AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 18, 2005.
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(4) Offering Price Fee
- --------------------------------------------------------------------------------
Common Stock,
no par value 15,507,890 shares(1) $.16 $2,481,262 $ 292.05
35,949,166 shares(2) $.18 $6,470,850 $ 821.80
426,437 shares(3) $.18 $ 76,759 $ 9.75
----------- --------
Total 51,883,493 shares $9,028,871 $1,123.60(5)
=========== ========
(1) Represents shares underlying convertible senior notes due June 30, 2007
issued to investors in our 2004-B senior note private placement offering.
(2) This registration statement amends our registration statement on Form SB-2,
Commission File No. 333-116977, and pursuant to Rule 429 of the Securities Act
of 1933, as amended, carries forward 28,290,833 shares issued as part of, and
7,658,333 shares issued upon the exercise of warrants issued as part of, our
2004-A private placement offering.
2
(3) This registration statement amends our registration statement on Form SB-2,
Commission File No. 333-116977, and pursuant to Rule 429 of the Securities Act
of 1933, as amended, carries forward 153,646 shares issued upon exercise of
warrants granted in June 2004 to the holders of our senior notes who previously
elected to receive warrants in lieu of cash interest payments and 272,791 shares
underlying warrants remaining unexercised.
(4) 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.
(5) $292.05 of the filing fee is being paid at the time of filing of this
registration statement. $831.55 of the filing fee was previously paid in
connection with and at the time of the filing of the original registration
statements relating to the shares which 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.
PROSPECTUS
USA TECHNOLOGIES, INC.
51,883,493 shares of Common Stock
THE OFFERING
The resale of up to 51,883,493 shares of common stock in the over-the-counter
market at the prevailing market price or in negotiated transactions. We will
receive no proceeds from the sale of the shares by the selling shareholders.
However, we will receive proceeds from the sale of shares issuable upon the
exercise of warrants by the selling shareholders. 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.
36,375,603 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.
3
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
February 14, 2005, was $0.16 per share.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES ONLY
IF YOU CAN AFFORD A COMPLETE LOSS. Please refer to Risk Factors beginning on
Page 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities or passed on the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is February 18, 2005.
TABLE OF CONTENTS
Prospectus Summary .......................................... 5
Forward Looking Statements................................... 6
Risk Factors ................................................ 7
Use of Proceeds ............................................. 13
Selected Financial Data...................................... 14
Quarterly Financial Data..................................... 15
Quantitative and Qualitative Disclosures
About Market Risk.......................................... 16
Managements Discussion And Analysis of
Financial Condition And Results of Operations.............. 16
Business .................................................... 32
Management .................................................. 49
Principal Shareholders ...................................... 57
Certain Transactions ........................................ 60
Selling Shareholders ........................................ 61
Market for Common Stock ..................................... 68
Plan of Distribution ........................................ 71
Description of Securities ................................... 72
Legal Matters ............................................... 77
Experts ..................................................... 77
Where You Can Find Additional Information.................... 77
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 approximately $688,000, $1,505,000, and $1,187,000 for the
years ended June 30, 2004, 2003 and 2002, respectively, and $272,000 for the six
months ended December 31, 2004.
ABOUT OUR OFFERING
Our selling shareholders are as of the date of this prospectus as follows:
* holders of 36,102,812 shares
* holders of senior notes which if converted would represent 15,507,890
shares
5
* holders of unexercised warrants which if exercised would represent 272,791
shares (based upon the price of our shares of $0.16 on February 14,
2005,all of these warrants have exercise prices less than this share
price)
Based upon the shares outstanding as of January 31, 2005 of 395,782,468, if all
of the senior notes are converted and all of the warrants are exercised, we
would have 411,563,149 shares outstanding.
36,375,603 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.
The shares covered by this prospectus 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 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.
6
RISK FACTORS
An investment in our common stock is very risky. You should be aware that you
could lose the entire amount of your investment. Prior to making an investment
decision, you should carefully consider the following risk factors and the other
information contained in this prospectus.
1. We have a history of losses since inception and if we continue to incur
losses the price of our shares can be expected to fall.
We have experienced losses since inception. We expect to continue to incur
losses for the foreseeable future as we expend substantial resources on sales,
marketing, and research and development of our products. From our inception
through December 31, 2004, our cumulative losses are approximately $105 million.
For our fiscal years ended June 30, 2002, 2003 and 2004, and the six month
period ended December 31, 2004, we have incurred net losses of $17,314,807,
$21,965,499, $21,426,178, and $7,445,641, 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 that 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 six months ended
December 31, 2004 we were using funds in our operations on a monthly basis of
approximately $1,056,000. 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 $12,100,000 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.
7
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.
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, 2007. 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.
8
Through February 13, 2005, we have 27 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 54 patents as of February
13, 2005. There can be no assurance that:
o any of the remaining patent applications will be granted to us;
o we will develop additional products that are patentable or do not infringe
the patents of others;
o any patents issued to us will provide us with any competitive advantages
or adequate protection for our products;
o any patents issued to us will not be challenged, invalidated or
circumvented by others; or
o any of our products would not infringe the patents of others.
If any of the products are found to have infringed any patent, there can be no
assurance that we will be able to obtain licenses to continue to manufacture and
license such product or that we will not have to pay damages as a result of such
infringement. Even if a patent application is granted for any of our products,
there can be no assurance that the patented technology will be a commercial
success or result in any profits to us.
6. Competition from others with greater resources could prevent USA from
increasing revenue and achieving profitability.
Competition from other companies which are well established and have
substantially greater resources may reduce our profitability. Many of our
competitors have established reputations for success in the development, sale
and service of high quality products. We face competition from the following
groups:
o companies offering automated, credit card activated control systems in
connection with facsimile machines, personal computers, debit card
purchase/revalue stations, and use of the Internet and e-mail which directly
compete with our products;
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.
9
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. We
have contracted with Delphi Medical Systems Corporation to manufacture our
energy management products. For other components, we do not have supply
contracts with any of our third-party suppliers and we purchase components as
needed from time to time. See "Business-Procurement". We have contracted with
IBM to develop our network services so that these services are Internet capable
as well as interact with our proposed media capable e-Post(TM). We have
contracted with IBM to host our network in a secure, 24/7 environment to ensure
reliability of our network services. If these business relationships are
terminated, the implementation of our business plan may be delayed until an
alternative supplier or service provider can be retained. If we are unable to
find another source or one that is comparable, the content and quality of our
products could suffer and our business, operating results and financial
condition could be harmed.
8. We do not expect to pay cash dividends in the foreseeable future and
therefore investors should not anticipate cash dividends on their investment.
The holders of our common stock and series A preferred stock are entitled to
receive dividends when, and if, declared by our board of directors. Our board of
directors does not intend to pay cash dividends in the foreseeable future, but
instead intends to retain any and all earnings to finance the growth of the
business. To date, we have not paid any cash dividends on the common stock or
series A preferred stock and there can be no assurance that cash dividends will
ever be paid on the common stock.
In addition, our articles of incorporation prohibit the declaration of any
dividends on the Common Stock unless and until all unpaid and accumulated
dividends on the Series A preferred stock have been declared and paid. Through
February 14, 2005, the unpaid and cumulative dividends on the series A preferred
stock equal $7,461,294. 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 February 14, 2005,
$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."
10
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 or our energy management products 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.
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.
11
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
January 31, 2005, these shares consisted of the following:
- - 395,782,468 shares of Common Stock
- - 522,742 shares of Preferred Stock
- - 10,968,949 shares underlying Common Stock options and warrants
- - 61,694,010 shares underlying our Convertible Senior Notes
- - 706,924 shares issuable upon conversion of the accrued and unpaid
dividends on the Series A Preferred Stock
- - 1,849,530 shares issuable under our agreement with Steve Illes; and
- - 433,693 shares issuable under our 2004-B Stock Compensation Plan.
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 January 31, 2005, we had issued and outstanding options to purchase
1,897,472 shares of our common stock and warrants to purchase 9,071,477 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.
As of January 31, 2005, we have $320,000 of unsecured senior notes due on June
30, 2005, approximately $2,991,791 of unsecured senior notes due on December 31,
2005, approximately $3,213,500 of unsecured notes due on December 31, 2006,
approximately $1,250,703 of unsecured notes due on June 30, 2007 and
approximately $2,992,105 of unsecured notes due on December 31, 2007. These
notes accrue cash interest at the rate of twelve percent (12%) per year with the
exception of the notes due June 30, 2007 which accrue cash interest at the rate
of ten percent (10%). We are required to make quarterly interest payments
totaling approximately $316,790 or $1,267,158 each year.
12
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 repaid using 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.
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 61 of this
prospectus. We will, however, receive proceeds from the exercise of any warrants
by the selling shareholders.
As of the date of this prospectus, we would receive $40,919 of proceeds from the
exercise of all of these warrants at the stated exercise price of $.15 per
share. Because these warrants have exercise prices of less than $.16 per share,
all of these warrants are in the money as of February 14, 2005.
13
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 financial data for the six months ended December 31, 2004 and 2003 are
derived from unaudited consolidated financial statements. The unaudited
consolidated financial statements include all adjustments, consisting of normal
recurring accruals, which USA Technologies, Inc. considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the six months ended December 31, 2004 are not
necessarily indicative of the results that may be expected for the entire year
ending June 30, 2005. 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)
Six months ended
December 31
2004 2003
------------------------------
OPERATIONS DATA
Revenues $ 1,648,076 $ 2,711,654
Loss before cumulative effect of
accounting change $ (7,445,641) $(13,040,708)
Cumulative effect of accounting change -- --
------------------------------
Net loss (7,445,641) (13,040,708)
Cumulative preferred dividends (392,057) (393,369)
------------------------------
Loss applicable to common shares $ (7,837,698) $(13,434,077)
==============================
Loss per common share (basic and diluted)
Loss before cumulative effect of
accounting change $ (0.02) $ (0.05)
Cumulative effect of accounting
change -- --
------------------------------
Net loss $ (0.02) $ (0.05)
==============================
Cash dividends per common share
$ -- $ --
BALANCE SHEET DATA
Total assets $ 23,466,108 $ 27,855,228
Convertible Senior Notes and other
long-term debt $ 5,756,925 $ 6,350,354
Shareholders' equity (accumulated deficit) $ 10,894,069 $ 15,049,052
(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.
14
(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 and the six months ended December 31, 2004 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 for the
fiscal years 2004 and 2003 and Form 10-Q for the fiscal year 2005.
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)
SIX MONTHS ENDED DECEMBER 31, 2004
Revenues $ 1,032,577 $ 1,135,449
Gross profit $ 130,534 $ 342,705
Net loss $ (3,640,637) $ (3,805,004)
Cumulative preferred dividends $ (392,057) $ --
Loss applicable to common shares $ (4,032,694) $ (3,805,004)
Loss per common share (basic and diluted) $ (0.01) $ (0.01)
15
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 are 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.
16
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.
17
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. During the six months ended December
31, 2004, no events or circumstances arose indicating that an impairment of
goodwill may have occurred.
18
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
and $15,861 on the remaining shares held by the Company is reflected in
shareholders' equity as accumulated other comprehensive income at June 30, 2004
and December 31, 2004, respectively.
19
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 2004
Revenues for the six months ended December 31, 2004 were $2,168,026 compared to
$3,595,194 for the corresponding six-month period in the previous fiscal year.
This $1,427,168 or 40% decrease was primarily due to a decrease in equipment
sales, a one-time payment that only occurred in the prior fiscal year and the
termination of the Kodak Vending Placement Agreement. The $1,063,578 decrease in
equipment sales was primarily due to a decrease in sales of approximately
$1,032,000 of energy conservation equipment and a decrease of approximately
$176,000 in intelligent vending equipment sales, offset by an increase of
approximately $158,000 in business center equipment sales. Of the $1,032,000
decrease in energy conservation equipment sales, approximately $886,000 relates
to two large customer orders of energy Miser(TM) products during the six-month
period ended December 31, 2003. There were no corresponding equipment sales of
this magnitude in the six-month period of the current fiscal year. License and
transaction fees decreased by $67,000 primarily due to a decrease of
approximately $253,000 in fees due to the termination of the Kodak agreement and
a decrease of approximately $24,000 in fees from our business centers, offset by
an increase in our intelligent vending fees of approximately $202,000. Product
sales and other decreased $296,734 due to the termination of the Kodak vending
placement agreement and the one-time payment of $200,000 in the corresponding
prior period related to the agreement with Unilever.
As previously disclosed, the Company had been in negotiations with a Fortune 50
company for the sale of its internal vending miser product. The Company and the
Fortune 50 company have entered into a one-year contract pursuant to which the
Company has agreed to supply its energy miser products to the customer. Under
the contract, the Fortune 50 customer would purchase our vending miser products
for delivery to its own customer, a Fortune 50 major retailer, which has
thousands of locations in the United States and abroad. The Fortune 50 customer
has agreed to provide us with a forecast of its requirements during the third
quarter of our fiscal year, at which time it is contemplated that the Company
will receive its first purchase order. Furthermore, it is contemplated that the
Fortune 50 customer could purchase our energy miser products for delivery to
other major accounts. The Company anticipates that installations by the Fortune
50 customer would commence during the fourth quarter of our current fiscal year.
The Company can make no assurances as to how many internal vending misers would
ultimately be purchased by the Fortune 50 customer under the contract. Based
upon our discussions with the Fortune 50 customer and subject to the receipt of
purchase orders, the Company believes that the impact upon revenues could be
material.
20
Cost of sales for the period consisted of equipment costs of approximately
$1,072,000 and network and transaction related costs of $623,000. The decrease
in cost of sales of $470,795 or 22% over the prior year period was due to the
fact that software development costs were fully amortized as of June 30, 2004,
resulting in a decrease of approximately $666,000. Additionally, equipment costs
decreased by approximately $183,000 due to the reduction in energy and
intelligent vending equipment sales. These two decreases were offset by an
increase of approximately $378,000 of network and transaction related costs.
Gross profit for the six months ended December 31, 2004 was $473,239, compared
to gross profit of $1,429,612 for the corresponding six-month period in the
previous fiscal year. This 67% decrease is due to the combined effect of the
lack of amortization of software development costs, the termination of the Kodak
Vending Placement Agreement, the decrease in energy and intelligent vending
equipment sales, the one-time Unilever payment in the prior period, the
decreased margins on intelligent vending equipment sales, and the increase in
transaction processing costs.
Compensation expense of $2,679,371 decreased by $4,763,839 or 64% primarily due
to the issuance of 10,500,000 shares of Common Stock valued at $0.44 per share
to the Company's Chief Executive Officer in connection with the amendment of his
employment agreement during the corresponding period in the prior fiscal year.
This was a one-time, non-cash payment valued at $4,620,000. Compensation expense
further decreased by approximately $134,000 due to a decrease in bonus expense,
excluding the above-mentioned one-time non cash payment, of approximately
$715,000 due to a reduction in bonuses granted, offset by an increase in
salaries and benefits expense of approximately $551,000 due to an increase in
the number of employees as compared to the prior period.
During the six-month period of the prior fiscal year, the Company incurred a
charge of $318,915 related to the modification of debt terms for certain 2003
and 2004 Senior Notes. This charge represents the unamortized debt discount that
remained on the Senior Notes that were scheduled to mature in December 2003 and
2004, and whose terms were substantially modified when the note holders agreed
to extend the maturity date of their notes in exchange for a reduction in the
conversion rate on the note. There was no such comparable charge in the period
ended December 31, 2004.
During the six-month period of the prior fiscal year, the Company recorded a
one-time gain of $515,844 relating to the termination of the Kodak Vending
Placement Agreement. This gain was comprised of the payment from Kodak of
approximately $675,000 plus the cancellation of Stitch Network's obligation to
the supplier of the vending machines of approximately $124,000 reduced by a
write down of the carrying value of vending machines of approximately $283,000
to their net realizable value of $300 per vending machine.
21
Interest expense decreased by $1,878,136 or 59% due to a decrease in non-cash
charges related to accelerated interest charges for the unamortized debt
discount and other issuance costs on the Senior Notes that were converted into
Common Stock during the corresponding six months of the prior fiscal year.
Conversions of Senior Notes totaled $1,994,334 during the six-month period ended
December 31, 2003 whereas only $47,292 of Senior Notes were converted during the
corresponding period of the current fiscal year.
The six-month period ended December 31, 2004 resulted in a net loss of
$7,445,641 (approximately $1.6 million of non-cash charges) compared to a net
loss of $13,040,708 (approximately $8.8 million of non-cash charges) for the
six-month period ended December 31, 2003.
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.
22
Cost of sales consisted of equipment, product and labor costs of approximately
$2,503,000 and $1,085,000 for the fiscal years ended June 31, 2004 and 2003,
respectively, an increase of $1,418,000; software development amortization of
approximately $999,000 and $1,331,000 for the fiscal years ended June 30, 2004
and 2003, respectively, a decrease of $332,000; and network and transaction
related costs of $828,000 and $555,000 for the years ended June 30, 2004 and
2003, respectively, an increase of $273,000. The total increase of $1,358,249 or
46% in cost of sales from $2,971,443 to $4,329,692 for the years ended June 30,
2003 and 2004, respectively, was principally attributable to the increase in
equipment sales.
Gross profit for the fiscal year ended June 30, 2004 was $1,303,123, compared to
a gross loss of $118,375 for fiscal year ended June 30, 2003. The increase of
$1,421,498 was due to increases in hardware sales, particularly the addition of
energy management equipment sales, which yield a higher profit margin and were
not present in the prior fiscal year, as well as a decrease of approximately
$332,000 related to the amortization of software development costs, which were
fully amortized as of March 31, 2004.
Total operating expenses for the fiscal year ended June 30, 2004 was
$18,770,423, an increase of $3,829,159 or 26% over the prior fiscal year. The
components of operating expenses (General and administrative, Compensation,
Depreciation and amortization and Loss on debt modification) and the causes of
this increase are explained in further detail, below:
General and administrative expenses decreased from $7,194,684 for the fiscal
year ended June 30, 2003 to $6,747,824 for the fiscal year ended June 30, 2004,
a decrease of $446,860 or 6%. The decrease is due to decreases of $1,717,000 of
professional fees, primarily related to business consulting, promotion and
public relations and decreases of $134,000 in IT consulting fees, offset by
increases in overall general and administrative expenses of approximately
$1,184,000 related to the acquired energy management operations, as such
expenses did not exist in the prior fiscal year, an increase of $118,000 in
expenses related to the recruitment of executive personnel, and an increase of
$164,000 in bad debt expense related to an increase in the allowance for
uncollectible accounts as a result of the increase in sales and accounts
receivable.
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.
23
Depreciation and amortization expense for the fiscal year ended June 30, 2004
was $1,632,330, compared to $1,251,716 for the prior fiscal year, a $380,614 or
30% increase. This increase was attributable to amortization of intangible
assets of $917,000 and depreciation of property and equipment of $122,000
acquired from Bayview in July 2003, offset by a decrease in depreciation of
approximately $337,000 related to existing assets that have reached the end of
their estimated useful life. Additionally there was an impairment charge of
$321,476 recorded on a group of vending machines during fiscal year 2003. The
Company incurred charges during the fiscal year ended June 30, 2004 and 2003
relating to the modification of debt terms for certain of the Senior Notes in
the amount of $318,915 and $1,521,654, respectively. This charge reflects the
write-off of the unamortized debt discount remaining for Senior Notes scheduled
to mature in December 2003 and December 2004, for which the conversion and
maturity terms were modified. The Company offered these note modifications to
manage short-term cash flows, which resulted in a non-cash charge.
During the fiscal year ended June 30, 2004, the Company sold 1,669,091 shares of
its investment in the Jubilee Investment Trust for net proceeds of $1,471,140,
resulting in a gain of $603,480. During the fiscal year ended June 30, 2003, the
Company determined that the decline in the market value of the investment in the
Jubilee Investment Trust was "other than temporary." Accordingly, the Company
recorded a loss of $1,945,951 on the investment during fiscal year 2003.
During the fiscal year ended June 30, 2004, a gain of $429,204 was recorded
relating to the termination of the Kodak Vending Placement Agreement. This gain
is comprised of the payment from Kodak of approximately $675,000 plus the
cancellation of Stitch's obligation to the supplier of the vending machines of
approximately $124,000 less a write down of the carrying value of vending
machines of approximately $367,000 and a net write-off of amounts due to and
from Kodak of $3,000.
Total interest expense increased from $4,978,600 to $5,032,351 for the fiscal
year ended June 30, 2003 and 2004, respectively, an increase of $53,751 or 1%.
Although the average principal balances were lower on the Company's 12% Senior
Notes during fiscal year ended June 30, 2004 versus 2003, as the result of
conversions of the Senior Notes into shares of the Company's Common Stock by
Senior Note Holders, interest expense increased due to the accelerated
amortization of debt discount charged to interest expense at the time of the
conversion of the Senior Notes.
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.
24
FISCAL YEAR ENDED JUNE 30, 2003
Revenues for the fiscal year ended June 30, 2003 were $2,853,068, an increase of
$1,170,367 or 70% from the fiscal year ended June 30, 2002. This increase in
revenues is primarily due to the inclusion of a full year of product revenues
and service and transaction fees relating to Stitch Networks Corporation, which
accounted for approximately $1,136,000 of the revenue increase. The remaining
increase was due to increased equipment sales of e-Port. Revenues are discussed
in more detail as follows:
Equipment sales: Revenues from equipment sales increased to $1,034,427 from
$795,938 in the prior fiscal year, an increase of $238,489 or 30%. This increase
was directly due to the increase in sales of the Company's e-Port equipment.
License and transaction fees: Revenues from license and transaction fees
increased $594,667 or 76% from $778,906 to $1,373,573 for the fiscal year ended
June 30, 2002 and 2003, respectively. This increase was due to the inclusion of
a full year of service fees earned on Company owned vending machines during
fiscal year ended June 30, 2003, as the acquisition of Stitch occurred in May
2002, the fourth quarter of fiscal year ended June 30, 2002.
Product sales and other: Revenues from product sales and other increased to
$445,068 from $107,857, an increase of $337,211 or 313% from the prior fiscal
year. This increase was due to the inclusion of a full year sales of camera and
film from Company owned vending machines during fiscal year ended June 30, 2003,
as the acquisition of Stitch occurred in May 2002, the fourth quarter of fiscal
year ended June 30, 2002.
Cost of sales consisted of equipment, product and labor costs of approximately
$1,085,000 and $695,000 for the fiscal years ended June 30, 2003 and 2002,
respectively, an increase of $390,000; software development amortization of
approximately $1,331,000 and $2,996,000 for the fiscal years ended June 30, 2003
and 2002, respectively, a decrease of $1,665,000; and network and transaction
related costs of $555,000 and $372,000 for the years ended June 30, 2003 and
2002, respectively, an increase of $183,000. The total decrease of $1,091,458 or
27% in cost of sales from $4,062,901 to $2,971,443 for the years ended June 30,
2002 and 2003, respectively, was principally attributable to the decrease in
software development amortization, offset by a full year of product costs
related to the Kodak Vending Placement Agreement acquired with Stitch.
Total operating expenses for the fiscal year ended June 30, 2003 was $14,941,264
(approximately $11.6 million of non-cash charges), an increase of $1,978,300 or
15% over the prior fiscal year. The components of operating expenses (General
and administrative, Compensation, Depreciation and amortization and Loss on debt
modification) and the causes of this increase are explained in further detail,
below:
25
General and administrative expenses decreased from $7,868,064 for the fiscal
year ended June 30, 2002 to $7,194,684 for the fiscal year ended June 30, 2003,
a decrease of $673,380 or 9%. This decrease is due to changes in the following
expenses: consulting, advertising, public relations and promotion expense
decrease of $1,368,022 for reduced corporate and investor relations services
offset by increases in product development and outside services of $926,395 for
work on the network.
Compensation expense increased to $4,973,210 for the fiscal year ended June 30,
2003, a $318,548 or 7% increase over the prior fiscal year. This increase is due
to the inclusion of salaries of $136,000 related to the Stitch operations as
well as an increase of approximately $200,000 in bonus expense during the fiscal
year ended June 30, 2003 compared to the fiscal year ended June 30, 2002.
Depreciation and amortization expense for the fiscal year ended June 30, 2003
was $1,251,716, compared to $440,238 for the prior fiscal year, an $811,478 or
184% increase. This increase was attributable to increased depreciation expense
resulting from assets acquired in the Stitch acquisition, as well as the
impairment loss of $321,476 recorded on a group of vending machines during the
fiscal year in accordance with SFAS No. 144.
The Company incurred charges during the fiscal year ended June 30, 2003 relating
to the modification of debt terms for certain of the Senior Notes in the amount
of $1,521,654. There was no such comparable charge in the prior year. This
charge was for the write-off of the unamortized debt discount remaining for
Senior Notes scheduled to mature in December 2003 and December 2004 whose
conversion and maturity terms were modified. The Company offered these note
modifications to the Note holders, and recognized the related non-cash charge to
operations in order to manage short-term cash flows.
In June 2003, the Company determined that the decline in the market value of the
investment in the Jubilee Investment Trust was "other than temporary."
Accordingly, the Company recorded a loss of $1,945,951, which is reflected as a
loss on investment. No such comparable loss was recorded in the previous year.
Total interest expense increased by $2,991,166, due to the greater debt carried
by the Company to finance its operations. A significant portion of interest
expense is the amortization of non-cash debt discount.
The fiscal year ended June 30, 2003 resulted in a net loss of $21,965,499
(approximately $12.6 million of non-cash charges) compared to a net loss of
$17,314,807 (approximately $11.0 million of non-cash charges) for the prior
fiscal year.
26
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.
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.
27
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.
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.
For the six months ended December 31, 2004, net cash of $6,338,595 was used by
operating activities, primarily due to the net loss of $7,445,641 offset by
non-cash charges aggregating to $1,552,597 for transactions involving the
issuance of Common Stock for services, depreciation and amortization of assets,
and amortization of debt discount. In addition, the Company's net operating
assets increased by $445,551 primarily due to decreases in accrued expenses. The
Company's working capital decreased during the six months ended December 31,
2004 due primarily to cash utilized to fund operations and a portion of the
long-term Senior Notes becoming current.
Proceeds from financing activities for the six months ended December 31, 2004
provided funds to support cash used in operating and investing activities. Net
proceeds of $5,351,387 were realized from the sale of Common Stock ($3,055,559),
the exercise of Common Stock Warrants ($1,090,395), the collection of Common
Stock subscriptions receivable ($300,000), and the issuance of Senior Notes
($1,108,803), offset by cash used to repay long-term debt ($203,370).
The Company has incurred losses since inception. Cumulative losses through
December 31, 2004 amounted to approximately $105,000,000. The Company has raised
capital through equity and debt offerings to fund operations.
28
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 is in the process of improving its management of working capital,
specifically as it relates to controllable costs, accounts receivable,
inventory, accounts payable and accrued expenses. During the first six months of
fiscal year 2005, the Company used approximately $1,056,000 cash per month in
operating activities. For the three months ended December 31, 2004, cash used in
operating activities was approximately $964,000 per month. Using the first two
quarters of the fiscal year as a basis for estimating cash requirements for the
year ending June 30, 2005 (which assumes a static level of revenues as compared
to the prior fiscal year), cash requirements for the fiscal year 2005, including
requirements for capital expenditures and repayments of long-term debt, would be
approximately $12,100,000.
Through the funding sources outlined below and by improving the management of
working capital, the Company believes it has a plan to obtain funding for
operating activities through the end of the fiscal year. As of December 31,
2004, the Company had approximately $1,936,000 of cash and cash equivalents on
hand.
As of December 31, 2004, the Company issued 31,450,470 shares out of 35,000,000
shares registered for issuance under the Common Stock Agreement. From January 1
through February 14, 2005, the Company issued 1,700,000 additional shares under
this agreement for gross proceeds of $170,000.
From January 1 through February 14, 2005, the Company received $431,986 in gross
proceeds from the 2004-B Senior Note offering.
On February 3, 2005, the Company authorized the issuance of up to $6,000,000 of
Senior Notes, which will not result in any additional dilution to existing
shareholders, due December 31, 2008 (the "2008 Senior Notes") and up to
15,000,000 shares of Common Stock to accredited investors and holders of the
Convertible Senior Notes due December 31, 2005 (the "2005 Senior Notes").
Interest is payable quarterly at a rate of 12% per annum. This offering will
allow the Company to raise up to $3,000,000 to repay the 2005 Senior Notes and
up to $3,000,000 for working capital requirements. For each $10,000 invested in
the offering, the subscriber shall receive a $10,000 12% Senior Note and 25,000
shares of restricted Common Stock. Due to the fact that a portion of the
proceeds could be used to repay the 2005 Senior Notes and release the reserved
underlying shares, the offering will not require the Company to reserve any
additional shares of Common Stock and will not result in any additional dilution
to existing shareholders.
Additionally, each holder of the 2005 Senior Notes has the right to exchange
their Notes as part of the offering. For each $10,000 of 2005 Senior Notes
exchanged, the holder will receive $10,000 of 2008 Senior Notes and 25,000
shares of restricted Common Stock. Due to the fact that the 2005 Senior Notes
are being exchanged for the 2008 Senior Notes and thus releasing the reserved
underlying shares, the offering will not require the Company to reserve any
additional shares of Common Stock and will not result in any additional dilution
to existing shareholders.
29
Future exercises of warrants that are "in the money", with exercise prices below
$0.16 per share, could yield approximately $541,000 as of February 14, 2005.
The Company has scheduled the 2005 Annual Meeting of Shareholders for March 17,
2005. One of the proposals to be considered by the shareholders at the meeting
is the approval of the increase in the number of authorized shares of Common
Stock of the Company from 475,000,000 to 560,000,000, which could provide the
Company with the flexibility to issue Common Stock for a variety of corporate
purposes, such as to raise equity capital, to issue convertible debt, to issue
additional warrants or options or to make acquisitions through the use of
shares. However, the Company currently has no specific plans in place regarding
future offerings.
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.
30
OTHER EVENTS
From February through June 2004, the Company sold 28,290,833 shares of Common
Stock at $.15 per share for an aggregate of $4,243,625("2004-A private placement
offering"). 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 were exercisable at $.20 per share at
any time through December 31, 2004 and the exercise price was later
retroactively reduced to $.10 per share. Through the expiration date of December
31, 2004, the warrant holders exercised warrants to purchase 7,658,333 shares
for a total of $765,833. We have agreed to register the shares and the shares
issued upon exercise of the warrants under the Act for resale for a period of
two years. The 28,290,833 shares and 7,658,333 shares issued upon exercise of
these warrants are covered by this prospectus. 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 accredited investors and 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 June 2004, we issued additional warrants to purchase up to 3,716,496 shares
of Common Stock to the holders of our senior notes who had previously elected to
receive shares and warrants in lieu of the cash interest payment due for the
quarters ended June 30, 2002, September 30, 2002, December 31, 2002, March 31,
2003, June 30, 2003, September 30, 2003 and December 31, 2003 ("additional
interest warrants"). For each warrant previously issued to the noteholder, the
noteholder received one additional interest warrant. The warrants were
exercisable at $.20 per share at any time through December 31, 2004. The
exercise price was subsequently retroactively reduced to $.10 per share. A total
of 153,646 shares were purchased through the exercise of these additional
interest warrants, 272,791 of these warrants were extended and were outstanding
as of January 31, 2005 as referred to in the next paragraph, and 3,290,059 of
these warrants were not exercised and were cancelled. We have agreed to register
the shares underlying the warrants under the Act for resale through June 30,
2005. These 272,791 shares underlying the unexercised warrants referred to in
the next paragraph and the 153,646 shares issued upon the exercise of these
warrants are covered by this prospectus. 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 August 2004, the Company agreed that for each warrant issued in lieu of
the cash interest payment that was exercised through October 4, 2004, the
expiration date of one additional interest warrant would be extended from
December 31, 2004 until June 30, 2005, and the exercise price would be reduced
to $.15 per share through June 30, 2005. As a result, the expiration date of
additional interest warrants to purchase up to 272,791 shares that were
outstanding as of January 31, 2005 was extended.
31
From November 3, 2004 through February 14, 2005, the Company sold $1,550,789 of
senior notes convertible into Common Shares at $.10 per share and maturing on
June 30, 2007 (2004-B senior note offering"). There are an aggregate of
15,507,890 shares underlying these senior notes. Interest is payable quarterly
at a rate of 10% per annum. The securities were offered and sold under the
exemption from registration set forth in Rule 506 promulgated under Section 4(2)
of the Act. All of the purchasers of the notes were accredited investors, were
either pre-existing security holders or business associates and there was no
general solicitation or advertising. We have agreed to use our best efforts to
have the shares underlying the warrants registered for resale under the Act
through June 30, 2007. These shares are covered by this prospectus.
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.
32
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).
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.
33
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.
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 ("LANs"), wide area
networks ("WANs") 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.
34
Energy Management Products
With the acquisition of Bayview in July 2003, our Company offers energy
conservation products ("Misers") 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.
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.
35
The market for networked device solutions is projected to be large and growing
rapidly and includes a wide variety of segments such as the security and alarm,
automated meter reading, fleet and asset management, and consumer telemetry
markets. Networked devices will include personal devices (e.g. cell phones,
PDAs), vehicles, containers, supply chain assets, medical devices, HVAC units,
industrial machinery, home appliances, energy, accelerometers, pressure gauges,
flow control indicators, biosensors, and countless other applications. According
to an article, "Pervasive Internet", in M2M Magazine (Fall 2003), a minimum of
1.5 billion devices will be connected to the Internet worldwide by 2010. This
represents a $700 billion total opportunity including device enabling,
monitoring, and providing value-added services made available by the M2M
network, according to M2M Magazine.
We believe that an opportunity exists to combine our technology with world-class
partners in order to deliver a best-in-class solution and emerge as a leader in
the Device Networking industry. Our Company has begun addressing this
opportunity by working in several initial verticals, which include vending,
commercial laundry, self-service business centers and self-service kiosks. These
services share several key attributes, specifically, they are all self-service,
cash-based businesses that are distributed across broad geographic areas. We
address the extremely broad range of Device Networking opportunities by
licensing our technologies to equipment makers throughout a variety of market
segments. Equipment makers will be able to merge our technology with their
in-depth market expertise.
THE INDUSTRY
Our current customers are primarily in the vending, commercial laundry, business
center and kiosk industry sectors. While these industry sectors represent only a
small fraction of the total Device Networking market, these are the areas where
we have gained the most traction. In addition to being our primary markets,
these sectors serve as a compelling proof-of-concept for other Device Networking
industry applications.
Vending
Annual worldwide sales in the vending industry sector are estimated to be
approximately $143.5 billion, according to Vending Times Census of the Industry
2002. According to this Census, there are an estimated 8 million vending
locations in the United States, and 30 million locations worldwide. The market
segment that can be addressed by our end-to-end solution consists primarily of
vended products retailing for $1 or greater, which represents a Company
estimated vended volume of approximately $28 billion. Per census statistics, the
overall market growth is 5% to 6% annually, while the addressable market segment
for our end-to-end solution is growing more rapidly at 9% annually. Our
VendingMiser(TM) energy conservation product can serve the entire vending
market.
36
Commercial Laundry
The domestic commercial laundry industry is estimated to be $5 billion in annual
sales and 3.5 million commercial laundry machines in operation, according to
Coin Laundry Association, October 2000 edition. The average annual growth rate
for the commercial laundry sector is estimated to be between 10% and 12%. The
Company believes the inline sale of additives (i.e. push-button selections for
detergent and softener) may lead to a significant increase in this figure due to
larger net margins over traditional industry standards. The addressable market
is primarily the seven largest laundry operators, as well as several other small
operators. These operators own and manage the equipment that is installed in
multi-housing and college and university locations. The addressable market
excludes those who own single laundromats.
Business Centers
There are currently 52,000 hotels in the United States and 300,000 worldwide,
per American Hotel & Lodging Association's website, www.ahma.com. There is
demand for business center availability in hotels, with ever-greater percentages
of travelers needing and expecting use of computers, printers, fax machines,
copiers, and other business services. We believe that there are 5,900 hotels in
the primary addressable market - business oriented hotels with over 150 rooms -
and 13,900 in the secondary market, hotels with 75 to 150 rooms. The growth rate
for the overall market is 5% annually, with the addressable market gaining 8%
annually.
Kiosk
According to a report by Frost and Sullivan Consulting, Kiosks represent a $500
million market. Kiosks are becoming increasingly popular as self-service
"specialty" shops within larger retail environments. Value-added services, such
as photo enlargement and custom imaging are a prominent example, located within
many major retailers. Since pricing on these products is generally higher than
$1 or $2, cashless payment options are essential.
OUR SUITE OF PRODUCTS AND SERVICES
Intelligent Vending(TM)
Developed for the vending industry, Intelligent Vending(TM) is our end-to-end
vending solution. This system bundles e-Port(TM), USALive(TM), and its web-based
remote monitoring, management, reporting and turnkey payment processing. Our
latest improvement to Intelligent Vending(TM) is the introduction of our
e-Port(TM) G-5. This device is smaller due to its one-piece design and costs
less to manufacture, as compared to our e-Port(TM) G-4 device. These features
make it more affordable and easier to install, improving our customers' rate of
return.
37
Vending operators purchasing our Intelligent Vending(TM) products and services
will have the capability: to conduct cashless transactions via credit cards,
debit cards and other payment mediums such as employee/student ids and hotel
room keys; to offer improved and expanded customer services by utilizing
'real-time', web-based reporting to keep machine inventory at a desirable level
and consumer access to our 1-800 help-desk center for customer purchasing
inquiries, both providing the end-user a more consistent user experience; to
reduce operational costs through utilization of our remote monitoring
technology, thereby maximizing the scheduling of service visits and limiting
'out-of-stock' machines; and to reduce theft and vandalism by providing 100%
accountability of all sales transactions and reducing the cash reserves inside
the machine.
eSuds(TM)
eSuds(TM) is our end-to-end solution developed for the commercial laundry
industry. The eSuds(TM) system bundles e-Port(TM) and USALive(TM) to offer a
cash-free payment option, web-based remote monitoring and management, an e-mail
alert system to notify users regarding machine availability, cycle completion,
and other events. The Company is also in the process of developing an injectable
detergent and fabric softener system which will allow users to inject and pay
for detergent and softener directly into their wash cycle, as well as allow
laundry operators to benefit from additional revenue through the sale of
detergent automatically added to the wash cycle. eSuds(TM) also supports a
variety of value-added services such as custom advertising or subscription-based
payments.
Laundry operators purchasing our eSuds(TM) system will have the capability: to
conduct cashless transactions via credit cards, debit cards and other payment
mediums such as student ids; to reduce operational costs through utilization of
our remote monitoring technology, thereby maximizing the scheduling of service
visits and increasing machine up-time. The system can also increase customer
satisfaction through improved maintenance, higher machine availability,
specialized services (i.e. email alerts to indicate that laundry cycle is
finished) and value-added services such as pay-injection laundry detergent and
fabric softener, and the convenience of non-cash transactions. Installations
have been completed at Carnegie Mellon University, Cedarville College, and
Bluffton College. We are working with distributors to install eSuds(TM) at other
colleges and universities based on the positive results of these installations.
Transact(TM) And Business Express(R)
TransAct(TM), our original payment technology system developed for self-service
business center devices, such as PCs, fax machines, and copiers, is a cashless
transaction-enabling terminal that permits customers to use office equipment
quickly and simply with the swipe of a major credit card. The TransAct(TM)
device can be sold as a stand-alone unit for customers wishing to integrate it
with their own office equipment.
38
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.
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.
39
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.
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.
40
STRATEGIC RELATIONSHIPS
IBM Corporation
We are an official "preferred" hardware, software, and services solution for IBM
Corporation. Together with IBM, we market and sell combined information
technology solutions to customers in the intelligent vending, retail point of
sale, and networked home applications markets. The proposed combined product
offerings include the e-Port(TM) terminal and related network, and IBM's
products and services, including but not limited to systems integration and
logistics support and delivery services.
ZiLog, Inc.
In October 2002, we signed a strategic alliance with ZiLOG, a leader in the
8-bit microprocessor market to co-develop an e-Port(TM) enabled chip, which the
Company currently uses in its eSuds(TM) and Intelligent Vending(TM) solutions,
and to co-market a joint product that combines ZiLOG's Web-enabled
microprocessor, the eZ80(R) Webserver, with the benefits of our wireless device
networking, cashless transactions processing, and remote control and monitoring
capabilities.
During August 2004, the Company and ZiLOG(R) announced the completion of the
combination of ZiLOG's ezAcclaim!(TM) Family of Flash microcontrollers and
e-Port(TM), enabling businesses to install networking capability into every day
commercial applications at an affordable price. Our new eSuds(TM) solution
incorporates this new microcontroller. As of January 2005, 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 January 2005, 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 January 2005, the Company has not yet earned revenues
from product sales under this agreement.
41
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.
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.
42
Multi-Vertical Expertise
We believe that none of our competitors serve the broad range of industry
verticals that we do. As such, we are able to leverage insights and best
practices from one industry sector for use in a new sector.
We are aware of three competitors who offer unattended business centers in the
hospitality industry in competition with Business Express(TM). We are aware of
one competitor for our e-Port(TM) control system, which is being used in the
beverage vending industry. We believe that there are very few installations of
this product at the present time.
In addition, the businesses which have developed unattended, credit card
activated control systems currently in use in connection with gasoline
dispensing, public telephones, prepaid telephone cards, ticket dispensing
machines, vending machines, or facsimile machines, are capable of developing
products or utilizing their existing products in direct competition with our
e-Port control systems targeted to the beverage vending industry. Many of these
businesses are well established, have substantially greater resources than the
Company and have established reputations for success in the development, sale
and service of high quality products. Any such increased competition may result
in reduced sales and/or lower percentages of gross revenues being retained by
the Company in connection with its licensing arrangements, or otherwise may
reduce potential profits or result in a loss of some or all of its customer
base. The Company is also aware of several businesses that make available use of
the Internet and use of personal computers to hotel guests in their hotel rooms.
Such services might compete with the Company's Business Express, and the
locations may not order the Business Express, or if ordered, the hotel guest may
not use it.
CUSTOMER CONCENTRATIONS
Approximately 39% and 57% of the Company's accounts receivable at June 30, 2004
and 2003, respectively, were concentrated with two customers and 44% as of
December 31, 2004 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. Approximately 31% of the Company's revenues for the six months
ended December 31, 2004 were concentrated with two customers.
43
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. The Company has two trademarks pending registration, VM2IQ and CM2IQ.
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 February 13, 2005, 52 United States patents and 2 Canadian patents have
been issued to the Company (including 4 patents acquired in July 2003 from
Bayview). 27 patents are pending (including 2 Canadian and 5 acquired from
Bayview) and 6 patents have received notices of allowance as of February 13,
2005.
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";
44
o U.S. Patent No. 6,119,934 entitled "Credit Card, Smart Card and Bank
Issued Debit Card Operated System and Method for Processing Electronic
Transactions";
o U.S. Patent No. 6,152,365 entitled "Credit and Bank Issued Debit Card
Operated System and Method for Controlling a Vending Machine";
o U.S. Patent No. D437,890 entitled "Electronic Commerce Terminal Enclosure
with a Hooked Fastening Edge for a Vending Machine";
o U.S. Patent No. D441,401 entitled "Electronic Commerce Terminal Enclosure
with Brackets";
o U.S. Patent No. 6,321,985 entitled "System and Method for Networking and
Controlling Vending Machines";
o U.S. Patent No. 6,505,095 entitled "System for Providing Remote Audit,
Cashless Payment, and Interactive Transaction Capabilities in a Vending
Machine" (Stitch);
o U.S. Patent No. 6,389,337 entitled "Transacting e-commerce and Conducting
e-business Related to Identifying and Procuring Automotive Service and
Vehicle Replacement Parts" (Stitch);
o U.S. Patent No. 6,021,626 entitled "Forming, Packaging, Storing,
Displaying and Selling Clothing Articles"; and
o U.S. Patent No. 6,152,845 entitled "Credit and Bank Issued Debit Card
Operated System and Method for Controlling a Prepaid Card
Encoding/Dispensing Machine";
o U.S Patent No. 6,622,124 entitled "Method of transacting an electronic
mail, an electronic commerce, and an electronic business transaction by an
electronic commerce terminal operated on a transportation vehicle";
o U.S. Patent No. 6,615,186 entitled "Communicating interactive digital
content between vehicles and internet based data processing resources for
the purpose of transacting e-commerce or conducting e-business";
o U.S. Patent No. 6,615,183 entitled "Method of warehousing user data
entered at an electronic commerce terminal";
o U.S. Patent No. 6,611,810 entitled "Store display window connected to an
electronic commerce terminal";
o U.S. Patent No. 6,609,103 entitled "Electronic commerce terminal for
facilitating incentive-based purchasing on transportation vehicles";
o U.S. Patent No. 6,609,102 entitled "Universal interactive advertising and
payment system for public access electronic commerce and business related
products and services";
o U.S. Patent No. D478,577 entitled "Transceiver base unit";
45
o U.S. Patent No. 6,606,605 entitled "Method to obtain customer specific
data for public access electronic commerce services";
o U.S. Patent No. 6,606,602 entitled "Vending machine control system having
access to the internet for the purposes of transacting e-mail, e-commerce,
and e-business, and for conducting vending transactions";
o U.S. Patent No. 6,604,087 entitled "Vending access to the internet,
business application software, e-commerce, and e-business in a hotel
room";
o U.S. Patent No. 6,604,086 entitled "Electronic commerce terminal connected
to a vending machine operable as a telephone";
o U.S. Patent No. 6,604,085 entitled "Universal interactive advertising and
payment system network for public access electronic commerce and business
related products and services";
o U.S. Patent No. 6,601,040 entitled "Electronic commerce terminal for
wirelessly communicating to a plurality of communication devices";
o U.S. Patent No. 6,601,039 entitled "Gas pump control system having access
to the Internet for the purposes of transacting e-mail, e-commerce, and
e-business, and for conducting vending transactions";
o U.S. Patent No. 6,601,038 entitled "Delivery of goods and services
resultant from an electronic commerce transaction by way of a pack and
ship type company";
o U.S. Patent No. 6,601,037 entitled "System and method of processing credit
card, e-commerce, and e-business transactions without the merchant
incurring transaction processing fees or charges worldwide";
o U.S. Patent No. D477,030 entitled "Vending machine cashless payment
terminal";
o U.S. Patent No. D476,037 entitled "User interface bracket for a point of
sale terminal";
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";
46
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 U.S. Patent No. 6,801,836 entitled "Power-conservation based on
indoor/outdoor and ambient-light determinations";
o U.S. Patent No. 6,807,532 entitled "Method of soliciting a user to input
survey data at an electronic commerce terminal";
o U.S. Patent No. 6,853,894 entitled "Global network based vehicle safety
and security telematics";
o Canadian Patent No. D199-1014 entitled "Sign holder";
o Canadian Patent No. D199-1038 entitled "Laptop data port enclosure".
The Company believes that the U.S. patent No. 6,505,095 entitled "System for
providing remote audit, cashless payment, and interactive transaction
capabilities in a vending machine" is very important in protecting its
intellectual property used in its e-Port(TM) control system targeted to the
vending industry. The patent expires in July 2021.
47
RESEARCH AND DEVELOPMENT
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, and $272,000 for the six
months ended December 31, 2004.
EMPLOYEES
On February 14, 2005, the Company had 48 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.
48
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our Directors and executive officers, on the date of this prospectus, together
with their ages and business backgrounds is 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) 48 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.
49
Stephen P. Herbert was elected a Director in April 1996, and joined USA on a
full-time basis on May 6, 1996. Prior to joining us and since 1986, Mr. Herbert
had been employed by Pepsi-Cola, the beverage division of PepsiCo, Inc. From
1994 to April 1996, Mr. Herbert was a Manager of Market Strategy. In such
position he was responsible for directing development of market strategy for the
vending channel and subsequently the supermarket channel for Pepsi-Cola in North
America. Prior thereto, Mr. Herbert held various sales and management positions
with Pepsi-Cola. Mr. Herbert graduated with a Bachelor of Science degree from
Louisiana State University.
Haven Brock Kolls, Jr., joined USA Technologies on a full-time basis in May 1994
and was elected an executive officer in August 1994. From January 1992 to April
1994, Mr. Kolls was Director of Engineering for International Trade Agency,
Inc., an engineering firm specializing in the development of control systems and
management software packages for use in the vending machine industry. Mr. Kolls
was an electrical engineer for Plateau Inc. from 1988 to December 1992. His
responsibilities included mechanical and electrical computer-aided engineering,
digital electronic hardware design, circuit board design and layout, fabrication
of system prototypes and software development. Mr. Kolls is a graduate of the
University of Tennessee with a Bachelor of Science Degree in Engineering.
Mary West Young joined USA in April 2004 and was named our Chief Financial
Officer in May 2004. From 2001 to 2003, Ms. Young served as Senior Vice
President-Finance, Controller and Chief Accounting Officer of RCN Corporation,
and from 1998 to 2000 she served as Vice President - Finance and Corporate
Controller for De Lage Landen Financial Services, Inc. Ms. Young held several
management positions in International, Treasury and Accounting with Verizon from
1984 to 1992 and 1994 to 1998. Ms. Young received her Bachelor of Science and
Masters of Business Administration degrees from La Salle University and is a
Certified Public Accountant.
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.
50
Steven Katz joined the Board of Directors in May 1999. He is President of Steven
Katz & Associates, Inc., a management consulting firm specializing in strategic
planning and corporate development for technology and service-based companies in
the health care, environmental, telecommunications and Internet markets. Mr.
Katz`s prior experience includes five years with PriceWaterhouse & Co. in audit,
tax and management advisory services; two years of corporate planning with
Revlon, Inc.; five years with National Patent Development Corporation (NPDC) in
strategic planning, merger and acquisition, technology in-licensing and
out-licensing, and corporate turnaround experience as President of three NPDC
subsidiaries; and two years as a Vice President and General Manager of a
non-banking division of Citicorp, N.A.
Douglas M. Lurio joined the Board of Directors of USA in June 1999. Mr. Lurio is
President of Lurio & Associates, P.C., attorneys-at-law, which he founded in
1991. He specializes in the practice of corporate and securities law. Prior
thereto, he was a partner with Dilworth, Paxson LLP. Mr. Lurio received Bachelor
of Arts Degree in Government from Franklin & Marshall College, a Juris Doctor
Degree from Villanova Law School, and a Masters in Law (Taxation) from Temple
Law School.
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 $ 30,000 -- -- 300,000
51
(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 $0.15 per share for Ms. Young. For fiscal year 2003 includes: a
$100,000 Senior Note due 2005, including 2,000,000 shares valued at $0.20, and
$150,000 cash bonus for Mr. Jensen; a $100,000 Senior Note due 2005, 200,000
shares valued at $0.20 and a $125,000 cash bonus for Mr. Herbert; a $25,000 cash
bonus for Mr. Kolls; and a $100,000 Senior Note due 2005, including 200,000
shares valued at $0.20 a share, $41,095 Senior Note due 2004, and a $100,000
cash bonus for Ms. Hepburn. For fiscal year 2002, amount represents shares of
Common Stock issued to the executive officers valued at $0.45 per share, which
was the market value on the date of grant (Mr. Jensen-640,000 shares; Mr.
Herbert-600,000 shares; and Mr. Kolls-400,000 shares). For Adele Hepburn in
fiscal 2002, the bonus includes $408,267 of non-cash compensation, as follows:
435,334 shares of Common Stock at $0.60; 384,334 shares at $0.10; and a $108,834
2001 - D 12% Senior Notes due December 31, 2003.
(2) Represents cash payments authorized to reimburse certain executive officers
for tax payments incurred from the award of a previous bonus as well as car
allowance payments.
(3) In July 1999, the Company extended the expiration dates to June 30, 2001 for
the options to acquire Common Stock as held by the following directors,
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.
52
(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.
The Company valued these shares at $.44 per share or an aggregate of $4,620,000.
(5) Employment commenced on April 28, 2004.
OPTION GRANTS IN LAST FISCAL YEAR
(Individual Grants)
- ----------------------------------------------------------------------------------------
Number of Percent of Exercise Expiration
securities total options base price date
underlying granted to ($/share)
options granted employees in
Name (#) fiscal year
- ----------------------------------------------------------------------------------------
Mary West Young 300,000 (1) 100% $.30 (2)
- ----------------------------------------------------------------------------------------
(1) Conditioned upon Ms. Young's employment, the options vest at a rate of
37,500 per three-month period commencing on July 31, 2004 for an aggregate of
300,000 options on April 30, 2006.
(2) The options expire two-years from the date of vesting.
53
TOTAL OPTIONS EXERCISED IN FISCAL YEAR ENDED JUNE 30, 2004 AND YEAR END VALUES
The following table gives information for options exercised by an executive
officer and an employee in fiscal year 2004, and the number of options held by
the executive officer and the employee at fiscal year end:
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
FY-End (#) FY-End($)
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, 2007, and is automatically renewed from year to year thereafter
unless canceled by Mr. Jensen or the Company. The agreement provides for an
annual base salary of $250,000 effective January 1, 2004. Mr. Jensen is entitled
to receive such bonus or bonuses as may be awarded to him by the Board of
Directors. In determining whether to pay such a bonus, the Board would use its
subjective discretion. The Agreement requires Mr. Jensen to devote his full time
and attention to the business and affairs of the Company, and obligates him not
to engage in any investments or activities which would compete with the Company
during the term of the Agreement and for a period of one year thereafter.
The agreement also grants to Mr. Jensen in the event a "USA Transaction" (as
defined below) occurs after the date thereof an aggregate of 14,000,000 shares
of Common Stock subject to adjustment for stock splits or combinations ("Jensen
Shares"). Mr. Jensen is not required to pay any additional consideration for the
Jensen Shares. At the time of any USA Transaction, all of the Jensen Shares are
automatically deemed to be issued and outstanding immediately prior to any USA
Transaction, and are entitled to be treated as any other issued and outstanding
shares of Common Stock in connection with such USA Transaction.
54
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, 2007, and is automatically renewed from year to year
thereafter unless canceled by Mr. Herbert or the Company. The Agreement provides
for an annual base salary of $230,000 per year effective January 1, 2004. Mr.
Herbert is entitled to receive such bonus or bonuses as the Board of Directors
may award to him. The Agreement requires Mr. Herbert to devote his full time and
attention to the business and affairs of the Company and obligates him not to
engage in any investments or activities which would compete with the Company
during the term of the agreement and for a period of one year thereafter. In the
event that a USA Transaction (as defined in Mr. Jensen's employment agreement)
shall occur, then Mr. Herbert has the right to terminate his agreement upon 30
days notice to USA.
Mr. Kolls has entered into an employment agreement with the Company, which
expires on June 30, 2006, 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. During December 2004, Mr. Kolls agreed to extend the
expiration date of his employment agreement from June 30, 2005 to June 30, 2006,
and in accordance with his employment agreement received an incentive cash
payment from USA of $70,000.
55
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
(and received 100,000 warrants) as part of the 2004-A private placement
offering. Ms. Young was also granted options to purchase up to 300,000 shares of
Common Stock of the Company at $.30 per share. The options vest ratably over a
two-year period and are exercisable at any time during the two-year period
following vesting. The agreement requires Ms. Young to devote her full-time and
attention to the business and affairs of the Company, and obligates her not to
engage in any investments or activities which would compete with the Company
during the term of her agreement and for a period of one year thereafter.
COMPENSATION OF DIRECTORS
Members of the Board of Directors receive cash and equity compensation for
serving on the Board of Directors, as determined from time to time by the
Compensation Committee with subsequent approval thereof by the Board of
Directors.
The only compensation paid to our Directors during the fiscal year ended June
30, 2004 was during June 2004, when we paid $30,000 to each of Messrs. Sellers
and Van Alen for services as Chairperson of the Compensation Committee and the
Audit Committee, respectively, rendered during the two prior fiscal years. As a
condition of the payment, each agreed to purchase 200,000 shares of Common Stock
at $.15 per share (and also received 100,000 warrants) as part of our 2004-A
private placement offering.
56
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
Mary West Young 337,500 shares(10) *
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355
57
All Directors and Executive Officers
As a Group (8 persons) 22,044,093 shares(11) 5.06%
- ---------
*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.
58
(6) Includes 473,044 shares of Common Stock owned by her spouse, 5,150 shares
underlying Series A Preferred Stock held by her and her spouse, 1,615,418 shares
issuable upon the conversion of her Senior Notes, 58,495 shares issuable upon
the conversion of Senior Notes beneficially owned by her spouse, 212,025 shares
issuable upon the exercise of her warrants, and 77,000 shares upon exercise of
options.
(7) Includes 225,000 shares issuable upon conversion of Senior Notes and 13,500
shares issuable upon exercise of warrants.
(8) Includes 17,846 shares of Common Stock owned by the Sellers Pension Plan of
which Mr. Sellers is a trustee, 4,952 shares of Common Stock owned by Sellers
Process Equipment Company of which he is a Director, 10,423 shares of Common
Stock owned by Mr. Seller's wife, 408,334 shares issuable upon conversion of his
Senior Notes and 143,366 shares issuable upon the exercise of warrants.
(9) Includes 266,670 shares of Common Stock issuable to Mr. Van Alen upon
conversion of his Senior Notes, 548,566 shares issuable upon the exercise of
warrants and 4,000 shares of Common Stock beneficially owned by his spouse.
(10) Includes 100,000 shares underlying warrants and 37,500 shares underlying
options.
(11) Includes all shares of Common Stock described in footnotes (3) through (5)
and (7) through (10) above.
PREFERRED STOCK
The following table sets forth, as of 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%
59
(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. Mr. Lurio is a Director of the Company.
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.
During December 2004, William L. Van Alen, Jr., a Director, purchased senior
notes in the principal amount of $103,405, and William W. Sellers, a Director,
purchased senior notes in the principal amount of $14,336 as part of our 2004-B
senior note offering.
60
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.
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.
61
2004-B SENIOR NOTE COMMON STOCK
Beneficial Ownership
Common Stock after Offering
Selling Shareholder Offered Hereby Number Percent
- ------------------- -------------- ------ -------
CHARLES W APPLE 100,000
JOHN P AYERS 10,200
CHARLES F BELLAVIA 7,950
LAWRENCE BERK 150,000
GUNTER BEYER(10) 12,966 422,983 *
BRITTAIN FAMILY TRUST (1) 11,867
WILLIAM P BURKS 50,000
GERALD E CLARK JR 13,000
ROBERT J CLARKE JR 500,000
JACK W CRIFFIELD 350,000
DUDLEY R & JANET S CROW 83
CLIFTON B CURRIN TR FBO CLIFTON B CURRIN TRUST U/A 3/8/89 20,000
DAVID M DEMEDIO (2) 19,000 280,475 *
LOUIS E & ROSE M DIRENZO 5,100
ROBERT R FREY 30,000
FUSION CAPITAL FUND II LLC (3) 500,000
MARGARET R GEDDIS 5,100
ROBERT G GIDDENS 500,000
GEORGE W GILLES 250,000
CARY GLICKSTEIN 100,000
HARRIET GLICKSTEIN 300,000
WILLIAM M GOLDSTEIN 62,500
WILLIAM R HANSEN 100,000
HEALD FAMILY TRUST (4) 16,800
ROBERT C HECTOR JR 250,000
MICHELLE P HOLLENSHEAD 4,255
HRUBALA ASSOCIATES, A PARTNERSHIP (5) 18,117
CHRISTINE F HUGHES 5,100
MICHAEL KATCHUR 15,300
THOMAS A KATCHUR 1,595,000
THOMAS JOHN KATCHUR 400,000
DEBORAH KIM 500,000
SUNG J KIM 200,000
YOUNG J KIM 250,000
62
GREGORY S KOBUS 15,300
AARON LEHMANN 100,000
MARTIN LIPPER 175,000
SEYMOUR LIPPER 100,000
PHILIP & RANDI LIPPER JTWROS 100,000
H MATHER LIPPINCOTT JR 100,000
BARRY N MCCABE 7,717
JOHN F MCCORMICK 16,875
ROBERT H & ROSEMARY M MONTGOMERY 30,000
MAC G MORRIS 10,200
GEORGE OCONNELL 1,000,000
PETER B PAKRADOONI 50,000
PALISADES MASTER FUND (6) 4,000,000
NEIL PARKER 9,050
ROBERT PETT 1,000,000
ROY T PIRHALA 110,000
J STEPHEN POWELL 20,000
JOHN B RETTEW III 11,500
JOHN S RUPP 8,196
EDWARD L SCHOENHUT 40,800
WILLIAM F SCHOENHUT JR 44,366
NICHOLAS SELLERS 10,200
WILLIAM W SELLERS (7) 143,366 2,333,812 *
SELMAN LIVING TRUST MORTON SELMAN & MARSHA SELMAN TTEES 100,000
LEONARD H SICHEL JR 15,300
GERTRUDE T STEVENS 111,354
PRISCILLA STITT 7,350
GEORGE E & MARIE E SZYCHOSKI 5,000
MICHAEL W SZYCHOSKI 257
WILLIAM L VAN ALEN JR (8) 1,034,050 337,571 *
BERNARD WIENER 2,564
J EDWARD WILLARD 66,750
KENNETH B WILSON 8,016
JOHN D WRIGHT 18,050
FRANCES YOUNG (9) 400,000 1,200,000 *
DONALD J ZELENKA 250,000
RUTH ZWEIGBAUM 34,293
------
TOTAL 15,507,890(11)
63
(1) 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.
(2) MR. DEMEDIO IS AN EMPLOYEE OF USA.
(3) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO THE SHARES HELD OF RECORD BY THE ENTITY, FUSION CAPITAL,
IS JOSHUA B. SCHEINFELD.
(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, HEALD FAMILY
TRUST, IS JACK HEALD.
(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) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO THE SHARES HELD OF RECORD BY THE ENTITY, PALISADES MASTER
FUND IS ANDY RUCKLESS.
(7) MR. SELLERS IS A DIRECTOR OF THE COMPANY.
(8) MR. VAN ALEN JR. IS A DIRECTOR OF USA.
(9) MS. YOUNG IS A FORMER EMPLOYEE OF THE COMPANY.
(10) MR. BEYER IS A CONSULTANT TO THE COMPANY.
(11) REPRESENTS SHARES INTO WHICH THE SELLING SHAREHOLDER`S 2004-B SENIOR NOTE
WOULD BE CONVERTED AT A RATE OF $.10 PER SHARE. AS OF THE DATE OF THIS
PROSPECTUS, NONE OF THE NOTES HAVE BEEN CONVERTED INTO COMMON STOCK.
64
2004-A OFFERING
Beneficial Ownership
Common Stock after Offering
Selling Shareholder Offered Hereby Number Percent
- ------------------- ----------------- ------ -------
SUSAN H BOTHNER 500,000
WILLIAM L CARHART 207,550
CEOCAST INC (1) 300,000 0 *
FAROOQ A CHAUDHRY 75,000
SHERI-LYNN DEMARIS 1,333,333
SUKHDEV S & NONI P DHINDSA 1,000,000
FRIEDLAND CAPITAL INC (2) 400,000
CAPE MCKINNON INC. (3) 750,000
ROBERT C HECTOR JR 500,000
ADELE H HEPBURN (4) 333,333 6,184,623 1.42%
STEPHEN P HERBERT (5) 500,000 1,100,000 *
STEVE ILLES (6) 7,500,000 42,793,797 9.83%
BURTON JENSEN 1,100,000
DAVE JENSEN 1,100,000
RON JENSEN 1,100,000
LEONARDO CAPITAL FUND LTD (7) 3,000,000
GREGG NEWHUIS 1,000,000
MICHAEL J OBRIEN 300,000
GEORGE OCONNELL 1,000,000
PETER B PAKRADOONI 150,000
PALISADES MASTER FUND LP (8) 4,500,000
WILLIAM RECKTENWALD 200,000
YOMI RODRIG 3,000,000
JOHN ROUGHNEEN (9) 200,000 0 *
WILLIAM W SELLERS (10) 200,000 2,477,178 *
DANIEL E SPEALMAN 666,667
BB SECURITIES CUSTODIAN
FBO DANIEL E SPEALMAN IRA 833,333
STANDARD BANK LONDON (11) 1,500,000
LUCAS POST VAN ALEN 125,000
WILLIAM L VAN ALEN III 50,000
WILLIAM L VAN ALEN JR (12) 1,025,000 1,371,621 *
FRANCIS E. WOLFE 100,000
FRANCES YOUNG (13) 1,200,000 0 *
MARY WEST YOUNG (14) 200,000 112,500 *
Total 35,949,166(15)
- ----------
* less than 1 %.
(1) CEOCAST IS OUR PUBLIC RELATIONS CONSULTANT. THE NATURAL PERSON WHO
EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE POWERS WITH RESPECT TO
SHARES HELD OF RECORD BY THE ENTITY, CEOCAST, INC. IS RACHEL GLICKSMAN AND
GARY NASH.
(2) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO SHARES HELD OF RECORD BY THE ENTITY, FRIEDLAND
CAPITAL INC IS JEFF FRIEDLAND.
(3) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED DISPOSITIVE POWERS
WITH RESPECT TO THE SHARES HELD OF RECORD BY THE ENTITY, CAPE MCKINNON
INC, IS STEVE FRYE.
65
(4) MS. HEPBURN IS AN EMPLOYEE OF THE COMPANY.
(5) MR. HERBERT IS A DIRECTOR AND OUR PRESIDENT AND CHIEF OPERATING OFFICER.
(6) MR. ILLES HAS ENTERED INTO A STOCK PURCHASE AGREEMENT WITH US DATED AUGUST
6, 2004.
(7) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO SHARES HELD OF RECORD BY THE ENTITY, LEONARDO
CAPITAL FUND LTD IS NEVIL DE TSCHARNER.
(8) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO SHARES HELD OF RECORD BY THE ENTITY, PAILSADES
MASTER FUND LP IS ANDY RUCKLESS.
(9) MR. ROUGHNEEN WAS AN EMPLOYEE OF THE COMPANY.
(10) MR. SELLERS IS A DIRECTOR OF THE COMPANY.
(11) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO SHARES HELD OF RECORD BY THE ENTITY, STANDARD BANK
LONDON IS YOMI RODRIG.
(12) MR. VAN ALEN IS A DIRECTOR OF THE COMPANY.
(13) MS. YOUNG IS A FORMER EMPLOYEE OF THE COMPANY.
(14) MS. YOUNG IS CHIEF FINANCIAL OFFICER OF THE COMPANY.
(15) REPRESENTS 28,290,833 SHARES ISSUED, AND 7,658,333 SHARES ISSUED PURSUANT
TO THE EXERCISE OF WARRANTS AT $.10 PER SHARE, TO INVESTORS IN OUR 2004-A
PRIVATE PLACEMENT OFFERING.
66
ADDITIONAL INTEREST WARRANT COMMON STOCK
Beneficial Ownership
After Offering
Common Stock --------------------
Selling Shareholder Offered Hereby Number Percent
- ------------------- -------------- ------ --------
BRITTAIN FAMILY TRUST (1) 6,800
BRITTAIN, DOUGLAS & CAROLYN 16,933
CROTHERS, WILLIAM R 6,378
DIN, ANEES T 116,200
DOLAN, LEO J 20,400
FANELLI, ANTHONY J 17,590
GLOCKNER, FREDERICK F 1,020
HALDEMAN, EDWARD 6,000
HALDEMAN, PAULINE 6,000
KARN, GLORIA & FRED 150
KILGORE, ROBERT A 51,000
MOFFITT REV TRUST, WANDA S 2,700
MOSIER, JAMES 15,099
NEWHUIS, GREGG 74,648
NEWHUIS, JEFFREY 7,140
OLDOM & CO (2) 1,500
POTTS, ROBERT H 9,000
RANSOME, ERNEST L 5,100
RUGART, KARL F 28,050
SAS, VALENTINA 2,040
SHOTWELL, RAYMOND K 4,493
STEINHILBER, ELINOR 7,200
THOMPSON, ALFRED & SUSAN 2,365
WEAVER, DWANE M 6,433
WEBSTER, JUANITA W 10,200
WOLFE, CLAUDINE W 1,998
TOTAL 426,437(3)
- ---
* less than one percent (1%)
(1) 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.
(2) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to shares held of record by the entity, Oldom & Co., is
Elizabeth Nelson.
67
(3) Represents 272,791 shares underlying warrants to purchase our shares at $.15
per share at any time through June 30, 2005 and 153,646 shares issued upon the
exercise of warrants at $.10 per share. These warrants were issued in June 2004
to our senior noteholders who elected to receive securities in lieu of cash for
quarterly interest payments. We have agreed to register these shares for resale
under the Act at our cost and expense through June 30, 2005.
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
Year ended June 30, 2005
- ------------------------
First Quarter (through September 30, 2004) $ 0.19 $ 0.12
Second Quarter (through December 31, 2004) $ 0.17 $ 0.09
On January 31, 2005 there were 1,488 record holders of the Common Stock and 538
record holders of the Preferred Stock.
At January 31, 2005, 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
68
All of the aforesaid options have been issued to our employees, former Stitch
option holders or consultants.
As of January 31, 2005, a total of 9,071,477 warrants were outstanding with
exercise prices ranging from $.07 per share to $1.25 per share.
As of January 31, 2005, there were 552,742 shares of Common Stock issuable upon
conversion of the outstanding Preferred Stock and 706,924 shares issuable upon
the conversion of cumulative preferred dividends.
As of January 31, 2005 there were $10,768,099 face value of Senior Notes
outstanding, which are convertible into 61,694,010 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 February 14, 2005, such accumulated unpaid
dividends amount to $7,461,294.
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. No conversions of Preferred Stock or cumulative
preferred dividends occurred during the six months ended December 31, 2004.
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)
69
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.
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 December 31, 2004 there were no
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.
70
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.
71
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 January 31, 2005, there were 395,782,468
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 January 31, 2005, 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.
72
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 February 14,
2005 the accumulated and unpaid dividends were $7,461,294.
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 January 31, 2005 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 January 31, 2005, we had outstanding $1,250,703 of Senior Notes due June
30, 2007, $2,992,105 of Senior Notes due December 31, 2007, $3,213,500 of Senior
Notes due December 31, 2006, $2,991,791 of Senior Notes due December 31, 2005
and $320,000 of Senior Notes due June 30, 2005. 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, with the exception of the
Senior Notes due June 30, 2007, which accrue interest at the rate of 10% per
annum. The senior notes are senior to all existing equity securities of USA,
including the series A preferred stock.
73
The outstanding Senior Notes which matured on December 31, 2004 had an aggregate
face amount of $451,152 and were convertible into shares of Common Stock at
$0.40 per share. During January 2005, the Company repaid $131,452 of these
notes, and agreed with the holders of $320,000 of these notes to extend the
maturity date to June 30, 2005 and reduce the conversion price to $0.10 per
share. 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 principal amount of each Senior Note due December 31, 2006 is
convertible at any time into shares of Common Stock at the rate of $.20 per
share. The principal amount of each Senior Note due June 30, 2007 is convertible
at any time at into shares of Common Stock at the rate of $.10 per share. The
principal amount of each Senior Note due December 31, 2007 is convertible at any
time into shares of Common Stock at the rate of $.20 per share.
The indebtedness evidenced in the Senior Note is subordinated to the prior
payment when due of the principal of, premium, if any, and interest on all
"Senior Indebtedness", as defined herein, of USA as follows: Upon any
distribution of its assets in a liquidation or dissolution of USA, or in
bankruptcy, reorganization, insolvency, receivership or similar proceedings
relating to USA, the Lender shall not be entitled to receive payment until the
holders of Senior Indebtedness are paid in full. Until a payment default occurs
with respect to any Senior Indebtedness, all payments of principal and interest
due to Lender under the senior note shall be made in accordance with this senior
note. Upon the occurrence of any payment default with respect to any Senior
Indebtedness then, upon written notice thereof to USA and Lender by any holder
of such Senior Indebtedness or its representative, no payments of principal or
interest on the senior note shall be made by USA until such payment default has
been cured to the satisfaction of the holder of such Senior Indebtedness or
waived by such holder, provided, however, that if during the 180 day period
following such default, the holder of Senior Indebtedness has not accelerated
its loan, commenced foreclosure proceedings or otherwise undertaken to act on
such default, then USA shall be required to continue making payments under the
senior note, including any which had not been paid during such 180 day period.
In the event that any institutional lender to USA at any time so requires, the
Lender shall execute, upon request of USA, any intercreditor or subordination
agreement(s) with any such institutional lender on terms not materially more
adverse to the Lender then the subordination terms contained in this senior
note.
The term "Senior Indebtedness" shall mean (a) all direct or indirect, contingent
or certain indebtedness of any type, kind or nature (present or future) created,
incurred or assumed by USA with respect to any future bank or other financial
institutional indebtedness of USA or (b) any indebtedness created, incurred, or
assumed, by USA secured by a lien on any of our assets.
Notwithstanding anything herein to the contrary, Senior Indebtedness does not
include:
o unsecured accounts payable to trade creditors of USA incurred in the
ordinary course of business;
o any debt owed by USA to any officer, director or stockholder of USA;
74
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 January 31, 2005, there were outstanding warrants to purchase 7,142,858
shares at $.07 per share, warrants to purchase 272,791 shares at $.15 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.
The exercise price of the warrants and the number of shares of Common Stock
issuable upon exercise of the warrants are subject to adjustment in certain
circumstances, including a stock split of, stock dividend on, or a subdivision,
combination or recapitalization of the common stock. Upon the merger,
consolidation, sale of substantially all the assets of USA, or other similar
transaction, the warrant holders shall, at the option of USA, be required to
exercise the warrants immediately prior to the closing of the transaction, or
such warrants shall automatically expire. Upon such exercise, the warrant
holders shall participate on the same basis as the holders of common stock in
connection with the transaction.
The warrants do not confer upon the holder any voting or any other rights of a
shareholder of USA. Upon notice to the warrant holders, USA has the right, at
any time and from time to time, to reduce the exercise price or to extend the
warrant termination date.
SHARES ELIGIBLE FOR FUTURE SALE
Of the 395,782,468 shares of common stock issued and outstanding on January 31,
2005, 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
January 31, 2005, 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 January 31, 2005 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.
75
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.
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.
76
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 report 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.
77
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-8
Notes to Consolidated Financial Statements..................................F-10
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
-------------------------------- December 31,
2004 2003 2004
------------- ------------- -------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 3,019,214 $ 2,384,455 $ 1,935,922
Accounts receivable, less allowance for
uncollectible accounts of $220,000
(unaudited) at December 31, 2004 and
$240,000 and $65,000 in 2004 and 2003,
respectively 1,075,858 414,796 1,214,173
Inventory 1,707,684 457,900 1,572,377
Prepaid expenses and other current assets 234,448 201,383 207,438
Subscriptions receivable 300,000 1,013,400 --
Investment 68,636 904,049 52,248
Assets held for sale 46,200 -- 42,300
------------- ------------- -------------
Total current assets 6,452,040 5,375,983 5,024,458
Property and equipment, net 602,953 943,784 552,503
Software development costs, net -- 998,660 --
Intangibles, net 10,831,832 2,591,500 10,213,531
Goodwill 7,985,208 7,945,580 7,663,208
Other assets 8,544 37,174 12,408
------------- ------------- -------------
Total assets $ 25,880,577 $ 17,892,681 $ 23,466,108
============= ============= =============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 2,929,491 $ 2,266,156 $ 2,839,281
Accrued expenses 1,569,368 2,720,743 1,213,689
Current obligations under long-term debt 240,764 830,674 48,134
Convertible Senior Notes 401,887 349,942 2,714,010
------------- ------------- -------------
Total current liabilities 5,141,510 6,167,515 6,815,114
Convertible Senior Notes, less current portion 6,617,987 7,808,469 5,755,247
Long-term debt, less current portion 12,418 224,614 1,678
------------- ------------- -------------
Total liabilities 11,771,915 14,200,598 12,572,039
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
(unaudited) at December 31, 2004
and 522,742 and 524,492 at June 30, 2004 and
2003, respectively (liquidation preference
of $12,296,657 (unaudited) at December 31,
2004 and $11,904,600 at June 30, 2004) 3,702,856 3,715,246 3,702,856
Common Stock, no par value:
Authorized shares-- 475,000,000 (unaudited)
at December 31, 2004 and 475,000,000 and
400,000,000 at June 30, 2004 and 2003,
respectively
Issued and outstanding shares-- 394,082,468
(unaudited) at December 31,2004 and
351,654,131 and 218,741,042 at June 30,
2004 and 2003, respectively 110,635,743 78,790,405 114,883,179
Accumulated other comprehensive income 32,249 -- 15,861
Accumulated deficit (100,262,186) (78,813,568) (107,707,827)
------------- ------------- -------------
Total shareholders' equity 14,108,662 3,692,083 10,894,069
------------- ------------- -------------
Total liabilities and shareholders' equity $ 25,880,577 $ 17,892,681 $ 23,466,108
============= ============= =============
See accompanying notes.
F-2
USA Technologies, Inc.
Consolidated Statements of Operations
Six months ended
Year ended June 30 December 31
--------------------------------------------------- --------------------------------
2004 2003 2002 2004 2003
------------- ------------- ------------- ------------- -------------
Revenues: (Unaudited)
Equipment sales $ 4,349,566 $ 1,034,427 $ 795,938 $ 1,648,076 $ 2,711,654
License and transaction fees 977,651 1,373,573 778,906 519,950 586,806
Product sales and other 305,598 445,068 107,857 -- 296,734
------------- ------------- ------------- ------------- -------------
Total revenues 5,632,815 2,853,068 1,682,701 2,168,026 3,595,194
Cost of sales (including
amortization of software
development costs Note 2) 4,329,692 2,971,443 4,062,901 1,694,787 2,165,582
------------- ------------- ------------- ------------- -------------
Gross profit (loss) 1,303,123 (118,375) (2,380,200) 473,239 1,429,612
Operating expenses:
General and administrative 6,747,824 7,194,684 7,868,064 3,171,900 3,282,011
Compensation 10,071,354 4,973,210 4,654,662 2,679,371 7,443,210
Depreciation and amortization 1,632,330 1,251,716 440,238 788,535 815,904
Loss on debt modification 318,915 1,521,654 -- -- 318,915
------------- ------------- ------------- ------------- -------------
Total operating expenses 18,770,423 14,941,264 12,962,964 6,639,806 11,860,040
------------- ------------- ------------- ------------- -------------
Operating loss (17,467,300) (15,059,639) (15,343,164) (6,166,567) (10,430,428)
Other income (expense):
Interest income 40,789 18,691 15,791 20,091 19,816
Gain (loss) on investment 603,480 (1,945,951) -- -- 31,361
Gain on contract settlement 429,204 -- -- -- 515,844
Interest expense:
Coupon or stated rate (1,179,322) (1,163,192) (966,974) (594,673) (507,240)
Non-cash interest and
amortization of debt
discount (3,853,029) (3,815,408) (1,513,118) (704,492) (2,670,061)
Less: amount capitalized -- -- 492,658 -- --
------------- ------------- ------------- ------------- -------------
Total interest expense (5,032,351) (4,978,600) (1,987,434) (1,299,165) (3,177,301)
Total other income (expense) (3,958,878) (6,905,860) (1,971,643) (1,279,074) (2,610,280)
------------- ------------- ------------- ------------- -------------
Net loss (21,426,178) (21,965,499) (17,314,807) (7,445,641) (13,040,708)
Cumulative preferred
dividends (786,513) (793,586) (822,561) (392,057) (393,369)
------------- ------------- ------------- ------------- -------------
Loss applicable to common
shares $ (22,212,691) $ (22,759,085) $ (18,137,368) $ (7,837,698) $ (13,434,077)
============= ============= ============= ============= =============
Loss per common share (basic
and diluted) $ (0.08) $ (0.20) (0.50) (0.02) $ (0.05)
============= ============= ============= ============= =============
Weighted average number of
common shares outstanding
(basic and diluted) 288,476,158 111,790,358 35,994,152 366,326,724 267,133,382
============= ============= ============= ============= =============
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)
Net loss
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 Shareholders' Equity (Continued)
(Unaudited)
ACCUMULATED
SERIES A OTHER
CONVERTIBLE COMMON COMPREHENSIVE ACCUMULATED
PREFERRED STOCK STOCK INCOME DEFICIT TOTAL
----------------------------------------------------------------------------------
Exercise of 10,965,828 Common Stock
Warrants at $0.10 per share, net -- 1,090,395 -- -- 1,090,395
Issuance of 236,459 shares of Common
Stock from the conversion of 12%
Senior Notes -- 47,292 -- -- 47,292
Issuance of 475,580 shares of Common
Stock for employee compensation -- 59,570 -- -- 59,570
Issuance of 31,450,470 shares of Common
Stock to an accredited investor at
varying prices per share, less
issuance costs of $128,062 -- 3,055,559 -- -- 3,055,559
Cancellation of 700,000 shares of Common
Stock in connection with the Bayview
acquisition -- (322,000) -- -- (322,000)
Debt discount related to the beneficial
conversion feature on Senior Notes
issued -- 316,620 -- -- 316,620
Comprehensive loss:
Net loss -- -- -- (7,445,641) (7,445,641)
Unrealized loss on investment -- -- (16,388) -- (16,388)
-------------
Total comprehensive loss (7,462,029)
----------------------------------------------------------------------------------
Balance, December 31, 2004 $ 3,702,856 $ 114,883,179 $ 15,861 $(107,707,827) $ 10,894,069
==================================================================================
See accompanying notes.
F-7
USA Technologies, Inc.
Consolidated Statements of Cash Flows
Six months ended
Year ended June 30 December 31
-------------------------------------------- ----------------------------
2004 2003 2002 2004 2003
------------ ------------ ------------ ------------ ------------
(Unaudited)
OPERATING ACTIVITIES:
Net loss $(21,426,178) $(21,965,499) $(17,314,807) $ (7,445,641) $(13,040,708)
Adjustment 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 59,570 4,835,980
Interest expense on the
Senior Notes paid through
the issuance of Common Stock 478,496 860,250 301,856 -- 479,617
Interest amortization related
to Senior Notes and
Convertible Debentures 3,374,533 2,955,158 1,513,699 704,492 2,190,444
Depreciation 469,418 1,119,536 403,738 170,234 271,294
Amortization 2,207,329 1,623,547 3,032,479 618,301 1,256,142
Loss (gain) on sale of
investment (603,478) 1,945,951 -- -- (31,361)
Gain on contract settlement (429,204) -- -- -- (515,844)
Loss of debt modification 318,915 1,521,654 -- -- 318,915
Loss on property and equipment
-- -- 195,722 -- --
Changes in operating assets
and liabilities:
Accounts receivable (785,201) (74,503) (232,653) (138,315) (1,442,536)
Inventory (1,249,784) 419,914 (36,642) 135,307 (559,314)
Prepaid expenses, deposits
and other assets (1,732) (38,325) 774,845 3,346 (131,744)
Accounts payable 843,680 (759,337) (259,627) (90,210) 474,592
Accrued expenses (796,342) 589,454 (44,413) (355,679) 410,372
------------ ------------ ------------ ------------ ------------
Net cash used in operating
activities (12,557,456) (9,228,899) (6,133,766) (6,338,595) (5,484,151)
INVESTING ACTIVITIES
Purchase of property and
equipment (358,033) (186,895) (102,917) (119,784) (229,369)
Cash paid in connection with
Bayview acquisition (727,970) -- -- -- (727,969)
Cash received from the sale of
investment 1,471,140 -- -- -- 395,249
Cash received from contract
settlement 674,649 -- -- -- --
Cash received from the sale of
assets held for sale 41,400 -- -- 23,700 --
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) (96,084) (562,089)
See accompanying notes.
F-8
USA Technologies, Inc.
Consolidated Statements of Cash Flows (Continued)
Six months ended
Year ended June 30 December 31
-------------------------------------------- ----------------------------
2004 2003 2002 2004 2003
------------ ------------ ------------ ------------ ------------
(Unaudited)
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 4,145,954 5,574,055
Collection of subscriptions
receivable 1,013,400 35,000 29,000 300,000 1,002,163
Net proceeds from issuance of
Senior Notes and Convertible
Debenture -- 1,833,841 4,269,223 1,108,803 --
Repayment of long-term debt and
Senior Notes (812,106) (557,441) (2,773,363) (203,370) (392,629)
Proceeds received from deposits
for future financings -- -- 500,000 -- --
------------ ------------ ------------ ------------ ------------
Net cash provided by financing
activities 12,091,029 11,242,279 5,937,625 5,351,387 6,183,589
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents 634,759 1,826,485 (259,600) (1,083,292) 137,349
Cash and cash equivalents at
beginning of period 2,384,455 557,970 817,570 3,019,214 2,384,455
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end
of period $ 3,019,214 $ 2,384,455 $ 557,970 $ 1,935,922 $ 2,521,804
============ ============ ============ ============ ============
Supplemental disclosures of
cash flow information:
Cash paid for interest $ 1,098,727 $ 1,479,984 $ 603,312 $ 648,123 $ 464,864
============ ============ ============ ============ ============
Conversion of Convertible
Preferred Stock to Common Stock $ 12,390 $ 33,912 $ 184,095 $ -- $ 2,125
============ ============ ============ ============ ============
Conversion of Cumulative
Preferred Dividends to Common
Stock $ 22,440 $ 56,050 $ 268,140 $ -- $ 3,820
============ ============ ============ ============ ============
Subscriptions receivable $ 300,000 $ 1,013,400 $ 35,000 $ -- $ 11,237
============ ============ ============ ============ ============
Conversion of Senior Notes and
Debenture to Common Stock $ 2,840,978 $ 1,388,442 $ 622,500 $ 47,292 $ 1,994,334
============ ============ ============ ============ ============
Issuance (cancellation) of
Common Stock in connection
with Bayview acquisition $ 9,278,200 $ -- $ -- $ (322,000) $ 9,278,200
============ ============ ============ ============ ============
Beneficial conversion feature
related to Senor Notes and
Convertible Debenture $ 1,981,007 $ 2,947,130 $ 4,067,813 $ 316,620 $ 1,981,007
============ ============ ============ ============ ============
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 $ -- $ --
============ ============ ============ ============ ============
Prepaid stock expenses through
issuance of Common Stock $ -- $ -- $ -- $ -- $ 105,000
============ ============ ============ ============ ============
Other receivable from
termination of contract $ -- $ -- $ -- $ -- $ 674,649
============ ============ ============ ============ ============
See accompanying notes.
F-9
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 ended June 30, 2004,
2003 and 2002, respectively, and a loss of $7.4 million (unaudited) during the
six months ended December 31, 2004. Cumulative losses from its inception through
June 30, 2004 amounted to approximately $97.6 million. Cumulative losses through
December 31, 2004 amounted to approximately $105.0 million (unaudited). Losses
have continued through February 2005 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 (Note 13), the issuance of debt
(Note 10) and raising funds in the capital markets, as needed.
INTERIM FINANCIAL INFORMATION
The consolidated financial statements and disclosures included herein for the
six months ended December 31, 2004 and 2003 are unaudited. These financial
statements and disclosures have been prepared by the Company in accordance with
U.S. generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by U.S. generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the six-month period ended December 31, 2004 are
not necessarily indicative of the results that may be expected for the fiscal
year ending June 30, 2005.
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-10
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 December 31, 2004,
and is therefore restricted as to use.
INVENTORY
Inventory, which principally consists of finished goods 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. During the six months ended
December 31, 2004, no events or circumstances arose indicating that an
impairment of goodwill may have occurred.
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.
F-11
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
2. ACCOUNTING POLICIES (CONTINUED)
SOFTWARE DEVELOPMENT COSTS (CONTINUED)
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 at June 30, 2004 and December 31, 2004 and
$4,327,526 at June 30, 2003. 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). Amortization expense was approximately $0
(unaudited) and $666,000 (unaudited) for the six months ended December 31, 2004
and 2003, respectively. 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 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.
F-12
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
2. ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG LIVED ASSETS (CONTINUED)
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
Sheets as of June 30, 2004 and December 31, 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 and 44% as of December 31,
2004 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. Approximately 31% of the Company's revenues for
the six months ended December 31, 2004 were concentrated with two customers. The
Company's customers are principally located in the United States.
REVENUE RECOGNITION
Revenue from the sale of equipment is recognized on the terms of
freight-on-board shipping point, or upon installation and acceptance of the
equipment if installation services are purchased for the related equipment.
Transaction processing revenue is recognized upon the usage of the Company's
cashless payment and control network. License fees for access to the Company's
devices and network services are recognized on a monthly basis. Product revenues
are recognized for the sale of products from Company owned vending machines when
there is purchase and acceptance of product by the vending customer. The Company
estimates an allowance for product returns at the date of sale.
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, and $272,000 (unaudited) and $362,000
(unaudited) for the six months ended December 31, 2004 and 2003, respectively.
F-13
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
2. ACCOUNTING POLICIES (CONTINUED)
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.
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123(R), "Share-Based Payment" ("FAS 123(R)"), which establishes standards
for transactions in which an entity exchanges its equity instruments for goods
or services. This standard requires a public entity to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award. This eliminates the alternative to
account for such awards using the intrinsic method currently allowable under APB
25. FAS 123(R) will be effective for the Company for the interim reporting
period beginning on July 1, 2005. The Company believes FAS 123(R) will not have
a material impact on the Company's financial statements.
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 ended
June 30, 2004 or the six months ended December 31, 2004 and 2003 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 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 ($31,361 (unaudited)
during the six months ended December 31, 2003), with the cost of the securities
calculated by the specific identification method. An unrealized gain of $32,249
and $15,861 (unaudited) on the remaining shares held by the Company is reflected
in shareholders' equity as accumulated other comprehensive income at June 30,
2004 and December 31, 2004, respectively. 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 and $52,248
(unaudited) at June 30, 2004 and December 31, 2004, respectively.
F-14
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, $61,000 (unaudited) and $121,000 (unaudited) of
royalty expense was recorded during fiscal year 2004 and the six months ended
December 31, 2004 and 2003, respectively, 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.
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.
Of the 20,000,000 shares issued to Bayview, 700,000 (unaudited) shares were
placed into an escrow account to be issued to one owner of Bayview if certain
Bayview stock options were exercised. This agreement called for these shares to
be returned to the Company if the Bayview stock options were not exercised.
During the three months ended September 30, 2004, the Company determined that
the Bayview stock options would not be exercised and the shares previously
issued into escrow would be cancelled. Therefore, the Company decreased the
purchase price by $322,000 (unaudited) due to the return and cancellation of the
700,000 (unaudited) shares held in escrow. The decrease in the purchase price
resulted in a reduction of goodwill and shareholders' equity of $322,000
(unaudited) in the three months ended September 30, 2004.
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 and the six months ended
December 31, 2003 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.
F-15
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
4. ACQUISITIONS (CONTINUED)
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 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.
F-16
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
4. ACQUISITIONS (CONTINUED)
STITCH NETWORKS CORPORATION (CONTINUED)
Unaudited pro-forma combined results of the Company as if the Company acquired
Stitch on July 1, 2001 is as follows:
YEAR ENDED
JUNE 30, 2002
Revenues $ 2,869,466
===============
Net loss (19,583,216)
Cumulative preferred dividends (822,561)
---------------
Loss applicable to common shares $ (20,405,777)
===============
Loss per common share (basic and diluted) $ (0.36)
===============
Weighted average number of common shares
outstanding (basic and diluted) 56,676,823
===============
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, and $618,301 (unaudited) and $590,368 (unaudited) for the six
months ended December 31, 2004 and 2003, respectively. The intangible asset
balance and related accumulated amortization consisted of the following:
JUNE 30, 2004
-----------------------------------------------------
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION VALUE
-----------------------------------------------------
Intangible assets:
Trademarks $ 2,064,000 $ (223,125) $ 1,840,875
Patents 9,294,000 (1,117,822) 8,176,178
Non-Compete agreement 1,011,000 (196,221) 814,779
-----------------------------------------------------
Total $12,369,000 $(1,537,168) $ 10,831,832
=====================================================
JUNE 30, 2003
-----------------------------------------------------
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION VALUE
-----------------------------------------------------
Intangible assets:
Trademark $1,050,000 $ (118,125) $ 931,875
Patents 1,870,000 (210,375) 1,659,625
-----------------------------------------------------
Total $2,920,000 $ (328,500) $ 2,591,500
=====================================================
F-17
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
4. ACQUISITIONS (CONTINUED)
STITCH NETWORKS CORPORATION (CONTINUED)
DECEMBER 31, 2004 (UNAUDITED)
-----------------------------------------------------
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION VALUE
-----------------------------------------------------
Intangible assets:
Trademarks $ 2,064,000 $ (275,625) $ 1,788,375
Patents 9,294,000 (1,582,522) 7,711,478
Non-Compete agreement 1,011,000 (297,322) 713,678
-----------------------------------------------------
Total $12,369,000 $(2,155,469) $ 10,213,531
=====================================================
At June 30, 2004 and December 31, 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
and December 31, 2004.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
USEFUL JUNE 30 DECEMBER 31
LIVES 2004 2003 2004
---------------------------------------- -----------
(Unaudited)
Computer equipment and purchased
software 3 years $ 2,206,759 $ 1,931,912 $ 2,241,753
Vending machines and related components 7 years 4,427 688,284 4,427
Control systems 3 years 479,530 980,759 479,530
Furniture and equipment 5-7 years 745,341 532,570 815,130
Leasehold improvements Lease term 59,575 16,140 74,576
Vehicles 5 years -- 10,258 --
-------------------------- -----------
3,495,632 4,159,923 3,615,416
Less accumulated depreciation (2,892,679) (3,216,139) (3,062,913)
-------------------------- -----------
$ 602,953 $ 943,784 $ 552,503
========================== ===========
Assets under capital lease totaled approximately $113,000, $180,000 and $113,000
(unaudited) as of June 30, 2004 and 2003 and December 31, 2004, respectively.
Capital lease amortization of approximately $20,000, $46,000, $54,000, $3,000
(unaudited) and $10,000 (unaudited) is included in depreciation expense for the
years ended June 30, 2004, 2003 and 2002, and the six months ended December 31,
2004 and 2003, respectively.
F-18
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
JUNE 30 DECEMBER 31
2004 2003 2004
----------------------- -----------
(Unaudited)
Accrued compensation and related sales commissions $ 444,302 $ 250,808 $ 336,984
Accrued interest 376,350 291,315 376,635
Accrued professional fees 192,633 650,974 81,345
Accrued taxes and filing fees 108,362 94,529 79,719
Accrued consulting fees 104,438 662,010 63,000
Accrued rent 66,662 15,572 12,159
Advanced customer billings 58,811 62,540 62,915
Accrued lease termination payments, net -- 344,934 --
Accrued software license and support costs -- 125,385 --
Accrued other 217,810 222,676 200,932
----------------------- -----------
$1,569,368 $2,720,743 $1,213,689
======================= ===========
7. RELATED PARTY TRANSACTIONS
During the years ended June 30, 2004, 2003 and 2002 and the six months ended
December 31, 2004 and 2003, the Company incurred approximately $391,000,
$305,000, $213,000, $132,000 (unaudited) and $255,000 (unaudited), respectively,
in connection with legal services provided by a member of the Company's Board of
Directors. At June 30, 2004 and 2003 and December 31, 2004, approximately
$32,000, $22,000 and $18,000 (unaudited), 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 and the six months ended December 31,
2004, certain Board members participated in various debt or equity offerings of
the Company for total investments of approximately $266,250, $661,500, $277,500,
and $117,000 (unaudited) respectively. There was no participation by Board
members in debt or equity offerings of the Company during the six months ended
December 31, 2003.
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 or the six months ended
December 31, 2004 and no payables to Dixie at June 30, 2004 or December 31,
2004.
8. LONG-TERM DEBT
Long-term debt consists of the following:
F-19
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
8. LONG-TERM DEBT (CONTINUED)
JUNE 30 DECEMBER 31,
2004 2003 2004
----------------------- ------------
(Unaudited)
Bank facility $ 170,987 828,466 $ --
Working capital loans 46,765 166,765 26,765
Other, including capital lease obligations 35,430 60,057 23,048
----------------------- ------------
253,182 1,055,288 49,812
Less current portion 240,764 830,674 48,134
----------------------- ------------
$ 12,418 $ 224,614 $ 1,678
======================= ============
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 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. However, the Company plans on repaying these
loans by the end of fiscal year 2005.
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:
F-20
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
9. INCOME TAXES (CONTINUED)
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 $ -- $ --
==============================
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 and six months ended December 31, 2004. 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 and six months ended December 31, 2004, $514,359,
$489,608 and $20,000 (unaudited), respectively, of the 2005 Senior Notes were
converted into 2,571,797, 2,448,215 and 100,000 (unaudited) shares of Common
Stock, respectively.
F-21
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
10. SENIOR NOTES (CONTINUED)
In March 2003, the Company granted to the holders of the 2003 Senior Notes and
2004 Senior Notes the right to extend the maturity date of these Senior Notes to
December 31, 2006 and December 31, 2007, respectively, in exchange for reducing
the conversion rates from $1.25 to $0.20 per share for the 2003 Senior Notes and
from $0.40 to $0.20 per share for the 2004 Senior Notes. This offer expired on
December 31, 2003. During the years ended June 30, 2004 and 2003, Senior Note
holders agreed to exchange an aggregate of $2,303,953 and $6,911,397,
respectively, of 2003 Senior Notes and 2004 Senior Notes for new notes maturing
in 2006 and 2007. The exchange of the 2003 Senior Notes and 2004 Senior Notes to
the 2006 Senior Notes and 2007 Senior Notes was deemed a significant
modification of the terms of the Senior Notes and, accordingly, the exchanged
2003 Senior Notes and 2004 Senior Notes have been extinguished. The unamortized
debt discount and other issuance costs remaining on the 2003 Senior Notes and
2004 Senior Notes exchanged and extinguished were expensed ($318,915 and
$1,521,654 for the years ended June 30, 2004 and 2003, respectively) and have
been reported as a loss on debt modification in the Consolidated Statements of
Operations. Included in the loss on debt modification for the year ended June
30, 2004 is $277,279 (unaudited) that occurred during the three months ended
September 30, 2003.
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.
During the years ended June 30, 2004 and 2003 and the six months ended December
31, 2004, $848,619, $323,334, and $27,292 (unaudited), respectively, of the 2007
Senior Notes were converted into 4,243,097, 1,616,668, and 136,459 (unaudited)
shares of Common Stock, respectively.
On November 3, 2004, the Company authorized the issuance of up to $2,500,000 of
Senior Notes convertible into shares of Common Stock at $0.10 per share and
maturing on June 30, 2007 (the "2004-B Senior Notes"). Interest is payable
quarterly at a rate of 10% per annum. Participation in the Senior Note offering
was offered to the holders of certain warrants issued in conjunction with the
payment of interest on Senior Notes (see "Additional Interest Warrants" in Note
13), holders of the warrants issued in conjunction with the 2004-A Private
Placement Offering, and to an accredited investor and current warrant holder.
Due to the limited number of authorized shares available for issuance, the terms
of the offering provided that all of such warrant holder's warrants would be
cancelled if they participated in the offering. Through December 31, 2004, the
Company received $1,108,803 (unaudited) in gross proceeds from sales of the
2004-B Senior Notes and 1,770,635 (unaudited) shares underlying the warrants
were cancelled. As the Company's share price on the day of issuance of each of
these Senior Notes was greater than the conversion price of $0.10, the Company
recorded the intrinsic value of this beneficial conversion feature totaling
$316,620 (unaudited) as additional debt discount, which is being amortized to
interest expense through the maturity date of these Senior Notes.
A summary of the activity for the Senior Notes for the years ended June 30,
2004, 2003 and 2002 and the six months ended December 31, 2004 follows:
F-22
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
10. SENIOR NOTES (CONTINUED)
Senior Notes
Maturing
Senior Notes Maturing December 31, June 30,
------------------------------------------------------------------------------------ ------------
2001 2003 2004 2005 2006 2007 2007
(2001 Senior (2003 Senior (2004 Senior (2005 Senior (2006 Senior (2007 Senior (2004-B Senior
Notes) 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 --
Conversions to Common Stock
(Unaudited) -- -- -- (20,000) -- (27,292) --
Issued for cash (unaudited) -- -- -- -- -- -- $ 1,108,803
------------------------------------------------------------------------------------ ------------
Balance, December 30, 2004
(Unaudited) $ -- $ -- $ 451,152 $ 2,991,791 $ 3,213,500 $ 2,992,105 $ 1,108,803
==================================================================================== ============
Senior Notes
Maturing
Senior Notes Maturing December 31, June 30,
--------------------------------------------------------------------------------- ----------
2001 2003 2004 2005 2006 2007 2007
(2001 Senior (2003 Senior (2004 Senior (2005 Senior (2006 Senior (2007 Senior (2004-B Senior
Notes) Notes) Notes) Notes) Notes) Notes) Notes)
--------------------------------------------------------------------------------- ----------
Debt discount and other
issuance costs
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 unamortized costs upon
conversions to Common Stock -- 448,934 1,004,748 1,104,157 183,580 24,607 --
Loss on modification for
exchanges Of 2003 and 2004
Senior Notes for 2006 and 2007
Senior Notes -- 221,130 1,300,524 -- -- -- --
--------------------------------------------------------------------------------- ----------
Unamortized costs at
June 30, 2003 -- (80,233) (453,930) (2,153,223) (1,104,169) (596,852) --
Debt discount from issuances -- -- -- -- (1,155,475) (825,532) --
Amortization and write-off of
unamortized costs upon
conversions to Common Stock -- 32,803 133,180 1,052,231 1,329,255 827,064 --
Loss on modification for
exchanges of 2003 and 2004
Senior Notes for 2006 and
2007 Senior Notes -- 47,430 271,485 -- -- -- --
--------------------------------------------------------------------------------- ----------
Unamortized costs at
June 30, 2004 -- -- (49,265) (1,100,992) (930,389) (595,320) --
Debt discount from issuance -- -- -- -- -- -- (316,620)
Amortization and write off
of unamortized costs upon
conversions to Common
Stock (Unaudited) -- -- 49,265 372,059 186,077 89,658 7,433
--------------------------------------------------------------------------------- ----------
Unamortized costs at
December 31, 2004 (Unaudited) $ -- $ -- $ -- $ (728,933) $ (744,312) $ (505,662) $ (309,187)
================================================================================= ==========
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 --
================================================================================= ==========
December 30, 2004 (Unaudited)
Face amount $ -- $ -- $ 451,152 $ 2,991,791 $ 3,213,500 $ 2,992,105 $1,108,803
Unamortized costs -- -- -- (728,933) (744,312) (505,662) (309,187)
--------------------------------------------------------------------------------- ----------
$ -- $ -- $ 451,152 $ 2,262,858 $ 2,469,188 $ 2,486,443 $ 799,616
================================================================================= ==========
F-23
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
10. SENIOR NOTES (CONTINUED)
During the year ended June 30, 2003 and through December 31, 2003, the holders
of the Senior Notes had the right to purchase shares of the Company's Common
Stock at $0.20 per share using quarterly interest payments that were due in lieu
of a cash payment of the interest. Additionally, for each share purchased, the
note holder was entitled to receive a warrant to purchase one share of the
Company's Common Stock at $0.20 per share exercisable at any time through June
30, 2004 (extended to August 30, 2004). 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 and for the six months ended December 31, 2003, 1,061,284, 2,315,000,
674,431 and 1,066,034 (unaudited) shares of Common Stock, respectively, were
issued for payment of interest due of $212,238, $448,647, $259,320 and $213,188
(unaudited), 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,
$42,536 and $266,429 (unaudited) for the years ended June 30, 2004, 2003, and
2003 and the three months ended December 31, 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.
F-24
Cumulative unpaid dividends at June 30, 2004 and 2003 and December 31, 2004
amounted to $6,677,180, $5,913,107 and $7,069,237 (unaudited), 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. There were no conversions of preferred
stock or cumulative preferred dividends during the six months ended December 31,
2004. The Series A Preferred Stock may be called for redemption at the option of
the Board of Directors at any time on and after January 1, 1998 for a price of
$11.00 per share plus payment of all accrued and unpaid dividends. No such
redemption has occurred as of June 30, 2004 or December 31, 2004. In the event
of any liquidation, the holders of shares of Series A Preferred Stock issued
shall be entitled to receive $10.00 for each outstanding share plus all
cumulative unpaid dividends. If funds are insufficient for this distribution,
the assets available will be distributed ratably among the preferred
shareholders.
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-25
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.
During the six months ended December 31, 2004, warrants were exercised to
purchase 10,965,828 (unaudited) shares of Common Stock at $0.10 per share
generating proceeds of $1,096,583 (unaudited). During the six months ended
December 31, 2003, warrants were exercised to purchase 3,035,258 (unaudited)
shares of Common Stock at $0.10 per share generating proceeds of $303,526
(unaudited).
In July 2003, the Company and the Company's Chief Executive Officer ("CEO")
amended the terms of his Executive Employment Agreement (expiring June 2005).
Under the terms of the previous Executive Employment Agreement, the CEO would
have been granted seven percent (non-dilutive) of all the then issued and
outstanding shares of the Company's Common Stock in the event a "USA
Transaction" (as defined) occurs, which among other events includes a change in
control of the Company. The amended terms of the Executive Employment Agreement,
eliminates the seven percent (non-dilutive) right to receive Common Stock upon a
"USA Transaction" and granted the CEO an aggregate of 14,000,000 shares of
Common Stock (subject to adjustment for stock splits or combinations) in the
event a "USA Transaction" occurs. In exchange for the amendment of these terms,
the Company issued the CEO 10,500,000 shares of its Common Stock valued at
$4,620,000 or $0.44 per share representing the quoted market price of the
Company's Common Stock on the date the amendment was entered into and the shares
were granted. In connection with this amendment, the CEO also entered into a
lock-up agreement pursuant to which he can not sell 2,500,000 of these shares
for a one-year period and 8,000,000 of these shares for a two-year period. The
CEO is not required to pay any additional consideration for these shares of
Common Stock. At the time of a "USA Transaction", all of the 14,000,000 shares
are automatically deemed to be issued and outstanding, and will be entitled to
be treated as any other issued and outstanding shares of Common Stock. These
shares are irrevocable and fully vested, have no expiration date, and are not
affected by the termination of the CEO for any reason whatsoever.
In addition to the shares issued to the CEO, there were 920,727 (594,000
(unaudited) for the six months ended December 31, 2003), 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
($215,980 (unaudited) for the three months ended December 31, 2003), $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 they were granted and totaled $181,000. During
the six months ended
F-26
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
12. COMMON STOCK (CONTINUED)
December 31, 2004, 475,580 (unaudited) shares of Common Stock valued at $59,570
(unaudited) were issued to employees for services.
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. During the six-month period ended
December 31, 2004, the Company issued 31,450,470 (unaudited) shares of Common
Stock under the Common Stock Agreement for total gross proceeds of $3,183,621
(unaudited). In addition to the due diligence fee, the Company incurred $83,062
(unaudited) of other stock issuance costs during the six months ended December
31, 2004.
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
==========
As of December 31, 2004, the Company has reserved shares of Common Stock for
future issuance for the following (unaudited):
Exercise of Common Stock Options 1,897,472
Exercise of Common Stock Warrants 9,071,579
Conversions of Preferred Stock and cumulative
Preferred Stock dividends 1,229,666
Conversions of Senior Notes 57,075,020
Issuance under Common Stock Agreement 3,549,530
Issuance under 2004-B Stock Compensation Plan 433,693
-----------
Total shares reserved for future issuance 73,256,960
===========
F-27
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
and the six months ended December 31, 2004 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
Exercised (Unaudited) (10,965,828)
Cancelled (13,419,784)
-----------
Outstanding at December 31, 2004 (Unaudited) 9,071,579
===========
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-28
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
13. COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)
Prior to June 30, 2004, the Company issued warrants to purchase approximately
3,700,000 shares of Common Stock to holders of the Senior Notes who elected to
receive quarterly interest on their Notes in shares of Common Stock, in lieu of
a 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 elected 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 reduced the exercise price of the Original Interest Warrants to
$0.15 per share and extended their expiration 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 reduced to $0.15 per
share through June 30, 2005. The Company also reduced the exercise price of the
Additional Interest Warrants to $0.15 per share through November 30, 2004 and
then retroactively to $0.10 per share through December 31, 2004. Investors who
had previously exercised Original Interest Warrants and Additional Interest
Warrants at $0.15 per share were refunded the equivalent of $0.05 per share in
recognition of the reduction of the exercise price to $0.10 per share that
occurred after the warrants were exercised. Such refunds amounted to $40,971
(unaudited). During the six-month period ended December 31, 2004, Original
Interest Warrants and Additional Interest Warrants were exercised to purchase
807,494 (unaudited) shares of Common Stock. Such exercises generated net
proceeds of approximately $75,000 (unaudited), after considering the
above-mentioned refund.
As of October 25, 2004, the Company reduced the exercise price of the Common
Stock warrants issued as part of the 2004-A Private Placement Offering to $0.10
per share, from $0.20 per share, through November 30, 2004. On December 13,
2004, the exercise price of $0.10 per share was retroactively extended to
December 31, 2004. During the six-month period ended December 31, 2004, the
Company received $765,833 (unaudited) upon the exercise of 7,658,334 (unaudited)
of these warrants at an exercise price of $0.10 per share.
During the six months ended December 31, 2004, the Company received $250,000
(unaudited) from an accredited investor upon the exercise of 2,500,000
(unaudited) Common Stock warrants at an exercise price of $0.10 per share.
All Common Stock warrants outstanding as of December 31, 2004 were exercisable.
The following table shows exercise prices and expiration dates for warrants
outstanding as of December 31, 2004 (unaudited):
WARRANTS EXERCISE PRICE
OUTSTANDING PER SHARE EXPIRATION DATE
272,893 $0.15 June 30, 2005
75,000 $1.25 June 30, 2006
7,142,858 $0.07 October 26, 2007
1,200,000 $0.91 August 29, 2010
377,927 $1.00 April 24, 2011
2,901 $1.03 April 30, 2011
----------
9,071,579
==========
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.
F-29
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
13. COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)
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 and December
31, 2004 there were 90,727 and 500,000 (unaudited) shares, respectively, issued
under the Plan. On October 29, 2004, the Board of Directors approved the 2004-B
Stock Compensation Plan to allow up to 500,000 shares of Common Stock to be
available for issuance to future or current employees, directors or consultants
of the Company. As of December 31, 2004, there were 66,307 (unaudited) shares
issued under the Plan.
Common Stock Option activity during the years ended June 30, 2004, 2003 and 2002
was as follows. No activity occurred during the six months ended December 30,
2004.
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 and
December 31, 2004 (Unaudited) 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.
F-30
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
13. COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)
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
=========
The following table shows exercise prices and the weighted average remaining
contractual life for options outstanding as of December 31, 2004. All Common
Stock Options outstanding as of December 31, 2004 were exercisable except for
the options granted at an exercise price of $.30 per share, 75,000 of which were
exercisable as of December 31, 2004.
OPTIONS EXERCISE PRICE WEIGHTED AVERAGE REMAINING
OUTSTANDING PER SHARE CONTRACTUAL LIFE (YEARS)
- --------------------------------------------------------------------------------
1,465,805 $0.165 2.67
300,000 $0.30 2.71
125,000 $1.00 1.42
6,667 $2.00 1.75
---------
1,897,472
=========
As there were no stock options granted during the year ended June 30, 2003 and
all options granted through June 30, 2002 were vested as of that date, pro-forma
net loss and pro-forma net loss per common share under FAS 123 for the year
ended June 30, 2003 would be the same as reported by the Company under APB 25.
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 or December 31, 2004 as the fair value of options granted for
the year ended June 30, 2004 were not considered to be material. There was no
pro-forma compensation expense for the six months ended December 31, 2003.
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:
F-31
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
13. COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)
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 United States under
agreements negotiated with the location owners and derived revenues amounting to
$358,484, $1,092,167, $209,196, $0 (unaudited) and $351,620 (unaudited) for the
years ended June 30, 2004, 2003 and 2002 and the six months ended December 31,
2004 and 2003, respectfully.
During 2003, Stitch alleged that the supplier and another party to the vending
agreement breached the vending agreement and the supplier and the other party to
the vending agreement alleged that Stitch had breached the vending agreement.
Effective December 31, 2003, the parties finalized a settlement of this matter
which resulted in the termination of the vending agreement. Under the settlement
agreement, the Company received a payment from Kodak of approximately $675,000.
The agreement also provides for the Company to receive payments of $300 per
vending machine from the supplier of the vending machines, as the machines are
pulled from service at the supplier's sole cost and expense. Upon receipt of the
$300 per machine, title to the vending machine transfers from Stitch to the
supplier. Through June 30, 2004, the Company has received approximately $41,400
for these machines. The agreement also provided that the supplier cancel a
$124,000 obligation of Stitch for the purchase of vending machines.
This termination agreement resulted in a gain of $429,204 during the year ended
June 30, 2004 and is reflected as Other income in the June 30, 2004 Consolidated
Statement of Operations. This gain is comprised of the payment from Kodak of
approximately $675,000 plus the cancellation of Stitch's obligation to the
supplier of the vending machines of approximately $124,000 less a write-down of
the carrying value of vending machines of approximately $367,000 and a net
write-off of amounts due to and from Kodak of $3,000. The remaining vending
machines are reported as assets held for sale in the June 30, 2004 and December
31, 2004 Consolidated Balance Sheets, as it was determined that the plan of sale
criteria in FAS 144 was met in the termination agreement, at which time
depreciation of these assets ceased.
F-32
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
15. RETIREMENT PLAN
The Company's Savings and Retirement Plan (the "Plan") allows employees who have
attained the age of 21 and have completed six months of service to make
voluntary contributions up to a maximum of 15% of their annual compensation, as
defined in the Plan. Through June 30, 2000, the Plan did not provide for any
matching contribution by the Company, however, starting at the beginning of
fiscal year 2001, the Company has amended the Plan to include a Company matching
contribution up to 10% of an employee's compensation. Effective January 1, 2003,
the matching contribution changed to a dollar-for-dollar matching contribution
on salary deferrals up to 3% of the employee's compensation then a fifty-cents
on the dollar matching contribution on salary deferrals from 3% to 5%. The
Company's contribution for the years ended June 30, 2004, 2003 and 2002 was
approximately $78,000, $67,000 and $48,000, respectively, and for the six months
ended December 31, 2004 and 2003, was approximately $55,000 (unaudited) and
$35,000 (unaudited), respectively.
16. LEASE COMMITMENTS
The Company conducts its operations from various facilities under operating
leases. In March 2003, the Company entered into a lease for 12,864 square feet
of space located in Malvern, Pennsylvania for its principal executive office and
used for general administrative functions, sales activities, and product
development. The lease term extends through December 31, 2008 and provides for
escalating rent payments and a period of free rent prior to the commencement of
the monthly lease payment in January 2004 of approximately $25,000 per month.
In connection with the acquisition of the energy conservation product line in
July 2003 from Bayview Technology Group, LLC, the Company assumed leases for
6,384 square feet of space located in Denver, CO used for administrative
functions, sales activities and product warehousing associated with our Miser
products. The lease terms extend through June 30, 2005 and provide for
escalating rent payments currently at $8,200 per month. The lease provides for
additional rent for a prorated share of operating costs for the entire facility.
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, and
$222,000 (unaudited) and $232,000 (unaudited) for the six months ended December
31, 2004 and 2003, 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 -- 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
=========
F-33
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
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)
During January 2005, the Company repaid $131,152 of the 2004 Senior Notes and
agreed with the holders of the remaining $320,000 of these notes to extend the
maturity date to June 30, 2005. In exchange for extending the maturity date, the
Company authorized a reduction of the conversion price to $0.10.
From January 1, 2005 to February 14, 2005, the Company issued an additional
1,700,000 shares of Common Stock under the Common Stock Agreement (Note 12) for
total gross proceeds of $170,000.
From January 1, 2005 to February 14, 2005, the Company received an additional
$431,986 in gross proceeds from the 2004-B Senior Note offering.
On February 3, 2005, the Company authorized the issuance of up to $6,000,000 of
Senior Notes, which will not result in any additional dilution to existing
shareholders, due December 31, 2008 (the "2008 Senior Notes") and up to
15,000,000 shares of Common Stock to accredited investors and holders of the
Convertible Senior Notes due December 31, 2005 (the "2005 Senior Notes").
Interest is payable quarterly at a rate of 12% per annum. This offering will
allow the Company to raise up to $3,000,000 to repay the 2005 Senior Notes and
up to $3,000,000 for working capital requirements. For each $10,000 invested in
the offering, the subscriber shall receive a $10,000 12% Senior Note and 25,000
shares of restricted Common Stock. Due to the fact that a portion of the
proceeds could be used to repay the 2005 Senior Notes and release the reserved
underlying shares, the offering will not require the Company to reserve any
additional shares of Common Stock and will not result in any additional dilution
to existing shareholders.
Additionally, each holder of the 2005 Senior Notes has the right to exchange
their Notes as part of the offering. For each $10,000 of 2005 Senior Notes
exchanged, the holder will receive $10,000 of 2008 Senior Notes and 25,000
shares of restricted Common Stock. Due to the fact that the 2005 Senior Notes
are being exchanged for the 2008 Senior Notes and thus releasing the reserved
underlying shares, the offering will not require the Company to reserve any
additional shares of Common Stock and will not result in any additional dilution
to existing shareholders.
F-34
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 .... $ 292.05
Printing and Engraving Expenses .......................... $ 2,207.95
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"):
78
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 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.
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.
79
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.
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.
80
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.
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.
81
In October 2002, the Company granted to the holders of the 12% senior notes
warrants to purchase that number of shares equal to 75% of the dollar amount of
the notes held by such holder. The total number of warrants issued was
10,360,025 and are exercisable at any time prior to October 31, 2003. If the
holder exercises all of such holder`s warrants, the holder shall receive another
identical warrant exercisable at any time prior to October 31, 2003. From
November 2002 through June 30, 2003, 14,025,804 of these warrants were exercised
at $.10 per share for a total of $1,402,851. The offer and sale of the warrants
and these shares was exempt from registration under Rule 506 promulgated under
the Act. All of the noteholders are accredited investors and already the holders
of our notes. The warrants and the shares all contained appropriate restrictive
legends under the Act.
On October 31, 2002, eight employees of and two consultants to USA entered into
subscription agreements with USA to receive an aggregate of 1,480,000 shares for
services to be rendered to USA. The shares were valued at $.125 per share and
were exempt from registration under Section 4(2) of the Act. All of the
employees and consultants were sophisticated investors, made appropriate
investment representations, were afforded access to all public filings and all
other information that USA could reasonably obtain, and the securities contained
appropriate restrictive legends under the Act.
During the 2003 fiscal year and through August 7, 2003, the Company issued an
aggregate of 85,601,130 shares to 398 accredited investors at $.10 per share for
an aggregate of $8,560,113. Of the $8,560,130, $8,345,674 were for cash proceeds
and $214,439 were for services rendered or to be rendered. The offer and sales
of the shares was exempt from registration under Rule 506 promulgated under
Section 4(2) of the Act. All of the investors were either pre-existing security
holders or business associates. The offer and sale thereof did not involve any
general advertising or solicitation and the securities contained appropriate
restrictive legends under the Act. In connection with the offering, we paid
$64,000 to Sloan Securities, Inc., a broker-dealer, in connection with the
8,000,000 shares sold by Sloan on our behalf. We have agreed to use our best
efforts to register all of these shares for resale under the Act for a period of
one year.
In February, 2003, Jubilee Investment Trust, PLC ("Jubilee"), a United Kingdom
investment trust made an equity investment in USA Technologies at U.S.$0.20 per
share. Jubilee is a newly established investment trust set up to invest in
securities traded on a range of public markets, primarily in the United Kingdom.
USA Technologies issued to Jubilee 15,000,000 shares of Common Stock of USA
Technologies at a price per share of U.S.$0.20 with an aggregate value of
U.S.$2,850,000. In full payment for the shares of USA Technologies, Jubilee
issued to USA Technologies an equivalent of their shares (1,870,091 shares of
Jubilee at a price per share valued at One British Pound which was the initial
public offering price per share for the Jubilee shares). The exchange rate used
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.
82
In March 2003, we issued a warrant to La Jolla Cove Investors, Inc. to purchase
up to 9,000,000 shares at $.10 per share. The warrants expire as follows:
3,000,000 on the three month anniversary of the date of this prospectus;
3,000,000 on the 6 month anniversary of the date of this prospectus; and
3,000,000 on the 9 month anniversary of the date of this prospectus. The
warrants may not be exercised without our consent on any date on which the
closing price of our shares is less than $.40. We have agreed to register the
shares underlying the warrants for resale under the Act for a period of one
year. The warrants were offered and sold to La Jolla pursuant to the exemption
from registration set forth in Section 4(2) of the Act. During October 2003,
these warrants were rescinded and cancelled by agreement of USA and La Jolla.
In April 2003, we issued 530,818 shares and warrants to purchase up to 530,818
shares to the holders of our senior notes who elected to receive these
securities in lieu of the cash interest payment due for the quarter ended March
31, 2003. The shares were purchased at the rate of $.20 per share and the
warrants are exercisable at $.20 per share at any time through June 30, 2004. We
have agreed to register the shares and the shares underlying the warrants under
the Act for resale for a period of 2 years. The securities were offered and sold
under the exemption from registration set forth in Rule 506 promulgated under
the Act. All of the noteholders are accredited investors and existing security
holders of USA and there was no general solicitation or advertising.
During April 2003, we agreed to issue to Steve Illes, an existing shareholder,
an aggregate of 1,000,000 shares for $.10 per share and agreed to issue to him
warrants to purchase up to 4,000,000 shares at $.10 per share at any time
through August 31, 2003. The offer and sale of the shares and warrants was
exempt from registration under Section 4(2) of the Act. Mr. Illes is an
accredited investor, made appropriate investment representations, was afforded
access to all public filings and all other information that USA could reasonably
obtain, and the securities contained appropriate restrictive legends under the
Act. We have agreed to register the shares and the shares underlying the
warrants for resale under the Act for a period of one year.
During May 2003, we issued to Providence Investment Management, an accredited
investor, an aggregate of 2,500,000 shares for $.10 per share. The offer and
sale of the shares was exempt from registration under Section 4(2) of the Act.
Providence Investment Management is an accredited investor, made appropriate
investment representations, was afforded access to all public filings and all
other information that USA could reasonably obtain, and the securities contained
appropriate restrictive legends under the Act. Providence approached us about
the investment and we did not solicit Providence. We have agreed to register the
shares for resale under the Act for a period of one year.
83
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.
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.
84
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.
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.
85
During the quarter ended June 30, 2003, 50 holders of $2,196,000 principal
amount of the Senior Notes maturing in December 2003 elected to extend these
notes until December 31, 2006 and to have the conversion rate reduced from $1.25
per share to $0.20 per share. The note exchange was exempt from the registration
requirements of the Act pursuant to Section 3(a)(9) thereof.
During the quarter ended June 30, 2003, 56 holders of $1,296,397 principal
amount of the Senior Notes maturing in December 2004 elected to extend these
notes until December 31, 2007 and to have the conversion rate reduced from $0.40
per share to $0.20 per share. The shares were issued solely in exchange for our
securities and we paid no commissions in connection with the transaction. The
note exchange was exempt from the registration requirements of the Act pursuant
to Section 3(a)(9) thereof.
During the quarter ended June 30, 2003, the Company issued 3,340 shares of
Common Stock upon the conversion of 3,340 shares of Series A Preferred Stock and
issued 4,008 shares of Common Stock upon the conversion of $40,080 of cumulative
dividends accrued and unpaid on these shares of Preferred Stock. The shares were
issued solely in exchange for our securities and we paid no commissions in
connection with the transaction. The shares of Common Stock were issued pursuant
to the exemption from registration set forth in Section 3(a)(9) of the Act.
During the quarter ended September 30, 2003, the Company issued an aggregate of
535,258 shares of Common Stock to 7 holders of warrants at $0.10 per share for
an aggregate of $53,526. The Company issued 105,000 shares for consulting
services rendered or to be rendered to the Company, to the following warrants
holders upon exercise of their warrants: Rachel Glicksman- 72,000 shares;
Charlotte Given-30,000 shares; and Gary Nash- 3,000 shares. These warrants were
exercised at $.10 per share and no cash payment was required in connection with
their exercise. The shares issued for services were recorded at the market price
on the date of grant. The offer and sales of the shares was exempt from the
registration requirements of the Act under Rule 506 promulgated thereunder. In
this regard, the offer and sale thereof was to existing security holders and did
not involve any general advertising or solicitation and the securities contained
appropriate restrictive legends under the Act. The Company agreed to use its
best efforts to register the shares for resale under the Act.
During the quarter ended September 30, 2003, the Company issued an aggregate of
7,500,834 shares of Common Stock to 31 holders of its Convertible Senior Notes
upon their conversion at the rate of $0.20 per share for an aggregate of
$1,500,167. The offer and sales of the shares was exempt from the registration
requirements of the Act under Rule 506 promulgated thereunder. In this regard,
the offer and sale thereof was to existing security holders and did not involve
any general advertising or solicitation and the securities contained appropriate
restrictive legends under the Act.
During the quarter ended September 30, 2003, 54 holders of $1,116,000 principal
amount of the Senior Notes maturing in December 2003 elected to extend these
notes until December 31, 2006 and to have the conversion rate reduced from $1.25
per share to $0.20 per share. The note exchange was exempt from the registration
requirements of the Act pursuant to Section 3(a)(9) thereof.
86
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 were originally exercisable at $.20 per
share at any time through December 31, 2004. The exercise price was subsequently
reduced to $.10 per share. 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 2004 and were later reduced in price to $.10 per
share. We have agreed to register the shares underlying the warrants under the
Act for resale through June 30, 2005. The securities were offered and sold under
the exemption from registration set forth in Rule 506 promulgated under the Act.
All of the noteholders are accredited investors and existing security holders of
USA, and there was no general solicitation or advertising.
In January 2004, we issued to CEOCAST, Inc. a total of 150,000 shares for
services to be rendered to the Company. The offer and sale of the shares were
exempt from registration under Section 4(2) of the Act. The Company agreed to
use its best efforts to register the shares for resale under the Act.
87
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.
From November 3, 2004 through February 14, 2005, the Company sold $1,550,789 of
senior notes convertible into Common Shares at $.10 per share and maturing on
June 30, 2007. Interest is payable quarterly at a rate of 10% per annum. The
securities were offered and sold under the exemption from registration set forth
in Rule 506 promulgated under Section 4(2) of the Act. All of the purchasers of
the notes were accredited investors, were either pre-existing security holders
or business associates and there was no general solicitation or advertising. We
have agreed to use our best efforts to have the shares underlying the senior
notes registered for resale under the Act through June 30, 2007.
88
STOCK OPTIONS
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).
4.2 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).
4.3 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).
4.4 Registration Rights Agreement dated October 26, 2002 by and
between the Company and Kazi Management VI, Inc. (Incorporated by
reference to Exhibit 4.19 to Form SB-2 Registration Statement No.
333-101032).
89
4.5 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).
4.6 Form of 2004 Senior Note (Incorporated by reference to Exhibit
4.24 to Form SB-2 Registration Statement No. 333-101032).
4.7 Form of 2005 Senior Note (Incorporated by reference to Exhibit
4.25 to Form SB-2 Registration Statement No. 333-101032).
4.8 Addendum to 2006 Senior Note. (Incorporated by reference to
Exhibit 4.30 to Form 10-KSB filed on September 28, 2004).
4.9 Addendum to 2007 Senior Note. (Incorporated by reference to
Exhibit 4.30 to Form 10-KSB filed on September 28, 2003).
4.10 Form of Subscription Agreement for 2004-A Offering. (Incorporated
by reference to Exhibit 4.3 to Form 10-QSB filed on May 17,
2004).
4.11 Form of 2004-A Warrant Certificate. (Incorporated by reference to
Exhibit 4.34 to Form SB-2 Registration Statement No. 333-116977).
4.12 Common Stock Purchase Agreement between the Company and Steve
Illes dated June 18, 2004. (Incorporated by reference to Exhibit
4.35 to Form SB-2 Registration Statement No. 333-116977).
4.13 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).
4.14 Form of 2004-B Note. (Incorporated by reference to Exhibit 4.28
to Form S-1 Registration Statement No. 333-119951).
**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).
90
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 Employment and Non-Competition Agreement between USA and Stephen
P. Herbert dated April 4, 1996 (Incorporated by reference to
Exhibit 10.30 to Form SB-2 Registration Statement No. 333-09465).
10.4.1 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).
10.4.2 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).
10.4.3 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).
10.4.4 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).
10.5 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).
10.5.1 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)
91
10.5.2 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).
10.5.3 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).
10.5.4 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).
10.5.5 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).
10.5.6 Sixth Amendment to Employment and Non-Competition Agreement
between USA and George R. Jensen, Jr. dated February 4, 2004.
(Incorporated by reference to Exhibit 10.21.6 to Form 10-QSB
filed on February 12, 2004).
10.5.7 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).
10.5.8 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).
10.6 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).
10.7 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).
10.8 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).
10.9 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).
10.10 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).
92
10.11 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).
10.12 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).
10.13 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).
10.14 Loan Agreement between Stitch Networks Corporation and US Bancorp
dated May 22, 2001 (Incorporated by reference to Exhibit 10.42 to
Form SB-2 Registration Statement No. 333-101032).
10.15 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).
10.16 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)
10.17 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).
10.18 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).
10.19 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).
10.20 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).
10.21 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).
93
**23.1 Consent of Ernst & Young LLP, Independent Registered Public
Accounting Firm
- ----------
** Filed herewith
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
- --------------------------------------------------------------------------------
94
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.
(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.
95
(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.
96
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 February
18, 2005.
USA TECHNOLOGIES, INC.
By: /s/ George R. Jensen, Jr.
-------------------------------------
George R. Jensen, Jr., Chairman
and Chief Executive Officer
97
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, February 18, 2005
- ------------------------- Chief Executive Officer
George R. Jensen, Jr. (Principal Executive Officer)
/s/ Mary West Young Chief Financial Officer (Principal February 18, 2005
- -------------------------- Accounting Officer)
Mary West Young
/s/ William W. Sellers Director February 18, 2005
- --------------------------
William W. Sellers
/s/ Stephen P. Herbert Director February 18, 2005
- --------------------------
Stephen P. Herbert
/s/ William L. Van Alen, Jr. Director February 18, 2005
- ----------------------------
William L. Van Alen, Jr.
/s/ Douglas M. Lurio Director February 18, 2005
- --------------------------
Douglas M. Lurio
/s/ Steven Katz Director February 18, 2005
- --------------------------
Steven Katz
98
Exhibit Index
Exhibit
Number Description
- -----------------------------------------------------------------------------
5.1 Opinion of Lurio & Associates, P.C.
23.1 Consent of Ernst & Young LLP, Independent Registered Public
Accounting Firm
99
Exhibit 5.1
February 18, 2005
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 51,883,493 shares
of Common Stock ("Common Stock") which are either currently outstanding,
issuable upon exercise of warrants, or issuable upon conversion of senior notes.
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 senior notes 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
February 18, 2005.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
February 15, 2005