UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended June 30, 2005
OR
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required]
For the transition period from ______ to ______
Commission file number: 000-50054
USA TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2679963
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 Deerfield Lane, Suite 140, Malvern, PA. 19355
(Address of principal executive offices) (Zip Code)
(610)-989-0340
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, NO PAR VALUE
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to for such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] No [X]
The Company's voting securities are traded on the Over the Counter (OTC)
Electronic Bulletin Board. The aggregate market value of the voting common
equity securities held by non-affiliates of the Registrant was $48,688,456 as of
the last business day of the most recently completed second fiscal quarter,
December 31, 2004, based upon the closing price of the Registrant's Common Stock
on that date.
As of August 31, 2005, there were 442,588,262 outstanding shares of Common
Stock, no par value.
TABLE OF CONTENTS
PART I PAGE
Item 1. Business. 3
2. Properties. 15
3. Legal Proceedings. 16
4. Submission of Matters to a Vote of Security Holders. 16
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities. 17
6. Selected Financial Data. 20
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 21
7A. Quantitative and Qualitative Disclosures About Market Risk. 32
8. Financial Statements and Supplementary Data. 33
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure. 34
9A. Controls and Procedures. 34
9B. Other Information. 34
PART III
Item 10. Directors and Executive Officers of the Registrant. 34
11. Executive Compensation. 37
12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters. 42
13. Certain Relationships and Related Transactions. 44
14. Principal Accounting Fees and Services. 45
PART IV
15. Exhibits, Financial Statement Schedules. 46
USA TECHNOLOGIES, INC.
PART I
Item 1. Business.
OVERVIEW
USA Technologies, Inc. (the "Company", "We" or "Our") 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
electrical power consumption of various existing equipment, such as refrigerated
vending machines and glass front coolers, thus reducing the electrical energy
costs associated with operating this equipment.
Our customers fall into the following categories; vending machine owners and/or
operators, business center operators which include hotels and audio visual
companies, commercial laundry operators servicing colleges and universities,
brand marketers wishing to provide their products or services via kiosks or
vending machines and equipment manufacturers such as consumer electronics,
appliances, building control systems, factory equipment and computer peripherals
that would like to incorporate the technological features of our networked
devices (i.e. remote monitoring, reporting and control as well as cashless
payments) into their products. Customers for our energy management products also
include energy utility companies, schools and operators of glass front coolers.
THE TECHNOLOGY
The Company offers an end-to-end solution for control/access management, remote
monitoring, turnkey cashless payment processing and data reporting for
distributed assets such as vending machines, office equipment and laundry
equipment. This solution consists of a device (thin-client hardware or firmware)
that controls the distributed asset, a connectivity medium, and our network that
includes server-based software applications for remote monitoring and cashless
transaction processing and a central database for web-based reporting of sales,
inventory, machine diagnostic and other supply chain data.
The Client Devices
As part of its end-to-end solution, the Company offers its customers several
different client devices. These client devices range from software, or dynamic
link libraries ("DLLs"), to hardware devices consisting of control boards,
magnetic strip card readers, barcode and RFID readers, LCD screen and/or receipt
printers. The client device can be embedded inside the host equipment, such as
software residing in the central processing unit of a Kiosk; it can be
integrated as part of the host equipment, such as our e-Port(R) 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).
3
e-Port(R) is the Company's core client device, which is currently being utilized
in vending and commercial laundry applications. Our e-Port(R) 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(R) 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(R) 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(R), the TransAct(R) 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(R) is the network component of our end-to-end solution to which the
Company's devices transmit their cashless payment information for processing as
well as the valuable sales and diagnostic data for storage and reporting to our
customers. Also, the network, through server-based software applications,
provides remote management information and enables control of the networked
device's functionality.
USALive(R) 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(R) and TransAct(R)) to the USALive(R)
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.
4
Increasing wireless connectivity options, coverage and reliability and
decreasing costs, over the past few years have allowed us to service a greater
number of customer locations, since many of our customer's host equipment,
particularly within the vending industry, do not have access to any other
communication medium. Additionally, we make it easy for our customers to deploy
wireless solutions by being a single point of contact. By aggregating different
wireless networks, we ensure our customers have reliable, cost effective
nationwide coverage without the hassles of certification and administration of
multiple wireless suppliers.
ENERGY MANAGEMENT PRODUCTS
With the acquisition of Bayview in July 2003, our Company offers energy
conservation products ("Misers") that reduce the electrical power consumption of
various types of existing 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 electrical power savings over the long-term use
of the equipment. Customers of our VendingMiser(R) 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 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.
5
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 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(R) energy conservation product can serve the entire vending market.
Commercial Laundry
The domestic commercial laundry industry is estimated to be $5 billion in annual
sales and 3.5 million commercial laundry machines in operation, according to
Coin Laundry Association, October 2000 edition. The average annual growth rate
for the commercial laundry sector is estimated to be between 10% and 12%. The
Company believes the inline sale of additives (i.e. push-button selections for
detergent and softener) may lead to a significant increase in this figure due to
larger net margins over traditional industry standards. The addressable market
is primarily the seven largest laundry operators, as well as several other small
operators. These operators own and manage the equipment that is installed in
multi-housing and college and university locations. The addressable market
excludes those who own single laundromats.
6
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(R)
Developed for the vending industry, Intelligent Vending(R) is our end-to-end
vending solution. This system bundles e-Port(R), USALive(R), and its web-based
remote monitoring, management, reporting and turnkey payment processing. Our
latest improvement to Intelligent Vending(R) is the introduction of our
e-Port(R) G-5. This device is smaller due to its one-piece design and costs less
to manufacture, as compared to our e-Port(R) G-4 device. These features make it
more affordable and easier to install, improving our customers' rate of return.
Vending operators purchasing our Intelligent Vending(R) 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.
e-Suds(TM)
eSuds(TM) is our end-to-end solution developed for the commercial laundry
industry. The eSuds(TM) system bundles e-Port(R) and USALive(R) 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.
7
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(R) And Business Express(R)
TransAct(R), 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(R) device
can be sold as a stand-alone unit for customers wishing to integrate it with
their own office equipment.
Business Express(R) is a bundled solution comprised of the TransAct(R) 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 advanced 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(R) and USALive(R) 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(R) software solution, have
been installed in approximately 60 locations across the United States.
8
Energy Management Products
The Miser family of energy-control devices, include:
VendingMiser(R) - installs in a cold drink vending machine and can reduce the
electrical power consumption of the vending machine by an average of up to 46%.
CoolerMiser(TM) - reduces the electrical 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.
VM2IQ(TM) and CM2IQ(TM) - The second generation of the VendingMiser(TM) and
CoolerMiser(TM) devices that is installed directly inside the machine and has
the capability to control the cooling system and the advertising lights
separately.
SALES AND MARKETING
The Company's sales strategy includes both direct sales and channel development,
depending on the particular dynamics of each of our markets. Our marketing
strategy is diversified and includes media relations, direct mail, conferences
and client referrals. As of June 30, 2005, 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 currently control 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 installed approximately 130 e-Port(R)
devices.
Channel Sales
We currently engage in channel sales for our TransAct(TM) and Business
Express(R) products. We also work with audio-visual companies that service major
hotels.
9
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 illustrate the value of our products;
the use of direct mail campaigns; advertising in vertically-oriented trade
publications such as Vending Times, Automatic Merchandiser and Energy User News;
and cultivate a network of State governments and utility companies to provide
incentives or underwriting for our energy management products.
STRATEGIC RELATIONSHIPS
IBM Corporation
We are an official "preferred" hardware, software, and services solution
provider for IBM Corporation. We market combined information technology
solutions to customers in the intelligent vending markets. The proposed combined
product offerings include the e-Port(R) terminal and related network, and IBM's
products and services, including but not limited to managed network services,
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(R) enabled chip, which the
Company currently uses in its eSuds(TM) and Intelligent Vending(R) 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(R). Although the Company has recognized the benefit of this development
effort by incorporating the new microcontroller in our eSuds(TM) solution,, the
Company has not yet earned revenues from this agreement as of September 2005.
Mars Electronics Inc. (MEI)
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(R), our network for services and credit card transaction
capability. As of September 2005, the Company has not earned material revenues
from these agreements.
Cingular Wireless (formerly 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 (now Cingular 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.
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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
The cashless vending, remote business service and energy conservation industries
are each highly competitive markets. While the Company offers unique products
and services within smaller niche markets of these industries, a number of
competitors in the broader market may offer products and services within our
niche market in the future. In the cashless vending market, we are aware of one
direct competitor, Transaction Network Services, Inc. In the cashless laundry
market, we are aware of one direct competitor, Mac-Gray Corporation. In the
automated business center market, we are aware of three direct competitors. In
the energy management market, we are not aware of any direct competitors for our
Miser products.
The businesses which have developed unattended, credit card activated control
systems currently in use in non-vending machine applications (e.g., gasoline
dispensing, public telephones, prepaid telephone cards and ticket dispensing
machines), might be capable of developing products or utilizing their existing
products in direct competition with our e-port control systems targeted to the
vending industry. 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. Finally, the production of highly efficient
vending machines and glass front coolers or alternative energy conservation
products may reduce or replace the need for our energy management products.
The Company's key competitive factors include our unique products, our
integrated services, product performance and price. Our competitors 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 increase in competition in the future 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.
CUSTOMER CONCENTRATIONS
Approximately 36% and 39% of the Company's accounts and finance receivables at
June 30, 2005 and 2004, respectively, were concentrated with two customers.
Approximately 11 and 13% of the Company's revenues for the year ended June 30,
2005 and 2004, respectively, were concentrated with one customer and 35% was
concentrated with two customers (12% with one customer and 23% with another
customer) for the year ended June 30, 2003. The Company's customers are
principally located in the United States.
11
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 August 23, 2005, 56 United States patents and 4 Foreign patents have
been issued to the Company (including 7 patents acquired in July 2003 from
Bayview), 17 United States patents and 8 Foreign patents are pending (including
5 acquired from Bayview) and 4 patents have received notices of allowance.
The list of issued patents is as follows:
o U.S. Patent No. 5,619,024 entitled "Credit Card and Bank Issued Debit Card
Operating System and Method for Controlling and Monitoring Access of Computer
and Copy Equipment";
o U.S. Patent No. 5,637,845 entitled "Credit and Bank Issued Debit Card
Operating System and Method for Controlling a Prepaid Card
Encoding/Dispensing Machine";
o U.S. Patent No. D423,474 entitled "Dataport";
o U.S. Patent No. D415,742 entitled "Laptop Dataport Enclosure";
o U.S. Patent No. D418,878 entitled "Sign Holder";
o U.S. Patent No. 6,056,194 entitled "System and Method for Networking and
Controlling Vending Machines";
o U.S. Patent No. D428,047 entitled "Electronic Commerce Terminal Enclosure";
o U.S. Patent No. D428,444 entitled "Electronic Commerce Terminal Enclosure for
a Vending Machine";
o U.S. Patent No. 6,119,934 entitled "Credit Card, Smart Card and Bank Issued
Debit Card Operated System and Method for Processing Electronic
Transactions";
o U.S. Patent No. 6,152,365 entitled "Credit and Bank Issued Debit Card
Operated System and Method for Controlling a Vending Machine";
o U.S. Patent No. D437,890 entitled "Electronic Commerce Terminal Enclosure
with a Hooked Fastening Edge for a Vending Machine";
o U.S. Patent No. D441,401 entitled "Electronic Commerce Terminal Enclosure
with Brackets";
12
o U.S. Patent No. 6,321,985 entitled "System and Method for Networking and
Controlling Vending Machines";
o U.S. Patent No. 6,505,095 entitled "System for Providing Remote Audit,
Cashless Payment, and Interactive Transaction Capabilities in a Vending
Machine" (Stitch);
o U.S. Patent No. 6,389,337 entitled "Transacting e-commerce and Conducting
e-business Related to Identifying and Procuring Automotive Service and
Vehicle Replacement Parts" (Stitch);
o U.S. Patent No. 6,021,626 entitled "Forming, Packaging, Storing, Displaying
and Selling Clothing Articles"; and
o U.S. Patent No. 6,152,845 entitled "Credit and Bank Issued Debit Card
Operated System and Method for Controlling a Prepaid Card Encoding/Dispensing
Machine";
o U.S Patent No. 6,622,124 entitled "Method of transacting an electronic mail,
an electronic commerce, and an electronic business transaction by an
electronic commerce terminal operated on a transportation vehicle";
o U.S. Patent No. 6,615,186 entitled "Communicating interactive digital content
between vehicles and internet based data processing resources for the purpose
of transacting e-commerce or conducting e-business";
o U.S. Patent No. 6,615,183 entitled "Method of warehousing user data entered
at an electronic commerce terminal";
o U.S. Patent No. 6,611,810 entitled "Store display window connected to an
electronic commerce terminal";
o U.S. Patent No. 6,609,103 entitled "Electronic commerce terminal for
facilitating incentive-based purchasing on transportation vehicles";
o U.S. Patent No. 6,609,102 entitled "Universal interactive advertising and
payment system for public access electronic commerce and business related
products and services";
o U.S. Patent No. D478,577 entitled "Transceiver base unit";
o U.S. Patent No. 6,606,605 entitled "Method to obtain customer specific data
for public access electronic commerce services";
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";
13
o U.S. Patent No. 6,601,038 entitled "Delivery of goods and services resultant
from an electronic commerce transaction by way of a pack and ship type
company";
o U.S. Patent No. 6,601,037 entitled "System and method of processing credit
card, e-commerce, and e-business transactions without the merchant incurring
transaction processing fees or charges worldwide";
o U.S. Patent No. D477,030 entitled "Vending machine cashless payment
terminal";
o U.S. Patent No. D476,037 entitled "User interface bracket for a point of sale
terminal";
o U.S. Patent No. D476,036 entitled "Printer bracket for point of sale
terminal";
o U.S. Patent No. D475,751 entitled "User interface bracket for a point of sale
terminal";
o U.S. Patent No. D475,750 entitled "Paper guide for a point of sale terminal";
o U.S. Patent No. D475,414 entitled "Printer bracket for point of sale
terminal";
o U.S. Patent No. 5,844,808 entitled "Apparatus and methods for monitoring and
communicating with a plurality of networked vending machines";
o U.S. Patent No. 6,581,396 entitled "Refrigerated vending machine exploiting
expanded temperature variance during power-conservation mode";
o U.S. Patent No. 6,389,822 entitled "Refrigerated vending machine exploiting
expanded temperature variance during power-conservation mode";
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";
14
o U.S. Patent No. 6,856,820 entitled "An in-vehicle device for wirelessly
connecting a vehicle to the internet and for transacting e-commerce and
e-business";
o U.S. Patent No. 6,895,310 entitled "Vehicle related wireless scientific
instrumentation telematics";
o U.S. Patent No. 6,931,869 entitled "Refrigerated vending machine exploiting
expanded temperature variance during power-conservation mode";
o Canadian Patent No. D199-1014 entitled "Sign holder";
o Canadian Patent No. D199-1038 entitled "Laptop data port enclosure";
o Canadian Patent No. 2,291,015 entitled "Universal interactive advertising and
payment system for public access electronic commerce and business related
products and services"; and
o Australian Patent No. 2001263356 entitled "Refrigerated vending machine
exploiting expanded temperature variance during power-conservation mode".
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 important in protecting its intellectual
property used in its e-Port(R) control system targeted to the vending industry.
The patent expires in July 2021.
RESEARCH AND DEVELOPMENT
Research and development expenses, which are included in general and
administrative and compensation expense in the Consolidated Statements of
Operations, were approximately $1,364,000, $688,000, and $1,505,000 for the
years ended June 30, 2005, 2004 and 2003, respectively.
EMPLOYEES
On August 31, 2005, the Company had 50 employees, all of whom were full-time.
Item 2. Properties
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.
During April 2005, the Company entered into an amendment to the lease covering
4,385 additional square feet that is contiguous to its existing space. The lease
term was extended to December 31, 2010, and the amendment provides for a period
of free rent for the additional space with rent of approximately $31,000 per
month commencing in September 2005 with escalating rental payments thereafter.
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.
15
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 our energy
management products. The lease terms extended through June 30, 2005 and provided
for escalating rent payments ending at $8,200 per month. The lease provided for
additional rent for a prorated share of operating costs for the entire facility.
In December 2004, the Company entered into a lease for 2,837 square feet of
space located in Denver, Colorado to replace the above-mentioned lease used for
administrative functions, sales activities and product warehousing associated
with our energy management products. The lease term extends through May 31, 2009
and provides for five months of free rent followed by rent payments of $1,200
per month and escalating payments beginning on June 1, 2006. The lease provides
for additional rent for a prorated share of operating costs for the entire
facility.
Item 3. Legal Proceedings.
As previously reported, in February 2005, a Complaint was filed against the
Company in the State Court of Fulton County, Georgia, captioned Swartz Private
Equity, L.L.C. vs. USA Technologies, Inc. (File No. 2005 VS 0777772D). The
Complaint alleges that the Company breached various agreements entered into with
Swartz Private Equity, LLC in August and September 2000 in connection with the
so-called equity line of credit provided by Swartz to the Company.
In June 2005, the Company filed an Answer, Affirmative Defenses and
Counterclaims in response to the Swartz Complaint. The Company's response denied
any liability to Swartz and sought unspecified money damages and other
affirmative relief against Swartz. The Company's filing alleged that Swartz
should be prohibited from enforcing the various agreements entered into by the
parties because Swartz had failed to register as a broker-dealer under
applicable Federal and state securities laws as required in order for Swartz to
be engaged in the business of providing equity line products. The Company's
filing also alleged that Swartz fraudulently induced the Company to enter into
the transaction by misrepresenting to the Company that Swartz was a deep pocket
investor with significant financial resources, and Swartz would make significant
investments in the Company. The Company's response states that Swartz only
provided the Company with approximately $30,000 of funding. The Company's filing
also alleged that Swartz misrepresented to the Company that it was properly
licensed under the securities laws to engage in the equity line transaction. The
Company also alleges that Swartz breached the agreements entered into between
the parties by refusing to promptly return shares to the Company that had
previously been delivered by the Company to Swartz under the equity line
arrangement.
The Company intends to vigorously defend this action and to prosecute its
counterclaims. At the present time, the Company is unable to estimate the
possible range of damages that the Company might incur should this action be
resolved against the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
16
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
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, 2005
------------------------
First Quarter (through September 30, 2004) $ 0.18 $ 0.12
Second Quarter (through December 31, 2004) $ 0.16 $ 0.10
Third Quarter (through March 31, 2005) $ 0.28 $ 0.11
Fourth Quarter (through June 30, 2005) $ 0.20 $ 0.13
Year ended June 30, 2004
------------------------
First Quarter (through September 30, 2003) $ 0.54 $ 0.34
Second Quarter (through December 31, 2003) $ 0.42 $ 0.12
Third Quarter (through March 31, 2004) $ 0.29 $ 0.15
Fourth Quarter (through June 30, 2004) $ 0.34 $ 0.17
On June 30, 2005 there were 1,423 record holders of the Common Stock and 535
record holders of the Preferred Stock.
The holders of the Common Stock are entitled to receive such dividends as the
Board of Directors of the Company may from time to time declare out of funds
legally available for payment of dividends. Through the date hereof, no cash
dividends have been declared on the Company's Common Stock or Preferred Stock.
No dividend may be paid on the Common Stock until all accumulated and unpaid
dividends on the Preferred Stock have been paid. As of June 30, 2005, such
accumulated unpaid dividends amounted to $7,461,293.
17
As of June 30, 2005, 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 2,009,972(a) $0.25 14,108,693(b)
a) Represents stock options outstanding as of June 30, 2005 for the purchase of
shares of Common Stock of the Company expiring at various times from February
2006 through April 2009. Of such options, 544,167 were granted to employees of
the Company and 1,465,805 to former option holders of Stitch Networks
Corporation. 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 108,693
shares of Common Stock issuable under the Company's 2004-B 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 2007). 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. The right to receive the
shares is irrevocable and fully vested, and the rights have no expiration date
and will not be affected by the termination of the CEO's employment with the
Company for any reason whatsoever. The shares issuable to Mr. Jensen have not
been reserved for issuance by the Company and are not reflected or included in
the number of issued and outstanding shares of the Company on a fully diluted
basis in this Form 10-K.
18
The Company's Board of Directors established and authorized the 2004-B Stock
Compensation Plan in October 2004 for use in compensating employees, directors
and consultants through the issuance of shares of Common Stock of the Company.
There were 500,000 shares authorized under the Plan. The underlying shares for
the Plan have been registered with the Securities and Exchange Commission as an
employee benefit plan under Form S-8. As of June 30, 2005 there were 108,693
shares available for future issuance under the Plan.
As of June 30, 2005, shares of Common Stock reserved for future issuance were as
follows:
2,009,972 shares issuable upon the exercise of stock options at exercise
prices ranging from $.165 to $2.00 per share
32,132,019 shares issuable upon the exercise of common stock warrants at
exercise prices ranging from $.07 to $1.25 per share
522,742 shares issuable upon the conversion of outstanding Preferred
Stock
73,382,480 shares issuable upon the conversion of Senior Notes having an
aggregate face value of $11,926,534
16,500,000 shares issuable to an accredited investor under the 2005
Common Stock Agreement
108,693 shares issuable the 2004-B Stock Compensation Plan
RECENT SALES OF UNREGISTERED SECURITIES
During the quarter ended June 30, 2005, the Company sold 23,333,333 shares of
Common Stock at $.15 per share for an aggregate of $3,500,000 ("2005-D Private
Placement Offering"). For each share purchased, the Company granted a warrant to
purchase one share of Common Stock exercisable at $.15 per share at anytime
prior to December 31, 2005. The Company issued warrants to purchase a total of
23,333,333 shares. We have agreed to register the shares and the shares
underlying the warrants under the Act for resale through December 31, 2006. 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. The offer and sale thereof did not involve any general advertising or
solicitation and the securities contained appropriate restrictive legends under
the Act.
During the quarter ended June 30, 2005, the Company issued to Steve Illes
3,500,000 shares of Common Stock for an aggregate purchase price of $420,000
pursuant to a Common Stock Purchase Agreement dated April 4, 2005 between Mr.
Illes and the Company. The offer and sale of the shares were exempt from
registration under Rule 506 promulgated 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 the Company
could reasonably obtain. We have agreed to register the shares for resale under
the Act through May 13, 2007.
On April 12, 2005 the Company issued its Chief Financial Officer, David DeMedio,
options to purchase 300,000 shares of Common Stock for $.20 per share, which
vested 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.
19
Item 6. Selected Financial Data.
Year ended June 30
2005 2004 2003 2002 2001
---------------------------------------------------------------------------------
OPERATIONS DATA
Revenues $ 4,677,989 $ 5,632,815 $ 2,853,068 $ 1,682,701 $ 1,451,002
Loss before cumulative effect of
accounting change $(15,499,190) $(21,426,178) $(21,965,499) $(17,314,807) $ (10,135,244)
Cumulative effect of accounting change -- -- -- -- (821,000)
---------------------------------------------------------------------------------
Net loss (15,499,190) (21,426,178) (21,965,499) (17,314,807) (10,956,244)
Cumulative preferred dividends (784,113) (786,513) (793,586) (822,561) (836,541)
---------------------------------------------------------------------------------
Loss applicable to common shares $(16,283,303) $(22,212,691) $(22,759,085) $(18,137,368) $ (11,792,785)
=================================================================================
Loss per common share (basic and diluted)
Loss before cumulative effect of
accounting change $ (0.04) $ (0.08) $ (0.20) $ (0.50) $ (0.65)
Cumulative effect of accounting
change -- -- -- -- (0.05)
---------------------------------------------------------------------------------
Net loss $ (0.04) $ (0.08) $ (0.20) $ (0.50) $ (0.70)
=================================================================================
Cash dividends per common share
$ -- $ -- $ -- $ -- $ --
BALANCE SHEET DATA
Total assets $ 23,391,765 $ 25,880,577 $ 17,892,681 $ 17,056,773 $ 6,180,061
Convertible Senior Notes and other
long-term debt $ 7,984,494 $ 6,630,405 $ 8,033,083 $ 7,117,453 $ 4,289,858
Shareholders' equity (accumulated deficit) $ 9,309,185 $ 14,108,662 $ 3,692,083 $ 3,395,892 $ (2,400,897)
20
Item 7. Management's 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 of product by the vending customer. The Company
estimates an allowance for product returns at the date of sale.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs pursuant to Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed", after technological
feasibility of the software is established and through the product's
availability for general release to the Company's customers. All costs incurred
in the research and development of new software and costs incurred prior to the
establishment of technological feasibility are expensed as incurred.
Amortization of software development costs commences when the product becomes
available for general release to customers. Amortization of software development
costs is calculated as the greater of the amount computed using (i) the ratio
that current gross revenues for a product bear to the total of current and
anticipated future gross revenues of that product or (ii) the straight-line
method over the remaining estimated economic life of the product. The Company
reviews the unamortized software development costs at each balance sheet date
and, if necessary, will write down the balance to net realizable value if the
unamortized costs exceed the net realizable value of the asset.
During May 2000, the Company reached technological feasibility for the
development of the multi-media e-Port(TM) product, a previous generation of our
product with vending machine advertising capabilities, 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".
21
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, 2005 and June 30, 2004 and $4,327,526 at
June 30, 2003. Amortization expense was approximately $999,000 and $1,331,000
during the year ended June 30, 2004 and 2003, respectively. Such amortization is
reflected in cost of sales in the accompanying consolidated statements of
operations.
IMPAIRMENT OF LONG LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-lived Assets" ("FAS 144"),
the Company reviews its long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. If the carrying amount of an asset or group of assets exceeds its
net realizable value, the asset will be written down to its fair value. In the
period when the plan of sale criteria of FAS 144 are met, long-lived assets are
reported as held for sale, depreciation and amortization cease, and the assets
are reported at the lower of carrying value or fair value less costs to sell.
During the fourth quarter of fiscal year 2003, the Company reviewed certain
long-lived assets (vending machines) and determined that such assets were
impaired. These vending machines were used and intended for use in connection
with the Company's program with Kodak to sell disposable cameras and film
pursuant to the Kodak Vending Placement Agreement. Management determined that it
was more likely than not that these vending machines would be disposed of before
the end of their previously estimated useful lives. The estimated undiscounted
cash flows for this group of assets was less than the carrying value of the
related assets. As a result, the Company recorded a charge of approximately
$321,000 representing the difference between the fair value as determined from a
quoted market price and the carrying value of the group of assets. Such amount
is reflected in depreciation expense in the 2003 Consolidated Statement of
Operations.
Effective December 31, 2003, the Kodak agreement was terminated (Note 14). As a
result, the carrying value of the vending machines were further impaired and a
charge of approximately $367,000 was recorded as a component of the gain on
contract settlement in the June 30, 2004 Consolidated Statement of Operations to
reflect these assets at their realizable value. The remaining value of these
vending machines was then recorded as assets held for sale in the Consolidated
Balance Sheets as of June 30, 2004. During the year ended June 30, 2005, the
Company wrote off the remaining value of the vending machines that had not been
sold during the year as a loss on contract settlement.
22
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 April 1, 2003, April 2004 and April 1, 2005.
Intangible assets include patents, trademarks and non-compete arrangements
purchased in acquisitions. Amortization expense related to these intangible
assets was $1,236,600, $1,208,668 and $292,000 during the years ended June 30,
2005, 2004, and 2003, respectively.
INVESTMENTS
The Company's accounts for investments in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("FAS 115"). Management determines the appropriate
classifications of securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Available for sale securities are
carried at fair value, with the unrealized gains and losses reported as a
separate component of stockholders' equity in other comprehensive income (loss).
A judgmental aspect of accounting for investments involves determining whether
an other-than-temporary decline in value of the investment has been sustained.
If it has been determined that an investment has sustained an
other-than-temporary decline in its value, the investment is written down to its
fair value, by a charge to earnings. Such evaluation is dependent on the
specific facts and circumstances. Factors that are considered by the Company
each quarter in determining whether an other-than-temporary decline in value has
occurred include: the market value of the security in relation to its cost
basis; the financial condition of the investee; and the intent and ability to
retain the investment for a sufficient period of time to allow for recovery in
the market value of the investment. In evaluating the factors above for
available-for-sale securities, management presumes a decline in value to be
other-than-temporary if the quoted market price of the security is below the
investment's cost basis for a period of six months or more. However, the
presumption of an other-than-temporary decline in these instances may be
overcome if there is persuasive evidence indicating that the decline is
temporary in nature (e.g., strong operating performance of investee, historical
volatility of investee, etc.).
During the 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.
23
During fiscal year 2004, the Company sold 1,669,091 of the Jubilee shares for
net proceeds of $1,471,140 and realized a gain of $603,480, with the cost of the
securities calculated by the specific identification method. An unrealized gain
of $3,080 and $32,249 on the remaining shares held by the Company is reflected
in shareholders' equity as accumulated other comprehensive income at June 30,
2005 and 2004, respectively. The 70,000 remaining shares are recorded at their
fair value of $39,467 and $68,636 at June 30, 2005 and 2004, respectively.
FORWARD LOOKING STATEMENTS
This Form 10-K contains certain forward looking statements regarding, among
other things, the anticipated financial and operating results of the Company.
For this purpose, forward looking statements are any statements contained herein
that are not statements of historical fact and include, but are not limited to,
those preceded by or that include the words, "believes," "expects,"
"anticipates," or similar expressions. Those statements are subject to known and
unknown risks, uncertainties and other factors that could cause the actual
results to differ materially from those contemplated by the statements. The
forward looking information is based on various factors and was derived using
numerous assumptions. Important factors that could cause the Company's actual
results to differ materially from those projected, include, for example (i) the
ability of the Company to generate sufficient sales to generate operating
profits, or to sell products at a profit, (ii) the ability of the Company to
raise funds in the future through sales of securities, (iii) whether the Company
is able to enter into binding agreements with third parties to assist in product
or network development, (iv) the ability of the Company to commercialize its
developmental products, or if actually commercialized, to obtain commercial
acceptance thereof, (v) the ability of the Company to compete with its
competitors to obtain market share, (vi) the ability of the Company to obtain
sufficient funds through operations or otherwise to repay its debt obligations
including but not limited to Senior Notes, or to fund development and marketing
of its products; (vii) the ability of the Company to obtain approval of its
pending patent applications, (viii) the ability of the Company to satisfy its
trade obligations included in accounts payable and accrued liabilities, and (ix)
the ability of the Company to predict or estimate its future quarterly or annual
revenues given the developing and unpredictable market for its products and the
lack of established revenues. Although the Company believes that the forward
looking statements contained herein are reasonable, it can give no assurance
that the Company's expectations will be met.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 2005
Revenues for the fiscal year ended June 30, 2005 were $4,677,989, a decrease of
$954,826 or 17% from the fiscal year ended June 30, 2004. This decrease was
primarily attributed to a decrease in sales of our energy management products.
Revenues are discussed in more detail as follows:
Equipment sales: Revenues from equipment sales decreased to $3,535,064 from
$4,349,566 in the prior fiscal year, a decrease of $814,502 or 19%. This
decrease was primarily attributed to a decrease in sales of our energy
management products of approximately $1 million. This was a result of
approximately $686,000 in sales from three large customer orders in the current
fiscal year as compared to approximately $1,691,000 in sales from five large
customer orders during fiscal year 2004.
License and transaction fees: Revenues from license and transaction fees
increased $165,274 or 17% from $977,651 to $1,142,925 for the fiscal years ended
June 30, 2004 and 2005, respectively. This increase was primarily due to an
increase in license and transaction fees from our Intelligent Vending products,
which was offset by the decrease in revenues from the termination of the Kodak
Vending Placement Agreement in the prior fiscal year.
24
Product sales and other: Revenues from product sales and other decreased to $0
from $305,598 in the prior fiscal year. This decrease was due to a decrease in
camera and film sales from Company owned vending machines of approximately
$105,000 as a result of the termination of the Kodak Vending Placement Agreement
and a decrease of $200,000 relating to a one-time payment in the prior fiscal
year related to the agreement with Unilever.
Cost of sales consisted of equipment, product and labor costs of approximately
$2,431,000 and $2,503,000 for the fiscal years ended June 31, 2005 and 2004,
respectively, a decrease of $72,000; software development amortization of
approximately $0 and $999,000 for the fiscal years ended June 30, 2005 and 2004,
respectively; and network and transaction related costs of $1,048,000 and
$828,000 for the years ended June 30, 2005 and 2004, respectively, an increase
of $220,000. The total decrease of $851,019 or 20% in cost of sales from
$4,329,692 to $3,478,673 for the years ended June 30, 2004 and 2005,
respectively, was principally attributable to the decrease in equipment sales
and the lack of software development costs.
Gross profit for the fiscal year ended June 30, 2005 was $1,119,316, compared to
$1,303,123 for fiscal year ended June 30, 2004. The decrease of $183,807 was due
to a reduction in sales of our higher margin energy management products.
Total operating expenses for the fiscal year ended June 30, 2005 was
$13,589,523, a decrease of $5,180,899 or 28% 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 decrease are explained in further detail, below:
General and administrative expenses decreased from $6,747,824 for the fiscal
year ended June 30, 2004 to $6,429,458 for the fiscal year ended June 30, 2005,
a decrease of $318,366 or 5%. The decrease is due to decrease in bad debt
expense and consulting fees, which is partially offset by increases in public
relations expenses.
Compensation expense decreased from $10,071,354 to $5,559,945 for the fiscal
year ended June 30, 2004 and 2005, respectively, a $4,511,409 or 45% decrease
over the prior fiscal year. This decrease 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 in the prior fiscal year. Additionally compensation expense
increased by approximately $108,000 related to an increase in medical insurance
costs.
Depreciation and amortization expense for the fiscal year ended June 30, 2005
was $1,600,120, compared to $1,632,330 for the prior fiscal year, a $32,210 or
2% decrease. This decrease was attributable to assets becoming fully depreciated
during the fiscal year ended June 30, 2005.
During 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 fiscal year ended June 30,
2005.
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. There were no sales of such investments during
the year ended June 30, 2005.
25
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. During the year ended June 30, 2005, the Company wrote off
the remaining value of the vending machines that had not been sold during the
year as a loss on contract settlement totaling $42,300.
Total interest expense decreased from $5,032,351 to $3,127,751 for the fiscal
year ended June 30, 2004 and 2005, respectively, a decrease of $1,904,600 or
38%. The decrease is a result of a reduction in the number of conversions of the
Senior Notes into shares of the Company's Common Stock by Senior Note Holders.
In the prior fiscal year, these conversions resulted in additional interest
expense 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, 2005 resulted in a net loss of $15,499,190
(approximately $3.6 million of non-cash charges) compared to a net loss of
$21,426,178 (approximately $10.9 million of non-cash charges) for the prior
fiscal year.
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.
26
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.
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.
27
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.
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.
28
Product sales and other: Revenues from product sales and other increased to
$445,068 from $107,857, an increase of $337,211 or 313% from the prior fiscal
year. This increase was due to the inclusion of a full year sales of camera and
film from Company owned vending machines during fiscal year ended June 30, 2003,
as the acquisition of Stitch occurred in May 2002, the fourth quarter of fiscal
year ended June 30, 2002.
Cost of sales consisted of equipment, product and labor costs of approximately
$1,085,000 and $695,000 for the fiscal years ended June 30, 2003 and 2002,
respectively, an increase of $390,000; software development amortization of
approximately $1,331,000 and $2,996,000 for the fiscal years ended June 30, 2003
and 2002, respectively, a decrease of $1,665,000; and network and transaction
related costs of $555,000 and $372,000 for the years ended June 30, 2003 and
2002, respectively, an increase of $183,000. The total decrease of $1,091,458 or
27% in cost of sales from $4,062,901 to $2,971,443 for the years ended June 30,
2002 and 2003, respectively, was principally attributable to the decrease in
software development amortization, offset by a full year of product costs
related to the Kodak Vending Placement Agreement acquired with Stitch.
Total operating expenses for the fiscal year ended June 30, 2003 was $14,941,264
(approximately $11.6 million of non-cash charges), an increase of $1,978,300 or
15% over the prior fiscal year. The components of operating expenses (General
and administrative, Compensation, Depreciation and amortization and Loss on debt
modification) and the causes of this increase are explained in further detail,
below:
General and administrative expenses decreased from $7,868,064 for the fiscal
year ended June 30, 2002 to $7,194,684 for the fiscal year ended June 30, 2003,
a decrease of $673,380 or 9%. This decrease is due to changes in the following
expenses: consulting, advertising, public relations and promotion expense
decrease of $1,368,022 for reduced corporate and investor relations services
offset by increases in product development and outside services of $926,395 for
work on the network.
Compensation expense increased to $4,973,210 for the fiscal year ended June 30,
2003, a $318,548 or 7% increase over the prior fiscal year. This increase is due
to the inclusion of salaries of $136,000 related to the Stitch operations as
well as an increase of approximately $200,000 in bonus expense during the fiscal
year ended June 30, 2003 compared to the fiscal year ended June 30, 2002.
Depreciation and amortization expense for the fiscal year ended June 30, 2003
was $1,251,716, compared to $440,238 for the prior fiscal year, an $811,478 or
184% increase. This increase was attributable to increased depreciation expense
resulting from assets acquired in the Stitch acquisition, as well as the
impairment loss of $321,476 recorded on a group of vending machines during the
fiscal year in accordance with SFAS No. 144.
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.
29
Total interest expense increased by $2,991,166, due to the greater debt carried
by the Company to finance its operations. A significant portion of interest
expense is the amortization of non-cash debt discount.
The fiscal year ended June 30, 2003 resulted in a net loss of $21,965,499
approximately $12.6 million of non-cash charges) compared to a net loss of
$17,314,807 (approximately $11.0 million of non-cash charges) for the prior
fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended June 30, 2005, net cash of $11,900,521 was used by operating
activities, primarily due to the net loss of $15,499,190 offset by non-cash
charges totaling $3,620,842 for transactions involving the issuance of Common
Stock (for services), depreciation and amortization of assets, amortization of
debt discount, and a loss on contract settlement. In addition to these non-cash
charges, the Company's net operating assets increased by $22,173 (primarily an
increase in finance receivables and other assets as well as accrued expense
reductions, which were offset by an increase in accounts payable).
For the year ended June 30, 2005, net cash used in investing activities was
$224,343, comprised of purchases of property and equipment, offset by sales of
assets held for sale related to the termination of the Kodak Vending Placement
Agreement.
Proceeds from financing activities for the year ended June 30, 2005 provided
$11,203,531 of funds, which were necessary to support cash used in operating
activities. Net proceeds of $8,004,436 were realized from the issuance of Common
Stock to an accredited investor, a private placement offering of Common Stock,
the exercise of Common Stock Warrants and the collection of Common Stock
subscriptions receivable. Net proceeds of $3,305,790 were realized from the
issuance of Senior Notes. These proceeds were reduced by payments of long-term
debt and capital leases totaling $262,808 and by the repayment of Senior Notes
totaling $143,887.
The Company has incurred losses since inception. Cumulative losses through June
30, 2005 amounted to approximately $112,900,000. The Company has continued to
raise capital through equity and debt offerings to fund operations.
During the year ended June 30, 2005, cash used in operating activities was
approximately $992,000 per month. During the second half of fiscal year 2005,
the Company made efforts to improve its working capital management. For the six
months ended June 30, 2005, cash used in operating activities was approximately
$927,000 per month. Using the second half of the prior fiscal year as a basis
for estimating cash requirements for the year ending June 30, 2006 (which
assumes a static level of revenues), cash requirements for the fiscal year 2006,
including requirements for capital expenditures and repayments of long-term
debt, would be approximately $12,600,000.
As of June 30, 2005, the Company had approximately $2,000,000 of cash and cash
equivalents on hand.
30
On April 4, 2005, the Company and an accredited investor entered into a new
Common Stock Purchase Agreement ("2005 Common Stock Agreement") that terminates
August 11, 2007. Pursuant to the 2005 Common Stock Agreement, the investor
agreed to purchase shares of the Company's Common Stock, provided that the
aggregate purchase price does not exceed $10,000,000. Under the 2005 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. During any calendar month, the investor cannot be required by the
Company to purchase Common Stock for an aggregate purchase price in excess of
$800,000. 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. Although the Company filed a registration statement
related to this agreement that included 20,500,000 shares of Common Stock and
was effective May 13, 2005, 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 issued
500,000 shares of Common Stock ($90,000) to the investor as a due
diligence/commitment fee in connection with this agreement. In addition to the
due diligence fee, the Company incurred $48,542 of other stock issuance costs in
connection with the 2005 Common Stock Agreement during the year ended June 30,
2005. During the year ended June 30, 2005, the Company issued 3,000,000 shares
of Common Stock under the 2005 Common Stock Agreement for total gross proceeds
of $420,000. From July 1 to September 23, 2005, the Company issued an additional
9,929,923 shares of Common Stock under the 2005 Common Stock Agreement for total
gross proceeds of $1,297,890. As of September 23, 2005, there are approximately
7,000,000 shares that remain registered for issuance under the 2005 Common Stock
Agreement. Based upon a share price of $.14, there is approximately $980,000 of
available funds.
On September 26, 2005, the Company approved a private placement offering
(non-dilutive) of up to $2,000,000 of principal amount 10% Senior Notes due
December 31, 2008 (the "2008-B Senior Notes"). The offering will terminate on
November 30, 2005. Interest on the 2008-B Senior Notes shall be paid on a
quarterly basis in arrears at the rate of 10% per annum with the outstanding
principal amount of the 2008-B Senior Notes together with all accrued and unpaid
interest thereon to be paid in full no later than December 31, 2008. In
addition, for each $10,000 investment in the 2008-B Senior Notes, the subscriber
would also receive a special purchase right to purchase up to 100,000 shares of
Common Stock at $.20 per share at any time on or before December 31, 2008. If
all of the Senior Notes are sold, the Company would issue special purchase
rights to acquire up to 20,000,000 shares of Common Stock. As of the date
hereof, the number of issued and outstanding shares on a fully diluted basis is
slightly less than the number of our authorized shares. As a result, the Common
Stock underlying the special purchase rights has not and will not be reserved
for issuance by the Company. The special purchase rights are non-dilutive and
can only be exercised if the shares issuable upon the exercise of the special
purchase rights are made available through the prepayment by the Company of the
currently outstanding Convertible Senior Notes that are convertible at $.20 per
share. As of the date hereof, there are approximately $9,000,000 principal
amount of these Convertible Senior Notes currently outstanding. The holders of
the special purchase rights shall provide the Company with at least 14-days
advance notice of the intent to exercise the special purchase rights. If the
Company is not able to make the shares available through the repayment of the
existing Convertible Senior Notes during such period, then the holder shall not
be able to exercise the special purchase rights and the special purchase rights
attempted to be exercised shall be deemed null and void. In such event, the
appropriate principal amount of the related 2008-B Senior Note (i.e., $10,000
principal amount for each 100,000 of purchase rights) shall become due and
payable by the Company within six months. In addition, the interest rate on the
principal amount of the related 2008-B Senior Note shall increase from 10% to
12% per annum effective retroactively from and after the original issuance date
of the related 2008-B Senior Note. The 2008-B Senior Notes as well as any shares
to be issued upon exercise of the special purchase rights have not been
registered under the Act and can not be sold or transferred unless the shares or
the 2008-B Senior Notes are so registered or are transferred or sold pursuant to
an exemption from registration.
31
Funding sources in place to meet the Company's cash requirements for the year
ending June 30, 2006 are primarily comprised of approximately $2,000,000 in cash
and cash equivalents on hand as of June 30, 2005, the proceeds that are
available under the 2005 Common Stock Purchase Agreement detailed above
($980,000 at $0.14 per share), the proceeds anticipated to be received in
connection with the sales of the 2008-B Senior Notes of up to $2,000,000, and
future exercises of warrants issued in connection with the 2005-D Private
Placement Offering (none of which are in the money as of the date hereof,
however could generate proceeds of approximately $3,500,000 if exercised at
$0.15). The Company believes these sources should provide sufficient funds
through March 31, 2006, including repayment of approximately $900,000 of Senior
Notes scheduled to mature on December 31, 2005. Subsequent to March 31, 2006,
and assuming that there would be no material increase in revenues, the Company
anticipates meeting its liquidity needs through a combination of issuing debt
securities or additional equity securities. If the Company is required to issue
additional equity securities, the Company would be required to increase the
number of its authorized and outstanding shares, as the number of issued and
outstanding shares on a fully diluted basis as of the date hereof is only
slightly less than the number of authorized shares (560,000,000). As an
alternative, we would have to significantly reduce our expenses and operations
to remain in business.
Item 7A. 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.
32
Item 8. Financial Statements and Supplementary Data.
USA TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements:
Reports of Independent Registered Public Accounting Firms.................F-1
Consolidated Balance Sheets...............................................F-3
Consolidated Statements of Operations.....................................F-4
Consolidated Statements of Shareholders' Equity...........................F-5
Consolidated Statements of Cash Flows.....................................F-8
Notes to Consolidated Financial Statements...............................F-10
33
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders of
USA Technologies, Inc.
We have audited the accompanying consolidated balance sheet of USA Technologies,
Inc. as of June 30, 2005 and the related consolidated statement of operations,
shareholders' equity, and cash flows for the year then ended. Our audit also
included the June 30, 2005 balances in the financial statement schedule listed
in Item 15(b). These consolidated financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.
We conducted our audit 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 audit provides 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, 2005 and the consolidated results of its operations and its
cash flows for the year then ended, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related June 30, 2005 balances
in the 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 the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a working capital deficiency that raise substantial doubt about its
ability to continue as a going concern. Management's plan in regard to these
matters is also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Goldstein Golub Kessler LLP
New York, NY
September 2, 2005
F-1
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 the related consolidated statements
of operations, shareholders' equity, and cash flows for each of the two years in
the period ended June 30, 2004. Our audits also included the June 30, 2004 and
2003 balances in the financial statement schedule listed in Item 15(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 the consolidated results of its operations and its
cash flows for each of the two years in the period ended June 30, 2004, in
conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the June 30, 2004 and 2003 balances in 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-2
USA Technologies, Inc.
Consolidated Balance Sheets
June 30
--------------------------------
2005 2004
------------- -------------
Assets
Current assets:
Cash and cash equivalents $ 2,097,881 $ 3,019,214
Accounts receivable, less allowance for
uncollectible accounts of $196,000
and $240,000 as of 2005 and 2004,
respectively 744,041 771,722
Finance receivables 255,595 162,874
Inventory 1,697,236 1,707,684
Prepaid expenses and other current assets 240,324 234,448
Subscriptions receivable 35,723 300,000
Investment 39,467 68,636
Assets held for sale - 46,200
------------- -------------
Total current assets 5,110,267 6,310,778
Finance receivables, less current portion 269,722 141,262
Property and equipment, net 684,927 602,953
Intangibles, net 9,595,232 10,831,832
Goodwill 7,663,208 7,985,208
Other assets 68,409 8,544
------------- -------------
Total assets $ 23,391,765 $ 25,880,577
============= =============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 3,265,928 $ 2,929,491
Accrued expenses 1,479,352 1,569,368
Current obligations under long-term debt 100,646 240,764
Convertible Senior Notes 1,252,161 401,887
------------- -------------
Total current liabilities 6,098,087 5,141,510
Convertible Senior Notes, less current portion 7,897,314 6,617,987
Long-term debt, less current portion 87,179 12,418
------------- -------------
Total liabilities 14,082,580 11,771,915
Commitments and contingencies (Note 16)
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
as of 2005 and 2004 (liquidation
preference of $12,688,713 and $11,904,600
as of 2005 and 2004, respectively) 3,702,856 3,702,856
Common Stock, no par value:
Authorized shares- 560,000,000 as of 2005
Issued and outstanding shares- 433,567,931
and 351,654,131 as of 2005 and 2004,
respectively 121,598,475 110,635,743
Subscriptions receivable (233,850) --
Accumulated other comprehensive income 3,080 32,249
Accumulated deficit (115,761,376) (100,262,186)
------------- -------------
Total shareholders' equity 9,309,185 14,108,662
------------- -------------
Total liabilities and shareholders' equity $ 23,391,765 $ 25,880,577
============= =============
See accompanying notes.
F-3
USA Technologies, Inc.
Consolidated Statements of Operations
Year ended June 30
---------------------------------------------------
2005 2004 2003
------------- ------------- -------------
Revenues:
Equipment sales $ 3,535,064 $ 4,349,566 $ 1,034,427
License and transaction fees 1,142,925 977,651 1,373,573
Product sales and other - 305,598 445,068
------------- ------------- -------------
Total revenues 4,677,989 5,632,815 2,853,068
Cost of sales (including
amortization of software
development costs Note 2) 3,478,673 4,329,692 2,971,443
------------- ------------- -------------
Gross profit (loss) 1,199,316 1,303,123 (118,375)
Operating expenses:
General and administrative 6,429,458 6,747,824 7,194,684
Compensation 5,559,945 10,071,354 4,973,210
Depreciation and amortization 1,600,120 1,632,330 1,251,716
Loss on debt modification - 318,915 1,521,654
------------- ------------- -------------
Total operating expenses 13,589,523 18,770,423 14,941,264
------------- ------------- -------------
Operating loss (12,390,207) (17,467,300) (15,059,639)
Other income (expense):
Interest income 61,068 40,789 18,691
Gain (loss) on investment -- 603,480 (1,945,951)
Gain (loss) on contract
settlement (42,300) 429,204 --
Interest expense:
Coupon or stated rate (1,256,999) (1,179,322) (1,163,192)
Non-cash interest and
amortization of debt
discount (1,870,752) (3,853,029) (3,815,408)
------------- ------------- -------------
Total interest expense (3,127,751) (5,032,351) (4,978,600)
Total other income (expense) (3,108,983) (3,958,878) (6,905,860)
------------- ------------- -------------
Net loss (15,499,190) (21,426,178) (21,965,499)
Cumulative preferred
dividends (784,113) (786,513) (793,586)
------------- ------------- -------------
Loss applicable to common
shares $ (16,283,303) $ (22,212,691) $ (22,759,085)
============= ============= =============
Loss per common share (basic
and diluted) $ (0.04) $ (0.08) $ (0.20)
============= ============= =============
Weighted average number of
common shares outstanding
(basic and diluted) 389,420,433 288,476,158 111,790,358
============= ============= =============
See accompanying notes.
F-4
USA Technologies, Inc.
Consolidated Statements of Shareholders' Equity
SERIES A
CONVERTIBLE COMMON SUBSCRIPTIONS ACCUMULATED
PREFERRED STOCK STOCK RECEIVABLE DEFICIT TOTAL
-------------------------------------------------------------------------------
Balance, June 30, 2002 $ 3,749,158 $ 56,588,503 $ (149,750) $(56,792,019) $ 3,395,892
Conversion of 4,790 shares of
Preferred Stock to 4,790
shares of Common $ (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)
SERIES A ACCUMULATED
CONVERTIBLE OTHER
PREFERRED COMMON SUBSCRIPTIONS COMPREHENSIVE ACCUMULATED
STOCK STOCK RECEIVABLE INCOME DEFICIT TOTAL
-----------------------------------------------------------------------------------
Exercise of 10,994,244 Common Stock
Warrants at $0.10 per share, net $ -- $ 1,094,658 $ -- $ -- $ -- $ 1,094,658
Issuance of 9,035,173 shares of Common
Stock from the conversion of 12%
Senior Notes -- 931,208 -- -- -- 931,208
Issuance of 800,580 shares of Common
Stock for employee compensation -- 107,670 -- -- -- 107,670
Issuance of 38,450,470 shares of Common
Stock to an accredited investor at
varying prices per share, less
issuance costs of $291,166 -- 3,779,454 -- -- -- 3,779,454
Issuance of 23,333,333 shares of Common
Stock from a private placement at
varying prices per share, less
issuance costs of $73,103 -- 3,426,897 (233,850) -- -- 3,193,047
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 various Senior
Notes issued -- 1,944,845 -- -- -- 1,944,845
Comprehensive loss:
Net loss -- -- -- -- (15,499,190) (15,499,190)
Unrealized loss on investment -- -- -- (29,169) -- (29,169)
------------
Total comprehensive loss (15,528,359)
------------------------------------------------------------------------------------
Balance, June 30, 2005 $ 3,702,856 $121,598,475 $(233,850) $ 3,080 $(115,761,376) $ 9,309,185
====================================================================================
See accompanying notes.
F-7
USA Technologies, Inc.
Consolidated Statements of Cash Flows
Year ended June 30
--------------------------------------------
2005 2004 2003
------------ ------------ ------------
OPERATING ACTIVITIES:
Net loss $(15,499,190) $(21,426,178) $(21,965,499)
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 107,670 5,042,092 2,573,301
Interest expense on the
Senior Notes paid through
the issuance of Common Stock -- 478,496 860,250
Interest amortization related
to Senior Notes and
Convertible Debentures 1,870,752 3,374,533 2,955,158
Depreciation 363,520 469,418 1,119,536
Amortization 1,236,600 2,207,329 1,623,547
Loss (gain) on sale of
investment -- (603,478) 1,945,951
Loss (gain) on contract settlement 42,300 (429,204) --
Loss on debt modification -- 318,915 1,521,654
Changes in operating assets and
liabilities:
Accounts receivable 27,680 (711,848) 116,948
Finance receivables (221,181) (73,353) (191,451)
Inventory 10,448 (1,249,784) 419,914
Prepaid expenses, deposits
and other assets (85,541) (1,732) (38,325)
Accounts payable 336,437 843,680 (759,337)
Accrued expenses (90,016) (796,342) 589,454
------------ ------------ ------------
Net cash used in operating
activities (11,900,521) (12,557,456) (9,228,899)
INVESTING ACTIVITIES
Purchase of property and
equipment (248,043) (358,033) (186,895)
Cash paid in connection with
Bayview acquisition -- (727,970) --
Cash received from the sale of
investment -- 1,471,140 --
Cash received from contract
settlement -- 674,649 --
Cash received from the sale of
assets held for sale 23,700 41,400 --
------------ ------------ ------------
Net cash provided by (used in)
investing activities (224,343) 1,101,186 (186,895)
See accompanying notes.
F-8
USA Technologies, Inc.
Consolidated Statements of Cash Flows (Continued)
Year ended June 30
--------------------------------------------
2005 2004 2003
------------ ------------ ------------
FINANCING ACTIVITIES:
Net proceeds from the issuance
of Common Stock and the
exercise of Common Stock
Purchase Warrants and Options $ 8,004,436 $ 11,889,735 $ 9,930,879
Collection of subscriptions
receivable 300,000 1,013,400 35,000
Net proceeds from the issuance
of Senior Notes 3,305,790 -- 1,833,841
Repayment of long-term debt and
Senior Notes (406,695) (812,106) (557,441)
------------ ------------ ------------
Net cash provided by financing
activities 11,203,531 12,091,029 11,242,279
------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents (921,333) 634,759 1,826,485
Cash and cash equivalents at
beginning of year 3,019,214 2,384,455 557,970
------------ ------------ ------------
Cash and cash equivalents at end
of year $ 2,097,881 $ 3,019,214 $ 2,384,455
============ ============ ============
Supplemental disclosures of cash
flow information:
Cash paid for interest $ 1,187,833 $ 1,098,727 $ 1,479,984
============ ============ ============
Purchases of equipment with
long-term debt $ 197,450 $ -- $ --
============ ============ ============
Conversion of Convertible
Preferred Stock to Common Stock $ -- $ 12,390 $ 33,912
============ ============ ============
Conversion of Cumulative
Preferred Dividends to Common
Stock $ -- $ 22,440 $ 56,050
============ ============ ============
Subscriptions receivable $ 35,723 $ 300,000 $ 1,013,400
============ ============ ============
Conversion of Senior Notes and
Debenture to Common Stock $ 931,208 $ 2,840,978 $ 1,388,442
============ ============ ============
Issuance (cancellation) of
Common Stock in connection
with Bayview acquisition $ (322,000) $ 9,278,200 $ --
============ ============ ============
Beneficial conversion feature
related to Senior Notes $ 1,944,845 $ 1,981,007 $ 2,947,130
============ ============ ============
Purchase of investment through
the issuance of Common Stock $ -- $ -- $ 2,850,000
============ ============ ============
Issuance of Common Stock in
connection with Senior Note
Conversions $ -- $ -- $ 1,664,819
============ ============ ============
See accompanying notes.
F-9
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
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 electrical power consumption of
various existing equipment, such as refrigerated vending machines and glass
front coolers, thus reducing the electrical 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 $15.5 million,
$21.4 million and $22.0 million during the fiscal years ended June 30, 2005,
2004 and 2003, respectively. Cumulative losses from its inception through June
30, 2005 amounted to approximately $112.9 million. Losses have continued through
September 2005 and are expected to continue during fiscal year 2006. The
Company's ability to meet its future obligations is dependent upon the success
of its products and services in the marketplace. Until the Company's products
and services 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.
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, 2005
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. The Company maintains its cash
in bank deposit accounts, which may exceed federally insured limits at times.
FINANCE RECEIVABLES
The Company offers extended payment terms to certain customers for equipment
sales. Finance receivables are reported net of an allowance for credit losses.
The Company does not require collateral or other security to support credit
sales, but provides an allowance for credit losses and discontinues the accrual
of interest, if necessary, based on historical experience and specifically
identified risks. Finance receivables are carried at fair value and charged off
against the allowance for credit losses when management determines that recovery
is unlikely and the Company ceases collection efforts. The Company recognizes a
portion of the loan payments as interest income based on the effective interest
rate method in the accompanying Consolidated Statement of Operations.
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 April 1, 2003, April 2004 and April 1, 2005.
Patents, trademarks and the non-compete agreement are carried at cost less
accumulated amortization, which is calculated on a straight-line basis over
their estimated economic life. The Company reviews intangible for impairment
whenever events or changes in circumstances indicate that they carrying amount
may not be recoverable. An asset is considered to be impaired when the sum of
the undiscounted future net cash flows expected to result from the use of the
asset and its eventual disposition is less than its carrying amount. The amount
of the impairment loss, if any, is measured as the difference between the net
book value of the asset and its estimated fair value.
F-11
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
2. ACCOUNTING POLICIES (CONTINUED)
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 at June 30, 2005 and June 30, 2004 and $4,327,526 at
June 30, 2003. Amortization expense was approximately $999,000 and $1,331,000
during the year ended June 30, 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.
F-12
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
2. ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-lived Assets" ("FAS 144"),
the Company reviews its long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. If the carrying amount of an asset or group of assets exceeds its
net realizable value, the asset will be written down to its fair value. In the
period when the plan of sale criteria of FAS 144 are met, long-lived assets are
reported as held for sale, depreciation and amortization cease, and the assets
are reported at the lower of carrying value or fair value less costs to sell.
During the fourth quarter of fiscal year 2003, the Company reviewed certain
long-lived assets (vending machines) and determined that such assets were
impaired. These vending machines were used and intended for use in connection
with the Company's program with Kodak to sell disposable cameras and film
pursuant to the Kodak Vending Placement Agreement. Management determined that it
was more likely than not that these vending machines would be disposed of before
the end of their previously estimated useful lives. The estimated undiscounted
cash flows for this group of assets was less than the carrying value of the
related assets. As a result, the Company recorded a charge of approximately
$321,000 representing the difference between the fair value as determined from a
quoted market price and the carrying value of the group of assets. Such amount
is reflected in depreciation expense in the 2003 Consolidated Statement of
Operations.
Effective December 31, 2003, the Kodak agreement was terminated (Note 14). As a
result, the carrying value of the vending machines were further impaired and a
charge of approximately $367,000 was recorded as a component of the gain on
contract settlement in the June 30, 2004 Consolidated Statement of Operations to
reflect these assets at their realizable value. The remaining value of these
vending machines was then recorded as assets held for sale in the Consolidated
Balance Sheets as of June 30, 2004. During the year ended June 30, 2005, the
Company wrote off the remaining value of the vending machines that had not been
sold during the year as a loss on contract settlement.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable, finance
receivables-current portion, 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 long-term
Finance Receivables and Long-Term Debt approximates book value as such
instruments are at market rates currently available to the Company. The fair
value of the Senior Notes approximates the principal amount as such instruments
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 and finance
receivables. 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 and finance receivables 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 and finance
receivables 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 36% and 39% of the
Company's accounts and finance receivables at June 30, 2005 and 2004,
respectively, were concentrated with two customers. Approximately 11% and 13% of
the Company's revenues for the year ended June 30, 2005 and 2004, respectively,
were concentrated with one customer and 35% was concentrated with two customers
(12% with one customer and 23% with another customer) for the year ended June
30, 2003. The Company's customers are principally located in the United States.
F-13
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
2. ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenue from the sale of equipment is recognized on the terms of
freight-on-board shipping point, or upon installation and acceptance of the
equipment if installation services are purchased for the related equipment.
Transaction processing revenue is recognized upon the usage of the Company's
cashless payment and control network. License fees for access to the Company's
devices and network services are recognized on a monthly basis. Product revenues
are recognized for the sale of products from Company owned vending machines when
there is purchase and acceptance of product by the vending customer. In all
cases, revenue is only recognized when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the price is fixed
and determinable, and collection of the resulting receivable is reasonably
assured. The Company estimates an allowance for product returns at the date of
sale.
WARRANTY COSTS
The Company generally warrants its products for one to three years. Warranty
costs are estimated and recorded at the time of sale based on historical
warranty experience, if available.
SHIPPING AND HANDLING
Shipping and handling fees billed to our customers in connection with sales are
recorded as revenue. The costs incurred for shipping and handling of our product
are recorded as cost of sales.
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 $1,364,000, $688,000, and $1,505,000 for the years ended June 30,
2005, 2004 and 2003, respectively.
ACCOUNTING FOR STOCK OPTIONS
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), provides companies with a choice to follow the
provisions of FAS 123 in determination of stock-based compensation expense or to
continue with the provisions of APB No. 25, "Accounting for Stock Issued to
Employees and Related Interpretations in Accounting for Stock-Compensation
Plans" ("APB 25") and the related Financial Accounting Standards Board ("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.
The pro-forma disclosures required by FAS 123 have not been included for the
years ended June 30, 2005 and 2004 as the fair value of the options granted were
not considered to be material.
As there were no stock options granted during the year ended June 30, 2003 and
all options granted through June 30, 2002 were vested as of that date, pro-forma
net loss and pro-forma net loss per common share under FAS 123 for the year
ended June 30, 2003 would be the same as reported by the Company under APB 25.
F-14
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
2. ACCOUNTING POLICIES (CONTINUED)
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 potential
common shares (approximately 125,000,000 shares as of June 30, 2005). 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, 2005 because
the assumed exercise of these securities would be anti-dilutive.
RECENT ACCOUNTING PRONOUCEMENTS
In May 2005, the FASB issued Statement of Financial Accounting Standards No.
154, "Accounting Changes and Error Corrections-a replacement of APB No.20 and
FAS No.3" ("FAS 154"). FAS 154 changes the requirements for the accounting for
and reporting of a change in accounting principle and applies to all voluntary
changes in accounting principle. The standard also applies to changes required
by an accounting pronouncement in the unusual instance that the pronouncement
does not include specific transition provisions. FAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The Company believes that implementing FAS 154 should
not have a material impact on its financial position and results of operations.
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). FIN 47 clarifies that the
term "conditional asset retirement obligation" as used in FASB Statement No.
143, "Accounting for Asset Retirement Obligations," refers to a legal obligation
to perform an asset retirement activity in which the timing and/or method of
settlement are conditional on a future event that may or may not be within the
control of the entity. Accordingly, an entity is required to recognize a
liability for the fair value of a conditional asset retirement obligation if the
fair value of the liability can be reasonably estimated. FIN 47 is effective for
fiscal years ending after December 15, 2005. The Company believes that
implementing FIN 47 should not have a material impact on its financial position
and results of operations.
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 has not determined if FAS 123(R)
will have a material impact on the Company's financial statements.
In November 2004, the FASB issued Statement of Financial Accounting Standards
No. 151, "Inventory Costs, an Amendment of ARB No. 43, Chapter 4" ("FAS 151").
FAS 151 clarifies the accounting for abnormal amounts of idle facilities,
freight, handling costs and spoilage and requires these items be recognized as
current period expenses. Also, FAS 151 requires fixed overhead costs be
allocated to inventories based on normal production capacity. FAS 151 is
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. The Company believes that implementing FAS 151 should not have a
material impact on its financial position and results of operations.
F-15
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
3. INVESTMENT IN JUBILEE INVESTMENT TRUST, PLC
During the year ended June 30, 2003, the Company issued 15,000,000 shares of its
Common Stock ($2,850,000) for an investment in 1,870,091 shares in the Jubilee
Investment Trust, PLC ("Jubilee"), a United Kingdom Investment Trust whose
shares trade on the London Stock Exchange. The Company agreed not to sell the
Jubilee shares for a period of 90 days from January 24, 2003 and to sell a
maximum of 10% of the Jubilee shares during each month thereafter. Jubilee
agreed not to sell the Company's shares of Common Stock for a period of two
years from the date of issuance unless agreed to by the Company. As this
investment declined in value below its cost basis for a period of six months or
more as of June 30, 2003, the Company determined that the decline in the market
value of this available for sale investment was "other than temporary" and,
accordingly, the Company wrote down the investment to its fair value, realizing
an impairment loss of $1,945,951 during fiscal year 2003.
During fiscal year 2004, the Company sold 1,669,091 of the Jubilee shares for
net proceeds of $1,471,140 and realized a gain of $603,480, with the cost of the
securities calculated by the specific identification method. An unrealized gain
of $3,080 and $32,249 on the remaining shares held by the Company is reflected
in shareholders' equity as accumulated other comprehensive income at June 30,
2005 and 2004, respectively. The 70,000 remaining shares are recorded at their
fair value of $39,467 and $68,636 at June 30, 2005 and 2004, respectively.
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 $112,000 and $169,000 of royalty expense was recorded during
the year ended June 30, 2005 and 2004, 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
============
F-16
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
4. ACQUISITIONS (CONTINUED)
BAYVIEW TECHNOLOGY GROUP, LLC (CONTINUED)
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 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 due to the return and cancellation of the 700,000 shares held in
escrow. The decrease in the purchase price resulted in a reduction of goodwill
and shareholders' equity of $322,000 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 would not have been
significantly different than reported had the acquisition taken place July 1,
2003 as the acquisition occurred on July 11, 2003. Pro-forma combined results
for the year ended June 30, 2003 would have been as follows had the acquisition
taken place July 1, 2002 - revenues of $8,487,190; net loss of $22,478,740; loss
applicable to common shares of $23,272,326; loss per common share (basic and
diluted) of $0.18.
STITCH NETWORKS CORPORATION
On May 14, 2002, USA Acquisition Corp., a wholly owned subsidiary of the Company
acquired Stitch pursuant to an Agreement and Plan of Merger by and among the
Company, USA Acquisition Corp., Stitch and the stockholders of Stitch.
Additionally, on May 14, 2002, the Company's shareholders voted to increase the
number of authorized shares of Common Stock to 150,000,000. The Company acquired
Stitch to strengthen its position as a leading provider of wireless remote
monitoring and cashless and mobile commerce solutions and to increase the
Company's revenue base. These revenues would include product revenues and
monthly service and transaction fees. Additionally, the acquisition of the
Stitch technology enhanced the Company's existing technology and complemented
the revenue and transaction processing revenue of the Company's existing
products. Certain Stitch personnel were believed to possess some key strengths
in several disciplines that the Company believed to be of great value in its
plans for growth.
The acquisition was accounted for using the purchase method and, accordingly,
the results of the operations of Stitch have been included in the accompanying
consolidated statements of operations since the acquisition date. The purchase
price consisted of the issuance of 22,762,341 shares of the Company's Common
Stock in exchange for the outstanding shares of Stitch, and the issuance of
warrants to purchase up to 7,587,447 shares of the Company's Common Stock at
$.40 per share at any time through June 30, 2002. The purchase price also
included the assumption of outstanding Stitch stock options that were converted
into 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".
F-17
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
4. ACQUISITIONS (CONTINUED)
STITCH NETWORKS CORPORATION (CONTINUED)
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.
INTANGIBLE ASSETS
Amortization expense relating to all acquired intangible assets was $1,236,600,
$1,208,668, and $292,000 during the years ended June 30, 2005, 2004 and 2003,
respectively. The intangible asset balance and related accumulated amortization
consisted of the following:
JUNE 30, 2005
-----------------------------------------------------
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION VALUE
-----------------------------------------------------
Intangible assets:
Trademarks $ 2,064,000 $ (328,125) $ 1,735,875
Patents 9,294,000 (2,047,222) 7,246,778
Non-Compete agreement 1,011,000 (398,421) 612,579
-----------------------------------------------------
Total $12,369,000 $(2,773,768) $ 9,595,232
=====================================================
F-18
4. ACQUISITIONS (CONTINUED)
INTANGIBLE ASSETS (CONTINUED)
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
=====================================================
At June 30, 2005 and 2004, the expected amortization of the intangible assets is
as follows: $1,200,000 per year in fiscal year 2006 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, 2005 and 2004.
5. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consist of the following:
USEFUL JUNE 30
LIVES 2005 2004
-------- -----------------------
Computer equipment and
purchased software 3 years $2,536,990 $2,206,759
Vending machines and
related components 7 years 4,427 4,427
Control systems 3 years 479,530 479,530
Furniture and equipment 5-7 years 816,537 745,341
Leasehold improvements Lease term 74,576 59,575
Vehicles 5 years 29,066 --
-----------------------
3,941,126 3,495,632
Less accumulated depreciation (3,256,199) (2,892,679)
-----------------------
$ 684,927 $ 602,953
=======================
Assets under capital lease totaled approximately $6,000, $113,000, and $180,000
as of June 30, 2005, 2004 and 2003, respectively. Capital lease amortization of
approximately $2,000, $20,000, and $46,000, is included in depreciation expense
for the years ended June 30, 2005, 2004 and 2003.
F-19
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
JUNE 30
2005 2004
-----------------------
Accrued compensation and related sales commissions $ 404,485 $ 444,302
Accrued interest 445,495 376,350
Accrued professional fees 151,220 192,633
Accrued taxes and filing fees 97,860 108,362
Accrued consulting fees 122,500 104,438
Accrued rent -- 66,662
Advanced customer billings 65,385 58,811
Accrued other 192,407 217,810
-----------------------
$1,479,352 $1,569,368
=======================
7. RELATED PARTY TRANSACTIONS
During the years ended June 30, 2005, 2004, and 2003, the Company incurred
approximately $284,000, $391,000, and $305,000, respectively, in connection with
legal services provided by a member of the Company's Board of Directors. At June
30, 2005 and 2004, approximately $25,000 and $32,000, respectively, of the
Company's accounts payable and accrued expenses were due to this Board member.
During the year ended June 30, 2005, the Company incurred approximately $72,600
in connection with consulting services provided by another member of the
Company's Board of Directors. At June 30, 2005, approximately $72,600 of the
Company's accrued expenses were due to this Board member. During the years ended
June 30, 2005, 2004 and 2003, certain Board members and executives participated
in various debt or equity offerings of the Company for total investments of
approximately $244,642, $266,250, and $661,500, respectively.
8. LONG-TERM DEBT
Long-term debt consists of the following:
JUNE 30
2005 2004
-----------------------
Bank facility $ -- $ 170,987
Working capital loans -- 46,765
Software licensing and other 186,768 28,881
Capital lease obligations 1,057 6,549
-----------------------
187,825 253,182
Less current portion 100,646 240,764
-----------------------
$ 87,179 $ 12,418
=======================
The bank facility (the "Facility") was assumed as part of the fiscal year 2002
acquisition of Stitch and was used to fund the purchase of vending machines
placed at locations where Kodak film products were sold. Borrowings were made
from time to time under the Facility, with repayment schedules set at the time
of each borrowing, including equal monthly payments over 36 months and an
interest rate based upon 495 basis points over the three year U.S. Treasury
Notes. The Company granted the bank a security interest in the vending machines.
Repayment of principal was insured by a Surety Bond issued by a third-party
insurer in exchange for an initial fee paid by the Company. The Facility matures
during the year ending June 30, 2005, due to the termination of the vending
placement agreement and the sale of the vending machines (Note 14).
F-20
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
8. LONG-TERM DEBT (CONTINUED)
The Company also assumed working capital loans in connection with of the Stitch
acquisition. These loans were collaterized by certain assets of Stitch and had
an interest rate of 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. The Company repaid these loans during
fiscal year 2005.
During fiscal year 2005, the Company entered into a loan agreement in connection
with software licensing for approximately $170,000, due in eight equal quarterly
payments of $21,229 through March 2007 at an interest rate of 5.32%.
9. INCOME TAXES
At June 30, 2005 and 2004, the Company had net operating loss carryforwards of
approximately $98,428,000 and $84,097,000, respectively, to offset future
taxable income expiring through approximately 2025. In addition, the Company had
a capital loss carryforward of approximately $1,264,000 as of June 30, 2005 and
2004 that expires in 2009. At June 30, 2005 and 2004, the Company recorded a net
deferred tax asset of approximately $39,143,000 and $34,365,000, respectively,
which was reduced by a valuation allowance of the same amount as the realization
of the deferred tax asset is not likely, principally due to the lack of earnings
history.
The timing and extent to which the Company can utilize future tax deductions in
any year may be limited by provisions of the Internal Revenue Code regarding
changes in ownership of corporations. Stitch had net operating loss
carryforwards of approximately $11,800,000 at the acquisition date. Such net
operating loss carryforwards are limited under the same provisions as to the
amount available to offset future taxable income and to the extent used in any
given year, will result in decreases to goodwill as opposed to income tax
expense.
The deferred tax assets arose primarily from the use of different accounting
methods for financial statement and income tax reporting purposes as follows:
JUNE 30
2005 2004
------------------------------
Deferred tax assets:
Net operating loss and capital loss
carryforwards $ 37,508,000 $ 32,447,000
Deferred research and development costs 373,000 548,000
Software development costs 1,297,000 1,513,000
Other 780,000 790,000
------------------------------
39,958,000 35,298,000
Deferred tax liabilities:
Intangibles (815,000) (933,000)
------------------------------
39,143,000 34,365,000
Valuation allowance (39,143,000) (34,365,000)
------------------------------
Deferred tax assets, net $ -- $ --
==============================
F-21
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
10. SENIOR NOTES
The Company has issued six 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, 2005
and 2004. These Senior Notes were scheduled to mature on December 31, 2004
("2004 Senior Notes"), December 31, 2005 ("2005 Senior Notes"), December 31,
2006 ("2006 Senior Notes"), December 31, 2007 ("2007 Senior Notes"), December
31, 2008 ("2008 Senior Notes"), and December 31, 2009 ("2009 Senior Notes"). The
Company has also issued two series of Senior Notes each with an annual interest
rate of 10% and are convertible into shares of the Company's Common Stock for
which there were outstanding obligations during the year ended June 30, 2005.
These Senior Notes were scheduled to mature on June 30, 2007 ("2004-B Senior
Notes") and December 31, 2010 ("2010 Senior Notes").
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. During January 2005, the Company repaid
$131,152 of these Senior Notes and agreed with the holders of the remaining
$320,000 of these notes to extend the maturity date to March 31, 2005. In
exchange for extending the maturity date, the Company authorized a reduction of
the conversion price to $0.10 resulting in the recording of $32,000 as debt
discount related to the intrinsic value of this beneficial conversion feature,
which was amortized through March 31, 2005. The maturity date was further
extended to June 30, 2006 in April 2005, with no other terms being modified.
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, 2005, 2004 and 2003, $21,000, $514,359 and $489,608,
respectively, of the 2005 Senior Notes were converted into 105,000, 2,571,797
and 2,448,215 shares of Common Stock, respectively.
In March 2003, the Company granted to the holders of Senior Notes due December
31, 2003 ("2003 Senior Notes") and the 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 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 year ended June 30, 2004, $1,478,000 of the 2006 Senior Notes were
converted into 7,390,000 shares of Common Stock, respectively. During the years
ended June 30, 2005 and 2004, $34,381 and $848,619, respectively, of the 2007
Senior Notes were converted into 171,907 and 4,243,097 shares of Common Stock,
respectively.
F-22
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
10. SENIOR NOTES (CONTINUED)
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 the last day of the
offering, the Company received $1,550,789 in gross proceeds from sales of the
2004-B Senior Notes and 5,637,083 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 $518,645 as
additional debt discount, which is being amortized to interest expense through
the maturity date of these Senior Notes. During the years ended June 30, 2005,
$460,827 of the 2004-B Senior Notes were converted into 4,608,266 shares of
Common Stock.
On February 23, 2005, the Company authorized the issuance of up to $1,755,000 of
Senior Notes, due April 30, 2005 to accredited investors (the "2005-B Senior
Notes") with interest payable at a rate of 10% per annum. In connection with
this offering, the Company paid a due diligence fee of $27,000 to an accredited
investor. The Company received $1,755,000 in gross proceeds from the 2005-B
Senior Note offering. On March 22, 2005, the Company authorized an offer whereby
the holders of the 2005-B Senior Notes had the right through April 30, 2005 to
exchange their 2005-B Senior Notes for Senior Notes convertible into shares of
Common Stock at $.10 per share maturing on December 31, 2010 ("2010 Senior
Notes"). Interest on the 2010 Senior Notes is payable quarterly at 10% per
annum. During March 2005, all of the 2005-B Senior Notes were exchanged for 2010
Senior Notes. 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
$1,394,200 as additional debt discount, which is being amortized to interest
expense through the maturity date of these Senior Notes. During the years ended
June 30, 2005, $415,000 of the 2010 Senior Notes were converted into 4,150,000
shares of Common Stock.
On March 22, 2005, the Company authorized an offer to the holders of the Senior
Notes whereby those holders may elect to extend the maturity date of their
Senior Notes (the "Senior Note Extension Offer"). Holders of 2005 Senior Notes
may extend their maturity to December 31, 2008 and holders of 2006 Senior Notes
may elect to extend their maturity to December 31, 2009. Principal on these
Senior Notes extended will not be prepaid prior to April 1, 2006. During the
year ended June 30, 2005, these Senior Note holders agreed to exchange an
aggregate of $1,920,651 and $1,520,000, respectively, of 2005 Senior Notes and
2006 Senior Notes for new notes maturing in 2008 and 2009. The exchange of the
2005 Senior Notes and 2006 Senior Notes to the 2008 Senior Notes and 2009 Senior
Notes was not deemed a significant modification of the terms of the Senior Notes
and, accordingly, the unamortized debt discount and other issuance costs
remaining on the 2005 Senior Notes and 2006 Senior Notes exchanged will be
amortized to interest expense through the maturity date of the new notes.
During the year ended June 30, 2003 and through December 31, 2003, the holders
of the Senior Notes had the right to purchase shares of the Company's Common
Stock at $0.20 per share using quarterly interest payments that were due in lieu
of a cash payment of the interest. Additionally, for each share purchased, the
note holder was entitled to receive a warrant to purchase one share of the
Company's Common Stock at $0.20 per share exercisable at any time through June
30, 2004 (extended to August 30, 2004). For the years ended June 30, 2004, and
2003, 1,061,284 and 2,315,000 shares of Common Stock, respectively, were issued
for payment of interest due of $212,238 and $448,647, respectively. The fair
value of the warrants issued and the beneficial conversion feature related to
the $0.20 per share rate used to convert the interest to shares of Common Stock
totaled $266,258 and $411,603 for the years ended June 30, 2004 and 2003,
respectively, and have been recorded as additional interest expense. There were
no shares of Common Stock issued for payment of interest on the Senior Notes
during the year ended June 30, 2005.
F-23
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
10. SENIOR NOTES (CONTINUED)
The Company executed a Securities Purchase Agreement, during the year ended June
30, 2002, 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,
in whole or in part, 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 various times 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
year ended June 30, 2003, the investment company converted $243,000 of the
Debenture, resulting in the issuance of 2,467,225 shares of Common Stock. The
investment company also exercised warrants resulting in the issuance of
17,465,469 and 7,206,893 shares of Common Stock and generating net cash proceeds
of $1,591,296 and $630,000 during the years ended June 30, 2004 and 2003.
A summary of the activity for the Senior Notes for the years ended June 30, 2005
and 2004 follows:
Senior Notes Maturing December 31,
-------------------------------------------------------------------------------------------------------
2003 2004 2005 2006 2007 2008 2009 2010
(2003 Senior (2004 Senior (2005 Senior (2006 Senior (2007 Senior (2008 Senior (2009 Senior (2010 Senior
Notes) Notes) Notes) Notes) Notes) Notes) Notes) Notes)
-------------------------------------------------------------------------------------------------------
Face amount of Senior Notes
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 -- -- --
Issued for cash -- -- -- -- -- -- -- --
Repayment -- (131,152) (12,735) -- -- -- -- --
2004 Senior Notes exchanged
for June 30, 2006 Senior
Notes -- (320,000) -- -- -- -- -- --
2005 and 2006 Senior Notes
exchanged for 2008 and 2009
Senior Notes -- -- (1,920,651) (1,520,000) -- 1,920,651 1,520,000 --
2005-B Senior Notes issued
for cash and subsequently
exchanged for 2010 Senior
Notes -- -- -- -- -- -- -- 1,755,000
Conversions to Common Stock -- -- (21,000) -- (34,381) -- -- (415,000)
-------------------------------------------------------------------------------------------------------
Balance, June 30, 2005 $ -- $ -- $ 1,057,405 $ 1,693,500 $ 2,985,016 $ 1,920,651 $ 1,520,000 $ 1,340,000
=======================================================================================================
Senior Notes Maturing
June 30,
---------------------------
2006 2007
(2004-B Senior
Notes)
---------------------------
Face amount of Senior Notes
Balance, June 30, 2004 $ -- $ --
Issued for cash -- 1,550,790
2004 Senior Notes exchanged
for June 30, 2006 Senior
Notes 320,000 --
Conversions to Common Stock -- (460,827)
--------------------------
Balance, June 30, 2005 $ 320,000 $ 1,089,962
==========================
F-24
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
10. SENIOR NOTES (CONTINUED)
Senior Notes Maturing December 31,
--------------------------------------------------------------------------------------------------------
2003 2004 2005 2006 2007 2008 2009 2010
(2003 Senior (2004 Senior (2005 Senior (2006 Senior (2007 Senior (2008 Senior (2009 Senior (2010 Senior
Notes) Notes) Notes) Notes) Notes) Notes) Notes) Notes)
--------------------------------------------------------------------------------------------------------
Debt discount and other
issuance costs
Unamortized costs at
June 30, 2002 $ (750,295) $(2,928,567) $ (323,988) $ -- $ -- $ -- $ -- $ --
Debt discount (created)
reduced for (issuances)
rescissions (2) 169,365 (2,933,392) (1,287,749) (621,459) -- -- --
Amortization and
write-off of unamortized
costs upon conversions
to Common Stock 448,934 1,004,748 1,104,157 183,580 24,607 -- -- --
Loss on modification
for exchanges of 2003
and 2004 Senior Notes
for 2006 and 2007 Senior
Notes 221,130 1,300,524 -- -- -- -- -- --
--------------------------------------------------------------------------------------------------------
Unamortized costs at
June 30, 2003 (80,233) (453,930) (2,153,223) (1,104,169) (596,852) -- -- --
Debt discount from
issuances -- -- -- (1,155,475) (825,532) -- -- --
Amortization and
write-off of unamortized
costs upon conversions
to Common Stock 32,803 133,180 1,052,231 1,329,255 827,064 -- -- --
Loss on modification
for exchanges of
2003 and 2004 Senior
Notes for 2006 and
2007 Senior Notes 47,430 271,485 -- -- -- -- -- --
--------------------------------------------------------------------------------------------------------
Unamortized costs at
June 30, 2004 -- (49,265) (1,100,992) (930,389) (595,320) -- -- --
Debt discount from
issuance -- -- 358,659 308,052 -- (358,659) (308,052) (1,394,200)
Amortization and
write off of unamortized
costs upon conversions
to Common Stock -- 49,265 617,089 328,148 174,933 23,911 16,213 376,778
--------------------------------------------------------------------------------------------------------
Unamortized costs at
June 30, 2005 $ -- $ -- $ (125,244) $ (294,189) $ (420,387) $ (334,748) $ (291,839) $(1,017,422)
========================================================================================================
Senior Notes reflected
in the Consolidated
Balance Sheet:
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 $ -- $ -- $ --
========================================================================================================
June 30, 2005
Face amount $ -- $ -- $ 1,057,405 $ 1,693,500 $ 2,985,016 $ 1,920,651 $ 1,520,000 $ 1,340,000
Unamortized costs -- -- (125,244) (294,189) (420,387) (334,748) (291,839) (1,017,422)
--------------------------------------------------------------------------------------------------------
$ -- $ -- $ 932,161 $ 1,399,311 $ 2,564,629 $ 1,585,903 $ 1,228,161 $ 322,578
========================================================================================================
Senior Notes Maturing
June 30,
--------------------------
2006 2007
(2004-B Senior
Notes)
--------------------------
Debt discount and other
issuance costs
Unamortized costs at
June 30, 2004 $ -- $ --
Debt discount from issuance -- (518,645)
Amortization and write off
of unamortized costs upon
conversions to Common
Stock -- 225,415
---------------------------
Unamortized costs at
June 30, 2005 $ -- $ (293,230)
===========================
Senior Notes reflected in the
Consolidated Balance Sheet:
June 30, 2005
Face amount $ 320,000 $ 1,089,962
Unamortized costs -- $ (293,230)
---------------------------
$ 320,000 $ 796,732
===========================
F-25
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
10. SENIOR NOTES (CONTINUED)
Aggregate maturities of Senior Notes as of June 30, 2005 are as follows:
2006 $ 1,377,405
2007 2,783,462
2008 2,985,016
2009 1,920,651
2010 1,520,000
2011 1,340,000
----------
$11,926,534
Less discount 2,777,059
----------
$ 9,149,475
==========
11. PREFERRED STOCK
The authorized Preferred Stock may be issued from time to time in one or more
series, each series with such rights, preferences or restrictions as determined
by the Board of Directors. Each share of Series A Preferred Stock shall have the
right to one vote and is convertible at any time into one share of Common Stock.
Each share of Common Stock entitles the holder to one voting right. Series A
Preferred Stock provides for an annual cumulative dividend of $1.50 per share
payable to the shareholders of record in equal parts on February 1 and August 1
of each year.
Cumulative unpaid dividends at June 30, 2005 and 2004 amounted to $7,461,293 and
$6,677,180, respectively. Cumulative unpaid dividends are convertible into
common shares at $10.00 per common share at the option of the shareholder.
During the years ended June 30, 2004 and 2003, certain holders of the Preferred
Stock converted 1,750 and 4,790 shares, respectively, into 1,750 and 4,790
shares of Common Stock, respectively. Certain of these shareholders also
converted cumulative preferred dividends of $22,440 and $56,050, respectively,
into 2,244 and 5,605 shares of Common Stock during the years ended June 30, 2004
and 2003, respectively. There were no conversions of preferred stock or
cumulative preferred dividends during the year ended June 30, 2005. 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 June 30, 2005. 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, 2005, 2004 and 2003 is as follows:
o On March 22, 2005, the Company authorized the issuance of up to 23,333,334
shares of Common Stock at $.15 per share to accredited investors through April
15, 2005 (the "2005-D Private Placement Offering"). For shares purchased under
the offering, the investors also received warrants to purchase an equal number
of shares of Common Stock exercisable at $.15 per share at any time prior to
December 31, 2005. The Company issued 23,333,333 shares of Common Stock and
23,333,333 Common Stock warrants under the 2005-D Private Placement Offering,
for total gross proceeds of $3,500,000. Included in this amount are
subscriptions receivable of $35,723 and $233,850 at June 30, 2005, of which
$35,723 was received in July 2005. No warrants have been exercised as of June
30, 2005. The Company incurred $73,103 of stock issuance costs in connection
with the 2005-D Private Placement Offering.
F-26
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
12. COMMON STOCK (CONTINUED)
o 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 did not exceed $7,500,000. Under the Common Stock
Agreement, the Company had 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 could require the investor to purchase shares under the Common Stock
Agreement only if the shares had been registered by the Company for resale under
the Act. Additionally, the shares were only available for purchase for a period
of one year from the date the shares were registered under the Act. During any
calendar month, the investor could not be required by the Company to purchase
Common Stock for an aggregate purchase price in excess of $700,000. The Company
registered 35,000,000 shares that were effective August 13, 2004. The Company
agreed to pay the investor a due diligence fee of $45,000 in connection with
this transaction. During the year ended June 30, 2005, the Company issued
34,950,470 shares of Common Stock under the Common Stock Agreement for total
gross proceeds of $3,560,620. In addition to the due diligence fee, the Company
incurred $152,624 of other stock issuance costs in connection with the Common
Stock Agreement during the year ended June 30, 2005.
On April 4, 2005, the Company and the same investor entered into a new Common
Stock Purchase Agreement ("2005 Common Stock Agreement") that terminates August
11, 2007. Pursuant to the 2005 Common Stock Agreement, the investor agreed to
purchase shares of the Company's Common Stock, provided that the aggregate
purchase price does not exceed $10,000,000. Under the 2005 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.
During any calendar month, the investor cannot be required by the Company to
purchase Common Stock for an aggregate purchase price in excess of $800,000. 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. Although the Company filed a registration statement related to
this agreement that included 20,500,000 shares of Common Stock and was effective
May 13, 2005, 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 issued 500,000 shares of
Common Stock ($90,000) to the investor as a due diligence/commitment fee in
connection with this agreement. In addition to the due diligence fee, the
Company incurred $48,542 of other stock issuance costs in connection with the
2005 Common Stock Agreement during the year ended June 30, 2005. During the year
ended June 30, 2005, the Company issued 3,000,000 shares of Common Stock under
the 2005 Common Stock Agreement for total gross proceeds of $420,000.
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 were 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.
F-27
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
12. COMMON STOCK (CONTINUED)
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.
On March 17, 2005, the Company's shareholders approved an increase in the number
of authorized shares of Common Stock from 475,000,000 to 560,000,000.
During the year ended June 30, 2005, warrants were exercised to purchase
10,994,244 shares of Common Stock at a share price of $0.10, generating net
proceeds of $1,094,658. 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.
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 cannot 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 800,580, 920,727, and
3,895,052 shares of Common Stock issued to certain employees and officers for
services and for professional services during the years ended June 30, 2005,
2004, and 2003, respectively. The value of these shares was based upon the fair
value of the Company's Common Stock on the dates the shares were granted and
totaled $107,670, $237,040, and $847,742 for the years ended June 30, 2005,
2004, and 2003 respectively. The value of these warrants and options was based
upon their fair value on dates they were granted and totaled $181,000.
During the year ended June 30, 2004, 500,000 shares of Common Stock were issued
to an accredited investor as settlement resulting from a non-registration event
as defined under the subscription agreement dated November 4, 2002.
F-28
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
12. COMMON STOCK (CONTINUED)
As of June 30, 2005, the Company has reserved shares of Common Stock for future
issuance for the following:
Exercise of Common Stock Options 2,009,972
Exercise of Common Stock Warrants 32,132,019
Conversions of Preferred Stock and cumulative
Preferred Stock dividends 1,268,871
Conversions of Senior Notes 73,382,480
Issuance under 2005 Common Stock Agreement 16,500,000
Issuance under 2004-B Stock Compensation Plan 108,693
-----------
Total shares reserved for future issuance 125,402,035
===========
13. COMMON STOCK WARRANTS AND OPTIONS
Common Stock Warrant activity for the years ended June 30, 2005, 2004 and 2003
was as follows:
WARRANTS
-----------
Outstanding at June 30, 2002 6,839,820
Issued 76,286,145
Exercised (18,894,241)
Cancelled (2,104,000)
-----------
Outstanding at June 30, 2003 62,127,724
Issued 18,873,932
Exercised (32,060,459)
Cancelled (15,484,006)
-----------
Outstanding at June 30, 2004 33,457,191
Issued 23,333,333
Exercised (10,994,244)
Cancelled (13,664,261)
-----------
Outstanding at June 30, 2005 32,132,019
===========
All Common Stock warrants outstanding as of June 30, 2005 were exercisable. The
following table shows exercise prices and expiration dates for warrants
outstanding as of June 30, 2005:
WARRANTS EXERCISE PRICE
OUTSTANDING PER SHARE EXPIRATION DATE
- -------------------------------------------------------------------
23,333,333 $0.15 December 31, 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
----------
32,132,019
==========
F-29
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
13. COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)
In conjunction with the 2005-D Private Placement Offering (Note 12), the Company
issued warrants to purchase 23,333,333 shares of Common Stock and are
exercisable at $.15 per share at any time prior to December 31, 2005. 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.
During the year ended June 30, 2005, Original Interest Warrants and Additional
Interest Warrants were exercised to purchase 807,494 shares of Common Stock.
Such exercises generated net proceeds of approximately $75,000, 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 year ended June 30, 2005, the Company received
$765,833 upon the exercise of 7,658,334 of these warrants at an exercise price
of $0.10 per share.
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.
The Company's Board of Directors has granted options to employees and Board
members to purchase shares of Common Stock at prices that were at or above fair
market value on the dates the options were granted. The option term and vesting
schedule were established by the contracts under which the options were granted.
In April 2004, the Company's Board of Directors established and authorized the
2004-A Stock Compensation Plan for use in compensating employees, directors and
consultants through the issuance of shares of Common Stock of the Company. There
were 500,000 shares authorized under the 2004-A Plan. As of June 30, 2005 and
2004, there were 500,000 and 500,000 shares, respectively, issued under the
2004-A 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 June 30, 2005, there were 391,307 shares issued under the
2004-B Plan.
F-30
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
13. COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)
Common Stock Option activity during the years ended June 30, 2005, 2004 and 2003
was as follows:
OPTIONS EXERCISE PRICE
OUTSTANDING PER SHARE
--------------------------------
Outstanding at June 30, 2002 5,290,485 $0.165-$5.00
Cancelled or expired (2,383,000) $0.40-$5.00
-----------------------------
Outstanding at June 30, 2003 2,907,485 $0.165-$2.50
Granted 300,000 $0.30
Exercised (223,862) $0.165
Cancelled or expired (1,086,151) $0.165-$2.50
-----------------------------
Outstanding at June 30, 2004 1,897,472 $0.165-$2.00
Granted 300,000 $0.20
Cancelled or expired (187,500) $0.30
-----------------------------
Outstanding at June 30, 2005 2,009,972 $0.165-$2.00
=============================
The following table shows exercise prices and the weighted average remaining
contractual life for options outstanding as of June 30, 2005. All Common Stock
Options outstanding as of June 30, 2005 were exercisable except for the options
granted at an exercise price of $.20 per share, none of which were exercisable
as of June 30, 2005.
OPTIONS EXERCISE PRICE WEIGHTED AVERAGE REMAINING
OUTSTANDING PER SHARE CONTRACTUAL LIFE (YEARS)
- -----------------------------------------------------------------------------
1,465,805 $0.165 1.87
300,000 $0.20 2.95
112,500 $0.30 1.31
125,000 $1.00 0.85
6,667 $2.00 0.96
---------
2,009,972
=========
During the year ended June 30, 2005, stock options were granted to one
individual to purchase 300,000 shares of Common Stock of the Company at $0.20
per share. The fair value of the stock options granted, $0.09, 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 0.922
Risk-free interest rate 4.0%
Expected life, in years 2
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 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
F-31
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
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
$0, $358,484, and $1,092,167 for the years ended June 30, 2005, 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 December 30, 2004, the Company had received $65,100 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, 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. During the year
ended June 30, 2005, the Company wrote off the remaining value of the vending
machines that had not been sold during the year as a loss on contract settlement
totaling $42,300.
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 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, 2005, 2004 and 2003 was
approximately $96,000, $78,000, and $67,000, respectively.
16. COMMITMENTS AND CONTINGENCIES
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.
During April 2005, the Company entered into an amendment to the lease covering
4,385 additional square feet that is contiguous to its existing space. The lease
term was extended to December 31, 2010, and the amendment provides for a period
of free rent for the additional space with rent of approximately $31,000 per
month commencing in September 2005 with escalating rental payments thereafter.
F-32
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
16. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 our energy
management products. The lease terms extended through June 30, 2005 and provided
for escalating rent payments ending at $8,200 per month. The lease provided for
additional rent for a prorated share of operating costs for the entire facility.
In December 2004, the Company entered into a lease for 2,837 square feet of
space located in Denver, Colorado to replace the above-mentioned lease used for
administrative functions, sales activities and product warehousing associated
with our energy management products. The lease terms extend through May 31, 2009
and provide for five months of free rent followed by rent payments of $1,200 per
month and escalating payments beginning on June 1, 2006. The lease provides for
additional rent for a prorated share of operating costs for the entire facility.
Rent expense under operating leases was approximately $447,000, $450,000, and
$292,000 during the years ended June 30, 2005, 2004 and 2003, respectively.
Future minimum lease payments subsequent to June 30, 2005 under capital and
noncancellable operating leases are as follows:
CAPITAL OPERATING
LEASES LEASES
---------------------------
2006 $ 1,060 $ 432,000
2007 -- 438,000
2008 -- 447,000
2009 -- 452,000
2010 -- 220,000
---------------------------
Total minimum lease payments $ 1,060 $1,989,000
===========================
Less amount representing interest 3
---------
Present value of net minimum lease payments 1,057
Less current obligations under capital leases 1,057
---------
Obligations under capital leases, less
current portion $ 0
=========
As of June 30, 2005, the Company had committed to purchase approximately
$529,000 of inventory from a third party contract manufacturer through December
31, 2005.
The Company has entered into an employment agreement with Mr. Jensen that
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.
F-33
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
16. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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"). The Jensen Shares have not been reserved for issuance by the Company
and are not reflected or included in the number of issued and outstanding shares
of the Company on a fully diluted basis in this Form 10-K. Mr. Jensen is not
required to pay any additional consideration for the Jensen Shares. At the time
of any USA Transaction, all of the Jensen Shares are automatically deemed to be
issued and outstanding immediately prior to any USA Transaction, and are
entitled to be treated as any other issued and outstanding shares of Common
Stock in connection with such USA Transaction.
The term USA Transaction is defined as (i) the acquisition of fifty-one percent
or more of the then outstanding voting securities entitled to vote generally in
the election of Directors of the Company by any person, entity or group, or (ii)
the approval by the shareholders of the Company of a reorganization, merger,
consolidation, liquidation, or dissolution of the Company, or the sale,
transfer, lease or other disposition of all or substantially all of the assets
of the Company. The Jensen Shares are irrevocable and fully vested, have no
expiration date, and will not be affected by the termination of Mr. Jensen`s
employment with the Company for any reason whatsoever. If a USA Transaction
shall occur at a time when there are not a sufficient number of authorized but
unissued shares of Common Stock, then the Company shall as a condition of such
USA Transaction promptly take any and all appropriate action to make available a
sufficient number of shares of Common Stock. In the alternative, the Company may
structure the USA Transaction so that Mr. Jensen would receive the same amount
and type of consideration in connection with the USA Transaction as any other
holder of Common Stock.
The Company has entered into an employment agreement with Mr. Herbert that
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.
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.
In February 2005, a Complaint was filed against the Company in the State Court
of Fulton County, Georgia, captioned Swartz Private Equity, L.L.C. vs. USA
Technologies, Inc. (File No. 2005 VS 0777772D). The Complaint alleges that the
Company breached various agreements entered into with Swartz Private Equity, LLC
in August and September 2000 in connection with the so-called equity line of
credit provided by Swartz to the Company. The Complaint alleges, among other
things, that the Company failed to issue common stock purchase warrants to
Swartz as required, and the Company did not permit the exercise by Swartz of
certain warrants already held by Swartz. The Complaint also alleges that the
Company breached certain rights of first refusal granted to Swartz to purchase
future securities offerings. The Complaint requests money damages of $4,350,381
representing the alleged value of the warrants currently held by or claimed to
be due to Swartz, money damages of $196,953 representing a termination fee
allegedly due in connection with the termination of the agreements, and
unspecified money damages relating to the alleged breach of the rights of first
refusal. The Complaint was served on the Company on March 10, 2005.
F-34
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
16. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In June 2005, the Company filed an Answer, Affirmative Defenses and
Counterclaims in response to the Swartz Complaint. The Company's response denied
any liability to Swartz and sought money damages and other affirmative relief
against Swartz. The Company alleged that the entire transaction should be
declared by the Court to be void and unenforceable because Swartz had failed to
register as a broker-dealer under applicable Federal and state securities laws
as required in order for Swartz to be engaged in the business of providing
equity line products. The Company also alleged that Swartz fraudulently induced
the Company to enter into the transaction by misrepresenting to the Company that
Swartz was a deep pocket investor with significant financial resources, and
Swartz would make significant investments in the Company. The Company's response
states that Swartz only provided the Company with approximately $30,000 of
funding. The Company alleged that it has suffered unspecified money damages as a
result of Swartz's misrepresentations and requests the Court to declare the
transaction rescinded. The Company also alleged that Swartz misrepresented to
the Company that it was properly licensed under the securities laws to engage in
the equity line transaction. The Company also alleges that Swartz breached the
agreements entered into between the parties by not being registered as a
broker-dealer as well as failing and refusing to promptly return shares to the
Company that had previously been delivered by the Company to Swartz under the
equity line arrangement.
The Company intends to vigorously defend this action and to prosecute its
counterclaims. At the present time, the Company is unable to estimate the
possible range of damages that the Company might incur should this action be
resolved against the Company.
17. QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
Unaudited quarterly results of operations for the years ended June 30, 2005 and
2004 follow and should be read in conjunction with the Company's quarterly
reports on Form 10-QSB for the fiscal year 2004 and Form 10-Q for the fiscal
year 2005.
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
----------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 2005
Revenues $ 1,032,578 $ 1,135,449 $ 1,122,330 $ 1,387,632 $ 4,677,989
Gross profit $ 130,534 $ 342,705 $ 566,720 $ 159,357 $ 1,119,316
Net loss $ (3,640,637) $ (3,805,004) $ (3,702,049) $ (4,351,500) $(15,499,190)
Cumulative preferred dividends $ (392,057) $ -- $ (392,056) $ -- $ (784,113)
Loss applicable to common shares $ (4,032,694) $ (3,805,004) $ (4,094,105) $ (4,351,500) $(16,283,303)
Loss per common share (basic and diluted) $ (0.01) $ (0.01) $ (0.01) $ (0.01) $ (0.04)
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)
18. SUBSEQUENT EVENTS (UNAUDITED)
From July 1 through September 2005, the Company issued an additional 9,929,923
shares of Common Stock to an investor under the 2005 Common Stock Agreement
(Note 12) for total gross proceeds of $1,297,890.
From July 1 through September 2005, $147,143 of the 2005 Senior Notes were
converted into 735,715 shares of Common Stock, $10,000 of the 2006 Senior Notes
were converted into 50,000 shares of Common Stock, and $40,000 of the 2010
Senior Notes were converted into 400,000 shares of Common Stock.
F-35
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9A. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures.
The principal executive officer and principal financial officer have evaluated
the Company's disclosure controls and procedures as of June 30, 2005. Based on
this evaluation, they conclude that the disclosure controls and procedures
effectively ensure that the information required to be disclosed in the
Company's filings and submissions under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
(b) Changes in internal controls.
There have been no changes during the quarter ended June 30, 2005 in the
Company's internal controls over financial reporting that have materially
affected, or are reasonably likely to materially affect, internal controls over
financial reporting.
Item 9B. Other Information.
Not Applicable.
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
DIRECTORS AND EXECUTIVE OFFICERS
Our Directors and executive officers, on September 28, 2005, together with their
ages and business backgrounds were as follows:
Name Age Position(s) Held
- ---- --- ----------------
George R. Jensen, Jr. 56 Chief Executive Officer,
Chairman of the Board of Directors
Stephen P. Herbert 42 Chief Operating Officer and
President, Director
Haven Brock Kolls, Jr. 40 Senior Vice President - Research
And Development
David M. DeMedio 34 Chief Financial Officer
William W. Sellers (1)(2) 84 Director
William L. Van Alen, Jr. (1)(2) 72 Director
Steven Katz (1) 57 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.
34
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. Mr. Jensen is also a Director of The Noah Fund, a publicly traded
mutual fund.
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.
David M. DeMedio joined USA Technologies on a full-time basis in March 1999 as
Controller. In the Summer of 2001, Mr. DeMedio was promoted to Director of
Financial Services where he was responsible for the sales and financial data
reporting to customers, the Company's turnkey banking services and maintaining
and developing relationships with credit card processors and card associations.
In July 2003, Mr. DeMedio served as interim Chief Financial Officer through
April, 2004. From April, 2004 until April 12, 2005, Mr. DeMedio served as Vice
President - Financial & Data Services. On April 12, 2005, he was appointed as
the Company's Chief Financial Officer. From 1996 to March 1999, prior to joining
the Company, Mr. DeMedio had been employed by Elko, Fischer, Cunnane and
Associates, LLC as a supervisor in its' accounting and auditing and consulting
practice. Prior thereto, Mr. DeMedio held various accounting positions with
Intelligent Electronics, Inc., a multi-billion reseller of computer hardware and
configuration services. Mr. DeMedio graduated with a Bachelor of Science in
Business Administration from Shippensburg University and is a Certified Public
Accountant.
35
William W. Sellers joined the Board of Directors of USA in May 1993. Mr. Sellers
founded The Sellers Company in 1949, which has been nationally recognized as the
leader in the design and manufacture of state-of-the-art equipment for the
paving industry. Mr. Sellers has been awarded five United States patents and
several Canadian patents pertaining to this equipment. The Sellers Company was
sold to Mechtron International in 1985. Mr. Sellers is Chairman of the Board of
Sellers Process Equipment Company, which sells products and systems to the food
and other industries. Mr. Sellers is actively involved in his community. Mr.
Sellers received his undergraduate degree from the University of Pennsylvania.
William L. Van Alen, Jr., joined the Board of Directors of USA in May 1993. Mr.
Van Alen is President of Cornerstone Entertainment, Inc., an organization
engaged in the production of feature films of which he was a founder in 1985.
Since 1996, Mr. Van Alen has been President and a Director of The Noah Fund, a
publicly traded mutual fund. Prior to 1985, Mr. Van Alen practiced law in
Pennsylvania for twenty-two years. Mr. Van Alen received his undergraduate
degree in Economics from the University of Pennsylvania and his law degree from
Villanova Law School.
Steven Katz joined the Board of Directors in May 1999. He is President of Steven
Katz & Associates, Inc., a management consulting firm specializing in strategic
planning and corporate development for technology and service-based companies in
the health care, environmental, telecommunications and Internet markets. Mr.
Katz`s prior experience includes five years with PriceWaterhouse & Co. in audit,
tax and management advisory services; two years of corporate planning with
Revlon, Inc.; five years with National Patent Development Corporation (NPDC) in
strategic planning, merger and acquisition, technology in-licensing and
out-licensing, and corporate turnaround experience as President of three NPDC
subsidiaries; and two years as a Vice President and General Manager of a
non-banking division of Citicorp, N.A. Mr. Katz is also a Director of Health
Systems Solutions Inc., Vivid Learning Systems Inc., Nanoscience Technologies
Inc. and Biophan Technologies Inc., all publicly traded companies.
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.
AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors has determined that the Company does not have an audit
committee financial expert (as defined under the rules of the Securities and
Exchange Commission) serving on its audit committee. Although the Company
believes that the current members of the audit committee have sufficient
knowledge, background, and experience to fulfill their responsibilities, the
Company realizes the importance of having a financial expert serve on its audit
committee, and plans to nominate a member to serve in this capacity before June
30, 2006.
CODE OF BUSINESS CONDUCT AND ETHICS
We have adopted a Code of Business Conduct and Ethics that applies to all
executive officers, directors and employees of the Company.
36
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's directors and executive officers, and persons who own more than 10% of
the Company's Common Stock, to file with the Securities and Exchange Commission
reports of ownership and changes in ownership of Common Stock. Officers,
directors and greater than 10% beneficial owners are required by Securities and
Exchange Commission regulations to furnish the Company with copies of all
Section 16(a) forms they file.
Stephen P. Herbert did not timely report 1 transaction and filed 1 late report;
William Van Alen, Jr. did not timely report 7 transactions and filed 2 late
reports; and William W. Sellers did not timely report 1 transaction and filed 1
late report.
Item 11. 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, 2003, June
30, 2004 and June 30, 2005 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(#)
- ------------------------------ ------ ------------ -------------- ----------------- -------------- -----------
George R. Jensen, Jr. 2005 $250,000 -- $ 17,875 -- --
Chief Executive Officer & 2004 $217,500 $4,870,000(3) $ 17,875 -- --
Chairman of the Board 2003 $189,038 $250,000 $223,211 -- --
Stephen P. Herbert 2005 $231,923 -- $ 17,875 -- --
Chief Operating Officer & 2004 $192,692 $225,000 $ 17,875 -- --
President 2003 $183,854 $225,000 $185,317 -- --
H. Brock Kolls 2005 $165,000 $110,000 $ 11,917 -- --
Senior Vice-President, 2004 $156,923 $ 60,000 $ 63,205 -- --
Research & Development 2003 $150,000 $ 25,000 $ 64,493 -- --
Adele H. Hepburn 2005 $130,000 -- -- -- --
Director of Investor 2004 $130,000 $167,075 -- -- --
Relations 2003 $ 91,000 $282,382 -- -- --
David M. DeMedio 2005 $131,689 $ 11,000 $ 7,800 -- 300,000
Chief Financial Officer (4)
(1) Fiscal year 2005, includes: a $110,000 cash bonus for Mr. Kolls and cash
bonuses totaling $11,000 for Mr. DeMedio. 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; and 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. 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.
37
(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) 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 14,000,000 shares. Under the new amended
agreement, the 14,000,000 shares became subject to dilution (i.e., did not
increase in order to reflect subsequent issuances by the Company of its shares).
Under the prior agreement, the number of shares to be issued to Mr. Jensen was
not subject to dilution (i.e., would be increased in order to reflect subsequent
issuances by the Company of its shares) and was based upon the actual total
number of shares outstanding at the time of a USA Transaction.
For example, if a USA Transaction occurred while there were 475,000,000 shares
then outstanding on a fully converted basis, Mr. Jensen would have received
33,250,000 shares under his prior agreement rather than the fixed number of
14,000,000 shares under his new amended agreement.
During July 2003, the Company issued to Mr. Jensen an aggregate of 10,500,000
shares of restricted Common Stock, 2,500,000 shares of which were issued as
compensation to Mr. Jensen, and 8,000,000 shares of which were issued to Mr.
Jensen in connection with the employment agreement amendment described above. In
accordance with generally accepted accounting principles, the Company was
required to value all of these shares at $.44 per share or an aggregate of
$4,620,000.
(4) Employment as Chief Financial Officer commenced on April 12, 2005.
OPTION GRANTS IN LAST FISCAL YEAR
(Individual Grants)
- --------------------------------------------------------------------------------
Number of Percent of Exercise Expiration
securities total options base price date
underlying granted to ($/share)
Options granted employees in
Name (#) fiscal year
- --------------------------------------------------------------------------------
David M. DeMedio 300,000 (1) 100% $.20 (2)
(1) Conditioned upon Mr. DeMedio's employment, the options vest at a
rate of 37,500 per three-month period commencing on July 31, 2005
for an aggregate of 300,000 options on April 30, 2007.
(2) The options expire two-years from the date of vesting.
38
TOTAL OPTIONS EXERCISED IN FISCAL YEAR ENDED JUNE 30, 2005 AND YEAR END VALUES
The following table gives information for options exercised by an executive
officer and an employee in fiscal year 2005, and the number of options held by
the executive officer and the employee at fiscal year end:
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
FY-End (#) FY-End($)
Shares Acquired Exercisable/ Exercisable/
Name On Exercise (#) Value Realized ($) Unexercisable Unexercisable
- -------------------------------------------------------------------------------------
Adele H. Hepburn 0 0 77,000/0 0
David M. DeMedio 0 0 0/300,000 0
- -------------------------------------------------------------------------------------
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Mr. Jensen that
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"). The Jensen Shares have not been reserved for issuance by the Company
and are not reflected or included in the number of issued and outstanding shares
of the Company on a fully diluted basis in this Form 10-K. Mr. Jensen is not
required to pay any additional consideration for the Jensen Shares. At the time
of any USA Transaction, all of the Jensen Shares are automatically deemed to be
issued and outstanding immediately prior to any USA Transaction, and are
entitled to be treated as any other issued and outstanding shares of Common
Stock in connection with such USA Transaction.
The term USA Transaction is defined as (i) the acquisition of fifty-one percent
or more of the then outstanding voting securities entitled to vote generally in
the election of Directors of the Company by any person, entity or group, or (ii)
the approval by the shareholders of the Company of a reorganization, merger,
consolidation, liquidation, or dissolution of the Company, or the sale,
transfer, lease or other disposition of all or substantially all of the assets
of the Company. The Jensen Shares are irrevocable and fully vested, have no
expiration date, and will not be affected by the termination of Mr. Jensen`s
employment with the Company for any reason whatsoever. If a USA Transaction
shall occur at a time when there are not a sufficient number of authorized but
unissued shares of Common Stock, then the Company shall as a condition of such
USA Transaction promptly take any and all appropriate action to make available a
sufficient number of shares of Common Stock. In the alternative, the Company may
structure the USA Transaction so that Mr. Jensen would receive the same amount
and type of consideration in connection with the USA Transaction as any other
holder of Common Stock.
39
The Company has entered into an employment agreement with Mr. Herbert that
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 that 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.
Ms. Hepburn has entered into an employment agreement with the Company that
expires on June 30, 2006 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.
Mr. DeMedio has entered into an employment agreement with the Company, which
expires on April 30, 2006, and is automatically renewed from year to year
thereafter unless cancelled by Mr. DeMedio or the Company. The agreement
provides for a base annual salary of $155,000 and discretionary bonuses. Mr.
DeMedio was also granted options to purchase up to 300,000 shares of Common
Stock of the Company at $.20 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 Mr. DeMedio 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 that would compete with the Company
during the term of his agreement and for a period of one year thereafter.
Effective April 8, 2005, Mary West Young resigned as Senior Vice President and
Chief Financial Officer of the Company. Effective April 12, 2005, the Company
appointed David M. DeMedio as Chief Financial Officer.
40
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.
During fiscal year 2005, we paid each of our four outside Directors $20,000 each
for serving as a Director during the fiscal year and $10,000 each for serving on
Board Committees.
41
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
COMMON STOCK
The following table sets forth, as of June 30, 2005, 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 of Common Stock Percent of
Beneficial Owner Beneficially Owned(1) of Class(2)
- ------------------- -------------------- ----------
George R. Jensen, Jr. 10,821,000 shares(3) 2.00%
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. 703,725 shares(5) *
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355
Adele H. Hepburn 3,382,760 shares(6) *
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 2,812,486 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. 3,924,955 shares(9) *
P.O. Box 727
Edgemont, Pennsylvania 19028
David M. DeMedio 282,625 shares(10) *
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355
All Directors and Executive Officers
As a Group (8 persons) 23,237,304 shares(11) 4.30%
- ---------
*Less than one percent (1%)
42
(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, 2005, are deemed to be beneficially owned for purposes hereof.
(2) On June 30, 2005 there were 432,008,931 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, and that all of the options to acquire Common Stock which have been
issued and are fully vested as of June 30, 2005 (or within 60-days of June 30,
2005) have been converted into 1,747,472 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 32,132,019 shares of Common Stock;
that all of the Senior Notes have been converted into 73,382,480 shares of
Common Stock; and that all of the accrued and unpaid dividends on the Preferred
Stock as of June 30, 2005 have been converted into 746,129 shares of Common
Stock. Therefore, 540,539,773 shares of Common Stock were treated as issued and
outstanding for purposes of computing the percentages under this table. Does not
reflect or include the shares issuable to Mr. Jensen upon a "USA Transaction".
(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 and
150,000 shares issuable to his spouse upon conversion of her Senior Note.
(6) Includes 473,044 shares of Common Stock owned by her spouse, 7,875 shares
underlying Series A Preferred Stock held by her and her spouse, 2,556,923 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.
(7) Includes 225,000 shares issuable upon conversion of Senior Notes.
(8) Includes 17,846 shares of Common Stock owned by the Sellers Pension Plan of
which Mr. Sellers is a trustee, 4,952 shares of Common Stock owned by Sellers
Process Equipment Company of which he is a Director, 10,423 shares of Common
Stock owned by Mr. Seller's wife, 551,700 shares issuable upon conversion of his
Senior Notes and 100,000 shares issuable upon the exercise of warrants.
(9) Includes 1,300,720 shares of Common Stock issuable to Mr. Van Alen upon
conversion of his Senior Notes, 512,500 shares issuable upon the exercise of
warrants and 4,000 shares of Common Stock beneficially owned by his spouse.
(10) Includes 81,500 shares of Common Stock issuable to Mr. DeMedio upon
conversion of his Senior Notes.
43
(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, 2005 the beneficial ownership of
the Preferred Stock by the Company's directors and executive officers, the other
employee named in the Summary Compensation Table set forth above, as well as by
the Company's directors and executive officers as a group. Except as set forth
below, the Company is not aware of any beneficial owner of more than five
percent of the Preferred Stock. Except as otherwise indicated, the Company
believes that the beneficial owners of the Preferred Stock listed below, based
on information furnished by such owners, have sole investment and voting power
with respect to such shares, subject to community property laws where
applicable.
Number of Shares
Name and Address of of Preferred Stock Percent
Beneficial Owner Beneficially Owned of Class(l)
- ------------------- ------------------ -----------
Adele H. Hepburn
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355
5,150 shares (2) *
All Directors and
Executive Officers
As a Group (8 persons) 0 shares *
- --------------------
* Less than 1%
(1) There were 522,742 shares of Preferred Stock issued and outstanding as of
June 30, 2005.
(2) Ms. Hepburn is an employee of the Company.
Item 13. Certain Relationships and Related Transactions.
During the fiscal year ended June 30, 2005, the Company incurred charges to
Lurio & Associates, P.C., of which Mr. Lurio is President and a shareholder, for
professional fees of approximately $284,000 for legal services rendered to the
Company by such law firm. Mr. Lurio is a Director of the Company. As of June 30,
2005, the Company had accrued approximately $25,000 for these services. During
fiscal year 2005, Mr. Lurio extended $15,000 and $30,000 of his 2005 and 2006
Senior Notes, respectively, into the 2008 and 2009 Senior Notes, respectively.
During the fiscal year ended June 30, 2005, the Company incurred charges of
approximately $72,600 in connection with consulting services provided by Steven
Katz, a Director of the Company. As of June 30, 2005, the Company had accrued
approximately $72,600 for these services.
During fiscal year 2005, William Van Alen, Jr., a Director, purchased 333,333
shares of Common Stock at $.15 per share, or $50,000, as part of the 2005-D
Private Placement. Mr. Van Alen also received warrants to purchase 333,333
shares of Common Stock at $.15 per share exercisable at any time prior to
December 31, 2005, pursuant to his investment in this offering. No value was
assigned to these warrants. Mr. Van Alen also purchased senior notes in the
principal amount of $103,405 as part of the 2004-B Senior Note offering and
extended $30,000 of his 2006 Senior Notes to 2009 Senior Notes.
44
During fiscal year 2005, William Sellers, a Director, invested $14,337 as part
of the 2004-B Senior Note offering and extended $50,000 of his 2006 Senior Notes
to 2009 Senior Notes.
During fiscal year 2005, David DeMedio, Chief Financial Officer, invested $1,900
as part of the 2004-B Senior Note offering.
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.
Item 14. Principal Accounting Fees and Services.
AUDIT AND NON-AUDIT FEES
Effective July 7, 2005, the Company dismissed Ernst & Young LLP as the Company's
independent registered public accounting firm and engaged Goldstein Golub
Kessler LLP as the Company's new independent registered public accounting firm.
Ernst & Young LLP served as the Company's independent registered public
accounting firm during the fiscal year ended June 30, 2004. Ernst & Young LLP
reviewed the Company's quarterly financial statements for the first, second, and
third quarters of the fiscal year ended June 30, 2005. Accordingly, the Company
was billed for professional services rendered by each of Ernst & Young LLP and
Goldstein Golub Kessler LLP in connection with the fiscal year ended June 30,
2005.
During the fiscal years ended June 30, 2005 and 2004, fees in connection with
services rendered by Ernst & Young LLP were as set forth below:
Fiscal 2004 Fiscal 2005
----------- -----------
Audit Fees $299,869 $177,839
Audit-Related Fees -- --
Tax Fees $ 65,321 $ 80,314
All Other Fees -- --
-------- --------
TOTAL $365,190 $258,153
During the fiscal year ended June 30, 2005, fees in connection with services
rendered by Goldstein, Golub, Kessler LLP were as set forth below:
Fiscal 2005
-----------
Audit Fees $100,000
Audit-Related Fees --
Tax Fees --
All Other Fees --
--------
TOTAL $100,000
Audit fees consisted of fees for the audit of our annual financial statements
and review of quarterly financial statements as well as services normally
provided in connection with statutory and regulatory filings or engagements,
consents and assistance with and review of Company documents filed with the
Securities and Exchange Commission.
Tax fees consisted primarily of fees for tax compliance, tax advice and tax
planning services.
There were no fees categorized as Audit-related or Other fees during fiscal
years 2004 and 2005.
45
AUDIT COMMITTEE PRE-APPROVAL POLICY
The Audit Committee's policy is to pre-approve all audit and permissible
non-audit services provided by the independent registered public accounting firm
on a case-by-case basis.
PART IV
ITEM 15. Exhibits, Financial Statement Schedules
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).
3.1.1 First Amendment to Amended and Restated Articles of Incorporation of
USA filed on March 17, 2005 (Incorporated by reference to Exhibit
3.1.1 to Form S-1 Registration Statement No. 333-124078).
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).
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).
46
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 April 4, 2005 (Incorporated by reference to Exhibit 4.13.1 to
Form S-1 Registration Statement No. 333-124078).
4.13 Form of 2004-B Note. (Incorporated by reference to Exhibit 4.28
to Form S-1 Registration Statement No. 333-119951).
4.14 Form of 2005-C Note (Incorporated by reference to Exhibit 4.15 to
Form S-1 Registration Statement No. 333-124078).
4.15 Form of Subscription Agreement for 2005-D Offering (Incorporated by
reference to Exhibit 4.16 to Form S-1Registration Statement No. 333-
124078).
4.16 Subscription Agreement between the Company and Ashford Capital
Management, Inc. dated March 28, 2005 (Incorporated by reference
to Exhibit 4.17 to Form S-1 Registration Statement No. 333-124078).
4.17 Subscription Agreement between the Company and Anvil Investment
Associates, LP dated March 28, 2005(Incorporated by reference to
Exhibit 4.18 to Form S-1 Registration Statement No. 333-124078).
10.1 Employment and Non-Competition Agreement between USA and Adele
Hepburn dated as of January 1, 1993 (Incorporated by reference to
Exhibit 10.7 to Form SB-2 Registration Statement No. 33-70992).
10.1.1 First Amendment to Employment and Non-Competition Agreement between
USA and Adele Hepburn dated as of February 4, 2004. (Incorporated by
reference to Exhibit 10.1.1 to Form 10-QSB filed on February 12,
2004).
10.2 Certificate of Appointment of American Stock Transfer & Trust
Company as Transfer Agent and Registrar dated October 8, 1993
(Incorporated by reference to Exhibit 10.23 to Form SB-2
Registration Statement No. 33-70992).
10.3 Employment and Non-Competition Agreement between USA and H. Brock
Kolls dated as of May 1, 1994 (Incorporated by reference to Exhibit
10.32 to Form SB-2 Registration Statement No. 33-70992).
10.3.1 First Amendment to Employment and Non-Competition Agreement between
USA and H. Brock Kolls dated as of May 1, 1994 (Incorporated by
reference to Exhibit 10.13.1 to Form SB-2 Registration Statement No.
333-09465).
10.3.2 Third Amendment to Employment and Non-Competition Agreement between
USA and H. Brock Kolls dated February 22, 2000 (Incorporated by
reference to Exhibit 10.3 to Form S-8 Registration Statement No.
333-341006).
10.3.3 Fourth Amendment to Employment and Non-Competition Agreement between
USA and H. Brock Kolls dated April 15, 2002. (Incorporated by
reference to Exhibit 10.4.3 to Form 10-QSB filed on February 12,
2004).
47
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).
10.4.5 Fifth Amendment to Employment and Non-Competition Agreement between
USA and Stephen P. Herbert dated February 28, 2005 (Incorporated by
reference to Exhibit 10.4 5 to Form S-1 Registration Statement No.
333-124078).
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)
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).
48
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).
10.5.9 Seventh Amendment to Employment and Non-Competition Agreement
between USA and George R. Jensen, Jr. dated February 28, 2005
(Incorporated by reference to Exhibit 10.5.9 to Form S-1
Registration Statement No. 333-124078).
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 Acquisition, Inc., Stitch Networks Corporation,
David H. Goodman, Pennsylvania Early Stage Partners, L.P., and
Maytag Holdings, Inc. (Incorporated by reference to Exhibit 2.1
to Form 10-QSB for the quarter ended March 31, 2002).
10.11 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).
49
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 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).
10.18 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).
10.19 Amendment to Office Space Lease dated as of April 1, 2005 by and
between the Company and Deerfield Corporate Center Associates, LP.
(Incorporated by reference to Exhibit 10.19.1 to Form S-1
Registration Statement No. 333-124078)
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).
10.22 Employment and Non-Competition Agreement between USA and David M.
DeMedio dated April 12, 2005 (Incorporated by reference to Exhibit
10.22 to Form S-1 Registration Statement No. 333-124078).
10.23 Option Certificate (No. 200) dated April 12, 2005 in favor of
David M. DeMedio (Incorporated by reference to Exhibit 10.23 to Form
S-1 Registration Statement No. 333-124078).
10.24 Agreement dated December 28, 2004 between USA Technologies and
PepsiCo, Inc. (Incorporated by reference to Exhibit 10.01 of Form
8-K filed July 27, 2005)
14.1 Code of Business Conduct and Ethics. (Incorporated by reference
to Exhibit 14.1 to Form 10-KSB filed on September 28, 2004).
**23.1 Consent of Ernst & Young LLP, Independent Registered Public
Accounting Firm.
**23.2 Consent of Goldstein, Golub, Kessler LLP, Independent Registered
Public Accounting Firm.
**31.1 Certifications of Chief Executive Officer pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934
**31.2 Certifications of Chief Financial Officer pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934.
**32 Certifications by the Chief Executive Officer and Chief Financial
Officer pursuant to 18 USC Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
- ------------
** Filed herewith
50
SCHEDULE II
USA TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
- --------------------------------------------------------------------------------
ACCOUNTS RECEIVABLE Deductions
Additions uncollectible
Balance at (reductions) receivables Balance
beginning of charged to written off, net at end
period earnings of recoveries of period
- --------------------------------------------------------------------------------
June 30, 2005 $240,000 (23,000) 20,000 $196,000
- --------------------------------------------------------------------------------
June 30, 2004 $ 65,000 194,000 19,000 $240,000
- --------------------------------------------------------------------------------
June 30, 2003 $ 37,000 30,000 2,000 $ 65,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INVENTORY Balance at Additions Deductions Balance
beginning of charged to shrinkage and at end
period earnings obsolescence of period
- --------------------------------------------------------------------------------
June 30, 2005 $229,000 286,000 194,000 $321,000
- --------------------------------------------------------------------------------
June 30, 2004 $ 63,000 190,000 24,000 $229,000
- --------------------------------------------------------------------------------
June 30, 2003 $244,000 76,000 257,000 $ 63,000
- --------------------------------------------------------------------------------
51
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
USA TECHNOLOGIES, INC.
By: /s/ George R. Jensen, Jr.
--------------------------
George R. Jensen, Jr., Chairman
and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURES TITLE DATE
- ----------- ----- ----
/s/ George R. Jensen, Jr. Chairman of the Board of Directors September 28, 2005
- ------------------------- and Chief Executive Officer
George R. Jensen, Jr. (Principal Executive Officer)
/s/ David M. DeMedio Chief Financial Officer (Principal September 28, 2005
- -------------------------- Accounting Officer)
David M. DeMedio
/s/ Stephen P. Herbert Chief Operating Officer, President September 28, 2005
- -------------------------- and Director
Stephen P. Herbert
/s/ William W. Sellers Director September 28, 2005
- --------------------------
William W. Sellers
/s/ William L. Van Alen, Jr. Director September 28, 2005
- ----------------------------
William L. Van Alen, Jr.
/s/ Douglas M. Lurio Director September 28, 2005
- --------------------------
Douglas M. Lurio
/s/ Steven Katz Director September 28, 2005
- --------------------------
Steven Katz
52
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-120139) of USA Technologies, Inc. of our report dated September 10,
2004, with respect to the consolidated financial statements and schedule of USA
Technologies, Inc. included in this Annual Report (Form 10-K) for the year ended
June 30, 2005.
/s/ Ernst & Young LLP
Philadelphia, PA
September 27, 2005
Exhibit 23.2
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-120139) of USA Technologies, Inc. of our report dated September 2,
2005, with respect to the consolidated financial statements and schedule of USA
Technologies, Inc. included in this Annual Report (Form 10-K) for the year ended
June 30, 2005.
/s/ Goldstein Golub Kessler LLP
New York, NY
September 27, 2005
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
I, George R. Jensen, Jr., Chief Executive Officer of the registrant, certify
that:
1. I have reviewed this annual report on Form 10-K of USA Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the issuer as of,
and for, the periods presented in this report;
4. The issuer's other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) for the issuer and have:
a. Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the issuer, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b. Evaluated the effectiveness of the issuer's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based upon such evaluation; and
c. Disclosed in this report any change in the issuer's internal control over
financial reporting that occurred during the issuer's most recent fiscal quarter
(the issuer's fourth fiscal quarter in the case of an annual report) that has
materially affected or is reasonably likely to materially affect, the issuer's
internal control over financial reporting; and
5. The issuer's other certifying officer and I have disclosed, based on our most
recent evaluation, of internal control over financial reporting to the auditors
and the audit committee of the issuer's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are reasonably
likely to adversely affect the issuer's ability to record, process, summarize
and report financial information; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the issuer's internal control over
financial reporting.
Date: September 28, 2005 /s/ George R. Jensen, Jr.
------------------------------------
George R. Jensen, Jr.,
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
I, David M. DeMedio, Chief Financial Officer of the registrant, certify that:
1. I have reviewed this annual report on Form 10-K of USA Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the issuer as of,
and for, the periods presented in this report;
4. The issuer's other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) for the issuer and have:
a. Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the issuer, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b. Evaluated the effectiveness of the issuer's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based upon such evaluation; and
c. Disclosed in this report any change in the issuer's internal control over
financial reporting that occurred during the issuer's most recent fiscal quarter
(the issuer's fourth fiscal quarter in the case of an annual report) that has
materially affected or is reasonably likely to materially affect, the issuer's
internal control over financial reporting; and
5. The issuer's other certifying officer and I have disclosed, based on our most
recent evaluation, of internal control over financial reporting to the auditors
and the audit committee of the issuer's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are reasonably
likely to adversely affect the issuer's ability to record, process, summarize
and report financial information; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the issuer's internal control over
financial reporting.
Date: September 28, 2005 /s/David M. DeMedio
-----------------------------------
David M. DeMedio,
Chief Financial Officer
Exhibit 32
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the accompanying Annual Report of USA Technologies,
Inc., (the "Company") on Form 10-K for the period ended June 30, 2005 (the
"Report"), I, George R. Jensen, Jr., Chief Executive Officer of the Company,
hereby certify that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ George R. Jensen, Jr.
------------------------
George R. Jensen, Jr.
Chief Executive Officer
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the accompanying Annual Report of USA Technologies,
Inc., (the "Company") on Form 10-K for the period ended June 30, 2005 (the
"Report"), I, David M. DeMedio, Chief Financial Officer of the Company, hereby
certify that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ David M. DeMedio
- --------------------
David M. DeMedio
Chief Financial Officer