to Common
Stock 448,934 1,004,748 1,104,157 183,580 24,607
Loss on modification for exchanges of
2003 and 2004 Senior Notes for 2006
and 2007 Senior Notes 221,130 1,300,524 -- -- --
-------------------------------------------------------------------------------
Unamortized costs at June 30, 2003 (80,233) (453,930) (2,153,223) (1,104,169) (596,852)
Debt discount from issuances -- -- -- (1,155,475) (825,532)
Amortization and write-off of unamortized
costs upon conversions to Common
Stock 32,803 133,180 1,052,231 1,329,255 827,064
Loss on modification for exchanges of
2003 and 2004 Senior Notes for 2006
and 2007 Senior Notes 47,430 271,485 -- -- --
-------------------------------------------------------------------------------
Unamortized costs at June 30, 2004 $ -- $ (49,265) $(1,100,992) $ (930,389) $ (595,320)
===============================================================================
F-21
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
10. SENIOR NOTES (CONTINUED)
Senior Notes Maturing December 31,
-------------------------------------------------------------------------------
2003 2004 2005 2006 2007
(2003 Senior (2004 Senior (2005 Senior (2006 Senior (2007 Senior
Notes) Notes) Notes) Notes) Notes)
-------------------------------------------------------------------------------
Senior Notes reflected in the
Consolidated Balance Sheet:
June 30, 2003
Face amount $ 1,486,000 $ 1,279,105 $ 3,526,150 $ 3,215,500 $ 3,040,063
Unamortized costs (80,233) (453,930) (2,153,223) (1,104,169) (596,852)
-------------------------------------------------------------------------------
$ 1,405,767 $ 825,175 $ 1,372,927 $ 2,111,331 $ 2,443,211
===============================================================================
June 30, 2004
Face amount $ -- $ 451,152 $ 3,011,791 $ 3,213,500 $ 3,019,397
Unamortized costs -- (49,265) (1,100,992) (930,389) (595,320)
-------------------------------------------------------------------------------
$ 401,887 $ 1,910,799 $ 2,283,111 $ 2,424,077
===============================================================================
During the year ended June 30, 2003 and through December 31, 2003, the holders
of the Senior Notes had the right to purchase shares of the Company's Common
Stock at $0.20 per share using quarterly interest payments that were due in lieu
of a cash payment of the interest. Additionally, for each share purchased, the
note holder was entitled to receive a warrant to purchase one share of the
Company's Common Stock at $0.20 per share exercisable at any time through June
30, 2004 (extended to August 30, 2004). For the years ended June 30, 2004 and
2003, 1,061,284 and 2,315,000 shares of Common Stock, respectively, were issued
(along with an identical number of warrants) for payment of interest due of
$212,238 and $448,647, respectively. The fair value of the warrants issued and
the beneficial conversion feature related to the $0.20 per share rate used to
convert the interest to shares of Common Stock totaled $266,258 and $411,603 for
the years ended June 30, 2004 and 2003, respectively, and have been recorded as
additional interest expense.
During the year ended June 30, 2002, 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. 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 were exercisable at the same conversion price as the Debenture. During
the year ended June 30, 2003 the investment company converted the remaining
$243,000 of the Debenture, resulting in the issuance of 2,467,225 shares of
Common Stock. The investment company also exercised warrants resulting in the
issuance of 17,465,469 and 7,206,893 shares of Common Stock and generating net
cash proceeds of $1,591,296 and $630,000 during the years ended June 30, 2004
and 2003, respectively.
F-22
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
11. 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, 2004 and 2003 amounted to $6,677,180 and
$5,913,107, respectively. 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, 2004 and 2003, certain holders of the Preferred
Stock converted 1,750 and 4,790 shares, respectively, into 1,750 and 4,790
shares of Common Stock, respectively. Certain of these shareholders also
converted cumulative preferred dividends of $22,440 and $56,050, respectively,
into 2,244 and 5,605 shares of Common Stock during the years ended June 30, 2004
and 2003, respectively. The Series A Preferred Stock may be called for
redemption at the option of the Board of Directors at any time on and after
January 1, 1998 for a price of $11.00 per share plus payment of all accrued and
unpaid dividends. No such redemption has occurred as of June 30, 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.
12. COMMON STOCK
The Company's Board of Directors has authorized various Common Stock private
placement offerings. Activity for these offerings during the years ended June
30, 2004 and 2003 is as follows:
o The 2004-A Private Placement Offering was authorized during fiscal
year 2004 for the issuance of common stock at $0.15 per share.
During the year ended June 30, 2004, there were 28,290,833 shares
issued generating net proceeds of $4,207,080. Included in this
amount are subscriptions receivable of $300,000 at June 30, 2004,
which were collected by the Company during July 2004. Participants
in the offering were granted one warrant to purchase shares of
Common Stock for every two shares of Common Stock purchased and are
exercisable at $0.20 per share through December 31, 2004.
F-23
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
12. COMMON STOCK (CONTINUED)
o The 2003-A Private Placement Offering was authorized during fiscal
year 2003 for the issuance of common stock at $0.10 per share.
During the years ended June 30, 2004 and 2003, there were 4,377,036
and 78,636,082 shares, respectively, issued generating net proceeds
of $432,754 and $7,792,133, respectively. The Company also issued
695,000 and 1,854,390 shares under this offering during the years
ended June 30, 2004 and 2003, respectively, for services rendered by
consultants amounting to $185,000 and $397,889, respectively.
o During the year ended June 30, 2004, 20,010,000 shares of Common
Stock were issued to accredited investors at $0.25 per share in four
private placement offerings generating net proceeds of $5,002,500.
o During the year ended June 30, 2003, 10,571,429 shares of Common
Stock were issued to accredited investors at per share prices
ranging from $0.07 to $0.12 in five private placement offerings
generating net proceeds of $957,925. These investors were also
granted warrants in connection with these private placement
offerings to purchase 18,892,858 shares of Common Stock at per share
prices ranging from $0.07 to $0.15 and expiring from May 2003 to
October 2007. None of these warrants were exercised during the year
ended June 30, 2003.
During the year ended June 30, 2004, the Company's Board of Directors granted
additional warrants to purchase shares of Common Stock to Senior Note holders
who chose to receive shares of Common Stock in lieu of being paid cash for
interest on their notes. The grant was one additional warrant for each warrant
previously granted in conjunction with receiving shares for interest and totaled
warrants to purchase 3,662,481 shares of Common Stock at $0.20 per share
expiring on December 31, 2004.
During the year ended June 30, 2003, the Company's Board of Directors granted
warrants to purchase shares of Common Stock to the holders of all Senior Notes
at the time of grant. The grant equaled 75% of the face amount of the Senior
Notes and totaled 10,306,026 warrants exercisable at $0.10 per share through
October 31, 2003. An additional warrant was granted for each of the initial
warrants exercised on the same terms and as a result, an additional 7,943,384
warrants to purchase Common Stock were granted.
During the year ended June 30, 2004, warrants and stock options were exercised
to purchase 32,179,321 shares of Common Stock at share prices ranging from $0.07
to $0.20, generating proceeds of $2,800,472. During the year ended June 30,
2003, warrants were exercised to purchase 17,686,489 shares of Common Stock at
$0.10 per share, generating proceeds of $1,768,651.
F-24
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
12. COMMON STOCK (CONTINUED)
In July 2003, the Company and the Company's Chief Executive Officer ("CEO")
amended the terms of his Executive 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 granted 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 the CEO 10,500,000 shares of its Common Stock valued at
$4,620,000 or $0.44 per share representing the quoted market price of the
Company's Common Stock on the date the amendment was entered into and the shares
were granted. In connection with this amendment, the CEO also entered into a
lock-up agreement pursuant to which he can 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 is not 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
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 are irrevocable and fully vested, have no expiration date, and are not
affected by the termination of the CEO for any reason whatsoever.
In addition to the shares issued to the CEO, there were 920,727 and 3,895,052
shares of Common Stock issued to certain employees and officers for services and
for professional services during the years ended June 30, 2004 and 2003,
respectively. The value of these shares was based upon the fair value of the
Company's Common Stock on the dates the shares were granted and totaled $237,040
and $847,742 for the years ended June 30, 2004 and 2003, respectively.
During the year ended June 30, 2004, 500,000 shares of Common Stock were issued
to an accredited investor as settlement resulting from a non-registration event
as defined under the subscription agreement dated November 4, 2002.
F-25
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
12. COMMON STOCK (CONTINUED)
A Common Stock purchase agreement with an accredited investor was initially
executed in June 2004 and then replaced in August 2004 with a new agreement (the
"Common Stock Agreement"). Pursuant to the Common Stock Agreement, the investor
agreed to purchase shares of the Company's Common Stock, provided that the
aggregate purchase price does not exceed $7,500,000. Under the Common Stock
Agreement, the Company has the right at any time to require the investor to
purchase Common Stock from the Company at the lower of: (i) $0.30 per share; or
(ii) 90% of the closing bid price per share on the date prior to the date of the
delivery by the Company to the investor of notice of his obligation to purchase.
The Company can require the investor to purchase shares under the Common Stock
Agreement only if the shares have been registered by the Company for resale
under the Act. Such shares were registered effective August 13, 2004.
Additionally, the shares are only available for purchase for a period of one
year from the date the shares are registered under the Act. During any calendar
month, the investor cannot be required by the Company to purchase Common Stock
for an aggregate purchase price in excess of $700,000. Although the Company has
registered 35,000,000 shares for resale by the investor, the Company has 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 the
investor. The Company has agreed to pay the investor a due diligence fee of
$45,000 in connection with this transaction. Subsequent to year end, the Company
issued 5,632,275 shares of Common Stock under the Common Stock Agreement for
total gross proceeds of $647,000.
As of June 30, 2004, the Company has reserved shares of Common Stock for future
issuance for the following:
Exercise of Common Stock Options 1,897,472
Exercise of Common Stock Warrants 33,457,191
Conversions of Preferred Stock and cumulative
Preferred Stock dividends 1,190,460
Conversions of Senior Notes 47,351,320
----------
Total shares reserved for future issuance 83,896,443
==========
13. COMMON STOCK WARRANTS AND OPTIONS
Common Stock Warrant activity for the years ended June 30, 2004 and 2003 was as
follows:
WARRANTS
------------
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 18,873,932
Exercised (32,060,459)
Cancelled (15,484,006)
-----------
Outstanding at June 30, 2004 33,457,191
===========
F-26
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
13. COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)
All Common Stock warrants outstanding as of June 30, 2004 were exercisable. The
following table shows exercise prices and expiration dates for warrants
outstanding as of June 30, 2004:
WARRANTS EXERCISE PRICE
OUTSTANDING PER SHARE EXPIRATION DATE
------------------------------------------------------
3,600,607 $0.20 August 30, 2004
2,500,000 $0.10 December 22, 2004
17,807,898 $0.20 December 31, 2004
75,000 $1.25 June 30, 2006
7,142,858 $0.07 October 26, 2007
750,000 $0.07 November 15, 2007
1,200,000 $0.91 August 29, 2010
377,927 $1.00 April 24, 2011
2,901 $1.03 April 30, 2011
----------
33,457,191
==========
During the years ended June 30, 2004 and 2003, 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, 2004.
The Company's Board of Directors has granted options to employees and Board
members to purchase shares of Common Stock at prices that were at or above fair
market value on the dates the options were granted. The option term and vesting
schedule were established by the contracts under which the options were granted.
In April 2004, the Company's Board of Directors established and authorized the
2004-A Stock Compensation Plan for use in compensating employees, directors and
consultants through the issuance of shares of Common Stock of the Company. There
were 500,000 shares authorized under the Plan. As of June 30, 2004 there were
90,727 shares issued under the Plan.
F-27
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
13. COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)
Common Stock Option activity during the years ended June 30, 2004 and 2003 was
as follows:
OPTIONS EXERCISE PRICE
OUTSTANDING PER SHARE
---------------------------------
Outstanding at June 30, 2002 5,290,485 $0.165-$5.00
Canceled or expired (2,383,000) $0.40-$5.00
---------------------------------
Outstanding at June 30, 2003 2,907,485 $0.165-$2.50
Granted 300,000 $0.30
Exercised (223,862) $0.165
Canceled or expired (1,086,151) $0.165-$2.50
---------------------------------
Outstanding at June 30, 2004 1,897,472 $0.165-$2.00
=================================
The following table shows exercise prices and the weighted average remaining
contractual life for options outstanding as of June 30, 2004. All Common Stock
Options outstanding as of June 30, 2004 were exercisable except for the options
granted at an exercise price of $.30 per share, none of which were exercisable
as of June 30, 2004.
OPTIONS EXERCISE PRICE WEIGHTED AVERAGE REMAINING
OUTSTANDING PER SHARE CONTRACTUAL LIFE (YEARS)
----------------------------------------------------------------
1,465,805 $0.165 2.92
300,000 $0.30 2.96
125,000 $1.00 1.67
6,667 $2.00 2.00
---------
1,897,472
=========
As there were no stock options granted during the year ended June 30, 2003 and
all options granted through June 30, 2002 were vested as of that date, pro-forma
net loss and pro-forma net loss per common share under FAS 123 for the year
ended June 30, 2003 would be the same as reported by the Company under APB 25.
F-28
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
13. COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)
During the year ended June 30, 2004, stock options were granted to one
individual to purchase 300,000 shares of Common Stock of the Company at $0.30
per share. The pro-forma disclosures required by FAS 123 have not been included
for June 30, 2004 as the fair value of options granted for the year ended June
30, 2004 were not considered to be material. The fair value of the stock options
granted, $0.16, was estimated on the date of the grant using the Black-Scholes
option-pricing model with the following assumptions.
Dividend yield 0%
Expected stock price volatility 0.971
Risk-free interest rate 4.0%
Expected life, in years 3
14. TERMINATION OF KODAK VENDING PLACEMENT AGREEMENT
The Company's wholly owned subsidiary, Stitch, entered into a vending placement
agreement whereby Stitch agreed to purchase film and cameras directly from
Eastman Kodak Company and vending machines from a supplier. Stitch placed the
vending machines at numerous locations throughout the United States under
agreements negotiated with the location owners and derived revenues amounting to
$358,484 and $1,092,167 for the years ended June 30, 2004 and 2003,
respectfully.
During 2003, Stitch alleged that the supplier and another party to the vending
agreement breached the vending agreement and the supplier and the other party to
the vending agreement alleged that Stitch had breached the vending agreement.
Effective December 31, 2003, the parties finalized a settlement of this matter
which resulted in the termination of the vending agreement. Under the settlement
agreement, the Company received a payment from Kodak of approximately $675,000.
The agreement also provides for the Company to 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 transfers from Stitch to the
supplier. Through June 30, 2004, the Company has received approximately $41,400
for these machines. The agreement also provided that the supplier cancel a
$124,000 obligation of Stitch for the purchase of vending machines.
This termination agreement resulted in a gain of $429,204 during the year ended
June 30, 2004 and is reflected as Other income in the June 30, 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 less a write-down of
the carrying value of vending machines of approximately $367,000 and a net
write-off of amounts due to and from Kodak of $3,000. The remaining vending
machines are reported as assets held for sale in the June 30, 2004 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.
F-29
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
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's contribution for the years ended June 30, 2004 and 2003 was
approximately $78,000 and $67,000, respectively.
16. LEASE COMMITMENTS
The Company conducts its operations from various facilities under operating
leases. In March 2003, the Company entered into a lease for 12,864 square feet
of space located in Malvern, Pennsylvania for its principal executive office and
used for general administrative functions, sales activities, and product
development. The lease term extends through December 31, 2008 and 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.
In connection with the acquisition of the energy conservation product line in
July 2003 from Bayview Technology Group, LLC, the Company assumed leases for
6,384 square feet of space located in Denver, CO used for administrative
functions, sales activities and product warehousing associated with our Miser
products. The lease terms extend through June 30, 2005 and provide for
escalating rent payments currently at $8,200 per month. The lease provides for
additional rent for a prorated share of operating costs for the entire facility.
F-30
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
16. LEASE COMMITMENTS (CONTINUED)
Rent expense under operating leases was approximately $450,000 and $292,000
during the years ended June 30, 2004 and 2003, respectively. Future minimum
lease payments subsequent to June 30, 2004 under capital and noncancelable
operating leases are as follows:
CAPITAL OPERATING
LEASES LEASES
-----------------------
2005 $ 5,622 $ 462,000
2006 1,060 339,000
2007 -- 313,000
2008 -- 319,000
2009 and thereafter 0- 161,000
-----------------------
Total minimum lease payments 6,682 $ 1,594,000
===========
Less amount representing interest 134
--------
Present value of net minimum lease payments 6,548
Less current obligations under capital leases 5,491
--------
Obligations under capital leases, less current portion $ 1,057
========
17. CONTINGENCIES
Various legal actions and claims occurring in the normal course of business 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
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
ITEM 8A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The principal executive officer and principal financial officer have evaluated
the Company's disclosure controls and procedures as of June 30, 2004. Based on
this evaluation, they conclude that the disclosure controls and procedures
effectively ensure that the information required to be disclosed in the
Company's filings and submissions under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
(b) Changes in internal controls.
There have been no changes during the quarter ended June 30, 2004 in the
Company's internal controls over financial reporting that have materially
affected, or are reasonably likely to materially affect, internal control over
financial reporting.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our Directors and executive officers, on September 28, 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. 39 Vice President - Research and
Development
Mary West Young 49 Chief Financial Officer
William W. Sellers (1)(2) 83 Director
William L. Van Alen, Jr. (1)(2) 71 Director
Steven Katz (1) 56 Director
Douglas M. Lurio (2) 47 Director
- ----
(1) Member of Compensation Committee
(2) Member of Audit Committee
31
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.
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.
32
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 a
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.
AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors has determined that the Company does not have an audit
committee financial expert (as defined under the rules of the Securities and
Exchange Commission) serving on its audit committee. The Company believes that
the current members of the audit committee have sufficient knowledge,
background, and experience to fulfill their responsibilities, and at the present
time, it is not necessary to have such a financial expert serving on the audit
committee.
33
CODE OF BUSINESS CONDUCT AND ETHICS
We have adopted a Code of Business Conduct and Ethics that applies to all
executive officers, directors and employees of the Company. The Code of Business
Conduct and Ethics is attached as an exhibit to this Annual Report on Form
10-KSB.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's directors and executive officers, and persons who own more than 10% of
the Company's Common Stock, to file with the Securities and Exchange Commission
reports of ownership and changes in ownership of Common Stock. Officers,
directors and greater than 10% beneficial owners are required by Securities and
Exchange Commission regulation to furnish the Company with copies of all Section
16(a) forms they file.
George R. Jensen, Jr. did not timely report 4 transactions and filed 3 late
reports; Stephen P. Herbert did not timely report 5 transactions and filed 3
late reports; William Van Alen, Jr. did not timely report 18 transactions
(relating primarily to quarterly interest received for past quarters) and filed
2 late reports; Steven Katz did not timely report 1 transaction and filed 1 late
report; William W. Sellers did not timely reports 12 transactions (relating
primarily to quarterly interest received for past quarters) and filed 1 late
report; H. Brock Kolls did not timely report 2 transactions and filed 1 late
report; and Mary West Young did not timely file 3 transactions and filed 1 late
report.
34
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to compensation
paid or accrued by the Company during the fiscal years ended June 30, 2002, June
30, 2003 and June 30, 2004 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
- ------------------------------ ------ ------------------------------------------- --------------------------
Securities
Other Annual Restricted Underlying
Salary Bonus(1) Compensation(2) Stock Awards Options(3)
- ------------------------------ ------ -------------------------------------------------------------------------
George R. Jensen, Jr., 2004 $217,500 $4,870,000(4) $ 17,875 -- --
Chief Executive Officer, 2003 $189,038 $250,000 $223,211 -- --
2002 $135,000 $288,000 $ 80,000 -- 320,000
Stephen P. Herbert, 2004 $192,692 $225,000 $ 17,875 -- --
President 2003 $183,854 $225,000 $185,317 -- --
2002 $125,000 $270,000 $ 80,000 -- 300,000
H. Brock Kolls, Senior Vice 2004 $156,923 $ 60,000 $ 63,205 -- --
President, Research & 2003 $150,000 $ 25,000 $ 64,493 -- --
Development 2002 $125,769 $180,000 $ 50,000 -- 250,000
Adele H. Hepburn 2004 $130,000 $167,075 -- -- --
Director of Investor 2003 $ 91,000 $282,382 -- -- --
Relations 2002 $ 91,000 $472,609 -- -- 500,000
Mary W. Young
Chief Financial Officer(5) 2004 $24,187 $33,636 -- -- 300,000
(1) For fiscal year 2004 includes: 10,500,000 shares valued at $0.44 per share,
in connection with the amendment of his employment agreement, and a $250,000
cash bonus for Mr. Jensen; a $225,000 cash bonus for Mr. Herbert; a $60,000 cash
bonus for Mr. Kolls; a cashless exercise of 470,750 warrants into 470,750 shares
valued at $0.10 per share and a $120,000 cash bonus for Ms. Hepburn; and 200,000
shares valued at $0.168 per share for Ms. Young. For fiscal year 2003 includes:
a $100,000 Senior Note due 2005, including 2,000,000 shares valued at $0.20, and
$150,000 cash bonus for Mr. Jensen; a $100,000 Senior Note due 2005, 200,000
shares valued at $0.20 and a $125,000 cash bonus for Mr. Herbert; a $25,000 cash
bonus for Mr. Kolls; and a $100,000 Senior Note due 2005, including 200,000
shares valued at $0.20 a share, $41,095 Senior Note due 2004, and a $100,000
cash bonus for Ms. Hepburn. For fiscal year 2002, amount 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; and Mr. Kolls-400,000 shares). 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.
(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 to June 30, 2001 for
the options to acquire Common Stock as held by the following directors,
35
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) Prior to July 2003, Mr. Jensen's employment agreement provided that upon the
occurrence of a USA Transaction he would receive that number of shares equal to
seven percent of all of the then issued and outstanding shares on a fully
converted basis. During July 2003, the Company and Mr. Jensen agreed to amend
Mr. Jensen's employment agreement so that upon the occurrence of a USA
Transaction he would receive only four percent of the authorized shares as of
July 2003. Based upon the authorized shares as of July 2003 of 350,000,000, the
fixed number of shares to be issued to Mr. Jensen by the Company upon the
occurrence of a USA Transaction was now only 14,000,000 shares. Under the new
amended agreement, the 14,000,000 shares became subject to dilution (i.e., did
not increase in order to reflect subsequent issuances by the Company of its
shares). Under the prior agreement, the number of shares to be issued to Mr.
Jensen was not subject to dilution (i.e., would be increased in order to reflect
subsequent issuances by the Company of its shares) and was based upon the actual
total number of shares outstanding at the time of a USA Transaction.
For example, if a USA Transaction occurred while there were 475,000,000 shares
then outstanding on a fully converted basis, Mr. Jensen would have received
33,250,000 shares under his prior agreement rather than the fixed number of
14,000,000 shares under his new amended agreement.
During July 2003, the Company issued to Mr. Jensen an aggregate of 10,500,000
shares of restricted Common Stock, 2,500,000 shares of which were issued as
compensation to Mr. Jensen, and 8,000,000 shares of which were issued to Mr.
Jensen in connection with the employment agreement amendment described above. In
accordance with generally accepted accounting principles, the Company was
required to value these shares at $.44 per share or an aggregate of $4,620,000.
(5) Employment commenced on April 28, 2004.
36
OPTION GRANTS IN LAST FISCAL YEAR
(Individual Grants)
- --------------------------------------------------------------------------------
Number of Percent of Exercise Expiration
securities total options base price date
underlying granted to ($/share)
options granted employees in
Name (#) fiscal year
- --------------------------------------------------------------------------------
Mary West Young 300,000 (1) 100% $.30 (2)
(1) Conditioned upon Ms. Young's employment, the options vest at a rate
of 37,500 per three-month period commencing on July 31, 2004 for an
aggregate of 300,000 options on April 30, 2006.
(2) The options expire two-years from the date of vesting.
TOTAL OPTIONS EXERCISED IN FISCAL YEAR ENDED JUNE 30, 2004 AND YEAR END VALUES
The following table gives information for options exercised by an executive
officer and an employee in fiscal year 2004, and the number of options held by
the executive officer and the employee at fiscal year end:
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
FY-End (#) FY-End($)
Name Shares Acquired Exercisable/ Exercisable/
On Exercise (#) Value Realized ($) Unexercisable/ Unexercisable/
- -------------------------------------------------------------------------------------
Adele H. Hepburn 0 0 77,000/0 0
Mary W. Young 0 0 0/300,000 0
- -------------------------------------------------------------------------------------
EXECUTIVE EMPLOYMENT AGREEMENTS
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.
37
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
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.
38
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 200,000 shares of restricted Common Stock at $.15 per share
as part of the 2004-A private placement offering. 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, as determined from time to time by the
Compensation Committee with subsequent approval thereof by the Board of
Directors.
The only compensation paid to our Directors during the fiscal year ended June
30, 2004 was during June 2004, when we paid $30,000 to each of Messrs. Sellers
and Van Alen for services as Chairperson 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 as part of our 2004-A private placement.
39
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
COMMON STOCK
The following table sets forth, as of June 30, 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:
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) 2.48%
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355
Stephen P. Herbert 3,236,050 shares(4) *
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355
Haven Brock Kolls, Jr. 707,325 shares(5) *
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355
Adele H. Hepburn 9,112,859 shares(6) 2.09%
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355
Douglas M. Lurio 921,463 shares(7) *
2005 Market Street, Suite 2340
Philadelphia, Pennsylvania 19103
William W. Sellers 2,712,486 shares(8) *
701 Eagle Road
Wayne, Pennsylvania 19087
Steven Katz 535,000 shares *
440 South Main Street
Milltown, New Jersey 08850
William L. Van Alen, Jr. 2,773,269 shares(9) *
P.O. Box 727
Edgemont, Pennsylvania 19028
Mary West Young 200,000 shares *
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355
All Directors and Executive Officers
As a Group (8 persons) 21,906,593 shares(10) 5.03%
- ---------
*Less than one percent (1%)
40
(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 June 30, 2004, are deemed to be
beneficially owned for purposes hereof.
(2) On June 30, 2004 there were 351,654,131 shares of Common Stock and
522,742 shares of 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 June 30, 2004 (or
within 60-days of June 30, 2004) have been converted into 1,897,472
shares of Common Stock. For purposes of computing such percentages it has
also been assumed that all of the remaining Common Stock Warrants have
been exercised for 33,457,191 shares of Common Stock; that all of the
Senior Notes have been converted into 47,351,320 shares of Common Stock;
and that all of the accrued and unpaid dividends on the Preferred Stock
as of June 30, 2004 have been converted into 667,718 shares of Common
Stock. Therefore, 435,550,574 shares of Common Stock were treated as
issued and outstanding for purposes of computing the percentages under
this table.
(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,
250,000 shares issuable upon the conversion of Senior Notes beneficially
owned by his spouse and 250,000 shares issuable to Mr. Herbert upon the
exercise of warrants.
(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.
41
(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 upon the conversion of Senior Notes beneficially owned by her
spouse, 212,025 shares issuable upon the exercise of her warrants, and
77,000 shares upon exercise of options.
(7) Includes 225,000 shares issuable upon conversion of Senior Notes and
13,500 shares issuable upon exercise of warrants.
(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, 10,423
shares of Common Stock owned by Mr. Seller's wife, 408,334 shares
issuable upon conversion of his Senior Notes and 143,366 shares issuable
upon the exercise of warrants.
(9) Includes 266,670 shares of Common Stock issuable to Mr. Van Alen upon
conversion of his Senior Notes, 548,566 shares issuable upon the exercise
of warrants and 4,000 shares of Common Stock beneficially owned by his
spouse.
(10) Includes all shares of Common Stock described in footnotes (3) through
(5) and (7) through (9) above.
PREFERRED STOCK
The following table sets forth, as of June 30, 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
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355
5,150 shares (2) *
All Directors and
Executive Officers
As a Group (8 persons) 0 shares *
- --------------------
* Less than 1%
(1) There were 522,742 shares of Preferred Stock issued and outstanding as of
June 30, 2004.
(2) Ms. Hepburn is an employee of the Company.
42
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal years ended June 30, 2004 and June 30, 2003, the Company
incurred charges to Lurio & Associates, P.C., of which Mr. Lurio is President
and a shareholder, for professional fees of approximately $391,000 and $305,000
respectively, for legal services rendered to the Company by such law firm.
During the years ended June 30, 2004 and 2003, the Company accrued approximately
$32,000 and $22,000, 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 March through August, 2003, certain Directors, officers, an employee, and
members of their immediate family, invested in the 2003-A Private Placement of
USA shares at $.10 per share, as follows: Adele Hepburn purchased 5,422,000
shares ($543,200); Austin Hepburn purchased 30,000 shares ($3,000); Adele
Hepburn IRA purchased 415,000 shares ($41,500); Stephen Herbert purchased
1,000,000 shares ($100,000); Julie Herbert purchased 250,000 shares ($25,000);
Burton Jensen purchased 1,000,000 shares ($100,000); David Jensen purchased
1,000,000 shares ($100,000), Ron Jensen purchased 1,000,000 shares ($100,000);
George R. Jensen, Jr. purchased 1,000,000 shares ($100,000); Michael Lawlor
purchased 333,070 shares ($33,307); Douglas M. Lurio purchased 500,000 shares
($50,000); Steven Katz purchased 500,000 shares ($50,000); the William W.
Sellers Trust purchased 1,160,000 shares ($116,000); William Van Alen, Jr.,
purchased 90,000 shares ($9,000); and Leland P. Maxwell purchased 276,920 shares
($27,692).
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.
43
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
seven percent of the then issued and outstanding shares as previously provided.
USA also issued to Mr. Jensen an aggregate of 10,500,000 shares of restricted
Common Stock, 2,500,000 shares of which were 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
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.
During April through June, 2004, certain Directors and officers, members of
their immediate family, and an employee, invested in the 2004-A Private
Placement of USA shares at $.15 per share and received a warrant to purchase an
additional fifty-percent of such shares at $.20 per share at any time before
December 31, 2004. The foregoing individuals invested as follows: Stephen P.
Herbert purchased 500,000 shares ($75,000) and received a warrant to purchase an
additional 250,000 shares; William W. Sellers purchased 200,000 shares ($30,000)
and received a warrant to purchase an additional 100,000 shares; William L. Van
Alen, Jr., purchased 1,025,000 ($153,750) and received a warrant to purchase an
additional 512,500 shares; Mary West Young purchased 200,000 shares ($30,000)
and received a warrant to purchase an additional 100,000 shares; Adele Hepburn
purchased 333,333 shares ($50,000) and received a warrant to purchase an
additional 166,667 shares; Burton Jensen purchased 733,333 shares ($110,000) and
received a warrant to purchase an additional 366,667 shares; David Jensen
purchased 733,333 shares ($110,000) and received a warrant to purchase an
additional 366,667 shares; Ronald Jensen purchased 733,333 shares ($110,000) and
received a warrant to purchase an additional 366,667 shares; and Lucas Post Van
Alen purchased 125,000 shares ($18,750) and received a warrant to purchase an
additional 62,500 shares.
Our Code of Business Conduct and Ethics prohibits us from entering into any
related party transaction with an officer or director where such transaction
would interfere with the exercise of the independent judgment of such officer or
director or materially impair the performance of the responsibilities of any
such officer or director.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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)
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).
44
3.2 By-Laws of USA (Incorporated by reference to Exhibit 3.2 to Form
SB-2 Registration Statement No. 33-70992).
4.1 Form of 12% Senior Note (Incorporated by reference to Exhibit 4.6 to
Form SB-2 Registration Statement No. 333-81591).
4.2 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).
4.3 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).
4.4 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).
4.4.1 Addendum to Warrant to Purchase Common Stock dated April 21, 2004,
between the Company and La Jolla Cove Investors, Inc. (Incorporated
by reference to Exhibit 4.1 to Form 10-QSB filed on May 17, 2004).
4.4.2 Addendum to Warrant to Purchase Common Stock dated May 11, 2004,
between the Company and La Jolla Cove Investors, Inc. (Incorporated
by reference to Exhibit 4.2 to Form 10-QSB filed on May 17, 2004).
4.5 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).
4.6 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).
4.7 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).
4.8 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).
4.9 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).
4.10 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).
4.11 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).
4.12 Form of 2004 Senior Note (Incorporated by reference to Exhibit 4.24
to Form SB-2 Registration Statement No. 333-101032).
4.13 Form of 2005 Senior Note (Incorporated by reference to Exhibit 4.25
to Form SB-2 Registration Statement No. 333-101032).
45
**4.14 Addendum to 2006 Senior Note.
**4.15 Addendum to 2007 Senior Note.
4.16 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).
4.17 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).
4.18 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).
4.19 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).
4.20 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).
4.21 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).
4.22 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).
4.23 Letter Agreement between USA and Alpha Capital Atkiengesellschaft
dated October 3, 2003. (Incorporated by reference to Exhibit 4.33 to
Form SB-2 Registration Statement No. 333-101032).
4.24 Form of Subscription Agreement for 2004-A Offering. (Incorporated by
reference to Exhibit 4.3 to Form 10-QSB filed on May 17, 2004).
4.25 Form of 2004-A Warrant Certificate. (Incorporated by reference to
Exhibit 4.34 to Form SB-2 Registration Statement No. 333-116977).
4.26 Common Stock Purchase Agreement between the Company and Steve Illes
dated June 18, 2004. (Incorporated by reference to Exhibit 4.35 to
Form SB-2 Registration Statement No. 333-116977).
4.27 Common Stock Purchase Agreement between the Company and Steve Illes
dated August 6, 2004 (Incorporated by reference to Exhibit 4.35 to
Form S-2 Registration Statement No. 333-118072).
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 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).
46
10.3 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).
10.3.1 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).
10.3.2 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).
10.3.3 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).
10.3.4 Fifth Amendment to Employment and Non-Competition Agreement between
USA and H. Brock Kolls dated April 20, 2004 (Incorporated by
reference to Exhibit 10.4 to Form SB-2 Registration Statement No.
333-116977).
10.4 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).
10.4.1 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)
10.5 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).
10.5.1 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).
10.5.2 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).
10.5.3 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).
10.5.4 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).
10.6 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).
10.6.1 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)
47
10.6.2 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).
10.6.3 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).
10.6.4 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).
10.6.5 Fifth Amendment to Employment and Non-Competition 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).
10.6.6 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).
10.6.7 Letter agreement between USA and George R. Jensen, Jr. dated July
16, 2003 (Incorporated by reference to Exhibit 10.21.7 to Form
10-QSB filed on November 19, 2003).
10.6.8 Lock-Up Agreement dated July 16, 2003 by George R. Jensen, Jr. in
favor of USA (Incorporated by reference to Exhibit 10.21.6 to Form
SB-2 Registration Statement No. 333-101032).
10.7 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).
10.8 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).
10.9 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).
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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).
48
10.15 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).
10.16 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).
10.17 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).
10.18 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).
10.19 Option Certificate (No. 198) dated April 28, 2004 in favor of Mary
West Young. (Incorporated by reference to Exhibit 10.45 to Form SB-2
Registration Statement No. 333-116977)
10.20 Employment and Non-Competition Agreement between USA and Mary West
Young dated April 28, 2004. (Incorporated by reference to Exhibit
10.46 to Form SB-2 Registration Statement No. 333-116977).
**10.21 Agreement of Lease between Pennswood Spring Mill Associates, as
landlord, and the Company, as tenant, dated September 2002, and the
Rider thereto
**10.22 Agreement of Lease between Deerfield Corporate Center 1 Associates
LP, as landlord, and the Company, as tenant, dated March 2003
10.23 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).
**14.1 Code of Business Conduct and Ethics.
**23 Consent of Independent Registered Public Accounting Firm.
**31.1 Certification by the Chief Executive Officer Pursuant to 18 USC
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
**31.2 Certification by the Chief Financial Officer Pursuant to 18 USC
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
**32 Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- -------------
** Filed herewith
(b) Reports on Form 8-K.
During the quarter ended June 30, 2004, the Company filed a Form 8-K dated May
24, 2004, reporting information under Item 5 thereof relating to the appointment
of Mary West Young as Chief Financial Officer of the Company.
49
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT AND NON-AUDIT FEES
During the fiscal years ended June 30, 2004 and 2003, fees in connection with
services rendered by Ernst & Young LLP, the Company's independent auditors were
as set forth below:
Fiscal 2003 Fiscal 2004
----------- -----------
Audit Fees $410,700 $299,869
Audit-Related Fees -- --
Tax Fees $ 83,097 $ 65,321
All Other Fees -- --
-------- --------
TOTAL $493,797 $365,190
Audit fees consisted of fees for the audit of our annual financial statements
and review of quarterly financial statements as well as services normally
provided in connection with statutory and regulatory filings or engagements,
consents and assistance with and review of Company documents filed the
Securities and Exchange Commission.
Tax fees consisted primarily of fees for tax compliance, tax advice and tax
planning services.
There were no fees categorized as Audit-related or Other fees during fiscal
years 2003 and 2004.
AUDIT COMMITTEE PRE-APPROVAL POLICY
The Audit Committee's policy is to pre-approve all audit and permissible
non-audit services provided by the independent auditors on a case-by-case basis.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
USA TECHNOLOGIES, INC.
By: /s/ George R. Jensen, Jr.
--------------------------
George R. Jensen, Jr., Chairman
and Chief Executive Officer
50
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURES TITLE DATE
- ----------- ----- ----
/s/ George R. Jensen, Jr. Chairman of the Board of Directors, September 28, 2004
- ------------------------- Chief Executive Officer
George R. Jensen, Jr. (Principal Executive Officer)
/s/ Mary West Young Chief Financial Officer (Principal September 28, 2004
- -------------------------- Accounting Officer)
Mary West Young
/s/ William W. Sellers Director September 28, 2004
- --------------------------
William W. Sellers
/s/ Stephen P. Herbert Director September 28, 2004
- --------------------------
Stephen P. Herbert
/s/ William L. Van Alen, Jr. Director September 28, 2004
- ----------------------------
William L. Van Alen, Jr.
/s/ Douglas M. Lurio Director September 28, 2004
- --------------------------
Douglas M. Lurio
/s/ Steven Katz Director September 28, 2004
- --------------------------
Steven Katz
51
Exhibit Index
Exhibit
Number Description
- --------------------------------------------------------------------------------
4.14 Addendum to 2006 Senior Note
4.15 Addendum to 2007 Senior Note
10.21 Agreement of Lease between Pennswood Spring Mill Associates, as
landlord, and USA, as tenant, Dated September 2002, with Rider
thereto.
10.22 Agreement of Lease between Deerfield Corporate Center I Associates,
L.P., as landlord, and USA, as tenant, Dated March 28, 2003.
14.1 Code of Business Conduct and Ethics
23 Consent of Independent Registered Public Accounting Firm.
31.1 Certification by the Chief Executive Officer Pursuant to 18 USC
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer Pursuant to 18 USC
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
EXHIBIT 4.14
ADDENDUM TO 2003 SENIOR NOTE
This Addendum shall be a part of and incorporated by reference into the
12% Convertible Senior Note, due December 31, 2003, made by USA in favor of the
undersigned ("Senior Note"). All capitalized terms used herein shall have the
meanings ascribed to them in the Senior Note.
The undersigned, ____________________, is the holder of a $_____________
principal amount Senior Note. The undersigned agrees and confirms that the
Maturity Date of the Senior Note is hereby extended from December 31, 2003 until
December 31, 2006. The undersigned further agrees and acknowledges that the
Conversion Price of the Senior Note is hereby reduced from $1.25 per share to
$.20 per share.
Except as expressly set forth herein, all the terms and conditions of the
Senior Note from USA in favor of the undersigned shall remain in full force and
effect.
IN WITNESS WHEREOF, the undersigned has executed this Addendum to 2003
Senior Note on this _____ day of ________ 2003.
#1 #2
______________________ ____________________
Signature Signature
#1 #2
______________________ ____________________
Witness Witness
AGREED TO AND ACCEPTED:
USA TECHNOLOGIES, INC.
By:_____________________
George R. Jensen, Jr.
Chairman and CEO
EXHIBIT 4.15
ADDENDUM TO 2004 SENIOR NOTE
This Addendum shall be a part of and incorporated by reference into the
12% Convertible Senior Note, due December 31, 2004, made by USA in favor of the
undersigned ("Senior Note"). All capitalized terms used herein shall have the
meanings ascribed to them in the Senior Note.
The undersigned, ____________________, is the holder of a $_____________
principal amount Senior Note. The undersigned agrees and confirms that the
Maturity Date of the Senior Note is hereby extended from December 31, 2004 until
December 31, 2007. The undersigned further agrees and acknowledges that the
Conversion Price of the Senior Note is hereby reduced from $.40 per share to
$.20 per share.
Except as expressly set forth herein, all the terms and conditions of the
Senior Note from USA in favor of the undersigned shall remain in full force and
effect.
IN WITNESS WHEREOF, the undersigned has executed this Addendum to 2004
Senior Note on this _____ day of ________ 2003.
#1 #2
______________________ ____________________
Signature Signature
#1 #2
______________________ ____________________
Witness Witness
AGREED TO AND ACCEPTED:
USA TECHNOLOGIES, INC.
By:_____________________
George R. Jensen, Jr.
Chairman and CEO
Untitled Document
Untitled Document
USA TECHNOLOGIES, INC.
CODE OF BUSINESS CONDUCT AND ETHICS
INTRODUCTION
A most valued asset of USA Technologies, Inc. ("USA" or the "Company") is
its reputation for integrity and ethical standards. To preserve USA's reputation
and to reaffirm its existing policy for integrity to its employees, officers and
directors and to persons who deal with USA, the Board of Directors of USA has
adopted this policy.
SCOPE
This Code of Business Conduct and Ethics ("Code") applies in the United
States and in every other country in which USA and its subsidiaries do business.
Compliance with this Code is required of every employee, officer and director.
If you have any questions regarding this Code or its application to you in any
situation, you should contact your supervisor or USA's President.
CODE
This Code outlines the broad principles of legal and ethical business
conduct embraced by USA. It is not a complete list of legal or ethical issues
you might face in the course of business, and, therefore, you must apply this
Code using common sense and good judgment. Employees, officers and directors
should report promptly to their supervisor or USA's President any possible
violations of this Code. No form of reprisal will be taken against you for
reporting in good faith actual or suspected violations.
COMPLIANCE WITH LAWS, RULES AND REGULATIONS.
All employees, officers and directors shall comply with all laws, rules
and regulations applicable to the Company wherever it does business. You are
expected to use good judgment and common sense in seeking to comply with all
applicable laws, rules and regulations and to ask for advice when you are
uncertain about them.
COMPETITIVE BUSINESS.
Each employee, officer and director must act in the best interests of USA.
You must refrain from engaging in any activity that interferes with your
exercise of independent judgment or materially impairs the performance of your
responsibilities, including engaging in any business venture or owning an
interest in any enterprise that places you in direct competition with USA. You
should not, as an employee, officer or director, take action or have an interest
that prevents you from performing your Company responsibilities honestly and
objectively. You may invest in stock (or other securities) in publicly or
privately owned companies, whether or not they are competitors of, or do
business with, USA so long as that holding is not so great as to interfere with
your exercise of independent judgment or materially impair the performance of
your responsibilities.
It is your responsibility to disclose any transaction or relationship that
reasonably could be expected to interfere with your exercise of independent
judgment or materially impair the performance of your responsibilities to USA's
President or, if you are an executive officer or director, to the Board of
Directors, which shall be responsible for reviewing such transaction or
relationship and determining whether any action needs to be taken.
INSIDER TRADING.
Employees, officers and directors who have material non-public information
about USA or other companies, including USA's suppliers and customers, as a
result of their relationship with the Company are prohibited by law and Company
policy from trading in securities of the Company or such other companies, as
well as from communicating such information to others who might trade on the
basis of that information.
POLITICAL CONTRIBUTIONS.
Except as permitted by applicable law, no political contributions of the
funds of USA are to be made, directly or indirectly, to candidates for political
office or to political parties or committees in the United States or any foreign
country. Any permissible exceptions to this general prohibition will require the
prior consent of the President of USA.
GIFTS AND GRATUITIES.
The use of USA funds or assets for gifts, gratuities or other favors to
employees or government officials is prohibited, except to the extent such gifts
are in compliance with applicable law, nominal in amount and not given in
consideration or expectation of any action by the recipient.
Employees, officers and directors must not accept, or permit any member of
their immediate family to accept, any gifts, gratuities or other favors from any
customer, supplier or other person doing or seeking to do business with USA,
other than items of nominal value. Any gifts that are not of nominal value
should be returned immediately and reported to your supervisor.
Bribes and kickbacks are criminal acts, strictly prohibited by law. You
must not offer, give, solicit or receive any form of bribe or kickback anywhere
in the world.
ACCURACY OF BOOKS AND RECORDS.
All transactions must be properly and accurately recorded in the
appropriate books and records of USA, and all receipts and disbursements, and
any asset or liability resulting from the transactions, must be reflected in any
financial statements based upon such books and records. All receipts and
disbursements must be properly supported and documented. No payment on behalf of
USA shall be approved or made with the intention or understanding that any part
of such payment is to be used for any purpose other than that described by the
documents supporting the payments. No undisclosed or unrecorded fund, bank
account or asset of USA may be established at any time. No employee, officer or
director shall make a false or misleading statement to, nor shall any employee,
officer or director conceal information from, outside or internal auditors or
legal counsel of USA.
PUBLIC REPORTING OF INFORMATION.
It is the policy of the Company to provide full, fair, accurate, timely
and understandable disclosure in reports and documents filed with, or submitted
to, the Securities and Exchange Commission ("SEC") and in other public
communications. Every employee of the Company has the responsibility to assist
the Company in meeting these legal and regulatory requirements. If an employee
reasonably believes that the Company or any of its employees or others, acting
on behalf of the Company, have violated any securities laws or regulations,
including matters relating to accounting and auditing, the employee should
immediately report any such potential violation to the Company's President.
CONFIDENTIALITY.
Employees, officers and directors must maintain the confidentiality of
confidential information entrusted to them by USA or other companies, including
USA's suppliers and customers, except when disclosure is authorized by a
supervisor or legally mandated. Unauthorized disclosure of any confidential
information is prohibited. Additionally, you should take appropriate precautions
to ensure that confidential or sensitive business information, whether it is
proprietary to USA or another company, is not communicated within the Company
except to those who have a need to know such information to perform their
responsibilities.
Employees, officers and directors (other than USA's authorized
spokespersons) must not discuss internal USA matters with, or disseminate
internal USA information to, anyone outside the Company, except as required in
the performance of their Company duties and after an appropriate confidentiality
agreement is in place. This prohibition applies particularly to inquiries
concerning the Company from the media, stock market professionals (such as
securities analysts, institutional investors, investment advisers, brokers and
dealers) and security holders. All responses to inquiries on behalf of the
Company must be made only by the Company's authorized spokespersons. If you
receive any inquiries of this nature, you must decline to comment and refer the
inquirer to your supervisor or one of the Company's authorized spokespersons.
You also must abide by any lawful obligations that you have to your former
employer. These obligations may include restrictions on the use and disclosure
of confidential information, restrictions on the solicitation of former
colleagues to work at USA and non-competition obligations.
HONEST AND ETHICAL CONDUCT AND FAIR DEALING.
Employees, officers and directors should endeavor to deal honestly,
ethically and fairly with the Company's suppliers, customers, competitors and
employees. Statements regarding the Company's products and services must not be
untrue, misleading, deceptive or fraudulent. You must not take unfair advantage
of anyone through manipulation, concealment, abuse of privileged information,
misrepresentation of material facts or any other unfair-dealing practice.
PROTECTION AND PROPER USE OF CORPORATE ASSETS.
Employees, officers and directors should seek to protect the Company's
assets. Theft, carelessness and waste have a direct impact on the Company's
financial performance. Employees, officers and directors must use the Company's
assets and services solely for legitimate business purposes of the Company and
not for any personal benefit or the personal benefit of anyone else.
REPORTING AND COMPLIANCE
RESPONSIBILITIES.
Every employee, officer and director has the responsibility to ask
questions, seek guidance, report suspected violations and express concerns
regarding compliance with this Code. Any employee, officer or director who knows
or believes that any other employee or representative of the Company has engaged
or is engaging in Company-related conduct that violates applicable law or this
Code should report such information to his or her supervisor or to the
President. You may report such conduct openly or anonymously without fear of
retaliation. The Company will not discipline, discharge, demote, suspend,
threaten, harass or in any other manner discriminate or retaliate against any
employee who reports such conduct, unless it is determined that the report was
made with knowledge that it was false. This Code should not be construed to
prohibit you from testifying, participating or otherwise assisting in any state
or federal administrative, judicial or legislative proceeding or investigation.
Questions regarding this policy should be referred to the President of
USA. Candor is expected from all employees, officers and directors at all times
and prompt communication of any problems or breaches seen or foreseen in the
areas described above should be made to the President of USA.
VICE PRESIDENT'S COMPLIANCE CERTIFICATIONS.
It shall be the responsibility of each USA Vice President annually (a) to
review this policy or cause it to be reviewed with his or her subordinates,
offering each subordinate an opportunity to report privately to such Vice
President any problems or breaches seen or foreseen in the areas described
above, and (b) to certify to the Audit Committee of the Board of Directors of
USA his or her knowledge with respect to such problems or breaches and that such
review has occurred.
DISCIPLINARY ACTIONS.
The Company shall determine whether violations of this Code have occurred
and, if so, shall determine the disciplinary measures to be taken against any
employee or officer who has violated this Code. In the event that the alleged
violation involves an executive officer or a director, the Chief Executive
Officer and the Board of Directors, respectively, shall determine whether a
violation of this Code has occurred and, if so, shall determine the disciplinary
measures to be taken against such executive officer or director.
Failure to comply with the standards outlined in this Code will result in
disciplinary action including, but not limited to, reprimands, warnings,
probation or suspension without pay, demotions, reductions in salary, discharge
and restitution. Certain violations of this Code may require the Company to
refer the matter to the appropriate governmental or regulatory authorities for
investigation or prosecution. Moreover, any supervisor who directs or approves
of any conduct in violation of this Code, or who has knowledge of such conduct
and does not immediately report it, also will be subject to disciplinary action,
up to and including discharge.
The Company reserves the right to amend, alter or terminate this Code at
any time for any reason. The most current version of this Code can be obtained
from USA's President.
This document is not an employment contract between the Company and any of
its employees, officers or directors.
WAIVERS OF THIS CODE
Any executive officer or director who seeks an exception to any of these
policies should contact USA's President. Any waiver of this Code for executive
officers or directors or any change of this Code that applies to executive
officers or directors may be made only by the Board of Directors of the Company
and will be disclosed as required by law or stock market regulation.
Exhibit 23
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-117073) of USA Technologies, Inc. and in the related Prospectus of
our report dated September 10, 2004, with respect to the consolidated financial
statements of USA Technologies, Inc. included in this Annual Report (Form
10-KSB) for the year ended June 30, 2004.
/s/ Ernst & Young LLP
September 28, 2004
Philadelphia, PA
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
I, George R. Jensen, Jr., Chief Executive Officer of the registrant, certify
that:
1. I have reviewed this annual report on Form 10-KSB of USA Technologies,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the small business issuer as of, and for, the periods presented in this
report;
4. The small business issuer's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small
business issuer and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
small business issuer, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b. Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based
upon such evaluation; and
c. Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small
business issuer's fourth fiscal quarter in the case of an annual
report) that has materially affected or is reasonably likely to
materially affect, the small business issuer's internal control over
financial reporting; and
5. The small business issuer's other certifying officer and I have disclosed,
based on our most recent evaluation, of internal control over financial
reporting to the auditors and the audit committee of the small business
issuer's board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies and material weaknesses in the design
or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial
information; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business
issuer's internal control over financial reporting.
Date: September 28, 2004 /s/ George R. Jensen, Jr.
----------------------------------------
George R. Jensen, Jr.,
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
I, Mary West Young, Chief Financial Officer of the registrant, certify that:
1. I have reviewed this annual report on Form 10-KSB of USA Technologies,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the small business issuer as of, and for, the periods presented in this
report;
4. The small business issuer's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small
business issuer and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
small business issuer, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b. Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based
upon such evaluation; and
c. Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small
business issuer's fourth fiscal quarter in the case of an annual
report) that has materially affected or is reasonably likely to
materially affect, the small business issuer's internal control over
financial reporting; and
5. The small business issuer's other certifying officer and I have disclosed,
based on our most recent evaluation, of internal control over financial
reporting to the auditors and the audit committee of the small business
issuer's board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies and material weaknesses in the design
or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial
information; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business
issuer's internal control over financial reporting.
Date: September 28, 2004 /s/ Mary West Young
---------------------------------------
Mary West Young,
Chief Financial Officer
Exhibit 32
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the accompanying Annual Report of USA Technologies,
Inc., (the "Company") on Form 10-KSB for the period ended June 30, 2004 (the
"Report"), I, George R. Jensen, Jr., Chief Executive Officer of the Company,
hereby certify that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
/s/ George R. Jensen, Jr.
---------------------------------------
George R. Jensen, Jr.
Chief Executive Officer
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the accompanying Annual Report of USA Technologies,
Inc., (the "Company") on Form 10-KSB for the period ended June 30, 2004 (the
"Report"), I, Mary West Young, Chief Financial Officer of the Company, hereby
certify that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
/s/ Mary West Young
---------------------------------------
Mary West Young
Chief Financial Officer
