AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 25, 2004.
REGISTRATION NO. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
Registration Statement
Under
The Securities Act of 1933
USA TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 7359 23-2679963
------------ ---- ----------
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355
(Address of principal executive offices and zip code)
George R. Jensen, Jr.
Chief Executive Officer
USA Technologies, Inc.
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355
(610) 989-0340
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Douglas M. Lurio, Esquire
Lurio & Associates, P. C.
One Commerce Square
2005 Market Street, Suite 2340
Philadelphia, PA 19103-7015
(215) 665-9300
Approximate date of proposed sale to the public:
From time to time after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, check the following box: [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
================================================================================
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
Title of each
class of Proposed Proposed
Securities Amount Maximum Maximum Amount of
to be to be Offering Price Aggregate Registration
Registered Registered Per Unit(7) Offering Price Fee
- --------------------------------------------------------------------------------
Common Stock,
no par value 1,465,812 shares(1) $.16 $ 234,530 $ 21.58
1,251,865 shares(2) $.16 $ 200,298 $ 18.43
17,500,000 shares(3) $.16 $ 2,800,000 $ 257.60
2,574,874 shares(4) $.40 $ 1,029,950 $ 94.76
603,030 shares(5) $.36 $ 217,091 $ 19.97
15,108,667 shares(6) $.36 $ 5,439,120 $ 500.40
----------- --------
Total 38,504,248 shares $10,246,429 $ 912.74(8)
=========== ========
(1) This registration statement amends our registration statement on Form SB-2,
Commission File No. 333-101032, and pursuant to Rule 429 of the Securities Act
of 1933, as amended, carries forward 1,465,812 shares issuable upon exercise the
options granted to the former owners of options to purchase shares of Stitch
Networks, Inc.
(2) This registration statement amends our registration statement on Form SB-2,
Commission File No. 333-101032, and pursuant to Rule 429 of the Securities Act
of 1933, as amended, carries forward 1,251,865 shares issued to the former
stockholders of Stitch Networks, Inc.
(3) This registration statement amends our registration statement on Form SB-2,
Commission File No. 333-101032, and pursuant to Rule 429 of the Securities Act
of 1933, as amended, carries forward 7,500,000 shares already issued to Kazi
Management and 10,000,000 shares issuable to Kazi Management upon exercise of
warrants.
2
(4) This registration statement amends our registration statement on Form SB-2,
Commission File No. 333-107800, and pursuant to Rule 429 of the Securities Act
of 1933, as amended, carries forward 451,264 shares issued to our senior
noteholders who exercised warrants and 2,123,610 shares issuable to our senior
noteholders upon exercise of outstanding warrants. These warrants were issued in
lieu of cash interest payments due on the senior notes for the calendar quarters
ended June 30, 2002, September 30, 2002, December 31, 2002, March 31, 2003, and
June 30, 2003.
(5) This registration statement amends our registration statement on Form SB-2,
Commission File No. 333-110148, and pursuant to Rule 429 of the Securities Act
of 1933, as amended, carries forward 134,404 shares issued to our senior
noteholders who exercised warrants and 468,626 shares issuable to our senior
noteholders upon exercise of outstanding warrants. These warrants were issued in
lieu of cash interest payments due on the senior notes for the calendar quarter
ended September 30, 2003.
(6) This registration statement amends our registration statement on Form SB-2,
Commission File No. 333-110148, and pursuant to Rule 429 of the Securities Act
of 1933, as amended, carries forward 15,108,667 shares issued to Bayview
Technology Group, LLC.
(7) Pursuant to Rule 457c, the registration fee has been calculated at the
average of the bid and ask price within 5 days prior to the date of the filing
of the original registration statement relating to the shares.
(8) The filing fee of $912.74 was previously paid in connection with and at the
time of the filing of the original registration statements relating to the
shares. All of the shares covered by this Registration Statement are being
carried forward pursuant to Rule 429 of the Securities Act of 1933, as amended.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission ("SEC") is effective. This prospectus is not
an offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
3
PROSPECTUS
USA TECHNOLOGIES, INC.
38,504,248 shares of Common Stock
THE OFFERING
The resale of up to 38,504,248 shares of common stock in the over-the-counter
market at the prevailing market price or in negotiated transactions. We will
receive no proceeds from the sale of the shares by the selling shareholders.
However, we will receive proceeds from the sale of shares issuable upon the
exercise of warrants or options by the selling shareholders. Because the selling
shareholders will offer and sell the shares at various times, we have not
included in this prospectus information about the price to the public of the
shares or the proceeds to the selling shareholders.
All of the shares covered by this prospectus have been previously registered
by us for resale under the Act and are being carried forward in this prospectus
as permitted by Rule 429 of the Act.
Our common stock is included for quotation on the over-the-counter bulletin
board under the symbol "USTT." The closing bid price for the common stock on
October 19, 2004, was $.13 per share.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES ONLY
IF YOU CAN AFFORD A COMPLETE LOSS. Please refer to Risk Factors beginning on
Page 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities or passed on the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is October 25, 2004.
TABLE OF CONTENTS
Prospectus Summary .......................................... 5
Forward Looking Statements................................... 6
Risk Factors ................................................ 6
Use of Proceeds ............................................. 13
Selected Financial Data...................................... 13
Quarterly Financial Data..................................... 14
Quantitative and Qualitative Disclosures
About Market Risk.......................................... 15
Managements Discussion And Analysis of
Financial Condition And Results of Operations.............. 15
Business .................................................... 29
Management .................................................. 45
Principal Shareholders ...................................... 52
Certain Transactions ........................................ 54
Selling Shareholders ........................................ 55
Market for Common Stock ..................................... 69
Plan of Distribution ........................................ 72
Description of Securities ................................... 73
Legal Matters ............................................... 79
Experts ..................................................... 79
Where You Can Find Additional Information.................... 79
Financial Statements ........................................ F-1
4
PROSPECTUS SUMMARY
OUR COMPANY
USA Technologies, Inc. (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.
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 BUSINESS
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.
OUR MARKET
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.
RESEARCH AND DEVELOPMENT COSTS
Research and development expenses, which are included in general and
administrative and compensation expense in the Consolidated Statements of
Operations, were $688,000, $1,505,000, and $1,187,000 for the years ended June
30, 2004, 2003 and 2002, respectively.
ABOUT OUR OFFERING
Our selling shareholders are as of the date of this prospectus as follows:
* holders of 24,446,200 shares
* holders of unexercised options and warrants which if exercised would represent
14,058,048 shares (based upon the price of our shares of $.13 on October 19,
2004, 10,000,000 of these options and warrants have exercise prices less than
this share price)
5
Based upon the shares outstanding as of June 30, 2004 of 351,654,131, if all of
these warrants and options are exercised, and all of these shares covered by
this prospectus were issued and outstanding as of such date, we would have
366,239,836 shares outstanding.
All of the shares covered by this prospectus have been previously registered by
us for resale under the Act and are being carried forward in this prospectus
as permitted by Rule 429 of the Act.
These shares would be offered by our selling shareholders at the market price at
the time of resale. Our selling shareholders may also sell their shares to other
investors in a transaction not on the open market. There is no requirement that
our selling shareholders sell their shares pursuant to this prospectus.
We will not receive any of the proceeds raised by the offering. We would receive
proceeds from the exercise by the selling shareholders of the warrants and
options referred to above.
FORWARD LOOKING STATEMENTS
This prospectus contains certain forward looking statements regarding, among
other things, the anticipated financial and operating results of the Company.
For this purpose, forward looking statements are any statements contained herein
that are not statements of historical fact and include, but are not limited to,
those preceded by or that include the words, "believes," "expects,"
"anticipates," or similar expressions. Those statements are subject to known and
unknown risks, uncertainties and other factors that could cause the actual
results to differ materially from those contemplated by the statements. The
forward looking information is based on various factors and was derived using
numerous assumptions. Important factors that could cause the Company's actual
results to differ materially from those projected, include, for example (i) the
ability of the Company to generate sufficient sales to generate operating
profits, or to sell products at a profit, (ii) the ability of the Company to
raise funds in the future through sales of securities, (iii) whether the Company
is able to enter into binding agreements with third parties to assist in product
or network development, (iv) the ability of the Company to commercialize its
developmental products, or if actually commercialized, to obtain commercial
acceptance thereof, (v) the ability of the Company to compete with its
competitors to obtain market share, (vi) the ability of the Company to obtain
sufficient funds through operations or otherwise to repay its debt obligations
including but not limited to Senior Notes, or to fund development and marketing
of its products; (vii) the ability of the Company to obtain approval of its
pending patent applications, (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.
RISK FACTORS
An investment in our common stock is very risky. You should be aware that you
could lose the entire amount of your investment. Prior to making an investment
decision, you should carefully consider the following risk factors and the other
information contained in this prospectus.
6
1. We have a history of losses since inception and if we continue to incur
losses the price of our shares can be expected to fall.
We have experienced losses since inception. We expect to continue to incur
losses for the foreseeable future as we expend substantial resources on sales,
marketing, and research and development of our products. From our inception
through June 30, 2004, our cumulative losses are approximately $97,600,000
million. For our fiscal years ended June 30, 2002, 2003 and 2004, we have
incurred net losses of $17,314,807, $21,965,499 and $21,426,178, respectively.
If we continue to incur losses, the price of our common stock can be expected to
fall.
2. Our existence is dependent on our ability to raise capital which may not be
available.
There is currently limited experience upon which to assume that our business
will prove financially profitable or generate more than nominal revenues. From
inception, we have generated funds primarily through the sale of securities.
There can be no assurances that we will be able to continue to sell additional
securities. We expect to raise funds in the future through sales of our debt or
equity securities until such time, if ever, as we are able to operate
profitably. There can be no assurance given that we will be able to obtain funds
in such manner or on terms that are beneficial to us. For the year ended June
30, 2004 we were using funds in our operations on a monthly basis of
approximately $1,050,000. These cash flows were impacted by working capital
increases that were disproportionate to the increase in revenues and included
working capital required as a result of the Bayview acquisition. Excluding these
working capital requirements, cash used in operating activities would have been
approximately $850,000 per month for fiscal year 2004. Using that as a basis for
estimating cash requirements for the year ending June 30, 2005, along with
requirements for capital expenditures and repayment of long term debt, the
Company's cash needs would approximate $10,500,000 through June 30, 2005. Our
inability to obtain needed funding can be expected to have a material adverse
effect on our operations and our ability to achieve profitability. If we fail to
generate increased revenues or fail to sell additional securities you may lose
all or a substantial portion of your investment.
3. We received an opinion from our auditor which raises substantial doubt about
our ability to continue as a going concern.
Our auditors, Ernst and Young, LLP, have included an explanatory paragraph in
their report on our June 30, 2004 consolidated financial statements indicating
that as of June 30, 2004, there is substantial doubt about our ability to
continue as a going concern. We will require additional funds in the future, and
there can be no assurance that any independent auditors` report on our future
financial statements will not include a similar explanatory paragraph if we are
unable to raise sufficient funds or generate sufficient cash from operations to
cover the cost of our operations. The existence of the explanatory paragraph may
adversely affect our relationship with prospective customers, suppliers and
potential investors, and therefore could have a material adverse effect on our
business, financial condition and results of operations.
7
4. We depend on our key personnel and if they would leave us, our business could
be adversely affected.
We are dependent on key management personnel, particularly the Chairman and
Chief Executive Officer, George R. Jensen, Jr. The loss of services of Mr.
Jensen or other executive officers would dramatically affect our business
prospects. Certain of our employees are particularly valuable to us because:
o they have specialized knowledge about our company and operations;
o they have specialized skills that are important to our operations; or
o they would be particularly difficult to replace.
We have entered into an employment agreement with Mr. Jensen that expires in
June 30, 2005. We have also entered into employment agreements with other
executive officers, each of which contain non-compete agreements. We have
obtained a key man life insurance policy in the amount of $2,000,000 on Mr.
Jensen, and a key man life insurance policy in the amount of $1,000,000 on our
Vice-President-Research and Development, Haven Brock Kolls, Jr.
We do not have and do not intend to obtain key man life insurance coverage on
any of our other executive officers. As a result, we are exposed to the costs
associated with the death of these key employees.
5. USA's dependence on proprietary technology and limited ability to protect our
intellectual property may adversely affect our ability to compete.
A successful challenge to our ownership of our technology could materially
damage our business prospects. Our technology may infringe upon the proprietary
rights of others. Our success is dependent in part on our ability to obtain
patent protection for our proprietary products, maintain trade secret protection
and operate without infringing the proprietary rights of others.
Through July 28, 2004, we have 34 pending patent applications, and intend to
file applications for additional patents covering our future products, although
there can be no assurance that we will do so. In addition, there can be no
assurance that we will maintain or prosecute these applications. The United
States Government and other countries have granted us 49 patents as of May 31,
2004. There can be no assurance that:
o any of the remaining patent applications will be granted to us;
o we will develop additional products that are patentable or do not infringe the
patents of others;
o any patents issued to us will provide us with any competitive advantages or
adequate protection for our products;
o any patents issued to us will not be challenged, invalidated or circumvented
by others; or
o any of our products would not infringe the patents of others.
8
If any of the products are found to have infringed any patent, there can be no
assurance that we will be able to obtain licenses to continue to manufacture and
license such product or that we will not have to pay damages as a result of such
infringement. Even if a patent application is granted for any of our products,
there can be no assurance that the patented technology will be a commercial
success or result in any profits to us.
6. Competition from others with greater resources could prevent USA from
increasing revenue and achieving profitability.
Competition from other companies which are well established and have
substantially greater resources may reduce our profitability. Many of our
competitors have established reputations for success in the development, sale
and service of high quality products. We face competition from the following
groups:
o companies offering automated, credit card activated control systems in
connection with facsimile machines, personal computers, debit card
purchase/revalue stations, and use of the Internet and e-mail which directly
compete with our products;
o companies which have developed unattended, credit card activated control
systems currently used in connection with public telephones, prepaid telephone
cards, gasoline dispensing machines, or vending machines and are capable of
developing control systems in direct competition with USA; and
o businesses which provide access to the Internet and personal computers to
hotel guests. Although these services are not credit card activated, such
services would compete with USA's Business Express(R).
Competition may result in lower profit margins on our products or may reduce
potential profits or result in a loss of some or all of our customer base. To
the extent that our competitors are able to offer more attractive technology,
our ability to compete could be adversely affected.
7. The termination of any of our relationships with third parties upon whom we
rely for supplies and services that are critical to our products could adversely
affect our business and delay achievement of our business plan.
We depend on arrangements with third parties for a variety of component parts
used in our products. We have contracted with RadiSys Corporation and Masterwork
Electronics to assist us to develop and manufacture our e-Port(TM) products. For
other components, we do not have supply contracts with any of our third-party
suppliers and we purchase components as needed from time to time. See
"Business-Procurement". We have contracted with IBM to develop our network
services so that these services are Internet capable as well as interact with
our proposed media capable e-Post(TM). We have contracted with IBM to host our
network in a secure, 24/7 environment to ensure reliability of our network
services. If these business relationships are terminated, the implementation of
our business plan may be delayed until an alternative supplier or service
provider can be retained. If we are unable to find another source or one that is
comparable, the content and quality of our products could suffer and our
business, operating results and financial condition could be harmed.
9
8. We do not expect to pay cash dividends in the foreseeable future and
therefore investors should not anticipate cash dividends on their investment.
The holders of our common stock and series A preferred stock are entitled to
receive dividends when, and if, declared by our board of directors. Our board of
directors does not intend to pay cash dividends in the foreseeable future, but
instead intends to retain any and all earnings to finance the growth of the
business. To date, we have not paid any cash dividends on the common stock or
series A preferred stock and there can be no assurance that cash dividends will
ever be paid on the common stock.
In addition, our articles of incorporation prohibit the declaration of any
dividends on the Common Stock unless and until all unpaid and accumulated
dividends on the Series A preferred stock have been declared and paid. Through
June 30, 2004, the unpaid and cumulative dividends on the series A preferred
stock equal $6,677,180. The unpaid and cumulative dividends on the series A
preferred stock are convertible into shares of common stock at the rate of
$10.00 per share at the option of the shareholder. Through June 30, 2004,
$2,684,444 of unpaid and cumulative dividends on the Series A Preferred Stock
were converted into 288,521 shares of common stock. See "Description of
Securities-Series A Convertible Preferred Stock."
9. We may fail to gain widespread market acceptance of our products and not
generate sufficient revenues or profit margins to become successful.
There can be no assurance that demand for our products will be sufficient to
enable us to become profitable. Likewise, no assurance can be given that we will
be able to install the TransActs and e-Ports at enough locations or sell
equipment utilizing our network to enough locations to achieve significant
revenues or that our operations can be conducted profitably. Alternatively, the
locations which would utilize the network may not be successful locations and
our revenues would be adversely affected. We may in the future lose locations
utilizing our products to competitors, or may not be able to install our
products at competitor's locations. In addition, there can be no assurance that
our products could evolve or be improved to meet the future needs of the market
place.
10. The lack of an established trading market may make it difficult to transfer
our stock and you may not be able to sell your shares on our trading market.
Our Common Stock is traded on the OTC Bulletin Board. Although there is limited
trading in the Common Stock, there is no established trading market. Until there
is an established trading market, holders of the common stock may find it
difficult to dispose of, or to obtain accurate quotations for the price of the
common stock. See "Description of Securities - Shares Eligible For Future Sale"
and "Market For Common Stock."
11. There are rules governing low-priced stocks that may make it more difficult
for you to resell your shares.
Our common stock is currently considered a "penny stock" under federal
securities laws since its market price is below $5.00 per share. Penny stock
rules generally impose additional sales practice and disclosure requirements on
broker-dealers who sell our shares to certain investors.
10
Broker-dealers who sell penny stock to certain types of investors are required
to comply with the SEC's regulations concerning the transfer of penny stock. If
an exemption is not available, these regulations require broker-dealers to:
- - make a suitability determination prior to selling penny stock to the
purchaser;
- - receive the purchaser's written consent to the transaction; and - provide
certain written disclosures to the purchaser.
- - These rules may affect the ability of broker-dealers to make a market in or
trade our shares. This, in turn, may affect your ability to resell those shares
in the public market.
12. The substantial market overhang of our shares and registered resales under
this prospectus will tend to depress the market price of our shares.
The substantial number of our shares currently eligible for sale in the open
market will tend to depress the market price of our shares. See "Description of
Securities--Shares Eligible for Future Sale" and "Market for Securities". As of
June 30, 2004, these shares consisted of the following:
- - 351,654,131 shares of Common Stock
- - 522,742 shares of Preferred Stock
- - 35,354,663 shares underlying Common Stock options and warrants; and
- - 47,351,320 shares underlying our Convertible Senior Notes.
13. Sales of shares eligible for future sale from exercise of warrants and
options could depress the market price of our common stock.
As of June 30, 2004, we had issued and outstanding options to purchase 1,897,472
shares of our common stock and warrants to purchase 33,457,191 shares. The
shares underlying all of these options and warrants have been registered and may
be freely sold upon issuance. Market sales of large amounts of our common stock,
or the potential for those sales even if they do not actually occur, may have
the effect of depressing the market price of our common stock. In addition, if
our future financing needs require us to issue additional shares of common stock
or securities convertible into common stock, the supply of common stock
available for resale could be increased which could stimulate trading activity
and cause the market price of our common stock to drop, even if our business is
doing well.
14. We are obligated to make substantial principal and interest payments to the
holders of the Senior Notes for which funds may not be available or would use
our available working capital.
11
As of the June 30, 2004 we have approximately $451,152 of unsecured senior notes
due on December 31, 2004, approximately $3,011,791 of unsecured senior notes due
on December 31, 2005, approximately $3,213,500 of unsecured notes due on
December 31, 2006, and approximately $3,019,397 of unsecured notes due on
December 31, 2007. These notes accrue cash interest at the rate of twelve
percent (12%) per year. We are required to make quarterly interest payments
totaling approximately $290,875 or $1,163,500 each year.
Until the Senior Notes have been paid by us, they will be reflected as a
liability on our financial statements, net of the related unamortized discount
and other issuance costs.
Our ability to satisfy the debt obligations is dependent on our future
performance, the success of our product lines and on our ability to raise
capital. Our performance is also subject to financial, business and market
factors affecting our business and operations.
We anticipate that the Senior Notes will either be converted into Common Stock
or be paid from cash generated from operations, as well as proceeds from
securities offerings. However, there can be no assurance that we will meet our
obligations to pay quarterly interest on or the principal amount of the senior
notes at maturity. The payment of the interest and principal on these notes
would utilize our available working capital which would not be available for
other purposes.
15. Our exchange of New Senior Notes to our 2004 Senior Note holders may have
been in violation of the registration provisions of the securities laws. As a
result, certain of our note holders may be granted the right to rescind the
exchange and demand the return of their old note to them by us which matures in
December 2004. The repayment of these notes in December 2004 would adversely
affect our liquidity.
The holders of $4,067,491 of our Senior Notes due December 31, 2007, may have a
right to rescind the exchange of these notes for notes originally due December
31, 2004, and demand that we return to them the $4,067,491 of notes due December
31, 2004. As of June 30, 2004, $3,019,397 of these notes remain outstanding.
During the period from March 2003 through December 2003, we granted to each
holder of the notes due December 31, 2004 the right to extend the notes until
December 31, 2007 and in such event agreed that the conversion rate of the note
would be reduced from $.40 to $.20. On April 14, 2003 we filed a Registration
Statement which included the shares underlying the 2007 notes. Because the
exchange offering was not completed prior to the filing of this registration
statement, the exchange offer may be deemed to have been in violation of the
registration requirements of Section 5 of the Act. As a result, we removed all
of the shares underlying the 2007 Notes from that registration statement.
Generally, the statute of limitations for this type of claim is one year after
the date of the alleged violations and if successful, would entitle the Note
holders to rescind the issuance of the new notes to them and demand a return of
the 2004 Senior Notes. If all of the note holders demanded the return of their
notes, we would be obligated to repay the $4,067,491 principal amount on
December 31, 2004 rather than on December 31, 2007. This repayment could
significantly exceed our cash reserves and require us to borrow funds (which may
not be available) and would materially and adversely affect our results of
operations and financial condition.
12
USE OF PROCEEDS
We will not receive any of the proceeds from the sales of our Common Stock by
the selling shareholder. The selling shareholders entitled to receive the net
proceeds from any sales of our common stock begins on page 55 of this
prospectus. We will, however, receive proceeds from the exercise of any options
or warrants by the selling shareholders.
As of the date of this prospectus, we would receive $1,493,545 of proceeds from
the exercise of all these options and warrants at the stated exercise price. As
of the date hereof, the exercise price of 10,000,000 of these options and
warrants (exercisable for a total of $775,000) are in the money.
SELECTED FINANCIAL DATA
The following selected financial data for the five years ended June 30, 2004 are
derived from the audited consolidated financial statements of USA Technologies,
Inc. The data should be read in conjunction with the consolidated financial
statements, related notes, and other financial information.
Year ended June 30
2004 2003 2002 2001 2000
--------------------------------------------------------------------------------
OPERATIONS DATA
Revenues $ 5,632,815 $ 2,853,068 $ 1,682,701 $ 1,451,002 $ 2,054,341
Loss before cumulative effect of
accounting change $(21,426,178) $(21,965,499) $(17,314,807) $(10,135,244) $ (8,404,481)
Cumulative effect of accounting change -- -- -- (821,000) --
--------------------------------------------------------------------------------
Net loss (21,426,178) (21,965,499) (17,314,807) (10,956,244) (8,404,481)
Cumulative preferred dividends (786,513) (793,586) (822,561) (836,541) (930,078)
--------------------------------------------------------------------------------
Loss applicable to common shares $(22,212,691) $(22,759,085) $(18,137,368) $(11,792,785) $ (9,334,559)
================================================================================
Loss per common share (basic and diluted)
Loss before cumulative effect of
accounting change $ (0.08) $ (0.20) $ (0.50) $ (0.65) $ (0.92)
Cumulative effect of accounting
change -- -- -- (0.05) --
--------------------------------------------------------------------------------
Net loss $ (0.08) $ (0.20) $ (0.50) $ (0.70) $ (0.92)
================================================================================
Cash dividends per common share
$ -- $ -- $ -- $ -- $ --
BALANCE SHEET DATA
Total assets $ 25,880,577 $ 17,892,681 $ 17,056,773 $ 6,180,061 $ 4,509,208
Convertible Senior Notes and other
long-term debt $ 6,630,405 $ 8,033,083 $ 7,117,453 $ 4,289,858 $ 2,723,367
Shareholders' equity (accumulated deficit)
$ 14,108,662 $ 3,692,083 $ 3,395,892 $ (2,400,897) $ (155,482)
13
(a) The cumulative effect of an accounting change in fiscal year 2001
reflects a catch up adjustment as required by EITF Issue 00-27,
Application of EITF Issue 98-5, "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios to Certain Convertible Instruments" in
connection with $4.6 million of Convertible Senior Notes issued by
the Company in 1999.
(b) During fiscal year 2001 the Company recorded an $863,000 loss on a
exchange of debt which was originally reported as an extraordinary
loss. In accordance with the provisions of SFAS No. 145, "Recission
of FASB Statements No. 4, 44 and 62, Amendment of SFAS No. 13, and
Technical Corrections," such loss was reclassified to a loss from
continuing operations.
(c) In May 2002 the Company acquired Stitch Networks Corporation. In
July 2003 the Company acquired substantially all the assets of
Bayview Technology Group, LLC. Both acquisitions have been accounted
for using the purchase method and, accordingly, are included in the
Company's results of operations from their respective dates of
acquisition.
QUARTERLY FINANCIAL DATA
Unaudited quarterly results of operations for the years ended June 30, 2004 and
2003 follow and should be read in conjunction with the consolidated financial
statements, related notes and other financial information and the Company's
quarterly reports on Form 10-QSB.
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
---------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 2004
Revenues $ 1,680,608 $ 1,914,586 $ 1,352,689 $ 684,932 $ 5,632,815
Gross profit $ 598,445 $ 831,167 $ 281,747 $ (408,236) $ 1,303,123
Net loss $ (9,303,084) $ (3,737,624) $ (3,383,570) $ (5,001,900) $(21,426,178)
Cumulative preferred dividends $ (393,369) $ -- $ (393,144) $ -- $ (786,513)
Loss applicable to common shares $ (9,696,453) $ (3,737,624) $ (3,776,714) $ (5,001,900) $(22,212,691)
Loss per common share (basic and diluted) $ (0.04) $ (0.01) $ (0.01) $ (0.02) $ (0.08)
YEAR ENDED JUNE 30, 2003
Revenues $ 734,445 $ 774,647 $ 724,238 $ 619,738 $ 2,853,068
Gross profit $ 66,985 $ 102,707 $ 6,465 $ (294,532) $ (118,375)
Net loss $ (3,574,218) $ (3,630,997) $ (5,337,683) $ (9,422,601) $(21,965,499)
Cumulative preferred dividends $ (396,962) $ -- $ (396,624) $ -- $ (793,586)
Loss applicable to common shares $ (3,971,180) $ (3,630,997) $ (5,734,307) $ (9,422,601) $(22,759,085)
Loss per common share (basic and diluted) $ (0.06) $ (0.04) $ (0.05) $ (0.05) $ (0.20)
14
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risks for interest rate changes is not
significant. Interest rates on its Senior Notes and long-term debt are generally
fixed and its investments in cash equivalents and other securities are not
significant. Market risks related to fluctuations of foreign currencies is not
significant and the Company has no derivative instruments.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
GENERAL
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and the accompanying notes. Actual results could differ
from those estimates. We believe the policies and estimates related to revenue
recognition, software development costs, impairment of long-lived assets,
goodwill and intangible assets, and investments represent our critical
accounting policies and estimates. Future results may differ from our estimates
under different assumptions or conditions.
REVENUE RECOGNITION
Revenue from the sale of equipment is recognized on the terms of
freight-on-board shipping point, or upon installation and acceptance of the
equipment if installation services are purchased for the related equipment.
Transaction processing revenue is recognized upon the usage of the Company's
cashless payment and control network. 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.
15
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.
During May 2000, the Company reached technological feasibility for the
development of the multi-media e-Port(TM) product and related internal network
and, accordingly, the Company commenced capitalization of software development
costs related to this product and network. Costs capitalized through 2002 were
$5.3 million, which included capitalized interest of approximately $493,000
pursuant to SFAS No. 34, "Capitalization of Interest Costs".
During the fourth quarter of fiscal year 2002, the multi-media e-Port(TM) client
product and enhanced network became available for general release to the
Company's customers. During this quarter, management performed an evaluation of
the commercial success and preliminary market acceptance of the multi-media
e-Port(TM) and enhanced network and as a result of this evaluation the Company
determined that the estimated future revenues less costs to complete and dispose
of the multi-media e-Port client product was zero. Therefore, the Company wrote
down $2,663,000 of software development costs related to the multi-media e-Port
client product. The unamortized balance of the software development costs after
the impairment charge was amortized over an estimated useful life of two years
and was 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 was approximately $999,000 during the year
ended June 30, 2004, and $1,331,000 during the year ended June 30, 2003 and
$2,996,000 during the year ended June 30, 2002 (including the above impairment
adjustment of $2,663,000). Such amortization is reflected in cost of sales in
the accompanying consolidated statements of operations.
16
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.
17
Intangible assets include patents, trademarks and non-compete arrangements
purchased in acquisitions. Amortization expense related to these intangible
assets was $1,208,668, $292,000, and $36,500 during the years ended June 30,
2004, 2003 and 2002, 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.
18
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.
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.
19
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.
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.
20
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.
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.
21
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:
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.
22
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.
FISCAL YEAR ENDED JUNE 30, 2002
Revenues for the fiscal year ended June 30, 2002 were $1,682,701, an increase of
$231,699 or 16% from the prior year. This increase in revenues is directly
attributable to the acquisition of Stitch Networks Corporation, which accounted
for $210,068 of the increase. Other revenues remained flat with the prior year,
as the Company's sales efforts did not produce significant revenues due to
limited market acceptance, which was less than that anticipated by the Company.
The Company is continually increasing its sales efforts to sell its e-Ports and
its Business Express products.
Overall, operating expenses for the fiscal year ended June 30, 2002 were
$17,025,865, representing a $7,365,090 or 76% increase over the prior year. This
increase is due to the increases of $3,113,674 or 328% in cost of sales,
$2,332,938 or 42% in general and administrative expenses, $1,687,886 or 57% in
compensation expense, and $230,592 or 110% in depreciation and amortization
expense. The significant changes in each category are as follows:
The increase of $3,113,674 or 328% in cost of sales is due primarily to the
inclusion of amortization of software development costs and the cost of product
relating to Stitch Networks Corporation. In fiscal 2002, the Company recorded
software amortization of $2,996,000, including an impairment charge of
$2,663,000, in cost of sales as required by generally accepted accounting
principles. During the fourth quarter of fiscal year 2002, the Company
determined that the estimated future revenues less costs to complete and dispose
the enhanced e-Port client product was zero, and therefore recorded this
impairment charge to reflect software development costs at their net realizable
value. There was no amortization expense for software development costs in
fiscal year ended 2001. The remaining increase in cost of sales is attributable
to the increase in sales, primarily related to the Stitch revenues in fiscal
2002.
23
The increase in general and administrative expenses of $2,332,938 or 42% is due
primarily to the increase in non-cash (securities) compensation in the amount of
$555,482 paid to our investment banker, increase in the non-cash (securities)
compensation paid to our public relations consultants in the amount of
$1,601,915, and the increase in non-cash (securities) compensation in the amount
of $657,238 paid to our other business consultants. Although these expenses did
not result in increased revenues during the fiscal year, we believe that
increased revenues may occur in the future. Our investment banker provided us
with various financial advisory services during the fiscal year, including
identifying strategic acquisition opportunities. Our public relations
consultants assisted us to attempt to introduce the Company and its products as
well as communicate with our shareholders. Our other business consultants
assisted us during the fiscal year with technical development of and advice in
connection with our network and e-Port products. The increases in our general
and administrative expenses were offset by a substantial decrease in legal
expenses of $992,181, primarily associated with termination of the Mail Boxes
Etc. litigation, which was settled in fiscal year 2001.
The increase in compensation expense of $1,687,886 or 57% from the previous year
is mainly attributable to an increase in stock bonus expense to Company officers
and employees of $1,248,545, which was a non-cash expense. The stock bonuses
were issued in order to adequately compensate and attempt to retain the
Company's management team intact. Corporate salaries increased $342,921 or 113%,
due to increased headcount by 16% during the year, primarily due to the addition
of Stitch Network's personnel during the last one and one half months of 2002.
Depreciation and amortization expense of $440,238 increased by $230,592, which
is directly attributable to the increased depreciation expense of the assets
acquired in the Stitch acquisition.
Interest expense increased by $864,929, primarily as a result of the non-cash
amortization to interest expense relating to the debt discount and beneficial
conversion features on the Company's convertible Senior Notes.
For the fiscal year ended June 30, 2002, the Company had a net loss of
$17,314,807 (approximately $11.0 million non-cash charges).
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.
24
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 $97,600,000. The Company has continued to
raise capital through equity and debt offerings to fund operations.
The impact of the Bayview acquisition on cash flows for the 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.
25
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. From July 1, 2004 through October 25,
2004, the Company issued 15,240,470 shares under this agreement for total gross
proceeds of $1,582,620.
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 $0.33 per
share and remain at that level, or higher, from a price of $0.13 per share as of
October 19, 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 $0.13 per share
that would yield approximately $800,000 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.
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 energy
management 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.
26
OTHER EVENTS
In May 2002, we acquired Stitch Networks Corporation. Pursuant to the
transaction, Stitch became our wholly-owned subsidiary. In exchange for their
Stitch stock, the Stitch stockholders received an aggregate of 22,762,341 of our
shares of common stock. We also issued to the former option holders of Stitch,
options to purchase up to 2,475,318 shares at $.165 per share at any time for
five years following closing. The offer and sale of the shares, warrants, and
options was exempt from registration under Section 4(2) of the Act. The Stitch
stockholders acquiring our shares were all accredited investors and we obtained
appropriate investment representations and the securities contained appropriate
restrictive legends under the Act. The thirty-three former option holders of
Stitch receiving our options consisted of directors, officers or key employees
of Stitch, all of whom were sophisticated investors. In connection with the
issuance of the options, we obtained appropriate investment representations and
the securities contained appropriate restrictive legends under the Act. As of
the date hereof, all of the shares issued to the former stockholders of Stitch
have been sold other than the 1,251,865 shares held by Maytag Holdings, Inc.
which are included in this prospectus. As of the date hereof, there are
unexercised options to purchase up to 1,465,812 shares which are included in
this prospectus.
During October 2002, the Company issued to an investor, Kazi Management VI,
Inc., 3,571,429 shares of its Common Stock at $.07 per share generating net
proceeds of $244,925. This investor also received a warrant to purchase up to
7,142,858 shares of Common Stock of the Company at $.07 per share at any time on
or before October 26, 2007, and a warrant to purchase up to 7,142,858 shares of
Common Stock at $.07 per share and up to 5,000,000 shares at $.10 per share at
any time before December 23, 2004. We have agreed to register for resale these
shares as well as the shares underlying the warrants for a period of five years.
As of the date of this prospectus, Kazi has exercised warrants to purchase
7,142,858 shares at $.07 per share and warrants to purchase 2,500,000 shares at
$.10 per share. The shares currently held by Kazi, as well as the unexercised
warrants, are included in this prospectus.
We issued the following to the holders of our senior notes:
- In July 2002, we issued warrants to purchase up to 191,250 shares to the
holders of our senior notes who elected to receive these securities in lieu of
the cash interest payment due for the quarter ended June 30, 2002;
- In October 2002, we issued warrants to purchase up to 529,324 shares to
the holders of our senior notes who elected to receive securities in lieu of the
cash interest payment due for the quarter ended September 30, 2002;
- In January 2003, we issued warrants to purchase up to 593,634 shares to
the holders of our senior notes who elected to receive securities in lieu of the
cash interest payment due for the quarter ended December 31, 2002;
- In April 2003, we issued warrants to purchase up to 530,818 shares to
the holders of our senior notes who elected to receive securities in lieu of the
cash interest payment due for the quarter ended March 31, 2003; and
27
- In July 2003, we issued warrants to purchase up to 661,224 shares to the
holders of our senior notes who elected to receive securities in lieu of the
cash interest payment due for the quarter ended June 30, 2003.
- In October 2003, we issued warrants to purchase up to 603,030 shares to
the holders of our senior notes who elected to receive these securities in lieu
of the cash interest payment due for the quarter ended September 30, 2003.
The warrants were exercisable at $.20 per share at any time through June 30,
2004 (later extended to October 29, 2004). On August 20, 2004, the exercise
price of these warrants was reduced retroactively to $.15 per share. We have
agreed to register the shares underlying the warrants under the Act for resale.
The securities were offered and sold under the exemption from registration set
forth in Rule 506 promulgated under the Act. All of the noteholders are
accredited investors and existing security holders and there was no general
solicitation or advertising. As of the date hereof, warrants have been exercised
for 585,668 shares at $.15 per share, and warrants to purchase up to 2,592,236
shares remain unexercised. All of these shares are covered by this prospectus.
On July 11, 2003, we issued 19,300,000 shares to Bayview Technology Group, LLC
(now known as BT LLC), as part of our purchase of substantially all of the
assets of Bayview. The securities were offered and sold under the exemption from
registration set forth in Rule 506 promulgated under Section 4(2) the Act.
Bayview agreed not to sell any of the shares until July 11, 2004, at which time
Bayview is permitted to sell during each calendar month thereafter (on a
non-cumulative basis) the greater of (i) 250,000 shares, or (ii) that number of
shares equal to five percent (5%) of the immediately prior calendar month's
trading volume of the shares. USA has agreed to use its best efforts to register
all of the shares for resale by Bayview under the Act for a period of one year
(from July 11, 2004 through July 11, 2005). In October 2004, Bayview transferred
11,070,000 of its shares to its members and a note holder. Prior to the
transfer, Bayview had sold 4,191,333 of the shares originally issued to it. All
of the remaining shares are covered by this prospectus.
28
BUSINESS
USA Technologies, Inc. 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 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).
29
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.
30
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.
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.
31
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.
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.
32
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.
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.
33
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.
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.
34
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.
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.
35
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.
36
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.
37
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 October 2004, the Company has not
yet earned revenues from this agreement.
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 October 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 October 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.
38
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.
39
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.
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%,
35% and 12% of the Company's revenues for the years ended June 30, 2004, 2003
and 2002, respectively, were concentrated with one, two 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, Dial-A-Vend.com, USALive and e-Port The Next Generation in
Vending. Through its wholly owned subsidiary, Stitch Networks, the Company has
secured three registered trademarks, including eVend.net, eSuds.net, and Stitch
Networks, and one trademark, E-ppliance, which is pending registration. 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 October 7, 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 2 patents have received notices of allowance as of October 7,
2004.
40
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";
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";
41
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";
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";
42
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";
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";
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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, $1,505,000, and $1,187,000 for the years ended June
30, 2004, 2003 and 2002, respectively.
EMPLOYEES
On June 30, 2004, the Company had 46 employees, all of whom were full-time.
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.
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, Colorado 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.
44
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
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.
45
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.
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.
46
Douglas M. Lurio joined the Board of Directors of USA in June 1999. Mr. Lurio is
President of Lurio & Associates, P.C., attorneys-at-law, which he founded in
1991. He specializes in the practice of corporate and securities law. Prior
thereto, he was a partner with Dilworth, Paxson LLP. Mr. Lurio received Bachelor
of Arts Degree in Government from Franklin & Marshall College, a Juris Doctor
Degree from Villanova Law School, and a Masters in Law (Taxation) from Temple
Law School.
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, 2004, June
30, 2003 and June 30, 2002 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.
47
(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,
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 $4,620,000.
48
(5) Employment commenced on April 28, 2004.
OPTION GRANTS IN LAST FISCAL YEAR
(Individual Grants)
- --------------------------------------------------------------------------------
Number of Percent of Exercise Expiration
securities total options base price date
underlying granted to ($/share)
options granted employees in
Name (#) fiscal year
- --------------------------------------------------------------------------------
Mary West Young 300,000 (1) 100% $.30 (2)
- ------
(1) Conditioned upon Ms. Young's employment, the options vest at a rate of
37,500 per three-month period commencing on July 31, 2004 for an aggregate of
300,000 options on April 30, 2006.
(2) The options expire two-years from the date of vesting.
TOTAL OPTIONS EXERCISED IN FISCAL YEAR ENDED JUNE 30, 2004 AND YEAR END VALUES
The following table gives information for options exercised by an executive
officer and an employee in fiscal year 2004, and the number of options held by
the executive officer and the employee at fiscal year end:
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
FY-End (#) FY-End($)
Shares Acquired Exercisable/ Exercisable/
Name 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.
49
The agreement also grants to Mr. Jensen in the event a "USA Transaction" (as
defined below) occurs after the date thereof an aggregate of 14,000,000 shares
of Common Stock subject to adjustment for stock splits or combinations ("Jensen
Shares"). Mr. Jensen is not required to pay any additional consideration for the
Jensen Shares. At the time of any USA Transaction, all of the Jensen Shares are
automatically deemed to be issued and outstanding immediately prior to any USA
Transaction, and are entitled to be treated as any other issued and outstanding
shares of Common Stock in connection with such USA Transaction.
The term USA Transaction is defined as (i) the acquisition of fifty-one percent
or more of the then outstanding voting securities entitled to vote generally in
the election of Directors of the Company by any person, entity or group, or (ii)
the approval by the shareholders of the Company of a reorganization, merger,
consolidation, liquidation, or dissolution of the Company, or the sale,
transfer, lease or other disposition of all or substantially all of the assets
of the Company. The Jensen Shares are irrevocable and fully vested, have no
expiration date, and will not be affected by the termination of Mr. Jensen`s
employment with the Company for any reason whatsoever. If a USA Transaction
shall occur at a time when there are not a sufficient number of authorized but
unissued shares of Common Stock, then the Company shall as a condition of such
USA Transaction promptly take any and all appropriate action to make available a
sufficient number of shares of Common Stock. In the alternative, the Company may
structure the USA Transaction so that Mr. Jensen would receive the same amount
and type of consideration in connection with the USA Transaction as any other
holder of Common Stock.
The Company has entered into an employment agreement with Mr. Herbert, which
expires on June 30, 2005, and is automatically renewed from year to year
thereafter unless canceled by Mr. Herbert or the Company. The Agreement provides
for an annual base salary of $230,000 per year effective January 1, 2004. Mr.
Herbert is entitled to receive such bonus or bonuses as the Board of Directors
may award to him. The Agreement requires Mr. Herbert to devote his full time and
attention to the business and affairs of the Company and obligates him not to
engage in any investments or activities which would compete with the Company
during the term of the agreement and for a period of one year thereafter. In the
event that a USA Transaction (as defined in Mr. Jensen's employment agreement)
shall occur, then Mr. Herbert has the right to terminate his agreement upon 30
days notice to USA.
50
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.
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.
51
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.
PRINCIPAL SHAREHOLDERS
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
52
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%)
(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.
(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.
53
(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.
CERTAIN TRANSACTIONS
During the fiscal year ended June 30, 2004, 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 for legal services rendered to the
Company by such law firm. During the year ended June 30, 2004, the Company
accrued approximately $32,000 for these services. Mr. Lurio is a Director of the
Company.
54
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 agreed to issue to Mr. Jensen an aggregate of 10,500,000 shares of
restricted Common Stock, 2,500,000 shares of which will be issued as
compensation to Mr. Jensen for future services, and 8,000,000 shares of which
will be issued to Mr. Jensen in connection with the employment agreement
amendment. Mr. Jensen has agreed to enter into a lock up agreement pursuant to
which he shall not sell 2,500,000 of the shares for a one-year period and
8,000,000 of the shares for a two-year period.
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.
SELLING SHAREHOLDERS
Each of the selling shareholders listed below is, as of the date hereof, the
holder of our common stock or has the right to acquire the number of shares of
common stock set forth opposite such selling shareholder's name. The issuance of
the common stock to the selling shareholders as well as the issuance of the
common stock to the selling shareholders upon exercise of the warrants was or
will be a transaction exempt from the registration requirements of the Act and
various state securities laws.
55
We have agreed, at our expense, to register all of the common stock for resale
by the selling shareholders under the Act. We expect to incur expenses of
approximately $35,000 in connection with the registration statement of which
this prospectus is a part.
The number of shares that may be actually sold by the selling shareholders will
be determined by the selling shareholders. The selling shareholders are under no
obligation to sell all or any portion of the shares offered, nor are the selling
shareholders obligated to sell such shares immediately under this Prospectus.
Particular selling shareholders may not have a preset intention of selling their
shares and may offer less than the number of shares indicated. Because the
selling shareholder may sell all, some or none of the shares of common stock
that the selling shareholder holds, no estimate can be given as to the number of
shares of our common stock that will be held by the selling shareholder upon
termination of the offering. Shares of common stock may be sold from time to
time by the selling shareholders or by pledgees, donees, transferees or other
successors in interest.
The following tables set forth information with respect to each selling
shareholder and the respective amounts of common stock that may be offered
pursuant to this prospectus. None of the selling shareholders has, or within the
past three years has had, any position, office or other material relationship
with us, except as noted below. Except as specifically set forth below,
following the offering, and assuming all of the common stock offered hereby has
been sold, none of the selling shareholders will beneficially own one percent
(1%) or more of the common stock.
STITCH COMMON STOCK OPTIONS
Beneficial Ownership
After Offering
Common Stock ------------------------
Selling Shareholder Offered Hereby(6) Number Percent
- ------------------- -------------- ------ -------
Scott Nissenbaum 252,377
David Goodman 126,188
Ritchie Snyder 126,188
Diane Goodman 126,188
Roger Scholten(1) 126,188 1,251,865 *
Kenneth Boyle(2) 126,188 0 *
Mike Bolton 126,188
Scott Rosenthal 79,082
Wendy Jenkins(3) 79,082 -- *
Alex Kane 55,358
Mark Rooney 39,541
Ken May 23,725
Matthew Heilman(4) 19,771 0 *
Erika Bender(4) 15,816 0 *
Susan Ledyard 11,862
Chris Keane(4) 11,862 0 *
Aaron Watkins 11,862
Staci Spitzer 11,862
Jim Rosemary 11,862
Doke Scott 11,862
Maeve McKenna(5) 11,862 0 *
Doug Wiggins 11,862
56
David Vrencur 7,908
Ron Wood(3) 7,908 0 *
Michael Knoll 7,908
Rob Foehl 7,908
Kate Jones 3,954
Sean McGraw 3,954
Eric Montgomery 3,163
Patrick Brisiel 3,163
Peter McNally 3,163
Total 1,465,812
- -----------------
* less than one percent
(1) Mr. Scholten is a Director of Maytag Holdings, Inc. which beneficially owns
1,251,865 shares of the Company.
(2) Mr. Boyle is a former Director of the Company.
(3) Current employee of the Company.
(4) Former employee of the Company.
(5) Consultant of the Company.
(6) Represents shares underlying options to purchase our shares that were issued
to holders of options to purchase shares of Stitch on May 14, 2002 as part of
our acquisition of Stitch. The options to purchase shares of Stitch were
cancelled as part of the exchange. The options are exercisable at any time
through May 13, 2007 at $.165 per share and none have been exercised as of the
date of this prospectus. We have agreed to register these shares for resale
under the Act at our cost and expense until May 13, 2005.
STITCH MERGER COMMON STOCK
Beneficial Ownership
After Offering
Common Stock --------------------
Selling Shareholder Offered Hereby(1) Number Percent
- ------------------- ----------------- ------ -------
Maytag Holdings, Inc.(2) 1,251,865 0 *
- -------
* Less than one percent (1%).
(1) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Maytag Holdings,
Inc., is Ken Boyle.
(2) Represents shares issued in exchange for shares of Stitch on May 14, 2002 as
part of our acquisition of Stitch. We have agreed to register these shares for
resale under the Act at our cost and expense until May 13, 2005.
57
KAZI MANAGEMENT COMMON STOCK
Beneficial Ownership
After Offering
--------------------
Common Stock
Selling Shareholder Offered Hereby(1) Number Percent
- ------------------- ----------------- ------ -------
Kazi Management VI, Inc. (2) 17,500,000 0 *
- ----------
(1) Consists of 7,500,000 shares of Common Stock purchased at $.07 per share and
10,000,000 shares underlying warrants. Of these warrants 2,500,000 are
exercisable at $.10 per share and the balance at $.07 per share.
(2) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Kazi Management,
is Zubair Kazi.
INTEREST WARRANT COMMON STOCK
COMMON STOCK BENEFICIAL OWNERSHIP
SELLING SHAREHOLDER OFFERED HEREBY AFTER OFFERING
- --------------------------- ----------------------- -----------------------
NUMBER PERCENT
-----------------------
DONALD T AANESTAD 9,900
VIJAY ALIMACHANDANI 14,650
ALAN ALPERT 3,600
JOHN P AYERS 7,200
JOHN BACHICH 21,000
CHARLES F BELLAVIA 4,950
NANCY & EARL BESCH 7,200
GUNTER J BEYER(18) 5,300 422,983 *
BENJAMIN LEE BIRD 7,200
KATHLYNE K BIRDSALL 902
DAVID C BLACKBURN 650
JOSEPH BOLITSKY 48,000
EDWIN R BOYNTON (1) 23,400 255,450 *
JAMES R BOYNTON, ACCT # 3,600
DAVID G BRAY 1,254
DOUGLAS & CAROLYN BRITTAIN 10,933
BRITTAIN FAMILY TRUST(19) 4,800
GORDON L BRODINE 24,080
MICHAEL J BUDINETZ 7,550
VINCENT CALVARESE 7,125
WILLIAM A CAMPBELL 1,350
RALPH A CARABASI 600
JULIE CARLSON 5,683
GARY CELLA 1,360
MICHAEL J CHIORDI 7,200
GERALD E CLARK JR 5,040
ROBERT J CLARKE 8,697
DIANE CLOUTIER 43,200
58
ROGER D COFFEY 4,933
MARC A COHEN 41,400
CORNERSTONE PUBLIC
RELATIONS GRP (20) 584
JOHANNA CRAVEN 1,068
JIM CROSS 2,400
WILLIAM R CROTHERS 4,502
DUDLEY R CROW 83
LORRAINE CROW 641
BENJAMIN DEACON 375
CLIFTON B CURRIN TRUST 6,000
DAMAR INVESTMENT TRUST (21) 80,273
BENJAMIN DEACON 1,603
DELTA WESTERN COMPANY (2) 27,000
DAVID DEMEDIO (3) 8,100 280,475 *
LOUIS E DI RENZO 3,600
DILIGENT FINANCE CO LTD (4) 178,134 1,000,000 *
ANEES T DIN 8,100
LEO J DOLAN 14,400
ROBERT F DRESS 5,200
HOWARD EFFRON 6,907
BENTLY ELLIOTT 6,413
ELLSHAY LLC (5) 1,500
ANTHONY J FANELLI 9,490
HENRY J FIELDMAN(22) 3,600
JOHN S FOSTER 49,200 0 *
HELEN K FOX 7,009
SAMANTHA HARRIS FULMER 637
DOROTHY GALVIN 720
MARGARET R GEDDIS 1,800
ROBERT G GIDDENS 64,734
FREDERICK F GLOCKNER 720
WILLIAM M GOLDSTEIN 21,600
EDWARD HALDEMAN 3,000
PAULINE E HALDEMAN 3,000
IRA FBO ROBERT A HAMILTON (6) 2,856 87,917 *
JOHN E HAMILTON 2,160
ROBERT HAMILTON (6) 6,552 134,084 *
PETER & DEBORAH HARRIS 3,600
GEORGE HARRUM (7) 417 3,334 *
JOHN HAY (23) 3,600 0 *
HEALD FAMILY TRUST (8) 8,400
ANDREW B HEBENSTREIT 16,500
ADELE H HEPBURN (28) 22,679 9,090,180 2.1%
JOYCE HODGES 3,600
MICHELLE HOLLENSHEAD 1,502
JAMES M HOLMWOOD 14,400
HRUBALA ASSOCIATES,
A PARTNERSHIP (9) 12,117
GORDON F HUDSON 13,375
CHRISTINE F HUGHES 1,800
STEVE ILLES (30) 45,000 16,955,000 3.9%
WENDY JENKINS (31) 5,900 170,800 *
WILLIAM ROBERT JOHNSTON 3,600
CHARLES T JONES 3,600
F/B/O FRED KARAGOSIAN 7,200
59
GLORIA & FRED KARN 720
MICHAEL KATCHUR 5,400
THOMAS A KATCHUR 18,750
MAUDE WOOD KENT 7,200
THOS & MAUDE WOOD KENT 7,200
ROBERT A KILGORE 36,000
SHIRLEY K KNERR 6,480
GREGORY S KOBUS 7,200
CHRISTINE F KOLLS(24) 3,600 703,725 *
PAUL G LANNI 7,200
WARREN D LEWIS 8,700
LEXINGTON VENTURES INC (10) 3,800
H MATHER LIPPINCOTT JR 6,000
ANTHONY F LOPEZ 8,700
ROBERT LOZOWSKI 987
DOUGLAS LURIO (11) 9,000 921,463 *
JAMES P MACCAIN 17,800
LEWIS F MADAN 1,440
KATHLEEN MASON 62,400
CHARLES MAYER 3,780
BARRY N MCCABE 4,717
DUANE C MCCARTHY 720
G ELLARD MCCARTHY 3,600
JOHN F MCCORMICK 3,750
BOB MCGARRAH(25) 9,000 607,260 *
JOHN P MCGONIGLE 720
MARY C MCGONIGLE 720
MEDIATECH CAPITAL(26) 250,587 1,132,279 *
JAMES F MERRIMAN 34,318
EILEEN MILLER 2,880
HARLEY MILLER 14,421
WANDA S MOFFITT 2,700
GEORGE W MOFFITT JR 8,102
THOMAS MOLUMPHY 3,600
MOLUMPHY CAPITAL MGMT (12) 7,200
ROBERT MONTGOMERY 19,200
MAC G MORRIS 3,600
JAMES H MOSIER 9,099
GARY NASH 480
ELIZABETH L NELSON 25,317
ROBERT F NEMETH 7,827
GREGG J NEWHUIS 41,648
JEFFREY M NEWHUIS 5,040
PATRICK NOLAN 15,618
PAUL NORDIN 2,400
GARY OAKLAND 4,850
GEORGE O`CONNELL 108,000
OLDOM & CO. (29) 3,000
ROBERT PADRICK, TRUSTEE 31,500
PANORAMA PARTNERS LP (13) 50
MICHAEL A PARKER 2,400
NEIL L PARKER 3,025
RICHARD & LAURA PARKER 12,042
JOSEPH PELLEGRINO 103,333
ROBERT H POTTS 6,000
CHARLES W PROCTOR III 258
60
ERNEST L RANSOME III 3,600
HARRY RENNER IV 28,800
JOHN B RETTEW III 7,500
GARDINER ROGERS 7,920
MARIE G ROPER 3,600
GERALD B ROSENTHAL 6,000
KARL F RUGART 19,800
JOHN S RUPP 5,196
VALENTINA SAS 1,440
EDWARD L SCHOENHUT 14,400
WILLIAM F SCHOENHUT JR 18,183
STEPHEN SCHWARTZ 16,400
VICKI S SCIFERS 1,950
MARY L SCRANTON 4,200
NICHOLAS SELLERS 7,200
WILLIAM W SELLERS TR UA
11/20/00 WILLIAM W
SELLERS REV(14) 21,683 2,690,803 *
AMY T SEYMOUR (15) 33 83,066 *
RAYMOND K SHOTWELL 2,843
LEONARD H SICHEL JR 7,200
RICHARD SMITH 80,320
KATHY SMITLEY 1,946
MELVIN G SNYDER 1,950
TERRY W STANGLEIN 21,242
ELINOR STEINHILBER 7,200
MICHAEL STEIR 7,758
CPT ERIC W STETSON 3,600
GERTRUDE T. STEVENS 8,334
HOMER N STEWART 7,200
PRISCILLA STITT 3,225
VIVIAN K STROUD (16) 4,050 197,975 *
CLARK D STULL 8,610
GEORGE E SZYCHOSKI 72
MICHAEL W SZYCHOSKI 182
CONSTANTINE TEOFIL SZYMBORSKI 7,200
ALFRED HUNTER THOMPSON 1,539
ANDREW THOMPSON 360
WILLIAM E HOROUGHGOOD 750
GUILLERMO M TORRES 3,000
JAMES TURNER(32) 20,467 637,334 *
ANTHONY B ULLMAN (27) 3,600 0 *
WILLIAM L VAN ALEN JR (17) 11,033 2,762,236 *
C. ANTHONY WAINWRIGHT 2,000
DWANE M WEAVER 4,933
MICHAEL L WEAVER 720
WESLEY R WEAVER 7,749
ARTHUR L WHEELER
ACCT #216-39U48 93,600
ARTHUR & RUTH WIENER 6,866
ARTHUR A WIENER 2,102
BERNARD WIENER 1,283
J EDWARD WILLARD 37,250
KENNETH B WILSON 2,508
CLAUDINE WOLFE 1,098
C EDWIN WRIGHT 2,358
61
JOHN D WRIGHT 6,025
CRAIG YOSHIMOTO 7,200
JOSEPH ZIRBES 1,500
RUTH ZWEIGBAUM 8,384
TOTAL 2,574,874 (33)
- ---------
* Less than 1%
(1) Mr. Boynton is a former Director of the Company.
(2) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Delta Western
Company, is George W Moffitt.
(3) Mr. Demedio is an employee of the Company.
(4) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Diligent Finance
Company Ltd, is Rai Hamilton. Diligent is currently our consultant.
(5) The The natural person who exercises sole and/or shared voting or
dispositive powers with respect to the shares held of record by the entity,
Ellshay Llc, is Mark Erlich.
(6) Mr. Hamilton is an employee of the Company.
(7) Mr. Harrum is an employee of the Company.
(8) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Heald Family
Trust, is Jack Heald.
(9) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Hrubala
Associates, A Partnership, is David R Molumphy.
(10) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Lexington
Ventures, is Larry Gordon.
(11) Mr. Lurio is a Director and his law firm, Lurio & Associates, P.C., is
General Counsel to the Company.
(12) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Molumphy Capital
Mgmt, is Thomas J Molumphy.
(13) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Panorama
Partners LLP, is Aaron Lehmann.
(14) Mr. Sellers is a Director of the Company.
(15) Mrs. Seymour is an employee of the Company.
(16) Ms. Stroud is an employee of the Company.
(17) Mr. Van Alen Jr. is a Director of the Company.
(18) Mr. Beyer is a consultant of the Company.
(19) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Brittain Family
Trust, is E. Douglas Brittain.
(20) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Cornerstone
Public Relations Group, is M. Darlene Herbert Felt.
(21) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Damar Investment
Trust, is David L. Weaver.
(22) Mr. Fieldman is a member of the law firm of Fieldman, Hay & Ullman, LLP,
which represented the Company in connection with prior litigation.
62
(23) Mr. Hay is a member of the law firm of Fieldman, Hay & Ullman, LLP, which
represented the Company in connection with prior litigation.
(24) Spouse of H. Brock Kolls, an Employee of the Company.
(25) Mr. Mcgarrah is a consultant to the Company.
(26) Mediatech Capital is the successor to Technology Partners (Holdings), LLC,
the Company's former investment banker. The natural person who exercises sole
and/or shared voting or dispositive powers with respect to the shares held of
record by the entity, Mediatech Capital, is Porter Bibb.
(27) Mr. Ullman is a member of the law firm of Fieldman, Hay & Ullman, LLP,
which represented the Company in connection with prior litigation.
(28) Ms. Hepburn is Director Of Investor Relations for the Company.
(29) Brokerage account for Elizabeth Nelson.
(30) Mr. Illes acted as our consultant from April through July 2003 and has
entered into a common stock purchase agreement with us dated August 6, 2004.
(31) Ms. Jenkins is an employee the Company.
(32) Mr. Turner is an employee of the Company.
(33) Represents 2,574,874 shares underlying warrants issued to our senior
noteholders who elected to receive these securities in lieu of cash for the June
30, 2002, September 30, 2002, December 31, 2002, March 31, 2003 and June 30,
2003 quarterly interest payments. We have agreed to register these shares for
resale under the Act at our cost and expense through December 31, 2004. As of
the date hereof, 451,264 warrants have been exercised at $.15 per share. The
remaining unexercised warrants are exercisable at $.15 per share through
October 29, 2004.
SEPTEMBER 2003 INTEREST WARRANT STOCK
Beneficial Ownership
After Offering
Common Stock --------------------
Selling Shareholder Offered Hereby (18) Number Percent
- ------------------- ------------------- ------ -------
DONALD T AANESTAD 3,000
VIJAY ALIMACHANDANI 4,500
ALAN ALPERT 750
HRUBALA ASSOCIATES 1,500
JOHN P AYERS 1,500
CHARLES F BELLAVIA 1,500
NANCY & EARL BESCH 1,500
GUNTER J BEYER (10) 1,184 427,099 *
BENJAMIN LEE BIRD 1,500
KATHLYNE K BIRDSALL 188
JOSEPH BOLITSKY 10,000
EDWIN R BOYNTON (1) 4,875 273,975 *
DAVID G BRAY 300
DOUGLAS & CAROLYN BRITTAIN 3,000
BRITTAIN FAMILY TRUST (11) 1,000
GORDON L BRODINE 6,000
MICHAEL J BUDINETZ 2,138
MOLUMPHY CAPITAL MGMT 1,500
CARLSON INVESTMENTS (16) 11,400
MICHAEL J CHIORDI 1,500
GERALD E CLARK JR 1,050
DIANE CLOUTIER 9,000
ROGER D COFFEY 1,500
MARC A COHEN 8,625
63
CORNERSTONE PUBLIC
RELATIONS GROUP(12) 141
JIM CROSS 500
WILLIAM R CROTHERS 938
LORRAINE CROW 150
CLIFTON B CURRIN TRUST 3,000
BENJAMIN DEACON 375
DELTA WESTERN COMPANY(2) 5,625
DAVID DEMEDIO (3) 1,875 286,700 *
LOUIS E DI RENZO 750
ANEES T DIN 4,050
LEO J DOLAN 3,000
ROBERT F DRESS 1,100
HOWARD EFFRON 1,500
BENTLY ELLIOTT 1,500
ANTHONY J FANELLI 4,050
JOHN S FOSTER 10,250
HELEN K FOX 1,500
SAMANTHA HARRIS FULMER 150
DOROTHY GALVIN 150
MARGARET R GEDDIS 375
ROBERT G GIDDENS 15,685
FREDERICK F GLOCKNER 150
WILLIAM M GOLDSTEIN 4,500
EDWARD HALDEMAN 3,000
PAULINE E HALDEMAN 3,000
JOHN E HAMILTON 450
IRA FBO ROBERT A HAMILTON(4) 630 90,152 *
ROBERT A HAMILTON (4) 1,365 139,271 *
PETER & DEBORAH HARRIS 750
JOYCE HODGES 750
MICHELLE HOLLENSHEAD 313
JAMES M HOLMWOOD 3,000
HRUBALA ASSOCIATES (5) 1,500
GORDON F HUDSON 3,000
CHRISTINE F HUGHES 375
STEVE ILLES(6) 45,000 16,955,000 3.9%
WENDY JENKINS (15) 3,000 173,700 *
WILLIAM ROBERT JOHNSTON 750
CHARLES T JONES 750
PERSHING TTEE FBO
FRED KARAGOSIAN IRA
ACCT# 7FP-0018377-007 1,500
GLORIA & FRED KARN 150
MICHAEL KATCHUR 1,125
THOMAS A KATCHUR 18,750
MAUDE WOOD KENT 1,500
THOMAS & MAUDE WOOD KENT 1,500
ROBERT A KILGORE 7,500
SHIRLEY K KNERR 1,350
GREGORY S KOBUS 1,500
PAUL G LANNI 1,500
WARREN D LEWIS 2,375
H MATHER LIPPINCOTT JR 1,500
ANTHONY F LOPEZ 3,000
ROBERT LOZOWSKI 300
DOUGLAS LURIO (7) 2,250 919,213 *
64
JAMES P MACCAIN 4,000
LEWIS F MADAN 300
KATHLEEN J MASON 13,000
BARRY N MCCABE 1,500
DUANE C MCCARTHY 150
G ELLARD MCCARTHY 750
BOB MCGARRAH (13) 4,500 611,760 *
JOHN P MCGONIGLE 150
MARY C MCGONIGLE 150
MEDIATECH PARTNERS (14) 54,015 1,132,279 *
JAMES F MERRIMAN 8,250
HARLEY MILLER 2,638
EILEEN MILLER 600
HARLEY & BROOK MILLER 525
GEORGE W MOFFITT JR 1,688
THOMAS MOLUMPHY 750
ROBERT H MONTGOMERY 4,000
MAC G MORRIS 750
JAMES MOSIER 3,000
ELIZABETH L NELSON 5,625
ROBERT F NEMETH 3,000
JEFFREY M NEWHUIS 1,050
GREGG J NEWHUIS 16,500
PATRICK NOLAN 3,522
PAUL NORDIN 500
GEORGE O'CONNELL 32,250
OLDOM & CO 1,500
ROBERT PADRICK 6,000
ROBERT PADRICK TRUSTEE FBO
KELLIE NICOLE PADRICK 1,500
ROBERT PADRICK TRUSTEE FOR
ROBERT G PADRICK 3,000
MICHAEL A PARKER 500
NEIL L PARKER 750
RICHARD & LAURA PARKER 3,750
JOSEPH PELLEGRINO 30,000
ROBERT H POTTS 1,500
CHARLES W PROCTOR III 63
ERNEST L RANSOME III 750
HARRY RENNER IV 12,563
JOHN B RETTEW III 2,000
GARDINER ROGERS 1,650
MARIE G ROPER 750
GERALD B ROSENTHAL 3,000
KARL F RUGART 4,125
JOHN S RUPP 1,500
VALENTINA SAS 300
EDWARD L SCHOENHUT 3,000
WILLIAM F SCHOENHUT JR 4,000
STEPHEN SCHWARTZ 3,750
MARY L SCRANTON 875
NICHOLAS SELLERS 1,500
RAYMOND K SHOTWELL 825
LEONARD H SICHEL JR 1,500
RICHARD SMITH 18,000
KATHY SMITLEY 750
65
TERRY W STANGLEIN 5,400
ELINOR STEINHILBER 1,500
MICHAEL STEIR 1,125
MICHAEL & ELLEN STEIR 750
CPT ERIC W STETSON 750
GERTRUDE T STEVENS 3,750
HOMER N STEWART 1,500
PRISCILLA STITT 225
VIVIAN STROUD (8) 750 201,275 *
GEORGE E SZYCHOSKI 15
MICHAEL W SZYCHOSKI 38
CONSTANTINE TEOFIL
SZYMBORSKI 1,500
ALFRED HUNTER THOMPSON 113
ANDREW THOMPSON 75
ALFRED & SUSAN THOMPSON 300
WILLIAM E THOROUGHGOOD 375
JAMES TURNER(17) 6,000 651,801 *
WILLIAM L VAN ALEN JR (9) 3,500 2,769,769 *
DAVID L WEAVER 780
MICHAEL L WEAVER 150
DWANE M WEAVER 1,500
WESLEY R WEAVER 2,250
ARTHUR L WHEELER
Acct #216-39U48 19,500
ARTHUR WIENER 485
ARTHUR & RUTH WIENER 2,049
J EDWARD WILLARD 14,750
KENNETH B WILSON 750
CLAUDINE W WOLFE 450
JOHN D WRIGHT 1,500
C EDWIN & JANET LYN WRIGHT 750
CRAIG YOSHIMOTO 1,500
JOSEPH ZIRBES 750
RUTH ZWEIGBAUM 1,881
---------
TOTAL 603,030
- ----------
* Less than 1%
(1) Mr. Boynton is a former director of the Company.
(2) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Delta Western
Company, is George W. Moffitt.
(3) Mr. DeMedio is an employee the Company.
(4) Mr. Hamilton is an employee the Company.
(5) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Hrubala
Associates, a partnership, is David R. Molumphy.
(6) Mr. Illes was a consultant of the Company and has entered into a Common
Stock Purchase Agreement with us dated August 6, 2004.
(7) Mr. Lurio is a director and his law firm, Lurio & Associates, P.C., is
general counsel to the Company.
(8) Ms. Stroud is an employee of the Company.
(9) Mr. Van Alen Jr. is a director of the Company.
(10) Mr. Beyer is a consultant of the Company.
66
(11) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to shares held of record by the entity, Brittain Family
Trust, is E. Douglas Brittain.
(12) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Cornerstone
Public Relations group, is M. Darlene Herbert Felt.
(13) Mr. McGarrah is a consultant to the Company.
(14) Mediatech Capital is the successor to Technology Partners (Holdings), LLC,
the company's former investment banker. The natural person who exercises sole
and/or shared voting or dispositive powers with respect to shares held of record
by the entity, Mediatech Capital, is Porter Bibb.
(15) Ms. Jenkins is an employee of the Company.
(16) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Carlson
Investments, is Jim Carlson.
(17) Mr. Turner is an employee of the Company.
(18) Represents 603,030 shares underlying warrants issued to our senior
noteholders who elected to receive these securities in lieu of cash for the
September 30, 2003 quarterly interest payments. We have agreed to register these
shares for resale under the act at our cost and expense through December 31,
2004. As of the date hereof, 134,404 warrants were exercised at $.15 per share.
The remaining unexercised warrants are exercisable at $.15 per share through
October 29, 2004.
67
BAYVIEW COMMON STOCK
Beneficial Ownership
After Offering
Common Stock --------------------
Selling Shareholder Offered Hereby Number Percent
- ------------------- -------------- ------ -------
BT LLC(1) 4,038,667 0 *
Marc Geman(2) 2,011,330 0 *
John Beldock 2,011,330
John Capone 328,260
Plum Street Investments Ltd.(3) 656,600 0 *
BonAnno Family Partnership LLP(4) 656,600 0 *
David Belford 262,620
Estate of Louis Marks(5) 131,270 0 *
Jerrold Marks 131,270
Robert Therrell 131,270
Craig/Cox family Trust
UTD 12/12/92(6) 393,890 0 *
Mt. Audubon Associates(7) 393,890 0 *
Energy Miser LLC(8) 525,240 0 *
Raymond Mancini 328,260
Thomas C. Baker IRA 131,270
Arthur Davis 262,620
Sandra LaForge 131,270
Ryan Wood 131,270
Michael Heines 150,380
Michael Opatowski 150,380
Arnold Tinter 998,220
Robert McGarrah(9) 252,760 0 *
BV Technologies (10) 900,000 0 *
Total 15,108,667(11)
- ----------
* Less than 1%.
(1) Formerly known as Bayview Technology Group, LLC. The natural person who
exercises sole and/or shares voting or dispositive power with respect to the
shares held of record by the entity is Marc Geman.
(2) Mr. Geman is a consultant to the Company.
(3) The natural person who exercises sole and/or shares voting or dispositive
power with respect to the shares held of record by the entity is Gene Johnson.
(4) The natural person who exercises sole and/or shares voting or dispositive
power with respect to the shares held of record by the entity is Raymond T.
BonAnno.
(5) The natural person who exercises sole and/or shares voting or dispositive
power with respect to the shares held of record by the entity is Jerold Marks.
(6) The natural person who exercises sole and/or shares voting or dispositive
power with respect to the shares held of record by the entity is Paul P. Craig.
(7) The natural person who exercises sole and/or shares voting or dispositive
power with respect to the shares held of record by the entity is Robert Grubb.
68
(8) The natural person who exercises sole and/or shares voting or dispositive
power with respect to the shares held of record by the entity is Michael
Opatowski.
(9) Mr. McGarrah is a consultant to the Company.
(10) The natural person who exercises sole and/or shares voting or dispositive
power with respect to the shares held of record by the entity is David Schanin.
(11) Represents shares issued by us in exchange for substantially all of the
assets of Bayview Technology Group, LLC (now known as BT LLC) in July 2003
valued at $.46 per share. We have agreed to register these shares for resale by
the holder thereof at our cost and expense until July 11, 2005. In October 2004,
Bayview transferred 11,070,000 of its shares to its members and a note holder.
Prior to the transfer, Bayview had sold 4,026,333 of the shares originally
issued to it.
MARKET FOR COMMON STOCK
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.
69
At June 30, 2004, there were 1,897,472 shares of Common Stock issuable upon
exercise of outstanding options. The following table shows the number of options
outstanding and their exercise price:
Option
Options Outstanding Exercise Price
------------------- --------------
1,465,805 $ .165
300,000 $ .30
125,000 $1.00
6,667 $2.00
------------------
Total 1,897,472
All of the aforesaid options have been issued to our employees, former Stitch
option holders or consultants.
As of June 30, 2004, a total of 33,457,191 warrants were outstanding with
exercise prices ranging from $.07 per share to $1.25 per share.
As of June 30, 2004, there were 522,742 shares of Common Stock issuable upon
conversion of the outstanding Preferred Stock and 667,718 shares issuable upon
the conversion of cumulative preferred dividends.
As of June 30, 2004 there are $9,695,840 face value of Senior Notes outstanding,
which are convertible into 47,351,320 shares of Common Stock.
The holders of the Common Stock are entitled to receive such dividends as the
Board of Directors of the Company may from time to time declare out of funds
legally available for payment of dividends. Through the date hereof, no cash
dividends have been declared on the Company's securities. No dividend may be
paid on the Common Stock until all accumulated and unpaid dividends on the
Preferred Stock have been paid. As of June 30, 2004, such accumulated unpaid
dividends amount to $6,677,180.
During fiscal year 2004, certain holders of the Company's Preferred Stock
converted 1,750 shares into 1,750 shares of Common Stock. Certain of these
shareholders also converted cumulative preferred dividends of $22,440 into 2,244
shares of Common Stock.
70
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.
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.
71
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.
PLAN OF DISTRIBUTION
The selling shareholders are free to offer and sell the common shares at such
times, in such manner and at such prices as the selling shareholders may
determine. The types of transactions in which the common shares are sold may
include transactions in the over-the-counter market (including block
transactions), negotiated transactions, the settlement of short sales of common
shares, or a combination of such methods of sale. The sales will be at market
prices prevailing at the time of sale or at negotiated prices. Such transactions
may or may not involve brokers or dealers.
The selling shareholders may effect such transactions by selling common stock
directly to purchasers or through broker-dealers, which may act as agents or
principals. Such broker-dealers may receive compensation in the form of
discounts, concessions, or commissions from the selling shareholders. They may
also receive compensation from the purchasers of common shares for whom such
broker-dealers may act as agents or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions).
The selling shareholders also may resell all or a portion of the common shares
in open market transactions in reliance upon Rule 144 under the Act, provided
they meet the criteria and conform to the requirements of such Rule. We have
agreed to bear all the expenses (other than selling commissions) in connection
with the registration and sale of the common stock covered by this prospectus.
In some circumstances, we have agreed to indemnify the selling shareholders
against certain losses and liabilities, including liabilities under the Act.
We have advised the selling shareholders that while they are engaged in a
distribution of the shares included in this prospectus they are required to
comply with Regulation M promulgated under the Securities Exchange Act of 1934,
as amended. With certain exceptions, Regulation M precludes the selling
shareholders, any affiliated purchasers, and any broker-dealer or other person
who participates in such distribution from bidding for or purchasing, or
attempting to induce any person to bid for or purchase any security which is the
subject of the distribution until the entire distribution is complete.
72
DESCRIPTION OF SECURITIES
GENERAL
We are authorized to issue up to 475,000,000 shares of common stock, no par
value, and 1,800,000 shares of undesignated preferred stock. As of the date
hereof, 900,000 preferred shares have been designated as series A convertible
preferred stock, no par value. As of June 30, 2004, there were 351,654,131
shares of common stock issued and outstanding and 522,742 shares of series A
preferred stock issued and outstanding which are convertible into 522,742 shares
of common stock. Through June 30, 2004, a total of 588,408 shares of preferred
stock have been converted into 664,852 shares of Common Stock and $2,684,444 of
accrued and unpaid dividends thereon have been converted into 288,521 shares of
Common Stock.
COMMON STOCK
The holder of each share of common stock:
o is entitled to one vote on all matters submitted to a vote of the shareholders
of USA, including the election of directors. There is no cumulative voting for
directors;
o does not have any preemptive rights to subscribe for or purchase shares,
obligations, warrants, or other securities of USA; and
o is entitled to receive such dividends as the Board of Directors may from time
to time declare out of funds legally available for payment of dividends.
No dividend may be paid on the common stock until all accumulated and unpaid
dividends on the series A preferred stock have been paid. Upon any liquidation,
dissolution or winding up of USA, holders of shares of common stock are entitled
to receive pro rata all of the assets of USA available for distribution, subject
to the liquidation preference of the series A preferred stock of $10.00 per
share and any unpaid and accumulated dividends on the series A preferred stock.
SERIES A CONVERTIBLE PREFERRED STOCK
The holders of shares of Series A preferred stock:
o have the number of votes per share equal to the number of shares of common
stock into which each such share is convertible (i.e., 1 share of series A
preferred stock equals 1 vote);
o are entitled to vote on all matters submitted to the vote of the shareholders
of USA, including the election of directors; and
o are entitled to an annual cumulative cash dividend of $1.50 per annum, payable
when, as and if declared by the Board of Directors.
The record dates for payment of dividends on the Series A Preferred Stock are
February 1 ($0.75) and August 1 ($0.75) of each year. Any and all accumulated
and unpaid cash dividends on the Series A Preferred Stock must be declared and
paid prior to the declaration and payment of any dividends on the Common Stock.
Any unpaid and accumulated dividends will not bear interest. As of June 30, 2004
the accumulated and unpaid dividends were $6,677,180. On August 1, 2004,an
additional $392,057 of dividends accrued on the preferred stock.
73
Each share of Series A Preferred Stock is convertible at any time into 1 share
of fully issued and non-assessable Common Stock. Accrued and unpaid dividends
earned on shares of Series A Preferred Stock being converted into Common Stock
are also convertible into Common Stock at the rate $10.00 per share of Common
Stock at the time of conversion and whether or not such dividends have then been
declared by USA. As of June 30, 2004 a total of 588,408 shares of series A
Preferred Stock have been converted into common stock and accrued and unpaid
dividends thereon have been converted into 288,521 shares of Common Stock. The
conversion rate of the Series A Preferred Stock (and any accrued and unpaid
dividends thereon) will be equitably adjusted for stock splits, stock
combinations, recapitalizations, and in connection with certain other issuances
of common stock by USA. Upon any liquidation, dissolution, or winding-up of USA,
the holders of Series A Preferred Stock are entitled to receive a distribution
in preference to the Common Stock in the amount of $10.00 per share plus any
accumulated and unpaid dividends.
We have the right, at any time, to redeem all or any part of the issued and
outstanding series A preferred stock for the sum of $11.00 per share plus any
and all unpaid and accumulated dividends thereon. Upon notice by USA of such
call, the holders of the series A preferred stock so called will have the
opportunity to convert their shares and any unpaid and accumulated dividends
thereon into shares of common stock. The $11.00 per share figure was the
redemption price approved by the Directors and shareholders of USA at the time
the series A preferred stock was created and first issued. We currently have no
plans to redeem the preferred stock.
12% SENIOR NOTES
As of June 30, 2004, we had outstanding $3,019,397 of Senior Notes due December
31, 2007, $3,213,500 of Senior Notes due December 31, 2006, $3,011,791 of Senior
Notes due December 31, 2005 and $451,152 of Senior Notes due December 31, 2004.
The principal amount of each senior note which is not voluntarily converted
shall be payable on the maturity date thereof, at which time any unpaid and
accrued interest shall also become due. Interest shall accrue at the rate of 12%
per annum from and after the date of issuance and shall be payable quarterly in
arrears on December 31, March 31, June 30, and September 30 of each year until
maturity. The senior notes are senior to all existing equity securities of USA,
including the series A preferred stock.
74
Of the Senior Notes that matured December 31, 2003, a total of $3,823,000 were
purchased through the exchange of $3,823,000 of the old senior notes previously
due December 31, 2001. The principal amount of these notes was convertible at
any time into shares of common stock at the rate of $1.25 per share. The
interest paid on these notes was also convertible into shares of common stock at
the rate of $1.00 per share. For the quarters ended September 31, 2001 and
December 31, 2001, the conversion rate relating to the interest payments was
reduced to $.50 per share and for the quarter ended March 31, 2002 to $.40 per
share and for the quarters ended June 30, 2002, September 30, 2002, December 31,
2002, March 31, 2003, June 30, 2003, and September 30, 2003, to $.20 per share
together with one warrant at $.20 per share for each share issued with an
exercise termination date of June 30, 2004 (extended to October 29, 2004). On
August 20, 2004, the exercise price was reduced retroactively to $.15. We have
agreed to use our best efforts to register the shares underlying the warrants
for resale under the Act. The shares underlying the warrants issued by us (other
than the warrants issued on account of the December 31, 2003 quarter) are
included in this prospectus. In March 2003, each holder of these senior notes
was granted the right to have the conversion rate reduced to $.20 in exchange
for extending the maturity date for three additional years or until December 31,
2006. A total of $5,024,000 of these notes were extended to December 31, 2006.
The principal amount of each Senior Note due December 31, 2004 is convertible at
any time into shares of Common Stock at the rate of $.40 per share. In January
2002, the Company agreed to provide the option to each holder of these senior
notes to elect to accept shares in lieu of receiving cash in satisfaction of the
interest payments otherwise due to them on account of the last three quarters of
fiscal 2002. The conversion rate for this interest payment due for the quarter
ended March 31, 2002 was $.40 per share. The Company continued this option at
$.20 per share for the quarters ended June 30, 2002, September 30, 2002,
December 31, 2002, March 31, 2003, June 30, 2003, September 30, 2003, and
December 31, 2003 together with one warrant at $.20 for each share issued with
an exercise termination date of June 30, 2004 (extended to October 29, 2004). On
August 20, 2004, the exercise price was reduced retroactively to $.15. We have
agreed to register these shares as well as the shares underlying the warrants
for resale under the Act. The shares underlying the warrants issued by us (other
than the warrants issued on account of the December 31, 2003 quarter) are
included in this prospectus. In March 2003, each holder of these senior notes
was granted the right to have the conversion rate reduced to $.20 in exchange
for extending the maturity date for three additional years or until December 31,
2007. The noteholder was required to make the election on or prior to December
31, 2003. A total of $4,191,350 of these notes have been extended to December
31, 2007 and are convertible at $.20 per share. In October 2004, each holder of
the $451,152 of the remaining notes due December 2004 was granted the right to
have the conversion rate reduced to $.15 in exchange for extending the maturity
date until December 31, 2006. As of the date hereof, none of these notes have
been extended.
75
The principal amount of each Senior Note due December 31, 2005 is convertible at
any time into shares of Common Stock at the rate of $.20 per share. The Company
agreed to provide the option to each holder of these senior notes to elect to
accept shares in lieu of receiving cash in satisfaction of the interest payments
otherwise due to them on account of the last quarter of fiscal 2002 at the rate
of $.20 per share. The Company continued this option at $.20 per share for the
quarters ended September 30, 2002, December 31, 2002, March 31, 2003, June 30,
2003, September 30, 2003, and December 31, 2003 together with one warrant at
$.20 for each share issued with an exercise termination date of June 30, 2004
(extended through October 29, 2004). On August 20, 2004, the exercise price was
reduced to retroactively $.15. We have agreed to register the shares underlying
the warrants for resale under the Act. The shares underlying the warrants issued
by us (other than the warrants issued on account of the December 31, 2003
quarter) are included in this prospectus.
During June 2004, we issued an additional warrant to purchase one share for each
existing warrant then held by the holders of the senior notes who had previously
elected to receive shares and warrants in lieu of cash interest payments. An
aggregate of 3,716,496 additional warrants were issued to the holders of the
existing warrants. The additional warrants were exercisable at $.20 per share at
any time through December 31, 2004. On August 20, 2004, the Company agreed that
for each existing warrant exercised by a holder prior to October 4, 2004, the
exercise price of one of the holder's additional warrants would be reduced to
$.15 per share exercisable at any time prior to June 30, 2005. The holders of
715,722 of the existing warrants exercised their warrants during this period,
resulting in the changed exercise price and termination date of 715,722 of the
additional warrants. On October 11, 2004, the exercise price of all the
remaining additional warrants was reduced retroactively to $.15 per share
through October 29, 2004. As of the date hereof, 37,446 additional warrants have
been exercised. We have agreed to register all of the shares underlying the
additional warrants for resale under the Act.
The indebtedness evidenced in the Senior Note is subordinated to the prior
payment when due of the principal of, premium, if any, and interest on all
"Senior Indebtedness", as defined herein, of USA as follows: Upon any
distribution of its assets in a liquidation or dissolution of USA, or in
bankruptcy, reorganization, insolvency, receivership or similar proceedings
relating to USA, the Lender shall not be entitled to receive payment until the
holders of Senior Indebtedness are paid in full. Until a payment default occurs
with respect to any Senior Indebtedness, all payments of principal and interest
due to Lender under the senior note shall be made in accordance with this senior
note. Upon the occurrence of any payment default with respect to any Senior
Indebtedness then, upon written notice thereof to USA and Lender by any holder
of such Senior Indebtedness or its representative, no payments of principal or
interest on the senior note shall be made by USA until such payment default has
been cured to the satisfaction of the holder of such Senior Indebtedness or
waived by such holder, provided, however, that if during the 180 day period
following such default, the holder of Senior Indebtedness has not accelerated
its loan, commenced foreclosure proceedings or otherwise undertaken to act on
such default, then USA shall be required to continue making payments under the
senior note, including any which had not been paid during such 180 day period.
In the event that any institutional lender to USA at any time so requires, the
Lender shall execute, upon request of USA, any intercreditor or subordination
agreement(s) with any such institutional lender on terms not materially more
adverse to the Lender then the subordination terms contained in this senior
note.
76
The term "Senior Indebtedness" shall mean (a) all direct or indirect, contingent
or certain indebtedness of any type, kind or nature (present or future) created,
incurred or assumed by USA with respect to any future bank or other financial
institutional indebtedness of USA or (b) any indebtedness created, incurred, or
assumed, by USA secured by a lien on any of our assets.
Notwithstanding anything herein to the contrary, Senior Indebtedness does not
include:
o unsecured accounts payable to trade creditors of USA incurred in the ordinary
course of business;
o any debt owed by USA to any officer, director or stockholder of USA;
o any obligation of Borrower issued or contracted for as payment in
consideration of the purchase by USA of the capital stock or substantially all
of the assets of another person or in consideration for the merger or
consolidation with respect to which USA was a party;
o any operating lease obligations of USA;
o any other indebtedness which by its terms is subordinated to the senior note;
or
o any "other indebtedness" which is subordinated to all indebtedness to which
the senior note is subordinated in substantially like terms as the senior note;
which such "other indebtedness" shall be treated as equal with the indebtedness
evidenced by the senior note.
COMMON STOCK PURCHASE WARRANTS
As of June 30, 2004, there are outstanding warrants to purchase 7,142,858 shares
at $.07 per share, warrants to purchase 2,500,000 shares at $.10 per share,
warrants to purchase 750,000 shares at $.067 per share, warrants to purchase
21,408,505 shares at $.20 per share, warrants to purchase 1,200,000 shares at
$.91 per share, warrants to purchase 377,927 shares at $1.00 per share, warrants
to purchase 2,901 shares at $1.03 per share, and warrants to purchase 75,000
shares at $1.25 per share. As of the date hereof, the exercise price of
7,263,088 of the warrants exercisable at $.20 per share has been reduced to $.15
through October 29, 2004.
The exercise price of the warrants and the number of shares of Common Stock
issuable upon exercise of the warrants are subject to adjustment in certain
circumstances, including a stock split of, stock dividend on, or a subdivision,
combination or recapitalization of the common stock. Upon the merger,
consolidation, sale of substantially all the assets of USA, or other similar
transaction, the warrant holders shall, at the option of USA, be required to
exercise the warrants immediately prior to the closing of the transaction, or
such warrants shall automatically expire. Upon such exercise, the warrant
holders shall participate on the same basis as the holders of common stock in
connection with the transaction.
77
The warrants do not confer upon the holder any voting or any other rights of a
shareholder of USA. Upon notice to the warrant holders, USA has the right, at
any time and from time to time, to reduce the exercise price or to extend the
warrant termination date.
SHARES ELIGIBLE FOR FUTURE SALE
Of the 351,654,131 shares of common stock issued and outstanding on June 30,
2004, a total of approximately 10,500,000 are restricted securities which are
not currently eligible for sale under Rule 144 promulgated under the Act. As of
June 30, 2004, there were 522,742 shares of preferred stock issued and
outstanding, all of which are freely transferable without further registration
under the Act (other than shares held by "affiliates" of USA).
The shares of preferred stock issued and outstanding as of the date hereof are
convertible into 522,742 shares of common stock all of which would be fully
transferable without further registration under the Act (other than shares held
by "affiliates" of USA).
Shares of our common stock which are not freely tradeable under the Act are
known as "restricted securities" and cannot be resold without registration under
the Act or pursuant to Rule 144 promulgated thereunder.
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are required to be aggregated), including any affiliate of USA, who
beneficially owns "restricted securities" for a period of at least one year is
entitled to sell within any three-month period, shares equal in number to the
greater of (i) 1% of the then outstanding shares of the same class of shares, or
(ii) the average weekly trading volume of the same class of shares during the
four calendar weeks preceding the filing of the required notice of sale with the
SEC. The seller must also comply with the notice and manner of sale requirements
of Rule 144, and there must be current public information available about USA.
In addition, any person (or persons whose shares must be aggregated) who is not,
at the time of sale, nor during the preceding three months, an affiliate of the
USA, and who has beneficially owned restricted shares for at least two years,
can sell such shares under Rule 144 without regard to the notice, manner of
sale, public information or the volume limitations described above.
LIMITATION OF LIABILITY; INDEMNIFICATION
As permitted by the Pennsylvania Business Corporation Law of 1988 ("BCL"), our
By-laws provide that Directors will not be personally liable, as such, for
monetary damages for any action taken unless the Director has breached or failed
to perform the duties of a Director under the BCL and the breach or failure to
perform constitutes self-dealing, willful misconduct or recklessness. This
limitation of personal liability does not apply to any responsibility or
liability pursuant to any criminal statute, or any liability for the payment of
taxes pursuant to Federal, State or local law. The By-laws also include
provisions for indemnification of our Directors and officers to the fullest
extent permitted by the BCL. Insofar as indemnification for liabilities arising
under the Act may be permitted to Directors, officers and controlling persons of
USA pursuant to the foregoing provisions, or otherwise, we have been advised
that in the opinion of the SEC such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
78
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our stock and warrants is American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005.
LEGAL MATTERS
The validity of the common stock has been passed upon for us by Lurio &
Associates, P.C., Philadelphia, Pennsylvania 19103.
EXPERTS
The consolidated financial statements and schedule of USA Technologies, Inc. at
June 30, 2004 and 2003, and for each of the three years in the period ended June
30, 2004 appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent registered public accounting firm, as
set forth in their report thereon (which contains an explanatory paragraph
describing conditions that raise substantial doubt about the Company's ability
to continue as a going concern as described in Note 2 to the consolidated
financial statements) appearing elsewhere herein, and are included in reliance
upon such reports given on the authority of such firm as experts in accounting
and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We file annual, quarterly and other reports, proxy statements and other
information with the Securities and Exchange Commission. Anyone may inspect a
copy of the registration statement or any other reports we file, without charge
at the public reference facility maintained by the Securities and Exchange
Commission in Room 1024, 450 Fifth Street, NW, Washington, DC 20549. Copies of
all or any part of the registration statement may be obtained from that facility
upon payment of the prescribed fees. The public may obtain information on the
operation of the public reference room by calling the Securities and Exchange
Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains a
website at http://www.sec.gov that contains reports, proxy and information
statements, and other information regarding registrants that file electronically
with the Securities and Exchange Commission.
We will furnish record holders of our securities with annual reports containing
financial statements audited and reported upon by our independent auditors,
quarterly reports containing unaudited interim financial information, and such
other periodic reports as we may determine to be appropriate or as may be
required by law.
You can find additional information concerning us on our website
http://wwwusatech.com. Information on our website is not and should not be
considered a part of this prospectus.
79
FINANCIAL STATEMENTS
USA TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements:
Report of Independent Registered Public Accounting Firm......................F-1
Consolidated Balance Sheets..................................................F-2
Consolidated Statements of Operations........................................F-3
Consolidated Statements of Shareholders' Equity..............................F-4
Consolidated Statements of Cash Flows........................................F-7
Notes to Consolidated Financial Statements...................................F-8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders of
USA Technologies, Inc.
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
three years in the period ended June 30, 2004. Our audits also included the
financial statement schedule listed in Item 16(b). These consolidated financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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 three years in the period ended June 30,
2004, in conformity with U.S. generally accepted accounting principles. Also, in
our opinion, the related consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
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 2002
---------------------------------------------------
Revenues:
Equipment sales $ 4,349,566 $ 1,034,427 $ 795,938
License and transaction fees 977,651 1,373,573 778,906
Product sales and other 305,598 445,068 107,857
---------------------------------------------------
Total revenues 5,632,815 2,853,068 1,682,701
Cost of sales (including amortization of
software development costs) 4,329,692 2,971,443 4,062,901
---------------------------------------------------
Gross profit (loss) 1,303,123 (118,375) (2,380,200)
Operating expenses:
General and administrative 6,747,824 7,194,684 7,868,064
Compensation 10,071,354 4,973,210 4,654,662
Depreciation and amortization 1,632,330 1,251,716 440,238
Loss on debt modification 318,915 1,521,654 --
---------------------------------------------------
Total operating expenses 18,770,423 14,941,264 12,962,964
---------------------------------------------------
Operating loss (17,467,300) (15,059,639) (15,343,164)
Other income (expense):
Interest income 40,789 18,691 15,791
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) (966,974)
Non-cash interest and amortization
of debt discount (3,853,029) (3,815,408) (1,513,118)
Less: amount capitalized -- -- 492,658
---------------------------------------------------
Total interest expense (5,032,351) (4,978,600) (1,987,434)
Total other income (expense) (3,958,878) (6,905,860) (1,971,643)
---------------------------------------------------
Net loss (21,426,178) (21,965,499) (17,314,807)
Cumulative preferred dividends (786,513) (793,586) (822,561)
---------------------------------------------------
Loss applicable to common shares $ (22,212,691) $ (22,759,085) $ (18,137,368)
===================================================
Loss per common share (basic and diluted) $ (0.08) $ (0.20) $ (0.50)
===================================================
Weighted average number of common shares
outstanding (basic and diluted) 288,476,158 111,790,358 35,994,152
===================================================
See accompanying notes.
F-3
USA Technologies, Inc.
Consolidated Statements of Shareholders' Equity
SERIES A
CONVERTIBLE
PREFERRED COMMON DEFERRED SUBSCRIPTIONS ACCUMULATED
STOCK STOCK COMPENSATION RECEIVABLE DEFICIT TOTAL
------------------------------------------------------------------------------------------------
Balance, June 30, 2001 $ 3,933,253 $ 32,977,922 $ (103,000) $ -- $ (39,209,072) $ (2,400,897)
Conversion of 26,002 shares of
Preferred Stock to 26,002
shares of Common Stock (184,095) 184,095 -- -- -- --
Conversion of $268,140 of
cumulative preferred dividends
into 26,814 shares of Common
Stock at $10.00 per share -- 268,140 -- -- (268,140) --
Issuance of 2,784,134 shares of
Common Stock for professional
services -- 1,330,944 -- -- 1,330,944
Issuance of 500,000 Common Stock
Warrants for professional
services -- 115,000 -- -- -- 115,000
Issuance of 2,340,000 shares of
Common Stock for Officer
compensation -- 981,000 -- -- -- 981,000
Issuance of 200,000 Common Stock
Options for professional
services -- 66,000 -- -- -- 66,000
Issuance of 498,000 shares of
Common Stock from the
conversion of $622,500 of the
2000 12% Senior Notes at $1.25
per share -- 622,500 -- -- -- 622,500
Exercise of 2,333,529 Common
Stock Warrants at exercise
prices ranging from $0.10 to
$0.50 per share, net of
offering costs -- 336,921 -- -- -- 336,921
Issuance of 333,678 shares of
Common Stock from the conversion
of $82,000 of a 9-3/4%
Convertible Debenture, and the
related exercise of Common Stock
Warrants at varying prices per
share to purchase 3,336,780
shares of Common Stock, net of
offering costs -- 886,250 -- -- 886,250
Issuance of 8,772,724 shares of
Common Stock in connection with
Private Placement Offerings at
varying offering prices, net of
offering costs of $343,944 -- 4,747,223 -- (149,750) -- 4,597,473
Issuance of 674,431 shares of
Common Stock in lieu of cash
payments for interest on the
Convertible Senior Notes and
the related issuance of 303,829
Common Stock Warrants -- 301,856 -- -- -- 301,856
Debt discount relating to
beneficial conversion feature
on the 2001 12% Senior Notes
and on the $325,000 9-3/4%
Convertible Debenture -- 4,067,813 -- -- -- 4,067,813
Issuance of Common Stock in
connection with Stitch
acquisition -- 8,710,816 -- -- -- 8,710,816
Issuance of Common Stock Options
and Common Stock Warrants in
connection with Stitch
acquisition -- 963,583 -- -- -- 963,583
Compensation expense related to
deferred stock awards -- -- 103,000 -- -- 103,000
Other -- 28,440 -- -- -- 28,440
Net loss -- -- -- -- (17,314,807) (17,314,807)
------------------------------------------------------------------------------------------------
Balance, June 30, 2002 3,749,158 56,588,503 -- (149,750) (56,792,019) 3,395,892
------------------------------------------------------------------------------------------------
See accompanying notes
F-4
USA Technologies, Inc.
Consolidated Statements of Shareholders' Equity (Continued)
SERIES A
CONVERTIBLE COMMON SUBSCRIPTIONS ACCUMULATED
PREFERRED STOCK STOCK RECEIVABLE DEFICIT TOTAL
-------------------------------------------------------------------------------
Conversion of 4,790 shares of
Preferred Stock to 4,790
shares of Common $ (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 of 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 Offering 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-5
USA Technologies, Inc.
Consolidated Statements of Shareholders' Equity (Continued)
ACCUMULATED
SERIES A OTHER
CONVERTIBLE COMMON COMPREHENSIVE ACCUMULATED
PREFERRED STOCK 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-6
USA Technologies, Inc.
Consolidated Statements of Cash Flows
YEAR ENDED JUNE 30
2004 2003 2002
--------------------------------------------------------
OPERATING ACTIVITIES:
Net loss $(21,426,178) $(21,965,499) $(17,314,807)
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 5,532,037
Interest expense on the Senior Notes paid
through the issuance of Common Stock 478,496 860,250 301,856
Interest amortization related to Senior
Notes and Convertible Debentures 3,374,533 2,955,158 1,513,699
Depreciation 469,418 1,119,536 403,738
Amortization 2,207,329 1,623,547 3,032,479
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 --
Loss on property and equipment -- -- 195,722
Changes in operating assets and liabilities:
Accounts receivable (785,201) (74,503) (232,653)
Inventory (1,249,784) 419,914 (36,642)
Prepaid expenses, deposits and
other assets (1,732) (38,325) 774,845
Accounts payable 843,680 (759,337) (259,627)
Accrued expenses (796,342) 589,454 (44,413)
--------------------------------------------------------
Net cash used in operating activities (12,557,456) (9,228,899) (6,133,766)
INVESTING ACTIVITIES:
Purchase of property and equipment (358,033) (186,895) (102,917)
Cash paid in connection with Bayview acquisition (727,970) -- --
Cash received from the sale of investment 1,471,140 -- --
Cash received form contract settlement 674,649 -- --
Cash received from the sale of assets held for sale 41,400 -- --
Cash acquired in connection with Stitch
acquisition, net of financing costs -- -- 2,278,229
Increase in software development costs -- -- (2,238,771)
--------------------------------------------------------
Net cash provided by (used in) investing activities 1,101,186 (186,895) (63,459)
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 3,912,765
Collection of subscriptions receivable 1,013,400 35,000 29,000
Net proceeds from issuance of Senior Notes
and Convertible Debenture -- 1,833,841 4,269,223
Repayment of long-term debt and Senior Notes (812,106) (557,441) (2,773,363)
Proceeds received from deposits for
future financings -- -- 500,000
--------------------------------------------------------
Net cash provided by financing activities 12,091,029 11,242,279 5,937,625
--------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 634,759 1,826,485 (259,600)
Cash and cash equivalents at beginning of year 2,384,455 557,970 817,570
--------------------------------------------------------
Cash and cash equivalents at end of year $ 3,019,214 $ 2,384,455 $ 557,970
========================================================
Supplemental disclosures of cash flow information:
Cash paid for interest $ 1,098,727 $ 1,479,984 $ 603,312
========================================================
Conversion of Convertible Preferred Stock
to Common Stock $ 12,390 $ 33,912 $ 184,095
========================================================
Conversion of Cumulative Preferred Dividends
to Common Stock $ 22,440 $ 56,050 $ 268,140
========================================================
Subscriptions receivable $ 300,000 $ 1,013,400 $ 35,000
========================================================
Conversion of Senior Notes and Debenture
to Common Stock $ 2,840,978 $ 1,388,442 $ 622,500
========================================================
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 $ 4,067,813
========================================================
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 $ --
========================================================
Issuance of Common Stock, Common Stock Options
and Warrants in connection with
Stitch acquisition $ -- $ -- $ 9,674,399
========================================================
Capital lease obligations incurred $ -- $ -- $ 62,984
========================================================
See accompanying notes.
F-7
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
1. BUSINESS
USA Technologies, Inc. (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,
$22.0 million and $17.3 million during the fiscal years ending June 30, 2004,
2003 and 2002, 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.
RECLASSIFICATION
Certain amounts in the prior year financial statements have been reclassified to
conform to the current year presentation.
F-8
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
2. ACCOUNTING POLICIES (CONTINUED)
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.
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
F-9
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
2. ACCOUNTING POLICIES (CONTINUED)
SOFTWARE DEVELOPMENT COSTS (CONTINUED)
becomes available for general release to customers. Amortization of software
development costs is calculated as the greater of the amount computed using (i)
the ratio that current gross revenues for a product bear to the total of current
and anticipated future gross revenues of that product or (ii) the straight-line
method over the remaining estimated economic life of the product. The Company
reviews the unamortized software development costs at each balance sheet date
and, if necessary, will write down the balance to net realizable value if the
unamortized costs exceed the net realizable value of the asset.
During May 2000, the Company reached technological feasibility for the
development of the multi-media e-Port(TM) product and related internal network
and, accordingly, the Company commenced capitalization of software development
costs related to this product and network. Costs capitalized through 2002 were
$5.3 million, which included capitalized interest of approximately $493,000
pursuant to SFAS No. 34, "Capitalization of Interest Costs".
During the fourth quarter of fiscal year 2002, the multi-media e-Port(TM) client
product and enhanced network became available for general release to the
Company's customers. During this quarter, management performed an evaluation of
the commercial success and preliminary market acceptance of the multi-media
e-Port(TM) and enhanced network and as a result of this evaluation the Company
determined that the estimated future revenues less costs to complete and dispose
of the multi-media e-Port client product was zero. Therefore, the Company wrote
down $2,663,000 of software development costs related to the multi-media e-Port
client product. The unamortized balance of the software development costs after
the impairment charge was amortized over an estimated useful life of two years
and was 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 was approximately $999,000 during the year
ended June 30, 2004, and $1,331,000 during the year ended June 30, 2003 and
$2,996,000 during the year ended June 30, 2002 (including the above impairment
adjustment of $2,663,000). Such amortization is reflected in cost of sales in
the accompanying consolidated statements of operations.
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 (loss). If the
investment sustains an other-than-temporary decline in fair value, the
investment is written down to its fair value by a charge to earnings.
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
F-10
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
2. ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG LIVED ASSETS (CONTINUED)
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.
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% of the
Company's revenues for the year ended June 30, 2004 were concentrated with one
customer and 35% and 12% were concentrated with two customers for the years
ended June 30, 2003 and 2002, respectively. The Company's customers are
principally located in the United States.
F-11
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
2. ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenue from the sale of equipment is recognized on the terms of
freight-on-board shipping point, or upon installation and acceptance of the
equipment if installation services are purchased for the related equipment.
Transaction processing revenue is recognized upon the usage of the Company's
cashless payment and control network. 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.
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, $1,505,000 and $1,187,000 for the years ended June 30,
2004, 2003 and 2002, 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 three fiscal years ending
June 30, 2004 because the assumed exercise of these securities would be
anti-dilutive.
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
F-12
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
3. INVESTMENT IN JUBILEE INVESTMENT TRUST, PLC (CONTINUED)
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.
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.
F-13
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
4. ACQUISITIONS (CONTINUED)
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
On May 14, 2002, USA Acquisition Corp., a wholly owned subsidiary of the Company
acquired Stitch pursuant to an Agreement and Plan of Merger by and among the
Company, USA Acquisition Corp., Stitch and the stockholders of Stitch.
Additionally, on May 14, 2002, the Company's shareholders voted to increase the
number of authorized shares of Common Stock to 150,000,000. The Company acquired
Stitch to strengthen its position as a leading provider of wireless remote
monitoring and cashless and mobile commerce solutions and to increase the
Company's revenue base. These revenues would include product revenues and
monthly service and transaction fees. Additionally, the acquisition of the
Stitch technology enhanced the Company's existing technology and complemented
the revenue and transaction processing revenue of the Company's existing
products. Certain Stitch personnel were believed to possess some key strengths
in several disciplines that the Company believed to be of great value in its
plans for growth.
The acquisition was accounted for using the purchase method and, accordingly,
the results of the operations of Stitch have been included in the accompanying
consolidated statements of operations since the acquisition date. The purchase
price consisted of the issuance of 22,762,341 shares of the Company's Common
Stock in exchange for the outstanding shares of Stitch, and the issuance of
warrants to purchase up to 7,587,447 shares of the Company's Common Stock at
$.40 per share at any time through June 30, 2002. The purchase price also
included the assumption of outstanding Stitch stock options that were converted
into
F-14
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
4. ACQUISITIONS (CONTINUED)
options to purchase an aggregate of 2,475,318 shares of the Company's Common
Stock at $.165 per share at any time prior to May 14, 2007, warrants to purchase
up to 412,553 shares of the Company's Common Stock at $.40 per share at any time
through June 30, 2002 and other acquisition related expenses. None of the
warrants issued in connection with the acquisition were exercised. A total of
4,800,000 shares of the Common Stock issued to the former stockholders of Stitch
were held in escrow to secure the former stockholder's indemnification
obligations under the Agreement and Plan of Merger. Such shares are subject to
cancellation if there is a breach of the indemnification (as defined). The value
of the marketable equity securities issued in connection with this acquisition
was determined based on the average market price of the Company's Common Stock
over a two-day period before and after April 10, 2002, the date the definitive
agreement to acquire Stitch was entered into. Such valuation was in accordance
with EITF 99-12: "Determination of the Measurement Date for the Market Price of
Acquirer Securities Issued in a Purchase Business Combination".
The following table summarizes the final purchase price allocation of the fair
value of the assets and liabilities assumed at the date of acquisition:
Current assets $ 2,710,000
Property and equipment 1,700,000
Goodwill 7,946,000
Intangibles 2,920,000
Current liabilities (1,554,000)
Long-term debt (Note 9) (3,976,000)
-----------
$ 9,746,000
===========
In connection with the acquisition, 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.
Unaudited pro-forma combined results of the Company as if the Company acquired
Stitch on July 1, 2001 is as follows:
F-15
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
4. ACQUISITIONS (CONTINUED)
YEAR ENDED
JUNE 30, 2002
---------------
Revenues $ 2,869,466
===============
Net loss (19,583,216)
Cumulative preferred dividends (822,561)
---------------
Loss applicable to common shares $ (20,405,777)
===============
Loss per common share (basic and diluted) $ (0.36)
===============
Weighted average number of common shares
outstanding (basic and diluted) 56,676,823
===============
Amortization expense relating to all acquired intangible assets was $1,208,668,
$292,000 and $36,500 during the years ended June 30, 2004, 2003 and 2002,
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-16
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, $46,000 and $54,000 is included in depreciation expense
for the years ended June 30, 2004, 2003 and 2002, 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-17
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
7. RELATED PARTY TRANSACTIONS
During the years ended June 30, 2004, 2003 and 2002, the Company incurred
approximately $391,000, $305,000 and $213,000, 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, 2003 and 2002, certain Board members
participated in various debt or equity offerings of the Company for total
investments of approximately $266,250, $661,500 and $277,500, 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 $8,000 for the period May 14, 2002 to June 30, 2002. Approximately
$130,000 in payables to Dixie is 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).
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
F-18
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
8. LONG TERM DEBT (CONTINUED)
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-19
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 for
which there were outstanding obligations during the years ended June 30, 2004
and 2003. These 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"). During the year ended June 30, 1999,
the Company issued Senior Notes scheduled to mature December 31, 2001. The final
principal balance of $240,000 for these Notes was paid during the year ended
June 30, 2002.
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, 2005. 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.
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
F-20
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
10. SENIOR NOTES (CONTINUED)
$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.
A summary of the activity for the Senior Notes for the years ended June 30,
2004, 2003 and 2002 follows:
Senior Notes Maturing December 31,
----------------------------------------------------------------------------------------------
2001 2003 2004 2005 2006 2007
(2001 Senior (2003 Senior (2004 Senior (2005 Senior (2006 Senior (2007 Senior
Notes) Notes) Notes) Notes) Notes) Notes)
----------------------------------------------------------------------------------------------
Face amount of Senior Notes
Balance June 30, 2001 $ 240,000 $ 5,656,500 $ -- $ -- $ -- $ --
Issued for cash and services -- -- 4,814,593 444,083 -- --
Repayment (240,000) -- -- -- -- --
Conversions to Common Stock -- (622,500) -- -- -- --
----------------------------------------------------------------------------------------------
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 Stock -- -- -- (514,359) (1,478,000) (848,619)
----------------------------------------------------------------------------------------------
Balance, June 30, 2004 $ -- $ -- $ 451,152 $ 3,011,791 $ 3,213,500 $ 3,019,397
==============================================================================================
F-21
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
10. SENIOR NOTES (CONTINUED)
Senior Notes Maturing December 31,
----------------------------------------------------------------------------------------------
2001 2003 2004 2005 2006 2007
(2001 Senior (2003 Senior (2004 Senior (2005 Senior (2006 Senior (2007 Senior
Notes) Notes) Notes) Notes) Notes) Notes)
-----------------------------------------------------------------------------------------------
Debt discount and other
issuance costs
Unamortized costs at
June 30, 2001 $ (28,296) $ (1,420,219) $ -- $ -- $ -- $ --
Debt discount created -- -- (3,587,535) (332,377) -- --
Amortization and write-off
of unamortized costs upon
conversions to Common Stock 28,296 669,924 658,968 8,389 -- --
-----------------------------------------------------------------------------------------------
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 unamotized 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 CommonStock -- 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)
===============================================================================================
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
F-22
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
10. SENIOR NOTES (CONTINUED)
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). During the year ended June 30, 2002, holders of the Senior
Notes also had the right to purchase shares of Common Stock using quarterly
interest payments that were due in lieu of cash payments for interest at per
share prices ranging from $0.25 to $0.60. Additionally, for each share purchased
with respect to the quarter ended June 30, 2002, the note holder received a
warrant, which was exercisable at any time through June 30, 2004 (extended to
August 30, 2004), to purchase one share of the Company's Common Stock at $0.20
per share. For the years ended June 30, 2004, 2003 and 2002, 1,061,284,
2,315,000 and 674,431 shares of Common Stock, respectively, were issued for
payment of interest due of $212,238, $448,647 and $259,320, 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, $411,603 and $42,536 for the years ended June 30, 2004,
2003, 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. Due to
the significance of the beneficial conversion features associated with this
instrument, the entire $325,000 of proceeds was allocated to the warrants and
was allocated to equity. During the years ended June 30, 2003 and 2002 the
investment company converted $243,000 and $82,000, respectively of the
Debenture, resulting in the issuance of 2,467,225 and 333,678, respectively,
shares of Common Stock. The investment company also exercised warrants resulting
in the issuance of 17,465,469, 7,206,893 and 3,336,780 shares of Common Stock
and generating net cash proceeds of $1,591,296, $630,000 and $804,250 during the
years ended June 30, 2004, 2003 and 2002, respectively.
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, 2003 and 2002, certain holders of the
Preferred Stock converted 1,750, 4,790 and 26,002 shares, respectively, into
1,750, 4,790 and 26,002 shares of Common Stock, respectively. Certain of these
shareholders also converted cumulative preferred dividends of $22,440, $56,050
and $268,140, respectively, into 2,244, 5,605 and 26,814 shares of Common Stock
during the years ended June 30, 2004, 2003 and 2002, respectively. The Series A
Preferred Stock may be called for redemption at the option of the Board of
Directors at any time
F-23
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
11. PREFERRED STOCK (CONTINUED)
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, 2003 and 2002 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.
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.
o During the year ended June 30, 2002, there were 4,046,684 shares of
Common Stock issued generating net proceeds of $1,992,852 pursuant
to the 2001-C Private Placement Offering under which shares were
sold at $0.50 per share. Participants in the offering also received
a warrant expiring in May 2002 to purchase an additional share of
Common Stock at $0.50 per share for each share purchase under the
offering.
F-24
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
12. COMMON STOCK (CONTINUED)
o During the year ended June 30, 2002, there were 4,726,040 shares of
Common Stock issued generating net proceeds of $2,754,371 pursuant
to the 2001-B Private Placement Offering under which shares were
sold at $0.60 per share. Participants in the offering also received
a warrant to purchase an additional share of Common Stock at $0.50
per share (reduced to $0.10 if the shareholder invested in the
2001-D Senior Note Offering) for each dollar invested in the
offering.
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. During the year ended June
30, 2002, warrants were exercised to purchase 5,670,309 shares of Common Stock
at share prices ranging from $0.10 to $0.50 generating proceeds of $1,141,171.
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.
F-25
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
12. COMMON STOCK (CONTINUED)
In addition to the shares issued to the CEO, there were 920,727, 3,895,052 and
5,124,134 shares of Common Stock issued to certain employees and officers for
services and for professional services during the years ended June 30, 2004,
2003 and 2002, 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, $847,742 and $2,311,944 for the years ended June 30, 2004,
2003, and 2002 respectively. In addition, during 2002 there were Common Stock
Warrants and Options granted for professional services. The value of these
warrants and options was based upon their fair value on dates there were granted
and totaled $181,000.
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.
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
==========
F-26
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
13. COMMON STOCK WARRANTS AND OPTIONS
Common Stock Warrant activity for the years ended June 30, 2004, 2003 and 2002
was as follows:
WARRANTS
------------
Outstanding at June 30, 2001 8,233,028
Issued 22,602,593
Exercised (1,833,529)
Cancelled (22,162,272)
-----------
Outstanding at June 30, 2002 6,839,820
Issued 76,286,145
Exercised (18,894,241)
Cancelled (2,104,000)
-----------
Outstanding at June 30, 2003 62,127,724
Issued 18,873,932
Exercised (32,060,459)
Cancelled (15,484,006)
-----------
Outstanding at June 30, 2004 33,457,191
===========
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, 2003 and 2002, the Company's Board of
Directors amended the terms of certain outstanding Common Stock Warrants whereby
the exercise price was reduced and the expiration dates were extended. The above
table reflects the status of the warrants as of June 30, 2004.
F-27
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
13. COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)
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.
Common Stock Option activity during the years ended June 30, 2004, 2003 and 2002
was as follows:
OPTIONS EXERCISE PRICE
OUTSTANDING PER SHARE
---------------------------------
Outstanding at June 30, 2001 4,886,667 $0.50-$5.00
Granted 4,505,318 $0.165-$0.70
Cancelled or expired (4,101,500) $0.40-$5.00
-----------------------------
Outstanding at June 30, 2002 5,290,485 $0.165-$5.00
Cancelled 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
Cancelled 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
=========
F-28
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
13. COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)
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.
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
The effect of applying FAS 123 for the year ended June 30, 2002 would have
resulted in a loss applicable to common shares and loss per common share as
follows:
Loss applicable to common shares as reported $(18,137,368)
Stock option expense under FAS 123 (985,046)
------------
Pro forma loss applicable to common shares $(19,122,414)
============
Loss per common share as reported $ (0.50)
============
Pro forma net loss per common share $ (0.53)
============
The fair value of stock options was estimated using the Black-Scholes option
pricing model with the following weighted-average assumptions for the year ended
June 30, 2002:
Dividend yield 0%
Expected stock price volatility .85 to .95
Risk-free interest rate 4.5% to 5.5%
Expected life, in years 2
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
F-29
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
14. TERMINATION OF KODAK VENDING PLACEMENT AGREEMENT (CONTINUED)
United States under agreements negotiated with the location owners and derived
revenues amounting to $358,484, $1,092,167, and $209,196 for the years ended
June 30, 2004, 2003 and 2002, 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.
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, 2003 and 2002 was
approximately $78,000, $67,000 and $48,000, 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.
F-30
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
16. LEASE COMMITMENTS (CONTINUED)
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.
Rent expense under operating leases was approximately $450,000, $292,000 and
$220,000 during the years ended June 30, 2004, 2003 and 2002, respectively.
Future minimum lease payments subsequent to June 30, 2004 under capital and
noncancellable 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.
18. SUBSEQUENT EVENTS (UNAUDITED)
Through October 25, 2004, the Company issued an additional 9,608,195 shares of
Common Stock under the Common Stock Agreement (Note 12) for gross proceeds of
$935,620.
F-31
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
18. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
Certain Senior Notes outstanding, which are scheduled to mature on December 31,
2004, have an aggregate face amount of $451,152 and are convertible into shares
of Common Stock at $0.40 per share. In October 2004, the holders of these notes
were granted the option, through December 31, 2004, to extend the maturity of
the notes to December 31, 2006 in exchange for reducing the conversion rate to
$0.15 per share.
Through June 30, 2004, the Company issued warrants to purchase approximately
3,700,000 shares of Common Stock to holders of the Senior Notes who chose to
receive quarterly interest on their Notes in shares of Common Stock, in lieu of
cash payment of interest ("Original Interest Warrants"). These warrants were
exercisable at $0.20 per share through August 30, 2004. In June 2004, the
Company issued additional warrants to the Senior Note holders who chose to
receive interest in shares of Common Stock ("Additional Interest Warrants"). One
additional warrant was issued for each warrant previously issued with an
exercise price of $0.20 per share through December 31, 2004.
The Company has reduced the exercise price of the Original Interest
Warrants and the Additional Interest Warrants to $0.15 per share through October
29, 2004. In addition, for each Original Interest Warrant exercised
through October 4, 2004, the expiration date of one Additional Interest
Warrant was extended to June 30, 2005 from December 31, 2004 and the exercise
price was permanently reduced to $0.15 per share.
Through October 20, 2004, Original Interest Warrants and Additional Interest
Warrants were exercised at $0.15 per share to purchase approximately 750,000
shares of Common Stock. Such exercises generated gross proceeds of approximately
$113,000.
F-32
PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is an itemized statement of the estimated amounts of all expenses
payable by the Registrant in connection with the registration of the common
stock, other than underwriting discounts and commissions.
Securities and Exchange Commission - Registration Fee .... $ 0.00
Printing and Engraving Expenses .......................... $ 2,500.00
Accounting Fees and Expenses ............................. $20,000.00
Legal Fees and Expenses .................................. $12,500.00
----------
Total ....................................... $35,000.00
==========
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 1746 of the Pennsylvania Business Corporation Law of 1988, as amended
("BCL"), authorizes a Pennsylvania corporation to indemnify its officers,
directors, employees and agents under certain circumstances against expenses and
liabilities incurred in legal proceedings involving such persons because of
their holding or having held such positions with the corporation and to purchase
and maintain insurance of such indemnification. Our By-laws substantively
provide that we will indemnify our officers, directors, employees and agents to
the fullest extent provided by Section 1746 of the BCL.
Section 1713 of the BCL permits a Pennsylvania corporation, by so providing in
its By-laws, to eliminate the personal liability of a director for monetary
damages for any action taken unless the director has breached or failed to
perform the duties of his office and the breach or failure constitutes
self-dealing, willful misconduct or recklessness. In addition, no such
limitation of liability is available with respect to the responsibility or
liability of a director pursuant to any criminal statute or for the payment of
taxes pursuant to Federal, state or local law. Our By-laws eliminate the
personal liability of the directors to the fullest extent permitted by Section
1713 of the BCL.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
During the three years immediately preceding the date of the filing of this
registration statement, the following securities were issued by USA without
registration under the Securities Act of 1933, as amended ("Act"):
80
PRIVATE PLACEMENTS
During the period from November 2001 through June 30, 2002, the Company sold
$4,814,593 principal amount of 12% Convertible Senior Notes due December 31,
2004. Each Senior Note is convertible into shares of common stock at $.40 per
share anytime through maturity. The notes were sold to 230 accredited investors
and the offer and sale thereof did not involve any general advertising or
solicitation and the offer and sale was therefore exempt from registration under
Rule 506 of the Regulation D promulgated under the Act.
In January 2002, the Company issued shares of common stock to the following
executive officers as a bonus: George R. Jensen, Jr.- 320,000 shares; Stephen P.
Herbert- 300,000 shares; H. Brock Kolls-200,000 shares; Leland Maxwell-130,000
shares; and Michael Lawlor- 130,000 shares. The issuance of the shares was
exempt from registration under Section 4(2) of the Act. All of these investors
are accredited and we obtained appropriate investment representations and the
securities contained appropriate restrictive legends under the Act.
In May 2002, we acquired Stitch Networks Corporation. Pursuant to the
transaction, Stitch become our wholly-owned subsidiary. In exchange for their
Stitch stock, the Stitch stockholders received an aggregate of 22,762,341 of our
shares of common stock and warrants to purchase up to 8,000,000 of our shares of
common stock at $.40 per share at any time through June 30, 2002. We also issued
to the former option holders of Stitch options to purchase up to 2,475,318
shares at $.165 per share at any time for five years following closing. The
offer and sale of the shares, warrants, and options was exempt from registration
under Section 4(2) of the Act.
The Stitch stockholders acquiring our shares and warrants are all accredited
investors and we obtained appropriate investment representations and the
securities contained appropriate restrictive legends under the Act. The
thirty-three former option holders of Stitch receiving our options consisted of
directors, officers or key employees of Stitch, all of whom were sophisticated
investors. In connection with the issuance of the options, we obtained
appropriate investment representations and the securities contained appropriate
restrictive legends under the Act.
In April 2002, the Company agreed to issue 400,000 shares of Common Stock to
Alex Consulting, Inc., a consultant to the Company. The offer and sale of the
shares was exempt from registration under Section 4(2) of the Act. The investor
is an accredited investor and we obtained appropriate investment representation
and the securities contained appropriate restrictive legends under the Act.
In April 2002, the Company agreed to issue 90,000 shares of Common Stock to
Larry Gershman, a consultant to the Company. The offer and sale of the shares
was exempt from registration under Section 4(2) of the Act. The investor is an
accredited investor and we obtained appropriate investment representation and
the securities contained appropriate restrictive legends under the Act.
81
In April 2002, the Company agreed to issue to Technology Partners (Holdings)
LLC, our investment banker, a total of 150,000 shares of Common Stock. The
shares are to be issued at the rate of 25,000 per month under the six month
extension of their consultant agreement. The offer and sale of the shares was
exempt from registration under Section 4(2) of the Act. The investor is an
accredited investor and we obtained appropriate investment representation and
the securities contained appropriate restrictive legends under the Act.
During September 2002, the Company sold 2,000,000 shares of restricted Common
Stock at $.12 per share for aggregate proceeds of $240,000 to an investor. In
addition, in October 2002, the Company granted to the investor warrants to
purchase up to 2,000,000 shares at $.10 per share through November 30, 2002
(later extended to March 31, 2003), and if all of these warrants are exercised,
the investor has been granted another identical warrant for 2,000,000 shares
exercisable at any time through March 31, 2003. The offer and sale of the shares
was exempt from registration under Section 4(2) of the Act. The investor is an
accredited investor and we obtained appropriate investment representation and
the securities contained appropriate restrictive legends under the Act.
Commencing during June 2002 and through October 2002, the Company sold to 186
accredited investors $4,144,008 principal amount of 12% Senior Notes due
December 31, 2005 and 8,288,016 shares of Common Stock. For each $10,000
invested, the subscriber received a $10,000 note and 20,000 shares of Common
Stock. The Company has received signed subscription documents for the 2002-A
Private Placement of Senior Notes for $4,114,008, of which $2,585,000 has been
deposited and the remainder for services. The notes were sold to accredited
investors and the offer and sale thereof did not involve any general advertising
or solicitation and the offer and sale was therefore exempt from registration
under Rule 506 of the Regulation D promulgated under the Act.
La Jolla Cove Investors converted Debentures and exercised warrants. The
investor utilized previously remitted funds to the Company which was reflected
as a deposit in the June 30, 2002 consolidated financial statements.
Specifically, from inception through June 30, 2003, La Jolla converted $325,000
of 9 3/4 percent Convertible Debentures, for which the Company issued 2,800,903
shares of stock, and exercised 10,543,673 warrants to purchase Common Stock at
an average price of $.16 per share. The Company had previously executed a
Securities Purchase Agreement with La Jolla for the purchase of $225,000
(increased by $100,000 on June 18, 2002) of Convertible Debentures bearing 9 3/4
percent interest with a maturity date of August 3, 2003 (extended to August 2,
2004 on June 18, 2002). Interest is payable by the Company monthly in arrears.
The Debenture is convertible at any time after the earlier of the effectiveness
of the registration statement or 90 days following issuance, at the lower of
$1.00 per share or 80% (later lowered to 72%) of the lowest closing bid price of
the Common Stock during the 30 days preceding exercise. The offer and sale of
the shares was exempt from registration under Section 4(2) of the Act.
82
In July 2002 the Company agreed to issue an aggregate of 234,600 shares to
employees as part of those employees` severance payments at the time of and as
part of the employee`s termination of employment. The offer and sale of the
shares was exempt from registration under Section 4(2) of the Act. All of these
eight former employees were sophisticated and were afforded access to all public
filings as well as to any other information reasonably obtainable by USA. We
received investment representations from all of these investors and all the
securities contained appropriate restrictive legends under the Act.
In July 2002, the Company agreed to issue to Karl Mynyk, a former employee, an
aggregate of 125,000 shares in settlement of litigation between he and the
Company. The shares were valued at $.20 per share. The offer and sale of the
shares was exempt from registration under Section 4(2) of the Act. Mr. Mynyk is
a sophisticated investor, was afforded access to all public filings as well as
to any other information reasonably obtainable by USA. We received investment
representations from him and the securities contained appropriate restrictive
legends under the Act.
In October 2002 and January 2003, the Company issued 529,324 and 593,634 shares,
respectively, (valued at $.20 per share) to the holders of the senior notes in
lieu of the cash quarterly interest payments due for the quarters ended
September 2002 and December 2002, respectively. In addition, for these two
quarters the Company granted warrants to purchase up to 1,122,958 shares at $.20
per share at any time prior to June 30, 2004. The offer and sale of the
shares and warrants was exempt from registration under Rule 506 promulgated
under the Act. All of these securities were sold to accredited investors and the
offer and sale did not involve any general advertising or solicitation.
In October 2002, the Company issued to Edwin P. Boynton 50,000 shares in lieu of
the 100,000 options granted to him in April 2002. The offer and sale of the
shares was exempt from registration under Section 4(2) of the Act. Mr. Boyton is
an accredited investor and a Director of the Company, we obtained investment
representations from him and the securities contained appropriate restrictive
legends under the Act.
In October 2002, the Company sold to an investor, Kazi Management VI, Inc.
3,571,429 shares of Common Stock at $.07 per share and issued the following
warrants: (1) warrants to purchase up to 7,142,858 shares of Common Stock at
$.07 at any time for a five year period; and (2) warrants to purchase up to
7,142,858 shares at $.07 per share and up to 5,000,000 shares at $.10 per share,
exercisable over a one year period. The offer and sale of the shares was exempt
from registration under Section 4(2) of the Act. The investor is an accredited
investor and we obtained appropriate investment representations from the
investor and the securities contained appropriate restrictive legends under the
Act.
In October 2002, the Company sold to an investor, Alpha Capital
Aktiengesellscharft, 1,500,000 shares at $.10 per share and granted warrants to
purchase up to 750,000 shares at $.15 per share at any time for five years.
83
Within seven days following the effectiveness of the registration statement
covering these shares, and provided that a Non-Registration Event (as defined in
our agreement with Alpha) has not occurred, the Company has agreed to sell to
the investor an additional 1,500,000 shares at $.10 per share and grant warrants
to purchase up to 750,000 shares at the then closing price per share at any time
for five years. The securities were sold to an accredited investor and the offer
and sale thereof did not involve any general advertising or solicitation and the
offer and sale was therefore exempt from registration under Rule 506 of the
Regulation D promulgated under the Act.
In October 2002, the Company granted to the holders of the 12% senior notes
warrants to purchase that number of shares equal to 75% of the dollar amount of
the notes held by such holder. The total number of warrants issued was
10,360,025 and are exercisable at any time prior to October 31, 2003. If the
holder exercises all of such holder`s warrants, the holder shall receive another
identical warrant exercisable at any time prior to October 31, 2003. From
November 2002 through June 30, 2003, 14,025,804 of these warrants were exercised
at $.10 per share for a total of $1,402,851. The offer and sale of the warrants
and these shares was exempt from registration under Rule 506 promulgated under
the Act. All of the noteholders are accredited investors and already the holders
of our notes. The warrants and the shares all contained appropriate restrictive
legends under the Act.
On October 31, 2002, eight employees of and two consultants to USA entered into
subscription agreements with USA to receive an aggregate of 1,480,000 shares for
services to be rendered to USA. The shares were valued at $.125 per share and
were exempt from registration under Section 4(2) of the Act. All of the
employees and consultants were sophisticated investors, made appropriate
investment representations, were afforded access to all public filings and all
other information that USA could reasonably obtain, and the securities contained
appropriate restrictive legends under the Act.
During the 2003 fiscal year and through August 7, 2003, the Company issued an
aggregate of 85,601,130 shares to 398 accredited investors at $.10 per share for
an aggregate of $8,560,113. Of the $8,560,130, $8,345,674 were for cash proceeds
and $214,439 were for services rendered or to be rendered. The offer and sales
of the shares was exempt from registration under Rule 506 promulgated under
Section 4(2) of the Act. All of the investors were either pre-existing security
holders or business associates. The offer and sale thereof did not involve any
general advertising or solicitation and the securities contained appropriate
restrictive legends under the Act. In connection with the offering, we paid
$64,000 to Sloan Securities, Inc., a broker-dealer, in connection with the
8,000,000 shares sold by Sloan on our behalf. We have agreed to use our best
efforts to register all of these shares for resale under the Act for a period of
one year.
84
In February, 2003, Jubilee Investment Trust, PLC ("Jubilee"), a United Kingdom
investment trust made an equity investment in USA Technologies at U.S.$0.20 per
share. Jubilee is a newly established investment trust set up to invest in
securities traded on a range of public markets, primarily in the United Kingdom.
USA Technologies issued to Jubilee 15,000,000 shares of Common Stock of USA
Technologies at a price per share of U.S.$0.20 with an aggregate value of
U.S.$2,850,000. In full payment for the shares of USA Technologies, Jubilee
issued to USA Technologies an equivalent of their shares (1,870,091 shares of
Jubilee at a price per share valued at One British Pound which was the initial
public offering price per share for the Jubilee shares). The exchange rate used
by the parties for the transaction was One British Pound equals U.S.$1.6042. The
shares to be issued to Jubilee by USA Technologies will not be registered under
the Securities Act of 1933, as amended. Jubilee has agreed not to sell USA
Technologies` shares for a period of two (2) years from the date of issuance
unless USA Technologies agrees otherwise. The shares were issued to Jubilee by
USA pursuant to the exemption from registration set forth in Section 4(2) of the
Act.
In March 2003, we issued a warrant to La Jolla Cove Investors, Inc. to purchase
up to 9,000,000 shares at $.10 per share. The warrants expire as follows:
3,000,000 on the three month anniversary of the date of this prospectus;
3,000,000 on the 6 month anniversary of the date of this prospectus; and
3,000,000 on the 9 month anniversary of the date of this prospectus. The
warrants may not be exercised without our consent on any date on which the
closing price of our shares is less than $.40. We have agreed to register the
shares underlying the warrants for resale under the Act for a period of one
year. The warrants were offered and sold to La Jolla pursuant to the exemption
from registration set forth in Section 4(2) of the Act. During October 2003,
these warrants were rescinded and cancelled by agreement of USA and La Jolla.
In April 2003, we issued 530,818 shares and warrants to purchase up to 530,818
shares to the holders of our senior notes who elected to receive these
securities in lieu of the cash interest payment due for the quarter ended March
31, 2003. The shares were purchased at the rate of $.20 per share and the
warrants are exercisable at $.20 per share at any time through June 30, 2004. We
have agreed to register the shares and the shares underlying the warrants under
the Act for resale for a period of 2 years. The securities were offered and sold
under the exemption from registration set forth in Rule 506 promulgated under
the Act. All of the noteholders are accredited investors and existing security
holders of USA and there was no general solicitation or advertising.
During April 2003, we agreed to issue to Steve Illes, an existing shareholder,
an aggregate of 1,000,000 shares for $.10 per share and agreed to issue to him
warrants to purchase up to 4,000,000 shares at $.10 per share at any time
through August 31, 2003. The offer and sale of the shares and warrants was
exempt from registration under Section 4(2) of the Act. Mr. Illes is an
accredited investor, made appropriate investment representations, was afforded
access to all public filings and all other information that USA could reasonably
obtain, and the securities contained appropriate restrictive legends under the
Act. We have agreed to register the shares and the shares underlying the
warrants for resale under the Act for a period of one year.
85
During May 2003, we issued to Providence Investment Management, an accredited
investor, an aggregate of 2,500,000 shares for $.10 per share. The offer and
sale of the shares was exempt from registration under Section 4(2) of the Act.
Providence Investment Management is an accredited investor, made appropriate
investment representations, was afforded access to all public filings and all
other information that USA could reasonably obtain, and the securities contained
appropriate restrictive legends under the Act. Providence approached us about
the investment and we did not solicit Providence. We have agreed to register the
shares for resale under the Act for a period of one year.
During July 2003, we issued an aggregate of 10,500,000 shares to George R.
Jensen, Jr., our Chairman and Chief Executive Officer, as part of the amendment
to his employment agreement. The offer and sale of the shares was exempt from
registration under Section 4(2) of the Act. Mr. Jensen is an accredited
investor, made appropriate investment representations, was afforded access to
all public filings and all other information that USA could reasonably obtain,
and the securities contained appropriate restrictive legends under the Act. Mr.
Jensen has entered into a lock up agreement pursuant to which he shall not sell
2,500,000 of the shares for a one year period and 8,000,000 of the shares for a
two year period.
In July 2003, we issued 661,224 shares and warrants to purchase up to 661,224
shares to the holders of our senior notes who elected to receive these
securities in lieu of the cash interest payment due for the quarter ended June
30, 2003. The shares were purchased at the rate of $.20 per share and the
warrants are exercisable at $.20 per share at any time through June 30, 2004. We
have agreed to register the shares and the shares underlying the warrants under
the Act for resale for a period of 2 years. The securities were offered and sold
under the exemption from registration set forth in Rule 506 promulgated under
the Act. All of the noteholders are accredited investors and existing security
holders of USA, and there was no general solicitation or advertising.
On July 11, 2003, we issued 20,000,000 shares to Bayview, as part of our
purchase of substantially all of the assets of Bayview. The securities were
offered and sold under the exemption from registration set forth in Rule 506
promulgated under the Act. Bayview was introduced to us through our consultant
Robert McGarrah, and there was no general solicitation or advertising. Bayview
has agreed not to sell any of the shares until July 11, 2004, at which time
Bayview shall be permitted to sell during each calendar month thereafter (on a
non-cumulative basis) the greater of (i) 250,000 shares of the Stock, or (ii)
that number of shares of the Stock equal to five percent (5%) of the immediately
prior calendar month's trading volume of the shares of Common Stock of USA. USA
has agreed to use its best efforts to register all of the shares for resale by
Bayview under the Securities Act of 1933, as amended, for a period of one year
(from July 11, 2004 through July 11, 2005).
During September 2003, we issued to Wellington Management Company, LLP, on
behalf of several of its clients, an aggregate of 18,000,000 shares for $.25 per
share. The offer and sale of the shares was exempt from registration under
Section 4(2) of the Act. All of these clients are accredited investors. This
investor approached us regarding this investment and we did not solicit this
investor. We have agreed to register the shares for resale under the Act for a
period of one year.
86
During September 2003, we issued to George O'Connell, an accredited investor and
existing shareholder, an aggregate of 1,000,000 shares for $.25 per share. The
offer and sale of the shares was exempt from registration under Section 4(2) of
the Act. We have agreed to register the shares for resale under the Act for a
period of one year.
During September 2003, we issued to Prophecy Asset Management, an accredited
investor, an aggregate of 750,000 shares for $.25 per share. The offer and sale
of the shares was exempt from registration under Section 4(2) of the Act. This
investor approached us regarding this investment and we did not solicit this
investor. We have agreed to register the shares for resale under the Act for a
period of one year.
During September 2003, we issued to Fulcrum Global Partners, LLC, an accredited
investor, an aggregate of 260,000 shares for $.25 per share. The offer and sale
of the shares was exempt from registration under Section 4(2) of the Act. This
investor approached us regarding this investment and we did not solicit this
investor. We have agreed to register the shares for resale under the Act for a
period of one year.
In October 2003, we issued 577,457 shares and 577,457 warrants to purchase up to
shares to the holders of our senior notes who elected to receive these
securities in lieu of the cash interest payment due for the quarter ended
September 30, 2003. The shares were purchased at the rate of $.20 per share and
the warrants are exercisable at $.20 per share at any time through June 30,
2004. We have agreed to register the shares and the shares underlying the
warrants under the Act for resale for a period of 2 years. The securities were
offered and sold under the exemption from registration set forth in Rule 506
promulgated under the Act. All of the noteholders are accredited investors and
existing security holders, and there was no general solicitation or advertising.
In October 2003, we issued to Alpha Capital Atkiengesellschaft, a current
shareholder, an aggregate of 500,000 shares due to Alpha as a result of the
occurrence of a Non-Registration Event as defined under our agreement with Alpha
because we failed to register within 120 days of issuance the securities issued
to Alpha in November 2002. The securities were sold to an accredited investor
and the offer and sale thereof did not involve any general advertising or
solicitation and the offer and sale was therefore exempt from registration under
Section 4(2) under the Act.
During the quarter ended June 30, 2003, the Company issued an aggregate of
8,497,819 shares to 464 holders of warrants at $0.10 per share for an aggregate
of $849,783. The offer and sales of the shares was exempt from the registration
requirements of the Act under Rule 506 promulgated thereunder. In this regard,
the offer and sale thereof did not involve any general advertising or
solicitation and the securities contained appropriate restrictive legends under
the Act. The Company agreed to use its best efforts to register the shares for
resale under the Act.
87
During the quarter ended June 30, 2003, the Company issued an aggregate of
4,462,918 shares to 13 holders of its Convertible Senior Notes at the rate of
$0.20 per share for aggregate conversions of $892,584. The offer and sales of
the shares was exempt from the registration requirements of the Act under Rule
506 promulgated thereunder. In this regard, the offer and sale thereof was to
existing security holders and did not involve any general advertising or
solicitation and the securities contained appropriate restrictive legends under
the Act.
During the quarter ended June 30, 2003, 50 holders of $2,196,000 principal
amount of the Senior Notes maturing in December 2003 elected to extend these
notes until December 31, 2006 and to have the conversion rate reduced from $1.25
per share to $0.20 per share. The note exchange was exempt from the registration
requirements of the Act pursuant to Section 3(a)(9) thereof.
During the quarter ended June 30, 2003, 56 holders of $1,296,397 principal
amount of the Senior Notes maturing in December 2004 elected to extend these
notes until December 31, 2007 and to have the conversion rate reduced from $0.40
per share to $0.20 per share. The shares were issued solely in exchange for our
securities and we paid no commissions in connection with the transaction. The
note exchange was exempt from the registration requirements of the Act pursuant
to Section 3(a)(9) thereof.
During the quarter ended June 30, 2003, the Company issued 3,340 shares of
Common Stock upon the conversion of 3,340 shares of Series A Preferred Stock and
issued 4,008 shares of Common Stock upon the conversion of $40,080 of cumulative
dividends accrued and unpaid on these shares of Preferred Stock. The shares were
issued solely in exchange for our securities and we paid no commissions in
connection with the transaction. The shares of Common Stock were issued pursuant
to the exemption from registration set forth in Section 3(a)(9) of the Act.
During the quarter ended September 30, 2003, the Company issued an aggregate of
535,258 shares of Common Stock to 7 holders of warrants at $0.10 per share for
an aggregate of $53,526. The Company issued 105,000 shares for consulting
services rendered or to be rendered to the Company, to the following warrants
holders upon exercise of their warrants: Rachel Glicksman- 72,000 shares;
Charlotte Given-30,000 shares; and Gary Nash- 3,000 shares. These warrants were
exercised at $.10 per share and no cash payment was required in connection with
their exercise. The shares issued for services were recorded at the market price
on the date of grant. The offer and sales of the shares was exempt from the
registration requirements of the Act under Rule 506 promulgated thereunder. In
this regard, the offer and sale thereof was to existing security holders and did
not involve any general advertising or solicitation and the securities contained
appropriate restrictive legends under the Act. The Company agreed to use its
best efforts to register the shares for resale under the Act.
During the quarter ended September 30, 2003, the Company issued an aggregate of
7,500,834 shares of Common Stock to 31 holders of its Convertible Senior Notes
upon their conversion at the rate of $0.20 per share for an aggregate of
$1,500,167. The offer and sales of the shares was exempt from the registration
requirements of the Act under Rule 506 promulgated thereunder. In this regard,
the offer and sale thereof was to existing security holders and did not involve
any general advertising or solicitation and the securities contained appropriate
restrictive legends under the Act.
88
During the quarter ended September 30, 2003, 54 holders of $1,116,000 principal
amount of the Senior Notes maturing in December 2003 elected to extend these
notes until December 31, 2006 and to have the conversion rate reduced from $1.25
per share to $0.20 per share. The note exchange was exempt from the registration
requirements of the Act pursuant to Section 3(a)(9) thereof.
During the quarter ended September 30, 2003, 23 holders of $708,096 principal
amount of the Senior Notes maturing in December 2004 elected to extend these
notes until December 31, 2007 and to have the conversion rate reduced from $0.40
per share to $0.20 per share. The note exchange was exempt form the registration
requirements of the Act pursuant to Section 3(a)(9) thereof.
From February through June 2004, the Company sold 28,290,833 shares of Common
Stock to 34 accredited investors at $.15 per share for an aggregate of
$4,243,625. During June 2004, the Company granted to each investor in the
offering a warrant to purchase one-half of a share for each share subscribed for
by such investor in the offering. The Company issued warrants to purchase a
total of 14,145,417 shares. The warrants are exercisable at $.20 per share at
any time through December 31, 2004. We have agreed to register the shares and
the shares underlying the warrants under the Act for resale for a period of two
years. The offer and sales of the shares was exempt from registration under Rule
506 promulgated under Section 4(2) of the Act. All of the investors were either
pre-existing security holders or business associates. The offer and sale thereof
did not involve any general advertising or solicitation and the securities
contained appropriate restrictive legends under the Act.
In January 2004, we issued 542,592 shares and 542,592 warrants to purchase up to
shares to the holders of our senior notes who elected to receive these
securities in lieu of the cash interest payment due for the quarter ended
December 31, 2003. The shares were purchased at the rate of $.20 per share and
the warrants are exercisable at $.20 per share at any time through June 30,
2004. We have agreed to register the shares and the shares underlying the
warrants under the Act for resale for a period of 2 years. The securities were
offered and sold under the exemption from registration set forth in Rule 506
promulgated under the Act. All of the noteholders are accredited investors and
existing security holders, and there was no general solicitation or advertising.
In June 2004, we issued warrants to purchase up to 3,716,496 shares of Common
Stock to the holders of our senior notes who elected to receive warrants in lieu
of the cash interest payment due for the quarters ended June 30, 2002, September
30, 2002, December 31, 2002, March 31, 2003, June 30, 2003, September 30, 2003
and December 31, 2003. The warrants are exercisable at $.20 per share at any
time through December 31, 2004. We have agreed to register the shares underlying
the warrants under the Act for resale for a period of 2 years. The securities
were offered and sold under the exemption from registration set forth in Rule
506 promulgated under the Act. All of the noteholders are accredited investors
and existing security holders of USA, and there was no general solicitation or
advertising.
89
In January 2004, we issued to CEOCAST, Inc. a total of 150,000 shares for
services to be rendered to the Company. The offer and sale of the shares were
exempt from registration under Section 4(2) of the Act. The Company agreed to
use its best efforts to register the shares for resale under the Act.
On June 18, 2004, we entered into a Common Stock Purchase Agreement with Steve
Illes. During the one year period following the effectiveness of a registration
statement covering the shares, Illes has agreed to purchase from USA shares of
Common Stock, provided that the aggregate purchase price can not exceed
$7,500,000. Under the Agreement, Illes is permitted to purchase Common Stock
from USA at any time at the price per share of $.30. In addition, USA has the
right at any time to require Illes to purchase Common Stock from USA at the
lower of: (i) $.30; or (ii) 90% of the closing bid price per share on the date
prior to the date of the delivery by USA to Illes of notice of his obligation to
purchase. USA can require Illes to purchase shares under the Agreement only if
the shares have been registered by the Company for resale by Illes under the
Act. During any calendar month, Illes is not permitted to purchase and can not
be required by USA to purchase Common Stock for an aggregate purchase price in
excess of $700,000. We have agreed to register for resale the shares purchased
by Illes under the Agreement for a period of one year from the date of the
effectiveness of the initial registration statement covering the shares to be
purchased by Illes. We have agreed to pay to Illes a due diligence fee of
$45,000. The securities were offered and sold to Illes under the exemption from
registration set forth under Rule 506 promulgated under the Act. Mr. Illes is an
existing shareholder and an accredited investor, and there was no general
solicitation or advertising.
In July 2004, the Staff of the Securities and Exchange Commission indicated that
because of the discretion given to Mr. Illes under the Agreement to purchase the
shares at any time for $.30 per share, it was not appropriate to register the
shares unless this discretion was eliminated. On August 6, 2004 the Company and
Mr. Illes entered into a subsequent agreement which superceded the prior
agreement and gave the Company the right to require Mr. Illes to purchase the
shares but did not give Mr. Illes any discretion to purchase shares. During the
one year period following the date of effectiveness of a registration statement
covering the shares, Illes has agreed to purchase from USA shares of Common
Stock, provided that the aggregate purchase price can not exceed $7,500,000.
Under the Agreement, USA has the right at any time to require Illes to purchase
Common Stock from USA at the lower of: (i) $.30; or (ii) 90% of the closing bid
price per share on the date prior to the date of the delivery by USA to Illes of
notice of his obligation to purchase. USA can require Illes to purchase shares
under the Agreement only if the shares have been registered by the Company for
resale by Illes under the Act. During any calendar month, Illes is not permitted
to purchase and can not be required by USA to purchase Common Stock for an
aggregate purchase price in excess of $700,000.
90
STOCK OPTIONS
In November 2001, the Company authorized issuance of 1,080,000 fully vested
options to purchase its Common Stock to its Executive Officers, provided that
they were employed by the Company as of January 2, 2002. The amounts of options
authorized were: George R. Jensen, Jr. - 320,000 options; Stephen P. Herbert -
300,000 options; Haven Brock Kolls 200,000 options; Leland Maxwell - 130,000
options; and Michael Lawlor - 130,000 options. Each option is exercisable at
$.40 per share at any time and on or before June 30, 2003. These options vested
during March, 2002.
In November 2001, the Company issued the following fully vested options to
purchase an aggregate of 650,000 shares: Gary Oakland - 100,000 options; Adele
Hepburn - 300,000 options; and Frances Young - 250,000 options. These options
vested during March, 2002.
In April 2002, the Company granted to H. Brock Kolls an aggregate of fully
vested options to purchase up to 50,000 shares exercisable at $.40 per share for
a three year period following issuance.
On April 28, 2004 the Company issued to Mary West Young options to purchase
300,000 shares of Common Stock for $.30 per share which vest ratably over a two
year period.
The issuance of all of the foregoing options was made in reliance upon the
exemption provided by Section 4(2) of the Act as all of the options were issued
to officers, directors, employees or consultants of USA, each of such issuances
were separate transactions not part of any plan, and none of the issuances
involved any general solicitation or advertising.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
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).
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).
91
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).
92
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).
4.14 Addendum to 2006 Senior Note. (Incorporated by reference to
Exhibit 4.30 to Form 10-KSB filed on September 28, 2004).
4.15 Addendum to 2007 Senior Note. (Incorporated by reference to
Exhibit 4.30 to Form 10-KSB filed on September 28, 2003).
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).
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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).
**5.1 Opinion of Lurio & Associates, P.C.
10.1 Employment and Non-Competition Agreement between USA and Adele
Hepburn dated as of January 1, 1993 (Incorporated by reference to
Exhibit 10.7 to Form SB-2 Registration Statement No. 33-70992).
10.1.1 First Amendment to Employment and Non-Competition Agreement
between USA and Adele Hepburn dated as of February 4, 2004.
(Incorporated by reference to Exhibit 10.1.1 to Form 10-QSB filed
on February 12, 2004).
10.2 Certificate of Appointment of American Stock Transfer & Trust
Company as Transfer Agent and Registrar dated October 8, 1993
(Incorporated by reference to Exhibit 10.23 to Form SB-2
Registration Statement No. 33-70992).
10.3 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).
94
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)
00.6.2 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-Competition 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).
95
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).
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).
96
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 (Incorporated by reference to Exhibit 10.21 to
Form 10-KSB filed on September 28, 2004).
10.22 Agreement of Lease between Deerfield Corporate Center 1
Associates LP, as landlord, and the Company, as tenant, dated
March 2003 (Incorporated by reference to Exhibit 10.22 to Form
10-KSB filed on September 28, 2004).
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).
10.24 Co-Marketing Agreement between Honeywell D.M.C. Services, LLC and
the Company dated July 13, 2004 (Incorporated by reference to
Exhibit 99.1 to Form 8-K filed on September 29, 2004).
14.1 Code of Business Conduct and Ethics. (Incorporated by reference
to Exhibit 14.1 to Form 10-KSB filed on September 28, 2004).
**23.1 Consent of Ernst & Young LLP.
- -------------
** Filed herewith
97
ITEM 16(b). FINANCIAL STATEMENT SCHEDULES
SCHEDULE II
USA TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
ACCOUNTS RECEIVABLE Deductions
uncollectible
Balance at Additions receivables Balance
beginning of charged to written off, net at end
period earnings of recoveries of period
- --------------------------------------------------------------------------------
June 30, 2004 $ 65,000 194,000 19,000 $240,000
- --------------------------------------------------------------------------------
June 30, 2003 $ 37,000 30,000 2,000 $ 65,000
- --------------------------------------------------------------------------------
June 30, 2002 $ 28,000 39,000 30,000 $ 37,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INVENTORY Balance at Additions Deductions Balance
beginning of charged to shrinkage and at end
period earnings obsolescence of period
- --------------------------------------------------------------------------------
June 30, 2004 $ 63,000 190,000 24,000 $229,000
- --------------------------------------------------------------------------------
June 30, 2003 $244,000 76,000 257,000 $ 63,000
- --------------------------------------------------------------------------------
June 30, 2002 $198,000 129,000 83,000 $244,000
- --------------------------------------------------------------------------------
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the Securities Act
of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
98
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement. Provided,
however, that paragraphs (1)(i) and (1)(ii) do not apply if the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
For purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant`s annual report pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 that is incorporated by reference in this
registration statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
99
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing this Form S-1 and has duly caused this
Registration Statement on Form S-1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in Malvern, Pennsylvania, on October 25,
2004.
USA TECHNOLOGIES, INC.
By: /s/ George R. Jensen, Jr.
--------------------------
George R. Jensen, Jr., Chairman
and Chief Executive Officer
100
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints George R. Jensen, Jr. and Stephen P. Herbert, and
each of them, his or her true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him or her and in his or her name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the SEC, granting unto such attorneys-in-fact and agents, full
power and authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them or
their or his substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been duly signed below by the following persons in
the capacities and dates indicated.
SIGNATURES TITLE DATE
- ----------- ----- ----
/s/ George R. Jensen, Jr. Chairman of the Board of Directors, October 25, 2004
- ------------------------- Chief Executive Officer
George R. Jensen, Jr. (Principal Executive Officer)
/s/ Mary West Young Chief Financial Officer (Principal October 25, 2004
- -------------------------- Accounting Officer)
Mary West Young
/s/ William W. Sellers Director October 25, 2004
- --------------------------
William W. Sellers
/s/ Stephen P. Herbert Director October 25, 2004
- --------------------------
Stephen P. Herbert
/s/ William L. Van Alen, Jr. Director October 25, 2004
- ----------------------------
William L. Van Alen, Jr.
/s/ Douglas M. Lurio Director October 25, 2004
- --------------------------
Douglas M. Lurio
/s/ Steven Katz Director October 25, 2004
- --------------------------
Steven Katz
101
Exhibit Index
Exhibit
Number Description
- -----------------------------------------------------------------------------
5.1 Opinion of Lurio & Associates, P.C.
23.1 Consent of Ernst & Young, LLP
102
Exhibit 5.1
October 25, 2004
USA Technologies, Inc.
100 Deerfield Lane, Suite 140
Malvern, PA 19355
Attn: Mr. George R. Jensen, Jr., Chief Executive Officer
Re: USA Technologies, Inc. - Registration Statement on Form S-1
Dear Mr. Jensen:
We have acted as counsel to USA Technologies, Inc., a Pennsylvania corporation
(the "Company"), in connection with a Registration Statement on Form S-1, filed
with the Securities and Exchange Commission on the date hereof (the
"Registration Statement"). The Registration Statement covers 38,504,248 shares
of Common Stock ("Common Stock") which are either currently outstanding or
issuable upon exercise of options or warrants.
In rendering this opinion, we have examined (i) the Articles of Incorporation,
as amended, and By-Laws of the Company; (ii) the resolutions of the Board of
Directors evidencing the corporate proceedings taken by the Company to authorize
the issuance of the Common Stock pursuant to the Registration Statement; (iii)
the Registration Statement (including all exhibits thereto); and (iv) such other
documents as we have deemed appropriate or necessary as a basis for the opinion
hereinafter expressed.
In rendering the opinion expressed below, we assumed the authenticity of all
documents and records examined, the conformity with the original documents of
all documents submitted to us as copies and the genuineness of all signatures.
We have also assumed that at all relevant times, the Company shall have a
sufficient number of authorized shares of Common Stock to cover the issuance by
the Company of all shares underlying warrants and options covered by the
Registration Statement.
Based upon and subject to the foregoing, and such legal considerations as we
deem relevant, we are of the opinion that when resold as contemplated by the
Registration Statement, and subject to effectiveness of the Registration
Statement and compliance with applicable state securities laws, the Common Stock
when issued will be legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to references made to this firm under the heading
"Legal Matters" in the Prospectus contained in the Registration Statement and
all amendments thereto.
Sincerely,
/s/ LURIO & ASSOCIATES, P.C.
----------------------------
LURIO & ASSOCIATES, P.C.
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated September 10, 2004, in the Registration Statement (Form
S-1 No. 333-00000) and related Prospectus of USA Technologies, Inc. dated
October 25, 2004.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
October 25, 2004