REGISTRATION NO. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
USA TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania
(State or other jurisdiction of incorporation or organization)
7359
(Primary Standard Industrial Classification Code Number)
23-2679963
(I.R.S. Employer Identification Number)
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355
(610) 989-0340
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)
George R. Jensen, Jr.
Chief Executive Officer
USA Technologies, Inc.
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355
(610) 989-0340
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Douglas M. Lurio, Esquire
Lurio & Associates, P. C.
One Commerce Square
2005 Market Street, Suite 2340
Philadelphia, PA 19103-7015
(215) 665-9300
(Approximate date of proposed sale to the
public) From time to time after this Registration
Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
Title of each Proposed Maximum Proposed Maximum
class of Securities Offering Price Per Aggregate Amount of
to be Registered Amount to be Registered Unit (11) Offering Price Registration Fee
- -------------------- ----------------------- ------------------ ---------------- ----------------
Common Stock, no par
value 40,000,000 shares (1) $.11 $4,400,000 $470.80
36,000,000 shares (2) $.11 $3,960,000 $423.72
5,449,443 shares (3) $.11 $599,439 $64.14
5,449,443 shares (4) $.11 $599,439 $64.14
7,700,000 shares (5) $.11 $847,000 $90.63
7,700,000 shares (6) $.11 $847,000 $90.63
4,000,000 shares (7) $.11 $440,000 $47.08
7,142,858 shares (8) $.16 $1,142,857 $122.29
15,507,890 shares (9) $.16 $2,481,263 $265.50
17,550,000 shares(10) $.18 $3,159,000 $338.01
----------------------- ---------------- ----------------
TOTAL 146,499,634 shares $18,035,998 $1,976.94(12)
======================= ================ ================
(1) Represents shares issued to Wellington Management Company, LLP, as
investment adviser for certain of its clients, pursuant to the December
13, 2005 Stock Purchase Agreement between Wellington and us.
(2) Represents shares issuable by us to Steve Illes under the Common Stock
Purchase Agreement between Mr. Illes and us dated April 4, 2005.
2
(3) Represents 5,449,443 shares underlying senior notes issued as part of our
2005-G private placement.
(4) Represents 5,449,443 shares underlying warrants issued in exchange for
purchase rights that had been issued as part of our 2005-G private
placement.
(5) Represents 7,700,000 shares underlying senior notes issued as part of our
2006-A private placement.
(6) Represents 7,700,000 shares underlying warrants issued in exchange for
purchase rights that had been issued as part of our 2006-A private
placement.
(7) Represents 4,000,000 shares issued to Rationalwave On Shore Equity Fund,
L.P., pursuant to the January 9, 2006 Stock Purchase Agreement between
Rationalwave and us.
(8) This registration statement amends our registration statement on Form S-1,
Commission File No. 333-101032, and pursuant to Rule 429 of the Securities
Act of 1933, as amended, carries forward 7,142,858 shares issuable to
Kazi Management upon exercise of warrants.
(9) This registration statement amends our registration statement on Form S-1,
Commission File No. 333-122899, and pursuant to Rule 429 of the Securities
Act of 1933, as amended, carries forward 15,507,890 shares issuable upon
the conversion of our 2004-B convertible senior notes.
(10) This registration statement amends our registration statement on Form S-1,
Commission File No. 333-124078, and pursuant to Rule 429 of the Securities
Act of 1933, as amended, carries forward 17,550,000 shares issuable upon
the conversion of our 2005-C convertible senior notes.
(11) Pursuant to Rule 457c, the registration fee has been calculated at the
average of the bid and ask price within 5 days prior to the date of the
filing of the registration statement.
(12) $1,251.14 of the filing fee is being paid at the time of filing of this
registration statement. $725.80 of the filing fee was previously paid in
connection with and at the time of the filing of the original registration
statements relating to the shares which are being carried forward pursuant
to Rule 429 of the Securities Act of 1933, as amended.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission ("SEC") is effective. This prospectus is not
an offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
3
PROSPECTUS
USA TECHNOLOGIES, INC.
146,499,634 shares of Common Stock
THE OFFERING
The resale of up to 146,499,634 shares of common stock in the over-the-counter
market at the prevailing market price or in negotiated transactions. We will
receive no proceeds from the sale of the shares by the selling shareholders.
However, we will receive proceeds from the sale of shares issuable upon the sale
of shares to Steve Illes under the Common Stock Purchase Agreement dated April
4, 2005, and from the sale of shares issuable upon the exercise of warrants by
the selling shareholders. Because the selling shareholders will offer and sell
the shares at various times, we have not included in this prospectus information
about the price to the public of the shares or the proceeds to the selling
shareholders.
Our common stock is included for quotation on the over-the-counter bulletin
board under the symbol "USTT." The closing bid price for the common stock on
January 9, 2006, was $.11 per share.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES ONLY
IF YOU CAN AFFORD A COMPLETE LOSS. Please refer to Risk Factors beginning on
Page 8.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities or passed on the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is January 12, 2006.
4
TABLE OF CONTENTS
Contents Page
- --------------------------------------------------------------------------------- ----------
1. Prospectus Summary ................................................................6
2. Forward Looking Statements ....................................................... 7
3. Risk Factors ......................................................................8
4. Use of Proceeds ..................................................................14
5. Selected Financial Data ..........................................................15
6. Quarterly Financial Data .........................................................16
7. Quantitative and Qualitative Disclosures About Market Risk Managements ...........17
8. Discussion And Analysis of Financial Condition And Results of Operations .........17
9. Business..........................................................................33
10. Management........................................................................48
11. Principal Shareholders ...........................................................55
12. Certain Transactions .............................................................59
13. Selling Shareholders .............................................................60
14. Market for Common Stock ..........................................................67
15. Plan of Distribution .............................................................71
16. Description of Securities ........................................................72
17. Legal Matters ....................................................................77
18. Experts ..........................................................................77
19. Where You Can Find Additional Information ........................................77
20. Financial Statements .............................................................F-1
5
PROSPECTUS SUMMARY
OUR COMPANY
USA Technologies, Inc. (the "Company", "We" and "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 a result of the
acquisition of the assets of Bayview Technology Group, LLC ("Bayview") in July
2003, our Company also manufactures and sells energy management products which
reduce the power consumption of various equipment, such as refrigerated vending
machines and glass front coolers, thus reducing the energy costs associated with
operating this equipment.
OUR BUSINESS
Our networked devices and associated services enable the owners and operators of
everyday, stand-alone, distributed assets, such as vending machines, personal
computers, copiers, faxes, kiosks and laundry equipment, the ability to remotely
monitor, control and report on the results of these distributed assets, as well
as the ability to offer their customers alternative cashless payment options.
OUR MARKET
Our customers fall into the following categories; vending machine owners and/or
operators, business center operators which include hotels and audio visual
companies, commercial laundry operators servicing colleges and universities,
brand marketers wishing to provide their products or services via kiosks or
vending machines and equipment manufacturers such as consumer electronics,
appliances, building control systems, factory equipment and computer peripherals
that would like to incorporate the technological features of our networked
devices (i.e. remote monitoring, reporting and control as well as cashless
payments) into their products. Customers for our energy management products also
include energy utility companies and operators of glass front coolers.
RESEARCH AND DEVELOPMENT COSTS
Research and development expenses, which are included in general and
administrative and compensation expense in the Consolidated Statements of
Operations, were approximately $1,364,000, $688,000, and $1,505,000 for the
years ended June 30, 2005, 2004 and 2003, respectively, and $220,000 for the
three months ended September 30, 2005.
ABOUT OUR OFFERING
Our selling shareholders are, as of the date of this prospectus, as follows:
* the holders of 44,000,000 shares;
* holders of senior notes which, if converted, would represent 46,207,333
shares;
6
* holders of unexercised warrants which, if exercised, would represent
20,293,301 shares (based upon the price of our shares of $.11 on January
9, 2006, 7,142,858 of these warrants are in the money); and
* up to 36,000,000 shares that Steve Illes has agreed to purchase under the
Common Stock Purchase Agreement dated April 4, 2005.
Based upon the shares outstanding as of January 9, 2006 of 500,162,015, if all
of the senior notes are converted, all of the warrants are exercised and Mr.
Illes purchases all of the shares covered by this prospectus, we would have
602,662,649 shares outstanding.
The shares covered by this prospectus would be offered by our selling
shareholders at the market price at the time of resale. Our selling shareholders
may also sell their shares to other investors in a transaction not on the open
market. There is no requirement that our selling shareholders sell their shares
pursuant to this prospectus.
We will not receive any of the proceeds raised by the offering. We would receive
proceeds from the exercise of the warrants by the selling shareholders and by
the purchase by Mr. Illes of the shares referred to above.
FORWARD LOOKING STATEMENTS
This prospectus contains certain forward looking statements regarding, among
other things, the anticipated financial and operating results of the Company.
For this purpose, forward looking statements are any statements contained herein
that are not statements of historical fact and include, but are not limited to,
those preceded by or that include the words, "believes," "expects,"
"anticipates," or similar expressions. Those statements are subject to known and
unknown risks, uncertainties and other factors that could cause the actual
results to differ materially from those contemplated by the statements. The
forward looking information is based on various factors and was derived using
numerous assumptions. Important factors that could cause the Company's actual
results to differ materially from those projected, include, for example (i) the
ability of the Company to generate sufficient sales to generate operating
profits, or to sell products at a profit, (ii) the ability of the Company to
raise funds in the future through sales of securities, (iii) whether the Company
is able to enter into binding agreements with third parties to assist in product
or network development, (iv) the ability of the Company to commercialize its
developmental products, or if actually commercialized, to obtain commercial
acceptance thereof, (v) the ability of the Company to compete with its
competitors to obtain market share, (vi) the ability of the Company to obtain
sufficient funds through operations or otherwise to repay its debt obligations
including but not limited to Senior Notes, or to fund development and marketing
of its products; (vii) the ability of the Company to obtain approval of its
pending patent applications, (viii) the ability of the Company to satisfy its
trade obligations included in accounts payable and accrued liabilities, and (ix)
the ability of the Company to predict or estimate its future quarterly or annual
revenues given the developing and unpredictable market for its products and the
lack of established revenues. Although the Company believes that the forward
looking statements contained herein are reasonable, it can give no assurance
that the Company's expectations will be met.
7
RISK FACTORS
An investment in our common stock is very risky. You should be aware that you
could lose the entire amount of your investment. Prior to making an investment
decision, you should carefully consider the following risk factors and the other
information contained in this prospectus.
1. We have a history of losses since inception and if we continue to incur
losses the price of our shares can be expected to fall.
We have experienced losses since inception. We expect to continue to incur
losses for the foreseeable future as we expend substantial resources on sales,
marketing, and research and development of our products. From our inception
through September 30, 2005, our cumulative losses are approximately $116
million. For our fiscal years ended June 30, 2003, 2004 and 2005, and the
three-month period ended September 30, 2005, we have incurred net losses of
$21,965,499, $21,426,178, $15,499,190, and $3,196,872, respectively. If we
continue to incur losses, the price of our common stock can be expected to fall.
2. Our existence is dependent on our ability to raise capital that may not be
available.
There is currently limited experience upon which to assume that our business
will prove financially profitable or generate more than nominal revenues. From
inception, we have generated funds primarily through the sale of securities.
There can be no assurances that we will be able to continue to sell additional
securities. We expect to raise funds in the future through sales of our debt or
equity securities until such time, if ever, as we are able to operate
profitably. There can be no assurance given that we will be able to obtain funds
in such manner or on terms that are beneficial to us. For the six months ended
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. Our inability to obtain needed funding can be
expected to have a material adverse effect on our operations and our ability to
achieve profitability. If we fail to generate increased revenues or fail to sell
additional securities you may lose all or a substantial portion of your
investment.
3. We received an opinion from our auditor which raises substantial doubt about
our ability to continue as a going concern.
Our auditors, Goldstein Golub Kessler LLP, have included an explanatory
paragraph in their report on our June 30, 2005 consolidated financial statements
indicating that as of June 30, 2005, there is substantial doubt about our
ability to continue as a going concern. We will require additional funds in the
future, and there can be no assurance that any independent auditors` report on
our future financial statements will not include a similar explanatory paragraph
if we are unable to raise sufficient funds or generate sufficient cash from
operations to cover the cost of our operations. The existence of the explanatory
paragraph may adversely affect our relationship with prospective customers,
suppliers and potential investors, and therefore could have a material adverse
effect on our business, financial condition and results of operations.
8
4. We depend on our key personnel and if they would leave us, our business could
be adversely affected.
We are dependent on key management personnel, particularly the Chairman and
Chief Executive Officer, George R. Jensen, Jr. The loss of services of Mr.
Jensen or other executive officers would dramatically affect our business
prospects. Certain of our employees are particularly valuable to us because:
o they have specialized knowledge about our company and operations;
o they have specialized skills that are important to our operations; or
o they would be particularly difficult to replace.
We have entered into an employment agreement with Mr. Jensen that expires in
June 30, 2007. We have also entered into employment agreements with other
executive officers, each of which contain non-compete agreements. We have
obtained a key man life insurance policy in the amount of $2,000,000 on Mr.
Jensen, a key man life insurance policy in the amount of $1,000,000 on our
President, Stephen P. Herbert, and a key man life insurance policy in the amount
of $1,000,000 on our Vice-President-Research and Development, Haven Brock Kolls,
Jr.
We do not have and do not intend to obtain key man life insurance coverage on
any of our other executive officers. As a result, we are exposed to the costs
associated with the death of these key employees.
5. USA's dependence on proprietary technology and limited ability to protect our
intellectual property may adversely affect our ability to compete.
A successful challenge to our ownership of our technology could materially
damage our business prospects. Our technology may infringe upon the proprietary
rights of others. Our success is dependent in part on our ability to obtain
patent protection for our proprietary products, maintain trade secret protection
and operate without infringing the proprietary rights of others.
Through January 9, 2006, we have 25 pending patent applications, and intend to
file applications for additional patents covering our future products, although
there can be no assurance that we will do so. In addition, there can be no
assurance that we will maintain or prosecute these applications. The United
States Government and other countries have granted us 61 patents as of January
9, 2006. There can be no assurance that:
o any of the remaining patent applications will be granted to us;
o we will develop additional products that are patentable or do not infringe
the patents of others;
o any patents issued to us will provide us with any competitive advantages
or adequate protection for our products;
9
o any patents issued to us will not be challenged, invalidated or
circumvented by others; or
o any of our products would not infringe the patents of others.
If any of the products are found to have infringed any patent, there can be no
assurance that we will be able to obtain licenses to continue to manufacture and
license such product or that we will not have to pay damages as a result of such
infringement. Even if a patent application is granted for any of our products,
there can be no assurance that the patented technology will be a commercial
success or result in any profits to us.
6. Competition from others with greater resources could prevent USA from
increasing revenue and achieving profitability.
Competition from other companies that are well established and have
substantially greater resources may reduce our profitability. Many of our
competitors have established reputations for success in the development, sale
and service of high quality products. We face competition from the following
groups:
o companies offering automated, credit card activated control systems in
connection with facsimile machines, personal computers, debit card
purchase/revalue stations, and use of the Internet and e-mail which
directly compete with our products;
o companies which have developed unattended, credit card activated control
systems currently used in connection with public telephones, prepaid
telephone cards, gasoline dispensing machines, or vending machines and are
capable of developing control systems in direct competition with USA; and
o businesses which provide access to the Internet and personal computers to
hotel guests. Although these services are not credit card activated, such
services would compete with USA's Business Express(R).
Competition may result in lower profit margins on our products or may reduce
potential profits or result in a loss of some or all of our customer base. To
the extent that our competitors are able to offer more attractive technology,
our ability to compete could be adversely affected.
7. The termination of any of our relationships with third parties upon whom we
rely for supplies and services that are critical to our products could adversely
affect our business and delay achievement of our business plan.
We depend on arrangements with third parties for a variety of component parts
used in our products. We have contracted with Masterwork Electronics to assist
us to develop and manufacture our e-Port(R) products and with various sources to
manufacture our energy miser products. For other components, we do not have
supply contracts with any of our third-party suppliers and we purchase
components as needed from time to time. See "Business-Procurement". We have
contracted with IBM to host our network in a secure, 24/7 environment to ensure
reliability of our network services. If these business relationships are
terminated, the implementation of our business plan may be delayed until an
alternative supplier or service provider can be retained. If we are unable to
find another source or one that is comparable, the content and quality of our
products could suffer and our business, operating results and financial
condition could be harmed.
10
8. We do not expect to pay cash dividends in the foreseeable future and
therefore investors should not anticipate cash dividends on their investment.
The holders of our common stock and series A preferred stock are entitled to
receive dividends when, and if, declared by our board of directors. Our board of
directors does not intend to pay cash dividends in the foreseeable future, but
instead intends to retain any and all earnings to finance the growth of the
business. To date, we have not paid any cash dividends on the common stock or
series A preferred stock and there can be no assurance that cash dividends will
ever be paid on the common stock.
In addition, our articles of incorporation prohibit the declaration of any
dividends on the Common Stock unless and until all unpaid and accumulated
dividends on the Series A preferred stock have been declared and paid. Through
January 9, 2006, the unpaid and cumulative dividends on the series A preferred
stock equal $7,836,030. The unpaid and cumulative dividends on the series A
preferred stock are convertible into shares of common stock at the rate of
$10.00 per share at the option of the shareholder. Through January 9, 2006,
$2,701,764 of unpaid and cumulative dividends on the Series A Preferred Stock
were converted into 290,253 shares of common stock. See "Description of
Securities-Series A Convertible Preferred Stock."
9. We may fail to gain widespread market acceptance of our products and not
generate sufficient revenues or profit margins to become successful.
There can be no assurance that demand for our products will be sufficient to
enable us to become profitable. Likewise, no assurance can be given that we will
be able to install the TransActs and e-Ports at enough locations or sell
equipment utilizing our network or our energy management products to enough
locations to achieve significant revenues or that our operations can be
conducted profitably. Alternatively, the locations which would utilize the
network may not be successful locations and our revenues would be adversely
affected. We may in the future lose locations utilizing our products to
competitors, or may not be able to install our products at competitor's
locations. In addition, there can be no assurance that our products could evolve
or be improved to meet the future needs of the market place.
10. The lack of an established trading market may make it difficult to transfer
our stock and you may not be able to sell your shares on our trading market.
Our Common Stock is traded on the OTC Bulletin Board. Although there is limited
trading in the Common Stock, there is no established trading market. Until there
is an established trading market, holders of the common stock may find it
difficult to dispose of, or to obtain accurate quotations for the price of the
common stock. See "Description of Securities - Shares Eligible For Future Sale"
and "Market For Common Stock."
11. There are rules governing low-priced stocks that may make it more difficult
for you to resell your shares.
11
Our common stock is currently considered a "penny stock" under federal
securities laws since its market price is below $5.00 per share. Penny stock
rules generally impose additional sales practice and disclosure requirements on
broker-dealers who sell our shares to certain investors.
Broker-dealers who sell penny stock to certain types of investors are required
to comply with the SEC's regulations concerning the transfer of penny stock. If
an exemption is not available, these regulations require broker-dealers to:
- - make a suitability determination prior to selling penny stock to the
purchaser;
- - receive the purchaser's written consent to the transaction; and
- - provide certain written disclosures to the purchaser.
These rules may affect the ability of broker-dealers to make a market in or
trade our shares. This, in turn, may affect your ability to resell those shares
in the public market.
12. The substantial market overhang of our shares and registered resales under
this prospectus will tend to depress the market price of our shares.
The substantial number of our shares currently eligible for sale in the open
market will tend to depress the market price of our shares. See "Description of
Securities-Shares Eligible for Future Sale" and "Market for Securities". As of
January 9, 2006, these shares consisted of the following:
- - 500,162,015 shares of Common Stock
- - 521,642 shares of Preferred Stock
- - 783,604 shares issuable upon conversion of the accrued and unpaid
dividends on the Series A Preferred Stock
- - 23,958,104 shares underlying Common Stock options and warrants
- - 80,053,551 shares underlying our Convertible Senior Notes
- - 36,000,102 shares issuable under our agreement with Steve Illes; and
- - 38,693 shares issuable under our 2004-B Stock Compensation Plan.
13. Sales of shares eligible for future sale from exercise of warrants and
options could depress the market price of our common stock.
As of January 9, 2006, we had issued and outstanding options to purchase
2,009,972 shares of our common stock and warrants to purchase 21,948,132 shares.
The shares underlying all of these options and warrants have been registered and
may be freely sold upon issuance. Market sales of large amounts of our common
stock, or the potential for those sales even if they do not actually occur, may
have the effect of depressing the market price of our common stock. In addition,
if our future financing needs require us to issue additional shares of common
stock or securities convertible into common stock, the supply of common stock
available for resale could be increased which could stimulate trading activity
and cause the market price of our common stock to drop, even if our business is
doing well.
12
14. We are obligated to make substantial principal and interest payments to the
holders of the Senior Notes for which funds may not be available or would use
our available working capital.
As of January 9, 2006, we had $320,000 of unsecured senior notes due on June 30,
2006, $1,683,500 of unsecured senior notes due on December 31, 2006, $1,078,827
of unsecured senior notes due on June 30, 2007, $2,975,016 of unsecured senior
notes due on December 31, 2007, $2,465,596 of unsecured senior notes due on
December 31, 2008, $1,520,000 of unsecured senior notes due on December 31,
2009, and $2,012,000 of unsecured senior notes due on December 31, 2010. These
notes accrue cash interest at the rate of twelve percent (12%) per year with the
exception of the notes due June 30, 2007, December 31, 2010 and $544,945 of the
December 31, 2008 notes, which accrue cash interest at the rate of ten percent
(10%) per year. We are required to make quarterly interest payments totaling
approximately $344,000 or $1,376,000 each year.
Until the Senior Notes have been paid by us, they will be reflected as a
liability on our financial statements, net of the related unamortized discount
and other issuance costs.
Our ability to satisfy the debt obligations is dependent on our future
performance, the success of our product lines and on our ability to raise
capital. Our performance is also subject to financial, business and market
factors affecting our business and operations.
We anticipate that the Senior Notes will either be converted into Common Stock
or be paid from cash generated from operations, as well as proceeds from
securities offerings. However, there can be no assurance that we will meet our
obligations to pay quarterly interest on or the principal amount of the senior
notes at maturity. The payment of the interest and principal on these notes
would utilize our available working capital which would not be available for
other purposes.
13
USE OF PROCEEDS
We will not receive any of the proceeds from the sales of our Common Stock by
the selling shareholders. The selling shareholders entitled to receive the net
proceeds from any sales of our common stock begins on page 60 of this
prospectus. We will, however, receive proceeds from the exercise of any warrants
by the selling shareholders and the purchase by Mr. Illes of shares under the
Common Stock Purchase Agreement dated April 4, 2005.
As of the date of this prospectus, we would receive $2,629,890 of proceeds from
the exercise of all of the warrants at the stated exercise price of $.20 per
share (none of which are in the money as of the date of this prospectus) and
$500,000 of proceeds from the exercise of all of the warrants at the stated
exercise price of $.07 per share (all of which are in the money as of the date
of this prospectus).
Based upon the price of our shares as of January 9, 2006, we would receive
$3,600,000 of proceeds from the purchase by Steve Illes of all 36,000,000 shares
issuable to him under his agreement with us at $.10 per share. If our share
price would be in excess of $.33, when purchases were made by Mr. Illes we would
receive $10,800,000 of proceeds from the purchase by Mr. Illes of 36,000,000
shares issuable to him at $.30 per share.
14
SELECTED FINANCIAL DATA
The following selected financial data for the five years ended June 30, 2005 are
derived from the audited consolidated financial statements of USA Technologies,
Inc. The financial data for the three months ended September 30, 2005 and 2004
are derived from unaudited consolidated financial statements. The unaudited
consolidated financial statements include all adjustments, consisting of normal
recurring accruals, which USA Technologies, Inc. considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the three months ended September 30, 2005 are not
necessarily indicative of the results that may be expected for the entire year
ending June 30, 2006. The data should be read in conjunction with the
consolidated financial statements, related notes, and other financial
information.
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 $ 7,984,493 $ 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)
Three months ended
September 31
2005 2004
------------ ------------
OPERATIONS DATA
Revenues $ 1,363,886 $ 1,032,578
Loss before cumulative effect of
accounting change $ (3,196,872) $ (3,640,637)
Cumulative effect of accounting change -- --
------------ ------------
Net loss (3,196,872) (3,640,637)
Cumulative preferred dividends (392,057) (392,057)
------------ ------------
Loss applicable to common shares $ (3,588,929) $ (4,032,694)
============ ============
Loss per common share (basic and diluted)
Loss before cumulative effect of
accounting change $ (0.01) $ (0.01)
Cumulative effect of accounting
change -- --
------------ ------------
Net loss $ (0.01) $ (0.01)
============ ============
Cash dividends per common share $ -- $ --
BALANCE SHEET DATA
Total assets $ 21,767,388 $ 22,936,222
Convertible Senior Notes and other
long-term debt $ 8,156,240 $ 6,936,958
Shareholders' equity (accumulated deficit) $ 8,119,225 $ 11,086,917
15
(a) The cumulative effect of an accounting change in fiscal year 2001 reflects a
catch up adjustment as required by EITF Issue 00-27, Application of EITF Issue
98-5, "Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios to Certain Convertible Instruments"
in connection with $4.6 million of Convertible Senior Notes issued by the
Company in 1999.
(b) During fiscal year 2001 the Company recorded an $863,000 loss on a exchange
of debt which was originally reported as an extraordinary loss. In accordance
with the provisions of SFAS No. 145, "Recission of FASB Statements No. 4, 44 and
62, Amendment of SFAS No. 13, and Technical Corrections," such loss was
reclassified to a loss from continuing operations.
(c) In May 2002 the Company acquired Stitch Networks Corporation. In July 2003
the Company acquired substantially all the assets of Bayview Technology Group,
LLC. Both acquisitions have been accounted for using the purchase method and,
accordingly, are included in the Company's results of operations from their
respective dates of acquisition.
QUARTERLY FINANCIAL DATA
Unaudited quarterly results of operations for the years ended June 30, 2005 and
2004 and the three months ended September 30, 2005 follow and should be read in
conjunction with the consolidated financial statements, related notes and other
financial information and the Company's quarterly reports on Form 10-QSB for the
fiscal years 2004 and 2003 and Form 10-Q for the fiscal year 2005.
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------------ ------------ ------------ ------------ ------------
YEAR ENDED JUNE 30, 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)
THREE MONTHS ENDED SEPTEMBER 30, 2005
Revenues $ 1,363,886
Gross profit $ 314,927
Net loss $ (3,196,872)
Cumulative preferred dividends $ (392,057)
Loss applicable to common shares $ (3,588,929)
Loss per common share (basic and diluted) $ (0.01)
16
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.
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.
17
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".
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.
18
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.
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, and $309,150 during the three months ended
September 30, 2005.
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.).
19
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. An unrealized loss of $5,852 on the remaining
shares held by the Company is reflected in shareholders' equity as accumulated
other comprehensive income at September 30, 2005. The 70,000 remaining shares
are recorded at their fair value of $39,467, $68,636 and $30,535 at June 30,
2005 and 2004 and September 30, 2005, respectively.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2005
Revenues for the three months ended September 30, 2005 were $1,363,886 compared
to $1,032,578 for the corresponding three-month period in the previous fiscal
year. This $331,308 or 32% increase was primarily due to an increase in
equipment sales of approximately $307,000 and license and transaction fees of
approximately $24,000. The increase in equipment sales was due to an increase in
sales of approximately $64,000 of energy conservation equipment, approximately
$149,000 in laundry equipment, and approximately $135,000 in e-Port vending
equipment sales, offset by a decrease of approximately $36,000 in sales of
business centers.
Cost of sales for the period consisted of equipment costs of approximately
$856,000 and network and transaction related costs of $193,000. The increase in
cost of sales of $146,915 or 16% over the prior year period was due to an
increase in equipment costs of approximately $414,000, offset by a decrease of
approximately $267,000 of network and transaction related costs.
20
Gross profit for the three months ended September 30, 2005 was $314,927,
compared to gross profit of $130,534 for the corresponding three-month period in
the previous fiscal year. This 141% increase is due to the combined effect of
the increase in energy, laundry and vending equipment sales and the decrease in
network and transaction related costs.
General and administrative expense of $1,107,503 decreased by $334,675 or 23%
primarily due to a reduction in consulting fees of approximately $250,000 and a
reduction in public relations fees of approximately $56,000.
Compensation expense of $1,353,596 increased by $53,574 or 4% primarily due to
an increase in salaries expense of approximately $40,000 due to an increase in
the number of employees and annual salary increases.
The quarter ended September 30, 2005 resulted in a net loss of $3,196,872
(approximately $0.7 million of non-cash charges) compared to a net loss of
$3,640,637 (approximately $0.8 million of non-cash charges) for the quarter
ended September 30, 2004.
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.
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.
21
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.
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.
22
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.
23
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.
24
Depreciation and amortization expense for the fiscal year ended June 30, 2004
was $1,632,330, compared to $1,251,716 for the prior fiscal year, a $380,614 or
30% increase. This increase was attributable to amortization of intangible
assets of $917,000 and depreciation of property and equipment of $122,000
acquired from Bayview in July 2003, offset by a decrease in depreciation of
approximately $337,000 related to existing assets that have reached the end of
their estimated useful life. Additionally there was an impairment charge of
$321,476 recorded on a group of vending machines during fiscal year 2003. The
Company incurred charges during the fiscal year ended June 30, 2004 and 2003
relating to the modification of debt terms for certain of the Senior Notes in
the amount of $318,915 and $1,521,654, respectively. This charge reflects the
write-off of the unamortized debt discount remaining for Senior Notes scheduled
to mature in December 2003 and December 2004, for which the conversion and
maturity terms were modified. The Company offered these note modifications to
manage short-term cash flows, which resulted in a non-cash charge.
During the fiscal year ended June 30, 2004, the Company sold 1,669,091 shares of
its investment in the Jubilee Investment Trust for net proceeds of $1,471,140,
resulting in a gain of $603,480. During the fiscal year ended June 30, 2003, the
Company determined that the decline in the market value of the investment in the
Jubilee Investment Trust was "other than temporary." Accordingly, the Company
recorded a loss of $1,945,951 on the investment during fiscal year 2003.
During the fiscal year ended June 30, 2004, a gain of $429,204 was recorded
relating to the termination of the Kodak Vending Placement Agreement. This gain
is comprised of the payment from Kodak of approximately $675,000 plus the
cancellation of Stitch's obligation to the supplier of the vending machines of
approximately $124,000 less a write down of the carrying value of vending
machines of approximately $367,000 and a net write-off of amounts due to and
from Kodak of $3,000.
Total interest expense increased from $4,978,600 to $5,032,351 for the fiscal
year ended June 30, 2003 and 2004, respectively, an increase of $53,751 or 1%.
Although the average principal balances were lower on the Company's 12% Senior
Notes during fiscal year ended June 30, 2004 versus 2003, as the result of
conversions of the Senior Notes into shares of the Company's Common Stock by
Senior Note Holders, interest expense increased due to the accelerated
amortization of debt discount charged to interest expense at the time of the
conversion of the Senior Notes.
The fiscal year ended June 30, 2004 resulted in a net loss of $21,426,178
(approximately $10.9 million of non-cash charges) compared to a net loss of
$21,965,499 (approximately $12.6 million of non-cash charges) for the prior
fiscal year.
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:
25
Equipment sales: Revenues from equipment sales increased to $1,034,427 from
$795,938 in the prior fiscal year, an increase of $238,489 or 30%. This increase
was directly due to the increase in sales of the Company's e-Port equipment.
License and transaction fees: Revenues from license and transaction fees
increased $594,667 or 76% from $778,906 to $1,373,573 for the fiscal year ended
June 30, 2002 and 2003, respectively. This increase was due to the inclusion of
a full year of service fees earned on Company owned vending machines during
fiscal year ended June 30, 2003, as the acquisition of Stitch occurred in May
2002, the fourth quarter of fiscal year ended June 30, 2002.
Product sales and other: Revenues from product sales and other increased to
$445,068 from $107,857, an increase of $337,211 or 313% from the prior fiscal
year. This increase was due to the inclusion of a full year sales of camera and
film from Company owned vending machines during fiscal year ended June 30, 2003,
as the acquisition of Stitch occurred in May 2002, the fourth quarter of fiscal
year ended June 30, 2002.
Cost of sales consisted of equipment, product and labor costs of approximately
$1,085,000 and $695,000 for the fiscal years ended June 30, 2003 and 2002,
respectively, an increase of $390,000; software development amortization of
approximately $1,331,000 and $2,996,000 for the fiscal years ended June 30, 2003
and 2002, respectively, a decrease of $1,665,000; and network and transaction
related costs of $555,000 and $372,000 for the years ended June 30, 2003 and
2002, respectively, an increase of $183,000. The total decrease of $1,091,458 or
27% in cost of sales from $4,062,901 to $2,971,443 for the years ended June 30,
2002 and 2003, respectively, was principally attributable to the decrease in
software development amortization, offset by a full year of product costs
related to the Kodak Vending Placement Agreement acquired with Stitch.
Total operating expenses for the fiscal year ended June 30, 2003 was $14,941,264
(approximately $11.6 million of non-cash charges), an increase of $1,978,300 or
15% over the prior fiscal year. The components of operating expenses (General
and administrative, Compensation, Depreciation and amortization and Loss on debt
modification) and the causes of this increase are explained in further detail,
below:
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.
26
Depreciation and amortization expense for the fiscal year ended June 30, 2003
was $1,251,716, compared to $440,238 for the prior fiscal year, an $811,478 or
184% increase. This increase was attributable to increased depreciation expense
resulting from assets acquired in the Stitch acquisition, as well as the
impairment loss of $321,476 recorded on a group of vending machines during the
fiscal year in accordance with SFAS No. 144.
The Company incurred charges during the fiscal year ended June 30, 2003 relating
to the modification of debt terms for certain of the Senior Notes in the amount
of $1,521,654. There was no such comparable charge in the prior year. This
charge was for the write-off of the unamortized debt discount remaining for
Senior Notes scheduled to mature in December 2003 and December 2004 whose
conversion and maturity terms were modified. The Company offered these note
modifications to the Note holders, and recognized the related non-cash charge to
operations in order to manage short-term cash flows.
In June 2003, the Company determined that the decline in the market value of the
investment in the Jubilee Investment Trust was "other than temporary."
Accordingly, the Company recorded a loss of $1,945,951, which is reflected as a
loss on investment. No such comparable loss was recorded in the previous year.
Total interest expense increased by $2,991,166, due to the greater debt carried
by the Company to finance its operations. A significant portion of interest
expense is the amortization of non-cash debt discount.
The fiscal year ended June 30, 2003 resulted in a net loss of $21,965,499
(approximately $12.6 million of non-cash charges) compared to a net loss of
$17,314,807 (approximately $11.0 million of non-cash charges) for the prior
fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended June 30, 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.
27
For the three months ended September 30, 2005, net cash of $2,900,833 was used
by operating activities, primarily due to the net loss of $3,196,872 offset by
non-cash charges totaling $736,901 for transactions involving the issuance of
Common Stock for services, depreciation and amortization of assets, and
amortization of debt discount. In addition to these non-cash charges, the
Company's net operating assets decreased by $440,862 primarily due to a decrease
in accounts payable.
Proceeds from financing activities for the three months ended September 30, 2005
provided $1,797,695 of funds, which were necessary to support cash used in
operating and investing activities. Net proceeds of $1,797,695 were realized
from the issuance of Common Stock ($1,807,990), the collection of Common Stock
subscriptions receivable ($35,723), offset by cash used to repay long-term debt
($34,018) and Senior Notes ($12,000).
The Company has incurred losses since inception. Cumulative losses through
September 30, 2005 amounted to approximately $119,000,000. 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 September 30, 2005, the Company had approximately $829,000 of cash and
cash equivalents on hand.
On April 4, 2005, the Company and Mr. Illes entered into a Common Stock Purchase
Agreement ("2005 Common Stock Agreement") that terminates August 11, 2007. From
October 1 through December 31, 2005, the Company issued 2,572,998 shares of
Common Stock under this agreement for total gross proceeds of $244,700. From
April 2005 through December 31, 2005, we received $2,472,690 from Mr. Illes
under the agreement, leaving $7,527,310 of future potential sales to him by us
thereunder. The 36,000,000 shares covered by this prospectus would yield
$3,600,000 of available funds under this agreement based on a share price under
the agreement of $0.10.
During October 2005, the Company approved a private placement offering of up to
$2,333,333 of principal amount 10% Convertible Senior Notes due June 30, 2008
(the "2005-G Senior Notes") to the holders of the 2005-D Common Stock Warrants.
Pursuant to the offering, the Company has sold $544,945 of the 2005-G Senior
Notes.
During October 2005, the Company approved a temporary reduction in the exercise
price of the 2005-D Common Stock Warrants from $0.15 to $0.10 per share through
November 30, 2005. The Company received $368,000 and issued 3,680,000 shares of
Common Stock as a result of the exercise of the 2005-D Common Stock Warrants at
$.10 per share.
28
During October 2005, the Company approved a private placement offering of up to
$1,000,000 of Notes ("Bridge Notes") due January 6, 2006 with interest payable
on the due date at a rate of 10% per annum. The Bridge Notes were automatically
exchanged for a like principal amount of new Convertible Senior Notes due
December 31, 2010 ("2006-A Senior Notes"). The Company issued $770,000 of the
Bridge Notes, and in January 2006, issued $770,000 of 2006-A Senior Notes in
exchange for the Bridge Notes.
During December 2005, the Company sold to certain clients of Wellington
Management Company, LLC ("Wellington") an aggregate of 40,000,000 shares for
$4,000,000.
As of December 31, 2005, funding sources in place to meet the Company's cash
requirements for the year ending June 30, 2006 are primarily comprised of
approximately $4,000,000 in cash and cash equivalents on hand as of December 31,
2005, and the proceeds that will become available under the 2005 Common Stock
Purchase Agreement detailed above ($3,600,000 at $0.10 per share). Susequent to
December 31, 2005 and during January 2006, the Company sold an additional
4,000,000 shares to an investor for an aggregate of $400,000. The Company
believes these sources should provide sufficient funds through June 30, 2006,
including repayment, during January 2006, of approximately $900,000 of Senior
Notes that matured on December 31, 2005. Subsequent to June 30, 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 capital resources described above do not materialize, or if the Company
is unsuccessful in meeting its forecasted operating plans, the Company has the
alternative of significantly reducing its expenses and operations to remain in
business.
COMMITMENTS
The Company conducts its operations from various facilities under operating
leases. In March 2003, the Company entered into a lease for 12,864 square feet
of space located in Malvern, Pennsylvania for its principal executive office and
used for general administrative functions, sales activities, and product
development. The lease term extends through December 31, 2008 and provides for
escalating rent payments and a period of free rent prior to the commencement of
the monthly lease payment in January 2004 of approximately $25,000 per month.
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.
29
In December 2004, the Company entered into a lease for 2,837 square feet of
space located in Denver, Colorado to be 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.
As of September 30, 2005, the Company had committed to purchase approximately
$529,000 of inventory from a third party contract manufacturer through December
31, 2005.
OTHER EVENTS
Pursuant to a Common Stock Purchase Agreement dated April 4, 2005 between Mr.
Illes and the Company ("2005 Common Stock Agreement"), Mr. Illes agreed to
purchase shares of the Company's Common Stock, with an aggregate purchase price
not to exceed $10,000,000. As of the date of this prospectus, Mr. Illes has
purchased 19,999,898 shares under the 2005 Common Stock Agreement for an
aggregate purchase price of $2,472,690. None of these shares are covered by this
prospectus. We have registered 36,000,000 additional shares to be purchased by
Mr. Illes under the 2005 Common Stock Agreement, and those shares are covered by
this prospectus. Under the 2005 Common Stock Agreement, the Company has the
right at any time to require Mr. Illes 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 Mr. Illes
of notice of his obligation to purchase. The Company can require Mr. Illes to
purchase shares only if the shares have been registered by the Company for
resale under the Act. During any calendar month, Mr. Illes cannot be required by
the Company to purchase Common Stock for an aggregate purchase price in excess
of $800,000. 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 Mr. Illes. During April 2005, the Company issued
500,000 shares of Common Stock to Mr. Illes as a due diligence/commitment fee in
connection with the 2005 Common Stock Agreement. The 2005 Common Stock Agreement
terminates August 11, 2007. The securities were offered and sold to Mr. Illes
under the exemption from registration set forth under Rule 506 promulgated under
the Act. Mr. Illes is an existing shareholder and an accredited investor, made
appropriate investment representations, was afforded access to all public
filings and all other information that the Company could reasonably obtain.
There was no general solicitation or advertising. We have agreed to register for
resale the shares issuable to Mr. Illes under the 2005 Common Stock Agreement,
and to keep the registration statement current and effective, through May 13,
2007.
During October and November 2005, the Company sold $544,945 principal amount of
2005-G Convertible Senior Notes due December 31, 2008 to six investors. These
notes earn interest at 10% per annum, payable quarterly, and are convertible
into Common Shares at $.10 per share at any time prior to maturity. The offering
was made to the holders of the 2005-D Common Stock Warrants. The 2005-D Warrants
were exercisable at $.10 per share through November 30, 2005, and at $.15
through December 31, 2005. Each holder of the 2005-D Common Stock Warrants was
entitled to purchase the principal amount of the 2005-G Senior Notes equal to
the number of 2005-D Warrants held multiplied by $.10. Upon any investment in
the offering, the corresponding number of 2005-D Warrants were cancelled. There
are 5,449,443 shares underlying these 2005-G senior notes which are covered by
this prospectus. For each $10,000 of senior notes purchased, the investor also
received a purchase right to purchase up to 100,000 shares at $.20 per share at
anytime prior to December 31, 2008. The purchase rights could only be exercised
if the shares issuable upon the exercise of the purchase rights are made
available through the prepayment by the Company of outstanding convertible
senior notes that are convertible at $.20 per share. The Company issued purchase
rights to acquire 5,449,443 shares. During January 2006, the holder of each
purchase right agreed to exchange the purchase rights for warrants to purchase
shares at $.20 at anytime prior to December 31, 2008. Pursuant thereto, warrants
were issued for an aggregate of 5,449,443 shares. We have agreed to register the
shares underlying the 2005-G Senior Notes and the shares underlying the warrants
under the Act for resale, and to keep the registration statement current and
effective through November 30, 2006. The offer and sale of the 2005-G Senior
Notes and purchase rights 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. The issuance by us of the warrants was exempt from registration under
Section 3(a)(9) of the Act. All of the investors were existing holders of the
purchase rights. No commission or remuneration was paid or given directly or
indirectly for soliciting the exchange.
30
On December 13, 2005, the Company entered into a Stock Purchase Agreement with
Wellington Management Company, LLP, a large Boston-based institutional investor,
on behalf of certain of its clients ("Wellington"). Pursuant thereto, the
Company sold to Wellington 40,000,000 shares of Common Stock for $.10 per share
for an aggregate of $4,000,000. The offer and sale of the shares was exempt from
registration under Rule 506 promulgated under Section 4(2) of the Act. As
investment manager, Wellington has shared dispositive and shared voting power
over the shares. All of these clients are accredited investors. We have agreed
to register the shares for resale under the Act for a period of one year from
the date of this prospectus. All of these shares are covered by this prospectus.
The Stock Purchase Agreement provides that if the registration statement is not
declared effective by the SEC within 60 days from the date of the Stock Purchase
Agreement, then the Company will pay to Wellington as liquidated damages two
percent of the purchase price for the shares for each month beyond 60 days that
the registration statement is not effective. As a condition of its investment,
Wellington required the Company to approve and call a special meeting of its
shareholders to consider approval of a 1-to-100 reverse stock split of its
Common Stock.
In October and November, 2005, the Company offered for sale up to $1,000,000 of
principal amount of 10% Bridge Notes due January 6, 2006. Interest accrued on
the Bridge Notes at the rate of 10% per annum from and after the date of
issuance with all accrued and unpaid interest paid on January 6, 2006. The
Company sold $770,000 Bridge Notes to 8 investors. On January 6, 2006, the
Bridge Notes were automatically exchanged for a like principal amount of new
2006-A Convertible Senior Notes due December 31, 2010. The 2006-A Notes bear
interest at 10% and are convertible at any time prior to maturity at $.10 per
share. For each $10,000 of 2006-A Convertible Senior Notes received in exchange
for the Bridge Notes, the Company also issued purchase rights enabling the
holder to purchase up to 100,000 shares of Common Stock at $.20 per share at
anytime prior to December 31, 2008. The purchase rights could only be exercised
if the shares issuable upon the exercise of the purchase rights are made
available through the prepayment by the Company of outstanding convertible
senior notes that are convertible at $.20 per share. The Company issued purchase
rights to acquire 7,700,000 shares. During January 2006, the holder of each
purchase right agreed to exchange the purchase right for a warrant to purchase
one share at $.20 at anytime prior to December 31, 2008. Pursuant thereto,
warrants were issued for an aggregate of 7,770,000 shares. The offer and sale of
the Bridge Notes 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. The
issuance by us of the 2006-A Senor Notes and purchase rights in exchange for the
Bridge Notes, and the warrants in exchange for the purchase rights was exempt
from registration under Section 3(a)(9) of the Act. All investors were existing
security holders of the Company. No commission or remuneration was paid or given
directly or indirectly for soliciting the exchange. We have agreed to register
the shares underlying the 2006-A Senior Notes and the shares underlying the
warrants under the Act for resale, and to keep the registration statement
current and effective through November 30, 2006.
31
On January 9, 2006, the Company entered into a Stock Purchase Agreement with
Rationalwave On Shore Equity Fund, L.P. ("Rationalwave"), an accredited
investor. Pursuant thereto, the Company sold to Rationalwave 4,000,000 shares of
Common Stock for $.10 per share for an aggregate of $400,000. The offer and sale
of the shares was exempt from registration under Rule 506 promulgated under
Section 4(2) of the Act. We have agreed to register the shares for resale under
the Act through January 9, 2007. All of these shares are covered by this
prospectus.
From November 3, 2004 through February 14, 2005, the Company sold $1,550,789 of
senior notes convertible into Common Stock at $.10 per share and maturing on
June 30, 2007 ("2004-B senior note offering"). There are an aggregate of
15,507,890 shares underlying these senior notes. Interest is payable quarterly
at a rate of 10% per annum. The securities were offered and sold under the
exemption from registration set forth in Rule 506 promulgated under Section 4(2)
of the Act. All of the purchasers of the notes were accredited investors, were
either pre-existing security holders or business associates and there was no
general solicitation or advertising. We have agreed to use our best efforts to
have the shares underlying the warrants registered for resale under the Act
through June 30, 2007. These shares are covered by this prospectus. As of the
date of this prospectus, none of the senior notes have been converted into
shares of Common Stock.
During February and March 2005, the Company sold $1,755,000 principal amount of
Senior Notes due April 30, 2005. These notes earned interest at 10% per annum
and were not convertible into shares. During March 2005 each of the holders of
these notes agreed to exchange all these notes for a like principal amount of
2005-C 10% Convertible Senior Notes ("2005-C Senior Notes"). The 2005-C Senior
Notes are convertible into Common Stock at $.10 per share and mature December
31, 2010. There are an aggregate of 17,550,000 shares underlying these senior
notes which are covered by this prospectus. We have agreed to register the
shares underlying the 2005-C Senior Notes under the Act for resale through April
30, 2006. The issuance by us of the 2005-C Senior Notes was exempt from
registration under Section 3(a)(9) of the Act. All of the investors are existing
security holders. No commission or remuneration was paid or given directly or
indirectly for soliciting the exchange. As of the date of this prospectus, none
of the senior notes have been converted into shares of Common Stock.
32
During October 2002, the Company issued to an investor, Kazi Management VI,
Inc., 3,571,429 shares of its Common Stock at $.07 per share generating net
proceeds of $244,925. This investor also received a warrant to purchase up to
7,142,858 shares of Common Stock of the Company at $.07 per share at any time on
or before October 26, 2007, and a warrant to purchase up to 7,142,858 shares of
Common Stock at $.07 per share and up to 5,000,000 shares at $.10 per share at
any time before December 23, 2004. We have agreed to register for resale the
shares underlying the warrants through December 19, 2008. As of the date of this
prospectus, Kazi has exercised warrants to purchase 7,142,858 shares at $.07 per
share and warrants to purchase 5,000,000 shares at $.10 per share. The 7,142,858
shares underlying the unexercised warrants exercisable at $.07 per share through
October 26, 2007 are included in this prospectus.
BUSINESS
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).
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.
33
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.
34
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.
35
Brand marketers will be able to provide their products and services to customers
wherever and whenever the need arises. They will no longer be limited to
existing distribution channels and outlets. Just as beverage vending machines
bring bottlers' products beyond the supermarket to the location where and when
the customer wants them, a vast range of products and branding opportunities can
be made available to customers at the point-of-need. In laundry, makers of
detergent and fabric softener can have their products injected directly into a
consumer's laundry, again putting their products at the point-of-need.
The market for networked device solutions is projected to be large and growing
rapidly and includes a wide variety of segments such as the security and alarm,
automated meter reading, fleet and asset management, and consumer telemetry
markets. Networked devices will include personal devices (e.g. cell phones,
PDAs), vehicles, containers, supply chain assets, medical devices, HVAC units,
industrial machinery, home appliances, energy, accelerometers, pressure gauges,
flow control indicators, biosensors, and countless other applications. According
to an article, "Pervasive Internet", in M2M Magazine (Fall 2003), a minimum of
1.5 billion devices will be connected to the Internet worldwide by 2010. This
represents a $700 billion total opportunity including device enabling,
monitoring, and providing value-added services made available by the M2M
network, according to M2M Magazine.
We believe that an opportunity exists to combine our technology with world-class
partners in order to deliver a best-in-class solution and emerge as a leader in
the Device Networking industry. Our Company has begun addressing this
opportunity by working in several initial verticals, which include vending,
commercial laundry, self-service business centers and self-service kiosks. These
services share several key attributes, specifically, they are all self-service,
cash-based businesses that are distributed across broad geographic areas. We
address the extremely broad range of Device Networking opportunities by
licensing our technologies to equipment makers throughout a variety of market
segments. Equipment makers will be able to merge our technology with their
in-depth market expertise.
THE INDUSTRY
Our current customers are primarily in the vending, commercial laundry, business
center and kiosk industry sectors. While these industry sectors represent only a
small fraction of the total Device Networking market, these are the areas where
we have gained the most traction. In addition to being our primary markets,
these sectors serve as a 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.
36
Commercial Laundry
The domestic commercial laundry industry is estimated to be $5 billion in annual
sales and 3.5 million commercial laundry machines in operation, according to
Coin Laundry Association, October 2000 edition. The average annual growth rate
for the commercial laundry sector is estimated to be between 10% and 12%. The
Company believes the inline sale of additives (i.e. push-button selections for
detergent and softener) may lead to a significant increase in this figure due to
larger net margins over traditional industry standards. The addressable market
is primarily the seven largest laundry operators, as well as several other small
operators. These operators own and manage the equipment that is installed in
multi-housing and college and university locations. The addressable market
excludes those who own single laundromats.
Business Centers
There are currently 52,000 hotels in the United States and 300,000 worldwide,
per American Hotel & Lodging Association's website, www.ahma.com. There is
demand for business center availability in hotels, with ever-greater percentages
of travelers needing and expecting use of computers, printers, fax machines,
copiers, and other business services. We believe that there are 5,900 hotels in
the primary addressable market - business oriented hotels with over 150 rooms -
and 13,900 in the secondary market, hotels with 75 to 150 rooms. The growth rate
for the overall market is 5% annually, with the addressable market gaining 8%
annually.
Kiosk
According to a report by Frost and Sullivan Consulting, Kiosks represent a $500
million market. Kiosks are becoming increasingly popular as self-service
"specialty" shops within larger retail environments. Value-added services, such
as photo enlargement and custom imaging are a prominent example, located within
many major retailers. Since pricing on these products is generally higher than
$1 or $2, cashless payment options are essential.
OUR SUITE OF PRODUCTS AND SERVICES
Intelligent Vending(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.
37
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.
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.
38
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.
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.
39
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.
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.
40
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.
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.
41
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 and
40% as of September 30, 2005 was 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. Approximately 32% of the Company's revenues for the three
months ended September 30, 2005 were concentrated with two customers. The
Company's customers are principally located in the United States.
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.
42
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 January 9, 2006, 57 United States patents and 4 Foreign patents have
been issued to the Company (including 7 patents acquired in July 2003 from
Bayview), 18 United States patents and 7 Foreign patents are pending (including
5 acquired from Bayview) and 3 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";
43
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";
44
o U.S. Patent No. 6,604,085 entitled "Universal interactive advertising and
payment system network for public access electronic commerce and business
related products and services";
o U.S. Patent No. 6,601,040 entitled "Electronic commerce terminal for
wirelessly communicating to a plurality of communication devices";
o U.S. Patent No. 6,601,039 entitled "Gas pump control system having access
to the Internet for the purposes of transacting e-mail, e-commerce, and
e-business, and for conducting vending transactions";
o U.S. Patent No. 6,601,038 entitled "Delivery of goods and services
resultant from an electronic commerce transaction by way of a pack and
ship type company";
o U.S. Patent No. 6,601,037 entitled "System and method of processing credit
card, e-commerce, and e-business transactions without the merchant
incurring transaction processing fees or charges worldwide";
o U.S. Patent No. D477,030 entitled "Vending machine cashless payment
terminal";
o U.S. Patent No. D476,037 entitled "User interface bracket for a point of
sale terminal";
o U.S. Patent No. D476,036 entitled "Printer bracket for point of sale
terminal";
o U.S. Patent No. D475,751 entitled "User interface bracket for a point of
sale terminal";
o U.S. Patent No. D475,750 entitled "Paper guide for a point of sale
terminal";
o U.S. Patent No. D475,414 entitled "Printer bracket for point of sale
terminal";
o U.S. Patent No. 5,844,808 entitled "Apparatus and methods for monitoring
and communicating with a plurality of networked vending machines";
o U.S. Patent No. 6,581,396 entitled "Refrigerated vending machine
exploiting expanded temperature variance during power-conservation mode";
o U.S. Patent No. 6,389,822 entitled "Refrigerated vending machine
exploiting expanded temperature variance during power-conservation mode";
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";
45
o U.S. Patent No. D480,948 entitled "Mounting bracket for mounting a
cashless payment terminal to a vending machine";
o U.S. Patent No. 6,643,623 entitled "A method of transacting an electronic
mail, an electronic commerce, and an electronic business transaction by an
electronic commerce terminal using a gas pump";
o U.S. Patent No. 6,684,197 entitled "Method of revaluing a private label
card using an electronic commerce terminal (as amended)";
o U.S. Patent No. 6,763,336 entitled "Method of transacting an e-mail, an
e-commerce, and an e-business transaction by an electronic commerce
terminal using a wirelessly networked plurality of portable devices";
o U.S. Patent No. 6,801,836 entitled "Power-conservation based on
indoor/outdoor and ambient-light determinations";
o U.S. Patent No. 6,807,532 entitled "Method of soliciting a user to input
survey data at an electronic commerce terminal";
o U.S. Patent No. 6,853,894 entitled "Global network based vehicle safety
and security telematics";
o 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 U.S. Patent No. 6,975,926 entitled "Method and apparatus for power
management control of a compressor-based appliance that reduces electrical
power consumption on an appliance";
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.
46
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, and $220,000 for the
three months ended September 30, 2005.
EMPLOYEES
On December 31, 2005, the Company had 52 employees, all of whom were full-time.
PROPERTY
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.
In December 2004, the Company entered into a lease for 2,837 square feet of
space located in Denver, Colorado, to be 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.
LEGAL PROCEEDINGS
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 requests monetary
damages of $4,350,381 representing the alleged value of the warrants currently
held by, or claimed to be due to, Swartz, monetary damages of $196,953
representing a termination fee allegedly due in connection with the termination
of an agreement, and unspecified monetary damages relating to the alleged breach
of certain rights of first refusal.
47
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, among other
things, 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. In September 2005, the
Company served various discovery requests upon Swartz that have been partially
responded to as of the date of this prospectus.
The Company intends to vigorously defend this action and to prosecute its
counterclaims. In particular, the Company believes it has a substantial defense
to the complaint because Swartz was not registered as a broker-dealer, and
intends to vigorously pursue this defense. 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.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our Directors and executive officers, on the date of this prospectus, 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) 49 Director
(1) Member of Compensation Committee
(2) Member of Audit Committee
48
Each Director holds office until the next Annual Meeting of shareholders and
until his successor has been elected and qualified.
George R. Jensen, Jr., has been our Chief Executive Officer and a Director since
our inception in January 1992. Mr. Jensen was Chairman, Director, and Chief
Executive Officer of American Film Technologies, Inc. ("AFT") from 1985 until
1992. AFT was in the business of creating color imaged versions of
black-and-white films. From 1979 to 1985, Mr. Jensen was Chief Executive Officer
and President of International Film Productions, Inc. Mr. Jensen was the
Executive Producer of the twelve hour miniseries, "A.D.", a $35 million dollar
production filmed in Tunisia. Procter and Gamble, Inc., the primary source of
funds, co-produced and sponsored the epic, which aired in March 1985 for five
consecutive nights on the NBC network. Mr. Jensen was also the Executive
Producer for the 1983 special for public television, "A Tribute to Princess
Grace". From 1971 to 1978, Mr. Jensen was a securities broker, primarily for the
firm of Smith Barney, Harris Upham. Mr. Jensen was chosen 1989 Entrepreneur of
the Year in the high technology category for the Philadelphia, Pennsylvania area
by Ernst & Young LLP and Inc. Magazine. Mr. Jensen received his Bachelor of
Science Degree from the University of Tennessee and is a graduate of the
Advanced Management Program at the Wharton School of the University of
Pennsylvania. 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.
49
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 a
Bachelor of Arts Degree in Government from Franklin & Marshall College, a Juris
Doctor Degree from Villanova Law School, and a Masters in Law (Taxation) Degree
from Temple Law School.
50
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
Annual Compensation Long Term
------------------- ---------
Compensation
------------
Other Annual Restricted Securities
Fiscal Compensation Stock Underlying
Name and Principal Position Year Salary Bonus (1) (2) Awards($) Options (#)
- --------------------------- ---------- ---------- ---------- ------------ ------------ ----------
George R. Jensen, Jr. Chief 2005 $ 250,000 -- $ 17,875 -- --
Executive Officer & Chairman 2004 $ 217,500 $4,870,000(3) $ 17,875 -- --
of the Board 2003 $ 189,038 $ 250,000 $ 223,211 -- --
Stephen P. Herbert Chief 2005 $ 231,923 -- $ 17,875 -- --
Operating Officer President 2004 $ 192,692 $ 225,000 $ 17,875 -- --
2003 $ 183,854 $ 225,000 $ 185,317 -- --
H. Brock Kolls Senior 2005 $ 165,000 $ 110,000 $ 11,917 -- --
Vice-President, Research & 2004 $ 156,923 $ 60,000 $ 63,205 -- --
Development 2003 $ 150,000 $ 25,000 $ 64,493 -- --
Adele H. Hepburn Director of 2005 $ 130,000 -- -- -- --
Investor Relations 2004 $ 130,000 $ 167,075 -- -- --
2003 $ 91,000 $ 282,382 -- -- --
David M. DeMedio Chief 2005 $ 131,689 $ 11,000 $ 7,800 -- 300,000
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.
51
(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 $4,620,000.
(4) Employment as Chief Financial Officer commenced on April 12, 2005.
OPTION GRANTS IN LAST FISCAL YEAR
(Individual Grants)
Number of securities Percent of total options
underlying options granted to employees in Exercise base
Name granted(#) fiscal year price ($/share) Expiration date
- ------ ------------- ------------------ ---------- ----------
David M. DeMedio 300,000 (1) 100% $.20 (2)
- ----------
(1) Conditioned upon Mr. DeMedio's employment, the options vest at a rate of
37,500 per three-month period commencing on July 31, 2005 for an aggregate
of 300,000 options on April 30, 2007.
(2) The options expire two years from the date of vesting.
52
TOTAL OPTIONS EXERCISED IN FISCAL YEAR ENDED JUNE 30, 2005 AND YEAR END VALUES
The following table gives information for options exercised by an executive
officer and an employee in fiscal year 2005, and the number of options held by
the executive officer and the employee at fiscal year end:
Unexercised
In-the-Money
Securities Underlying Options at FY-End($)
Shares Acquired Unexercised Options at Exercisable
Name On Exercise(#) Value Realized ($) FY-End (#) /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 prospectus. 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.
53
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.
54
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.
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.
PRINCIPAL SHAREHOLDERS
COMMON STOCK
The following table sets forth, as of January 9, 2006, the beneficial
ownership of the Common Stock of each of the Company's directors, executive
officers and other employee named below, 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.
55
Number of Shares of
Name and Address Common Stock
Beneficial Owner Beneficially Owned (1) Percent of Class (2)
- ---------------------------- ---------------------- -----------------
George R. Jensen, Jr. 10,821,000 shares(3) 1.79%
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355
Stephen P. Herbert 2,736,050 shares(4) *
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355
Haven Brock Kolls, Jr. 707,325 shares(5) *
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355
Adele H. Hepburn 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. 4,891,615 shares (9) *
P.O. Box 727
Edgemont, Pennsylvania 19028
David M. DeMedio 357,625 shares (10) *
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355
Wellington Management Company, LLP 71,000,000 (11) 11.73%
75 State Street
Boston, MA 02109
All Directors and Executive Officers
As a Group (8 persons) 23,778,964 shares (12) 3.93%
- ----------
* Less than one percent (1%)
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and derives from either voting or
investment power with respect to securities. Shares of Common Stock
issuable upon conversion of the Preferred Stock, shares issuable upon the
conversion of Convertible Senior Notes, or shares of Common Stock issuable
upon exercise of warrants and options currently exercisable, or
exercisable within 60 days of January 9, 2006, are deemed to be
beneficially owned for purposes hereof.
56
(2) On January 9, 2006 there were 500,162,015 shares of Common Stock and
521,642 shares of Series A Preferred Stock issued and outstanding. For
purposes of computing the percentages under this table, it is assumed that
all shares of issued and outstanding Series A Preferred Stock have been
converted into 521,642 shares of Common Stock, that all of the options to
acquire Common Stock which have been issued and are fully vested as of
January 9, 2006 (or within 60-days of January 9, 2006) have been converted
into 1,822,472 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 21,948,132 shares of Common Stock;
that all of the Convertible Senior Notes have been converted into
80,053,551 shares of Common Stock; and that all of the accrued and unpaid
dividends on the Series A Preferred Stock as of January 9, 2006 have been
converted into 783,604 shares of Common Stock. Therefore, 605,291,416
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). 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 1,050 shares of Common Stock beneficially owned by his child,
600,000 shares of Common Stock beneficially owned by his spouse and
250,000 shares issuable to Mr. Herbert upon the exercise of warrants.
(5) Includes 12,000 shares of Common Stock owned by Mr. Kolls' spouse, 150,000
shares issuable to his spouse upon conversion of her Senior Note.
(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 and
13,500 shares issuable upon exercise of warrants.
(8) Includes 17,846 shares of Common Stock owned by the Sellers Pension Plan
of which Mr. Sellers is a trustee, 4,952 shares of Common Stock owned by
Sellers Process Equipment Company of which he is a Director, 10,423 shares
of Common Stock owned by Mr. Seller's wife, 551,700 shares issuable upon
conversion of his Senior Notes and 100,000 shares issuable upon the
exercise of warrants.
57
(9) Includes 1,200,717 shares of Common Stock issuable to Mr. Van Alen upon
conversion of his Senior Notes, 1,045,830 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 and 75,000 shares of Common Stock issuable
to Mr.DeMedio upon the exercise of his Common Stock Options.
(11) Wellington Management Company, LLP ("Wellington Management"), in its
capacity as an investment adviser, may be deemed to have beneficial
ownership of 71,000,000 shares of common stock that are owned by numerous
investment advisory clients, none of which is known to have such interest
with respect to more than five percent of the class of shares. Wellington
Management has shared voting authority over 45,600,000 shares and shared
dispositive power over 71,000,000 shares. Wellington Management is a
registered investment adviser under the Investment Advisers Act of 1940,
as amended.
(12) 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 January 9, 2006 the beneficial
ownership of the Series A Preferred Stock by the Company's directors and
executive officers, the other employee named below, as well as by the Company's
directors and executive officers as a group. The Company is not aware of any
beneficial owner of more than five percent of the Series A Preferred Stock.
Except as otherwise indicated, the Company believes that the beneficial owners
of the Series A 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 of Series A
Name and Address Preferred Stock Beneficially
Beneficial Owner Owned Percent of Class (1)
- ----------------------- ---------------------------- --------------------
Adele H. Hepburn 5,150 shares (2) *
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355
All Directors and 0 shares *
Executive Officers
As a Group (8 persons)
- ----------
* Less than one percent (1%)
(1) There were 521,642 shares of Series A Preferred Stock issued and
outstanding as of January 9, 2006.
(2) Ms. Hepburn is an employee of the Company.
58
CERTAIN 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.
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.
During November 2005, Mr. Van Alen invested $33,333 as part of the 2005-G Senior
Note Offering and $20,000 as part of the bridge note offering that matured on
January 6, 2006. At maturity, the bridge notes were automatically exchanged for
2006-A Convertible Senior Notes and purchase rights.
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.
59
SELLING SHAREHOLDERS
Each of the selling shareholders listed below is, as of the date hereof, the
holder of our common stock or has the right to acquire the number of shares of
common stock set forth opposite such selling shareholder's name. The issuance of
the common stock to the selling shareholders as well as the issuance of the
common stock to the selling shareholders upon exercise of the warrants or
conversion of the senior notes, or upon purchase under the Common Stock Purchase
Agreement dated April 4, 2005 was or will be a transaction exempt from the
registration requirements of the Act and various state securities laws.
We have agreed, at our expense, to register all of the common stock for resale
by the selling shareholders under the Act. We expect to incur expenses of
approximately $35,000 in connection with the registration statement of which
this prospectus is a part.
The number of shares that may be actually sold by the selling shareholders will
be determined by the selling shareholders. The selling shareholders are under no
obligation to sell all or any portion of the shares offered, nor are the selling
shareholders obligated to sell such shares immediately under this Prospectus.
Particular selling shareholders may not have a preset intention of selling their
shares and may offer less than the number of shares indicated. Because the
selling shareholder may sell all, some or none of the shares of common stock
that the selling shareholder holds, no estimate can be given as to the number of
shares of our common stock that will be held by the selling shareholder upon
termination of the offering. Shares of common stock may be sold from time to
time by the selling shareholders or by pledgees, donees, transferees or other
successors in interest.
The following tables set forth information with respect to each selling
shareholder and the respective amounts of common stock that may be offered
pursuant to this prospectus. None of the selling shareholders has, or within the
past three years has had, any position, office or other material relationship
with us, except as noted below. Except as specifically set forth below,
following the offering, and assuming all of the common stock offered hereby has
been sold, none of the selling shareholders will beneficially own one percent
(1%) or more of the common stock.
STEVE ILLES COMMON STOCK
Beneficial Ownership after
Common Stock Offering
Selling Shareholder Offered Hereby Number Percent
----------------------- ----------------- ----------- ----------
Steve Illes 36,000,000 (1) 7,584,615 1.53%
- ----------
(1) Represents 36,000,000 shares that Mr. Illes may purchase from us under his
Common Stock Purchase Agreement dated April 4, 2005 with the Company
through August 11, 2007. USA has the right to require Mr. Illes to
purchase Common Stock at the lower of: (i) $.30; or (ii) 90% of the
closing bid price per share on the applicable date. We have agreed to
register these shares for resale by Mr. Illes at our cost and expense
through May 13, 2007. Through January 9, 2006, Mr. Illes has purchased
from us an aggregate of 19,999,898 shares under the April 2005 Agreement
for an aggregate purchase price of $2,472,690. None of these shares are
reflected in the above table.
60
2005-G SENIOR NOTE OFFERING
Beneficial Ownership after
Common Stock Offering
Selling Shareholder Offered Hereby(1) Number Percent
----------------------- ----------------- ----------- ----------
William Recktenwald 800,000
Crestview Capital Master LLC(2) 6,666,666
Thomas A. Katcher 360,000
Michael J. O'Brien, Sr. 600,000
William L. Van Alen, Jr.(3) 666,660 4,224,955 *
Robert Allen Pett 1,805,560
----------
TOTAL 10,898,886
==========
- ----------
* Less than 1%
(1) During October and November 2005, the Company sold to the above
shareholders $544,945 principal amount of Senior Notes due December 31,
2008. These 2005-G Notes are convertible at the rate of $.10 per share at
any time prior to maturity. For each $10,000 invested in the offering, the
selling shareholder also received purchase rights, which were exchanged
for warrants to purchase 100,000 shares of Common Stock at $.20 per share
at any time prior to December 31, 2008. We have agreed to register the
5,449,443 shares underlying the notes and the 5,449,443 shares underlying
the warrants through November 30, 2006. As of the date of this prospectus,
none of the notes have been converted into common stock and none of the
warrants have been exercised.
(2) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity is Stewart
R. Flink.
(3) Mr. Van Alen is a Director of the Company.
61
2006-A SENIOR NOTE OFFERING
Beneficial Ownership after
Common Stock Offering
Selling Shareholder Offered Hereby(1) Number Percent
----------------------- ----------------- ----------- ----------
The Nutmeg Group LLC(2) 4,000,000
Daniel E. and JoAnn G. Spealman 2,000,000
Fusion Capital Fund II LLC(3) 4,000,000
Nite Capital LP(4) 4,000,000
William L. Van Alen, Jr.(5) 400,000 4,491,615 *
Deborah L. and Robert F. Jones 600,000
Lawrence Berk 200,000
Martin Lipper 200,000
----------
TOTAL 15,400,000
==========
- ----------
* Less than 1%
(1) During October and November 2005, the Company sold to the above selling
shareholders $770,000 principal amount of notes due January 6, 2006. These
notes earned interest at 10% per annum and were not convertible into
shares. On January 6, 2006, these notes were automatically exchanged for a
like principal amount of 2006-A Senior Notes bearing interest at 10% per
annum. The 2006-A Senior Notes are convertible at the rate of $.10 per
share and mature December 31, 2010. For each $10,000 of 2006-A Notes
received, the selling shareholder also received purchase rights, which
were exchanged for warrants to purchase up to 100,000 shares at $.20 per
share at any time prior to December 31, 2008. We have agreed to register
the 7,700,000 shares underlying the Senior Notes and the 7,700,000 shares
underlying the warrants through November 30, 2006. As of the date of this
prospectus, none of the notes have been converted into common stock and
none of the warrants have been exercised.
(2) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity is Randall
Goulding.
(3) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the share held of record by the entity is Joshua B.
Schienfeld.
(4) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the share held of record by the entity is Keith
Goodman.
(5) Mr. Van Alen is a Director of the Company.
62
WELLINGTON MANAGEMENT COMPANY COMMON STOCK
Beneficial Ownership after
Common Stock Offering
Selling Shareholder Offered Hereby(1) Number Percent
----------------------- ----------------- ----------- ----------
British Columbia Investment Management Corporation
(nominee name: Hare & Co.) 1,400,000
Government of Singapore Investment Corporation Pte Ltd 2,000,000
(nominee name: ELL & CO.)
The Retirement Program Plan for Employees of Union Carbide 2,000,000
Corporation (nominee name: KANE & CO.)
The Dow Chemical Employees' Retirement Plan 2,200,000
(nominee name: KANE & CO.)
The Robert Wood Johnson Foundation 2,500,000
(nominee name: Benchworthy & Co.)
Howard Hughes Medical Institute 3,000,000
(nominee name: MAC & Co.)
WTC-CIF Emerging Companies Portfolio 4,500,000
(nominee name: Finwell & Co.)
WTC-CTF Emerging Companies Portfolio 5,000,000
(nominee name: Landwatch & Co.)
Public Sector Pension Investment Board 7,400,000
(nominee name: MAC & Co.)
Oregon Investment Council 10,000,000
(nominee name: Westcoast & Co.) ----------
TOTAL 40,000,000
==========
- ----------
(1) Wellington Management Company, LLP ("Wellington") is an investment adviser
registered under the Investment Advisers Act of 1940, as amended.
Wellington, in such capacity, is deemed to share beneficial ownership over
the shares held by its client accounts.Represents 40,000,000 shares issued
at $0.10 per share during December 2005. We have agreed to register these
shares for resale by the holder thereof at our cost and expense for a
period of one year from the date of this prospectus.
KAZI MANAGEMENT COMMON STOCK
Beneficial Ownership after
Common Stock Offering
Selling Shareholder Offered Hereby(1) Number Percent
----------------------- ----------------- ----------- ----------
Kazi Management VI, Inc. (2) 7,142,858
- ----------
(1) Consists of 7,142,858 shares of Common Stock underlying warrants
exercisable at $.07 per share at any time prior to October 26, 2007.
63
(2) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Kazi
Management, is Zubair Kazi.
RATIONALWAVE ON SHORE EQUITY FUND, L.P. COMMON STOCK
Beneficial Ownership after
Common Stock Offering
Selling Shareholder Offered Hereby Number Percent
----------------------- ----------------- ----------- ----------
Rationalwave On Shore Equity Fund, L.P. 4,000,000(1)
- ----------
(1) Represents 4,000,000 shares issued at $0.10 per share on January 9, 2006.
We have agreed to register these shares for resale by the holder thereof
at our cost and expense through January 9, 2007. The natural person who
exercises dispositive powers and voting discretion with respect to these
shares is Mark Rosenblatt.
2005-C SENIOR NOTE OFFERING
Beneficial Ownership after
Common Stock Offering
Selling Shareholder Offered Hereby(4) Number Percent
----------------------- ----------------- ----------- ----------
Bonnie Lee Burnett 100,000
Marc Cohen 150,000
Bentley T Elliott 1,000,000
Rachel Glicksman(1) 288,000 215,000 *
Adele H Hepburn(2) 1,000,000 3,382,760 *
Steve Illes(3) 7,500,000 36,084,615 7.3
Gary S. Nash(1) 12,000 6,000 *
Peter Ruben 500,000
Richard Schonwald 500,000
Pat Smith 3,500,000
Daniel E Spealman 980,000
Daniel E Spealman Ira 2,020,000
==========
TOTAL 17,550,000
- ----------
* Less than 1%
(1) Rachel Glicksman and Gary S. Nash are principals in the firm of CEOCAST,
Inc., which is our public relations consultant.
(2) Ms. Hepburn is an employee of the Company.
(3) Mr. Illes entered into a Common Stock Purchase Agreement with us in April
2005 and had entered into a common Stock Purchase Agreement with us in
August 2004, which has been superceded by the April 2005 agreement.
64
(4) During February and March 2005, the Company sold to the above selling
shareholders $1,755,000 principal amount of Senior Notes due April 30,
2005. These notes earned interest at 10% per annum and were not
convertible into shares. During March 2005, each of the above selling
shareholders agreed to exchange such selling shareholder's note for a
like principal amount of 2005-C Senior Notes bearing interest at 10% per
annum. The 2005-C Senior Notes are convertible at the rate of $.10 per
share and mature December 31, 2010. We have agreed to register the
shares underlying the 2005-C Senior Notes under the Act for resale
through April 30, 2006, and these shares are reflected in the above
table. As of the date of this prospectus, none of the notes have been
converted into common stock.
2004-B SENIOR NOTE OFFERING
Beneficial Ownership after
Common Stock Offering
Selling Shareholder Offered Hereby(11) Number Percent
----------------------- ----------------- ----------- ----------
Charles W. Apple 100,000
John P. Ayers 10,200
Charles F. Bellavia 7,950
Lawrence Berk 150,000
Gunter Beyer(10) 12,966
Brittain Family Trust (1) 11,867
William P. Burks 50,000
Gerald E. Clark Jr. 13,000
Robert J. Clarke Jr. 500,000
Jack W. Criffield 350,000
Dudley R. & Janet S. Crow 83
Clifton B. Currin Tr Fbo
Clifton B Currin Trust 20,000
U/A 3/8/89
David M. Demedio (2) 19,000 338,625 *
Louis E. & Rose M. Direnzo 5,100
Robert R. Frey 30,000
Fusion Capital Fund Ii Llc (3) 500,000
Margaret R. Geddis 5,100
Robert G. Giddens 500,000
George W. Gilles 250,000
Cary Glickstein 100,000
Harriet Glickstein 300,000
William M. Goldstein 62,500
William R. Hansen 100,000
Heald Family Trust (4) 16,800
Robert C. Hector Jr. 250,000
Michelle P. Hollenshead 4,255
Hrubala Associates, A Partnership (5) 18,117
Christine F. Hughes 5,100
Michael Katchur 15,300
Thomas A. Katchur 1,595,000
Thomas John Katchur 400,000
65
Deborah Kim 500,000
Sung J. Kim 200,000
Young J. Kim 250,000
Gregory S. Kobus 15,300
Aaron Lehmann 100,000
Martin Lipper 175,000
Seymour Lipper 100,000
Philip & Randi Lipper Jtwros 100,000
H Mather Lippincott Jr. 100,000
Barry N. Mccabe 7,717
John F. Mccormick 16,875
Robert H. & Rosemary M. Montgomery 30,000
Mac G. Morris 10,200
George O'connell 1,000,000
Peter B. Pakradooni 50,000
Palisades Master Fund (6) 4,000,000
Neil Parker 9,050
Robert Pett 1,000,000
Roy T. Pirhala 110,000
J. Stephen Powell 20,000
John B. Rettew Iii 11,500
John S. Rupp 8,196
Edward L. Schoenhut 40,800
William F. Schoenhut Jr. 44,366
Nicholas Sellers 10,200
William W. Sellers (7) 143,366 2,669,120 *
Selman Living Trust Morton Selman & Marsha 100,000
Selman Ttees
Leonard H. Sichel Jr. 15,300
Gertrude T. Stevens 111,354
Priscilla Stitt 7,350
George E. & Marie E. Szychoski 5,000
Michael W. Szychoski 257
William L. Van Alen Jr. (8) 1,034,050 3,857,565 *
Bernard Wiener 2,564
J. Edward Willard 66,750
Kenneth B. Wilson 8,016
John D. Wright 18,050
Frances Young (9) 400,000
Donald J. Zelenka 250,000
Ruth Zweigbaum 34,293
==========
TOTAL 15,507,890(11)
- ----------
* Less than 1%
(1) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to shares held of record by the entity, Brittain
Family Trust, is E. Douglas Brittain.
(2) Mr. Demedio is an officer of the Company.
66
(3) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Fusion
Capital, is Joshua B. Scheinfeld.
(4) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Heald
Family Trust, is Jack Heald.
(5) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Hrubala
Associates, a partnership, is David R. Molumphy.
(6) The natural person who exercises sole and/or shared voting or dispositive
powers with respect to the shares held of record by the entity, Palisades
Master Fund is Andy Ruckless.
(7) Mr. Sellers is a director of the Company.
(8) Mr. Van Alen Jr. is a director of the Company.
(9) Ms. Young is a former employee of the Company.
(10) Mr. Beyer is a consultant to the Company.
(11) Represents shares into which the selling shareholder's 2004-B Senior Note
would be converted at a rate of $.10 per share. We have agreed to register
the shares underlying the 2004-B Senior Notes under the Act for resale
through June 30, 2007, and these shares are reflected in the above table.
As of the date of this prospectus, none of the notes have been converted
into common stock.
MARKET FOR COMMON STOCK
The Common Stock of the Company is currently traded on the OTC Electronic
Bulletin Board under the symbol USTT.
The high and low bid prices on the OTC Electronic Bulletin Board for the Common
Stock were as follows. These quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent actual
transactions.
Year ended June 30, 2006 High Low
- --------------------------- ------- ------
First Quarter (through September 30, 2005) $0.17 $0.12
Second Quarter (through December 31, 2005) $0.13 $0.09
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
67
On January 9, 2006, there were 1,389 record holders of the Common Stock and 529
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 January 9, 2006, such
accumulated unpaid dividends amounted to $7,836,040.
As of June 30, 2005, equity securities authorized for issuance by the Registrant
with respect to compensation plans were as follows:
Number of securities to be
issued upon exercises of Weighted average exercise Number of securities
outstanding options and price of outstanding remaining available for
Plan Category warrants options and warrants future issuance
--------------- ------------------ ------------------------- -----------------------
Equity compensation
plans approved by None Not applicable None
security holders
Equity compensation
plans not approved
by security holders 2,009,972(1) $0.25 14,108,693(2)
(1) 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.
(2) 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 prospectus.
68
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 January 9, 2006 there were 38,693
shares available for future issuance under the Plan.
As of January 9, 2006, 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
21,948,132 shares issuable upon the exercise of common stock warrants at
exercise prices ranging from $.07 to $1.25 per share
521,642 shares issuable upon the conversion of outstanding Preferred Stock
80,053,551 shares issuable upon the conversion of Senior Notes having an
aggregate face value of $12,054,939
36,000,102 shares issuable under our agreement with Steve Illes
38,693 shares issuable the 2004-B Stock Compensation Plan
Reverse Stock Split
On December 13, 2005, the Company entered into a Stock Purchase Agreement
with Wellington Management Company, LLP, a large Boston-based institutional
investor, on behalf of certain of its clients ("Wellington"). Pursuant thereto,
the Company sold to Wellington 40,000,000 shares of Common Stock for $.10 per
share for an aggregate of $4,000,000. As a condition of the investment by
Wellington, prior to entering into the Stock Purchase Agreement, the Company was
required by Wellington to approve and call for a special meeting of its
shareholders to consider a proposal to effectuate a 1-to-100 reverse split of
its Common Stock (the "Reverse Split"). Pursuant thereto, on December 13, 2005,
the Board of Directors unanimously approved and called for a special meeting of
shareholders on February 7, 2006, to consider the Reverse Split.
69
If the Reverse Split is approved by the shareholders, on the effective
date of the Reverse Split, (i) each 100 shares of outstanding Common Stock would
be reduced to one share of Common Stock; (ii) the number of shares of Common
Stock into which each outstanding warrant, or option is exercisable would be
proportionately reduced on a 100-to-1 basis; (iii) the exercise price of each
outstanding warrant or option would be proportionately increased on a 1-to-100
basis; (iv) the number of shares of Common Stock into which each share of Series
A Preferred Stock is convertible would be reduced from 1 share to one-hundredth
of a share, and each share would be entitled to one-hundredth of a vote rather
than one vote per share as currently provided; (v) the conversion rate of the
accrued and unpaid dividends on the Series A Preferred Stock would be increased
from $10.00 to $1,000.00 per share of Common Stock; (vi) the conversion price of
each convertible senior note would be proportionately increased on a 1-to-100
basis, and the number of shares into which each convertible senior note would be
convertible would be decreased on a 100-to-1 basis; and (vii) the number of
shares issuable under the 2004-B Stock Compensation Plan would be reduced from
38,693 to 386 shares. Any fractional share resulting from the Reverse Split will
be converted into a right to receive cash.
The effect of the Reverse Split on the aggregate number of authorized and
outstanding shares of Common Stock and Preferred Stock as of January 9, 2006 is
as follows:
Number Of Shares
Prior to After
Reverse Split Reverse Split
-------------- ---------------
|_| Common Stock
Authorized 640,000,000 640,000,000
Outstanding 500,162,015 5,001,620
|_| Series Preferred Stock
Authorized 1,800,000 1,800,000
Outstanding 521,642 521,642
o Series A Preferred Stock
Authorized 900,000 900,000
Outstanding 521,642 521,642
The foregoing does not reflect any adjustment that may result from the
repurchase of fractional shares of Common Stock as a result of the Reverse
Split.
The effect of the Reverse Split on the aggregate number of shares of
Common Stock issuable by the Company as of January 9, 2006 in connection with
the exercise or conversion of outstanding warrants, options, convertible senior
notes, Series A Preferred Stock, and accrued and unpaid dividends thereon, is as
follows:
70
Number Of Shares
Prior to After
Reverse Split Reverse Split
-------------- -------------
Series A Preferred Stock 521,642 5,216
Accrued Dividends on Series A
Preferred Stock 783,604 7,836
Warrants 21,948,132 219,481
Options 2,009,972 20,099
Convertible Senior Notes 80,053,551 800,536
----------- ---------
Total 105,316,901 1,053,169
=========== =========
Therefore, as shown above, on a fully converted basis, after the Reverse
Split there would be 6,054,789 shares of Common Stock issued and outstanding,
compared to 605,478,916 shares issued and outstanding as of January 9, 2006. The
number of authorized shares of Common Stock would remain the same at
640,000,000, leaving 633,945,211 shares available for issuance by the Company.
PLAN OF DISTRIBUTION
The selling shareholders are free to offer and sell the common shares at such
times, in such manner and at such prices as the selling shareholders may
determine. The types of transactions in which the common shares are sold may
include transactions in the over-the-counter market (including block
transactions), negotiated transactions, the settlement of short sales of common
shares, or a combination of such methods of sale. The sales will be at market
prices prevailing at the time of sale or at negotiated prices. Such transactions
may or may not involve brokers or dealers.
The selling shareholders may effect such transactions by selling common stock
directly to purchasers or through broker-dealers, which may act as agents or
principals. Such broker-dealers may receive compensation in the form of
discounts, concessions, or commissions from the selling shareholders. They may
also receive compensation from the purchasers of common shares for whom such
broker-dealers may act as agents or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions).
Steve Illes is an "underwriter" within the meaning of the Act in connection with
the sale of shares purchased from us under his agreement with us. The
ten-percent discount received by him in connection with his purchase of shares
from us will be an underwriting discount. The other selling shareholders and any
broker-dealers or agents that are involved in selling the shares may also be
deemed to be "underwriters" within the meaning of the Act in connection with
such sales. In such event, any commissions received by such broker-dealers or
agents and profit on the resale of the shares purchased by them may be deemed to
be underwriting discounts under the Act.
The selling shareholders also may resell all or a portion of the common shares
in open market transactions in reliance upon Rule 144 under the Act, provided
they meet the criteria and conform to the requirements of such Rule. We have
agreed to bear all the expenses (other than selling commissions) in connection
with the registration and sale of the common stock covered by this prospectus.
In some circumstances, we have agreed to indemnify the selling shareholders
against certain losses and liabilities, including liabilities under the Act.
71
We have advised the selling shareholders that while they are engaged in a
distribution of the shares included in this prospectus they are required to
comply with Regulation M promulgated under the Securities Exchange Act of 1934,
as amended. With certain exceptions, Regulation M precludes the selling
shareholders, any affiliated purchasers, and any broker-dealer or other person
who participates in such distribution from bidding for or purchasing, or
attempting to induce any person to bid for or purchase any security which is the
subject of the distribution until the entire distribution is complete.
DESCRIPTION OF SECURITIES
GENERAL
We are authorized to issue up to 640,000,000 shares of common stock, no par
value, and 1,800,000 shares of undesignated preferred stock. As of the date
hereof, 900,000 preferred shares have been designated as series A convertible
preferred stock, no par value. As of January 9, 2006, there were 500,162,015
shares of common stock issued and outstanding and 521,642 shares of series A
preferred stock issued and outstanding which are convertible into 521,642 shares
of common stock. Through January 9, 2006, a total of 589,508 shares of preferred
stock have been converted into 665,952 shares of Common Stock and $2,701,764 of
accrued and unpaid dividends thereon have been converted into 290,253 shares of
Common Stock.
COMMON STOCK
The holder of each share of common stock:
o is entitled to one vote on all matters submitted to a vote of the
shareholders of USA, including the election of directors. There is no
cumulative voting for directors;
o does not have any preemptive rights to subscribe for or purchase shares,
obligations, warrants, or other securities of USA; and
o is entitled to receive such dividends as the Board of Directors may from
time to time declare out of funds legally available for payment of
dividends.
No dividend may be paid on the common stock until all accumulated and unpaid
dividends on the series A preferred stock have been paid. Upon any liquidation,
dissolution or winding up of USA, holders of shares of common stock are entitled
to receive pro rata all of the assets of USA available for distribution, subject
to the liquidation preference of the series A preferred stock of $10.00 per
share and any unpaid and accumulated dividends on the series A preferred stock.
SERIES A CONVERTIBLE PREFERRED STOCK
The holders of shares of Series A preferred stock:
72
o have the number of votes per share equal to the number of shares of common
stock into which each such share is convertible (i.e., 1 share of series A
preferred stock equals 1 vote);
o are entitled to vote on all matters submitted to the vote of the
shareholders of USA, including the election of directors; and
o are entitled to an annual cumulative cash dividend of $1.50 per annum,
payable when, as and if declared by the Board of Directors.
The record dates for payment of dividends on the Series A Preferred Stock are
February 1 ($0.75) and August 1 ($0.75) of each year. Any and all accumulated
and unpaid cash dividends on the Series A Preferred Stock must be declared and
paid prior to the declaration and payment of any dividends on the Common Stock.
Any unpaid and accumulated dividends will not bear interest. As of January 9,
2006 the accumulated and unpaid dividends were $7,836,030.
Each share of Series A Preferred Stock is convertible at any time into 1 share
of fully issued and non-assessable Common Stock. Accrued and unpaid dividends
earned on shares of Series A Preferred Stock being converted into Common Stock
are also convertible into Common Stock at the rate $10.00 per share of Common
Stock at the time of conversion and whether or not such dividends have then been
declared by USA. As of January 9, 2006 a total of 589,508 shares of series A
Preferred Stock have been converted into common stock and accrued and unpaid
dividends thereon have been converted into 290,253 shares of Common Stock. The
conversion rate of the Series A Preferred Stock (and any accrued and unpaid
dividends thereon) will be equitably adjusted for stock splits, stock
combinations, recapitalizations, and in connection with certain other issuances
of common stock by USA. Upon any liquidation, dissolution, or winding-up of USA,
the holders of Series A Preferred Stock are entitled to receive a distribution
in preference to the Common Stock in the amount of $10.00 per share plus any
accumulated and unpaid dividends.
We have the right, at any time, to redeem all or any part of the issued and
outstanding series A preferred stock for the sum of $11.00 per share plus any
and all unpaid and accumulated dividends thereon. Upon notice by USA of such
call, the holders of the series A preferred stock so called will have the
opportunity to convert their shares and any unpaid and accumulated dividends
thereon into shares of common stock. The $11.00 per share figure was the
redemption price approved by the Directors and shareholders of USA at the time
the series A preferred stock was created and first issued. We currently have no
plans to redeem the preferred stock.
SENIOR NOTES
As of January 9, 2006, we had $320,000 of unsecured senior notes due on June 30,
2006, $1,683,500 of unsecured senior notes due on December 31, 2006, $1,078,827
of unsecured senior notes due on June 30, 2007, $2,975,016 of unsecured senior
notes due on December 31, 2007, $2,465,596 of unsecured senior notes due on
December 31, 2008, $1,520,000 of unsecured senior notes due one December 31,
2009, and $2,012,000 of unsecured senior notes due on December 31, 2010. The
principal amount of each senior note which is not voluntarily converted shall be
payable on the maturity date thereof, at which time any unpaid and accrued
interest shall also become due. Interest shall accrue at the rate of 12% per
annum from and after the date of issuance and shall be payable quarterly in
arrears on December 31, March 31, June 30, and September 30 of each year until
maturity, with the exception of the Senior Notes due June 30, 2007 and December
31, 2010 and $544,945 of the December 31, 2008 notes, which accrue interest at
the rate of 10% per annum. The senior notes are senior to all existing equity
securities of USA, including the series A preferred stock.
73
The principal amount of each Senior Note due June 30, 2006 is convertible at any
time into shares of Common Stock at the rate of $.10 per share. The principal
amount of each Senior Note due December 31, 2006 is convertible at any time into
shares of Common Stock at the rate of $.20 per share. The principal amount of
each Senior Note due June 30, 2007 is convertible at any time at into shares of
Common Stock at the rate of $.10 per share. The principal amount of each Senior
Note due December 31, 2007 is convertible at any time into shares of Common
Stock at the rate of $.20 per share. $544,945 of the Senior Notes due December
31, 2008 are convertible at anytime into shares of Common Stock at a rate of
$.10 per share and the remaining $1,920,651 principal amount of each Senior Note
due December 31, 2008 is convertible at anytime into shares of Common Stock at
the rate of $.20 per share. The principal amount of each Senior Note due
December 31, 2009 is convertible at anytime into shares of Common Stock at the
rate of $.20 per share. The principal amount of each Senior Note due December
31, 2010 is convertible at anytime into shares of Common Stock at the rate of
$.10 per share.
The indebtedness evidenced in the Senior Note is subordinated to the prior
payment when due of the principal of, premium, if any, and interest on all
"Senior Indebtedness", as defined herein, of USA as follows: Upon any
distribution of its assets in a liquidation or dissolution of USA, or in
bankruptcy, reorganization, insolvency, receivership or similar proceedings
relating to USA, the Lender shall not be entitled to receive payment until the
holders of Senior Indebtedness are paid in full. Until a payment default occurs
with respect to any Senior Indebtedness, all payments of principal and interest
due to Lender under the senior note shall be made in accordance with this senior
note. Upon the occurrence of any payment default with respect to any Senior
Indebtedness then, upon written notice thereof to USA and Lender by any holder
of such Senior Indebtedness or its representative, no payments of principal or
interest on the senior note shall be made by USA until such payment default has
been cured to the satisfaction of the holder of such Senior Indebtedness or
waived by such holder, provided, however, that if during the 180 day period
following such default, the holder of Senior Indebtedness has not accelerated
its loan, commenced foreclosure proceedings or otherwise undertaken to act on
such default, then USA shall be required to continue making payments under the
senior note, including any which had not been paid during such 180 day period.
In the event that any institutional lender to USA at any time so requires, the
Lender shall execute, upon request of USA, any intercreditor or subordination
agreement(s) with any such institutional lender on terms not materially more
adverse to the Lender then the subordination terms contained in this senior
note.
The term "Senior Indebtedness" shall mean (a) all direct or indirect, contingent
or certain indebtedness of any type, kind or nature (present or future) created,
incurred or assumed by USA with respect to any future bank or other financial
institutional indebtedness of USA or (b) any indebtedness created, incurred, or
assumed, by USA secured by a lien on any of our assets.
74
Notwithstanding anything herein to the contrary, Senior Indebtedness does not
include:
o unsecured accounts payable to trade creditors of USA incurred in the
ordinary course of business;
o any debt owed by USA to any officer, director or stockholder of USA;
o any obligation of Borrower issued or contracted for as payment in
consideration of the purchase by USA of the capital stock or substantially
all of the assets of another person or in consideration for the merger or
consolidation with respect to which USA was a party;
o any operating lease obligations of USA;
o any other indebtedness which by its terms is subordinated to the senior
note; or
o any "other indebtedness" which is subordinated to all indebtedness to
which the senior note is subordinated in substantially like terms as the
senior note; which such "other indebtedness" shall be treated as equal
with the indebtedness evidenced by the senior note.
COMMON STOCK PURCHASE WARRANTS
As of January 9, 2006, there were outstanding warrants to purchase 7,142,858
shares at $.07 per share, warrants to purchase 1,200,000 shares at $.91 per
share, warrants to purchase 377,927 shares at $1.00 per share, warrants to
purchase 2,901 shares at $1.03 per share, warrants to purchase 75,000 shares at
$1.25 per share, and warrants to purchase up to 13,149,446 shares at $.20 per
share.
The exercise price of the warrants and the number of shares of Common Stock
issuable upon exercise of the warrants are subject to adjustment in certain
circumstances, including a stock split of, stock dividend on, or a subdivision,
combination or recapitalization of the common stock. Upon the merger,
consolidation, sale of substantially all the assets of USA, or other similar
transaction, the warrant holders shall, at the option of USA, be required to
exercise the warrants immediately prior to the closing of the transaction, or
such warrants shall automatically expire. Upon such exercise, the warrant
holders shall participate on the same basis as the holders of common stock in
connection with the transaction.
The warrants do not confer upon the holder any voting or any other rights of a
shareholder of USA. Upon notice to the warrant holders, USA has the right, at
any time and from time to time, to reduce the exercise price or to extend the
warrant termination date.
SHARES ELIGIBLE FOR FUTURE SALE
Of the 500,162,015 shares of common stock issued and outstanding on January 9,
2006, all are freely transferable without further registration under the Act
(other than shares held by "affiliates" of the Company). As of January 9, 2006,
there were 521,642 shares of preferred stock issued and outstanding, all of
which are freely transferable without further registration under the Act (other
than shares held by "affiliates" of USA).
75
The shares of preferred stock issued and outstanding as of January 9, 2006 are
convertible into 521,642 shares of common stock all of which would be fully
transferable without further registration under the Act (other than shares held
by "affiliates" of USA).
Shares of our common stock which are not freely tradeable under the Act are
known as "restricted securities" and cannot be resold without registration under
the Act or pursuant to Rule 144 promulgated thereunder.
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are required to be aggregated), including any affiliate of USA, who
beneficially owns "restricted securities" for a period of at least one year is
entitled to sell within any three-month period, shares equal in number to the
greater of (i) 1% of the then outstanding shares of the same class of shares, or
(ii) the average weekly trading volume of the same class of shares during the
four calendar weeks preceding the filing of the required notice of sale with the
SEC. The seller must also comply with the notice and manner of sale requirements
of Rule 144, and there must be current public information available about USA.
In addition, any person (or persons whose shares must be aggregated) who is not,
at the time of sale, nor during the preceding three months, an affiliate of the
USA, and who has beneficially owned restricted shares for at least two years,
can sell such shares under Rule 144 without regard to the notice, manner of
sale, public information or the volume limitations described above.
LIMITATION OF LIABILITY; INDEMNIFICATION
As permitted by the Pennsylvania Business Corporation Law of 1988 ("BCL"), our
By-laws provide that Directors will not be personally liable, as such, for
monetary damages for any action taken unless the Director has breached or failed
to perform the duties of a Director under the BCL and the breach or failure to
perform constitutes self-dealing, willful misconduct or recklessness. This
limitation of personal liability does not apply to any responsibility or
liability pursuant to any criminal statute, or any liability for the payment of
taxes pursuant to Federal, State or local law. The By-laws also include
provisions for indemnification of our Directors and officers to the fullest
extent permitted by the BCL. Insofar as indemnification for liabilities arising
under the Act may be permitted to Directors, officers and controlling persons of
USA pursuant to the foregoing provisions, or otherwise, we have been advised
that in the opinion of the SEC such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our stock is American Stock Transfer &
Trust Company, 40 Wall Street, New York, New York 10005.
76
LEGAL MATTERS
The validity of the common stock has been passed upon for us by Lurio &
Associates, P.C., Philadelphia, Pennsylvania 19103.
EXPERTS
The consolidated financial statements and schedule of USA Technologies, Inc. at
June 30, 2005, and for the year ended June 30, 2005 appearing in this Prospectus
and Registration Statement have been audited by Goldstein Golub Kessler LLP,
independent registered public accounting firm, as set forth in their report
thereon (which contains an explanatory paragraph describing conditions that
raise substantial doubt about the Company's ability to continue as a going
concern as described in Note 2 to the consolidated financial statements)
appearing elsewhere herein, and are included in reliance upon such report given
on the authority of such firm as experts in accounting and auditing.
The consolidated financial statements and schedule of USA Technologies, Inc. at
June 30, 2004, and for each of the two years in the period ended June 30, 2004
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent registered public accounting firm, as set forth
in their report thereon (which contains an explanatory paragraph describing
conditions that raise substantial doubt about the Company's ability to continue
as a going concern as described in Note 2 to the consolidated financial
statements) appearing elsewhere herein, and are included in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We file annual, quarterly and other reports, proxy statements and other
information with the Securities and Exchange Commission. Anyone may inspect a
copy of the registration statement or any other reports we file, without charge
at the public reference facility maintained by the Securities and Exchange
Commission in Room 1024, 450 Fifth Street, NW, Washington, DC 20549. Copies of
all or any part of the registration statement may be obtained from that facility
upon payment of the prescribed fees. The public may obtain information on the
operation of the public reference room by calling the Securities and Exchange
Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains a
website at http://www.sec.gov that contains reports, proxy and information
statements, and other information regarding registrants that file electronically
with the Securities and Exchange Commission.
We will furnish record holders of our securities with annual reports containing
financial statements audited and reported upon by our independent auditors,
quarterly reports containing unaudited interim financial information, and such
other periodic reports as we may determine to be appropriate or as may be
required by law.
You can find additional information concerning us on our website
http://wwwusatech.com. Information on our website is not and should not be
considered a part of this prospectus.
77
PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is an itemized statement of the estimated amounts of all expenses
payable by the Registrant in connection with the registration of the common
stock, other than underwriting discounts and commissions.
Securities and Exchange Commission - Registration Fee $ 1,251.14
Printing and Engraving Expenses $ 3,748.86
Accounting Fees and Expenses $15,000.00
Legal Fees and Expenses $15,000.00
----------
Total $35,000.00
==========
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 1746 of the Pennsylvania Business Corporation Law of 1988, as amended
("BCL"), authorizes a Pennsylvania corporation to indemnify its officers,
directors, employees and agents under certain circumstances against expenses and
liabilities incurred in legal proceedings involving such persons because of
their holding or having held such positions with the corporation and to purchase
and maintain insurance of such indemnification. Our By-laws substantively
provide that we will indemnify our officers, directors, employees and agents to
the fullest extent provided by Section 1746 of the BCL.
Section 1713 of the BCL permits a Pennsylvania corporation, by so providing in
its By-laws, to eliminate the personal liability of a director for monetary
damages for any action taken unless the director has breached or failed to
perform the duties of his office and the breach or failure constitutes
self-dealing, willful misconduct or recklessness. In addition, no such
limitation of liability is available with respect to the responsibility or
liability of a director pursuant to any criminal statute or for the payment of
taxes pursuant to Federal, state or local law. Our By-laws eliminate the
personal liability of the directors to the fullest extent permitted by Section
1713 of the BCL.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
During the three years immediately preceding the date of the filing of this
registration statement, the following securities were issued by USA without
registration under the Securities Act of 1933, as amended ("Act"):
PRIVATE PLACEMENTS
During the 2003 fiscal year and through August 7, 2003, the Company issued an
aggregate of 85,601,130 shares to 398 accredited investors at $.10 per share for
an aggregate of $8,560,113. Of the $8,560,130, $8,345,674 were for cash proceeds
and $214,439 were for services rendered or to be rendered. The offer and sales
of the shares was exempt from registration under Rule 506 promulgated under
Section 4(2) of the Act. All of the investors were either pre-existing security
holders or business associates. The offer and sale thereof did not involve any
general advertising or solicitation and the securities contained appropriate
restrictive legends under the Act. In connection with the offering, we paid
$64,000 to Sloan Securities, Inc., a broker-dealer, in connection with the
8,000,000 shares sold by Sloan on our behalf. We have agreed to use our best
efforts to register all of these shares for resale under the Act for a period of
one year.
78
In February, 2003, Jubilee Investment Trust, PLC ("Jubilee"), a United Kingdom
investment trust made an equity investment in USA Technologies at U.S.$0.20 per
share. Jubilee is a newly established investment trust set up to invest in
securities traded on a range of public markets, primarily in the United Kingdom.
USA Technologies issued to Jubilee 15,000,000 shares of Common Stock of USA
Technologies at a price per share of U.S.$0.20 with an aggregate value of
U.S.$2,850,000. In full payment for the shares of USA Technologies, Jubilee
issued to USA Technologies an equivalent of their shares (1,870,091 shares of
Jubilee at a price per share valued at One British Pound which was the initial
public offering price per share for the Jubilee shares). The exchange rate used
by the parties for the transaction was One British Pound equals U.S.$1.6042. The
shares to be issued to Jubilee by USA Technologies will not be registered under
the Securities Act of 1933, as amended. Jubilee has agreed not to sell USA
Technologies` shares for a period of two (2) years from the date of issuance
unless USA Technologies agrees otherwise. The shares were issued to Jubilee by
USA pursuant to the exemption from registration set forth in Section 4(2) of the
Act.
In March 2003, we issued a warrant to La Jolla Cove Investors, Inc. to purchase
up to 9,000,000 shares at $.10 per share. The warrants expire as follows:
3,000,000 on the three month anniversary of the date of this prospectus;
3,000,000 on the 6 month anniversary of the date of this prospectus; and
3,000,000 on the 9 month anniversary of the date of this prospectus. The
warrants may not be exercised without our consent on any date on which the
closing price of our shares is less than $.40. We have agreed to register the
shares underlying the warrants for resale under the Act for a period of one
year. The warrants were offered and sold to La Jolla pursuant to the exemption
from registration set forth in Section 4(2) of the Act. During October 2003,
these warrants were rescinded and cancelled by agreement of USA and La Jolla.
In April 2003, we issued 530,818 shares and warrants to purchase up to 530,818
shares to the holders of our senior notes who elected to receive these
securities in lieu of the cash interest payment due for the quarter ended March
31, 2003. The shares were purchased at the rate of $.20 per share and the
warrants are exercisable at $.20 per share at any time through June 30, 2004. We
have agreed to register the shares and the shares underlying the warrants under
the Act for resale for a period of 2 years. The securities were offered and sold
under the exemption from registration set forth in Rule 506 promulgated under
the Act. All of the noteholders are accredited investors and existing security
holders of USA and there was no general solicitation or advertising.
During April 2003, we agreed to issue to Steve Illes, an existing shareholder,
an aggregate of 1,000,000 shares for $.10 per share and agreed to issue to him
warrants to purchase up to 4,000,000 shares at $.10 per share at any time
through August 31, 2003. The offer and sale of the shares and warrants was
exempt from registration under Section 4(2) of the Act. Mr. Illes is an
accredited investor, made appropriate investment representations, was afforded
access to all public filings and all other information that USA could reasonably
obtain, and the securities contained appropriate restrictive legends under the
Act. We have agreed to register the shares and the shares underlying the
warrants for resale under the Act for a period of one year.
79
During May 2003, we issued to Providence Investment Management, an accredited
investor, an aggregate of 2,500,000 shares for $.10 per share. The offer and
sale of the shares was exempt from registration under Section 4(2) of the Act.
Providence Investment Management is an accredited investor, made appropriate
investment representations, was afforded access to all public filings and all
other information that USA could reasonably obtain, and the securities contained
appropriate restrictive legends under the Act. Providence approached us about
the investment and we did not solicit Providence. We have agreed to register the
shares for resale under the Act for a period of one year.
During July 2003, we issued an aggregate of 10,500,000 shares to George R.
Jensen, Jr., our Chairman and Chief Executive Officer, as part of the amendment
to his employment agreement. The offer and sale of the shares was exempt from
registration under Section 4(2) of the Act. Mr. Jensen is an accredited
investor, made appropriate investment representations, was afforded access to
all public filings and all other information that USA could reasonably obtain,
and the securities contained appropriate restrictive legends under the Act. Mr.
Jensen has entered into a lock up agreement pursuant to which he shall not sell
2,500,000 of the shares for a one year period and 8,000,000 of the shares for a
two year period.
In July 2003, we issued 661,224 shares and warrants to purchase up to 661,224
shares to the holders of our senior notes who elected to receive these
securities in lieu of the cash interest payment due for the quarter ended June
30, 2003. The shares were purchased at the rate of $.20 per share and the
warrants are exercisable at $.20 per share at any time through June 30, 2004. We
have agreed to register the shares and the shares underlying the warrants under
the Act for resale for a period of 2 years. The securities were offered and sold
under the exemption from registration set forth in Rule 506 promulgated under
the Act. All of the noteholders are accredited investors and existing security
holders of USA, and there was no general solicitation or advertising.
On July 11, 2003, we issued 20,000,000 shares to Bayview, as part of our
purchase of substantially all of the assets of Bayview. The securities were
offered and sold under the exemption from registration set forth in Rule 506
promulgated under the Act. Bayview was introduced to us through our consultant
Robert McGarrah, and there was no general solicitation or advertising. Bayview
has agreed not to sell any of the shares until July 11, 2004, at which time
Bayview shall be permitted to sell during each calendar month thereafter (on a
non-cumulative basis) the greater of (i) 250,000 shares of the Stock, or (ii)
that number of shares of the Stock equal to five percent (5%) of the immediately
prior calendar month's trading volume of the shares of Common Stock of USA. USA
has agreed to use its best efforts to register all of the shares for resale by
Bayview under the Securities Act of 1933, as amended, for a period of one year
(from July 11, 2004 through July 11, 2005).
80
During September 2003, we issued to Wellington Management Company, LLP, on
behalf of several of its clients, an aggregate of 18,000,000 shares for $.25 per
share. The offer and sale of the shares was exempt from registration under
Section 4(2) of the Act. All of these clients are accredited investors. This
investor approached us regarding this investment and we did not solicit this
investor. We have agreed to register the shares for resale under the Act for a
period of one year.
During September 2003, we issued to George O'Connell, an accredited investor and
existing shareholder, an aggregate of 1,000,000 shares for $.25 per share. The
offer and sale of the shares was exempt from registration under Section 4(2) of
the Act. We have agreed to register the shares for resale under the Act for a
period of one year.
During September 2003, we issued to Prophecy Asset Management, an accredited
investor, an aggregate of 750,000 shares for $.25 per share. The offer and sale
of the shares was exempt from registration under Section 4(2) of the Act. This
investor approached us regarding this investment and we did not solicit this
investor. We have agreed to register the shares for resale under the Act for a
period of one year.
During September 2003, we issued to Fulcrum Global Partners, LLC, an accredited
investor, an aggregate of 260,000 shares for $.25 per share. The offer and sale
of the shares was exempt from registration under Section 4(2) of the Act. This
investor approached us regarding this investment and we did not solicit this
investor. We have agreed to register the shares for resale under the Act for a
period of one year.
In October 2003, we issued 577,457 shares and 577,457 warrants to purchase up to
shares to the holders of our senior notes who elected to receive these
securities in lieu of the cash interest payment due for the quarter ended
September 30, 2003. The shares were purchased at the rate of $.20 per share and
the warrants are exercisable at $.20 per share at any time through June 30,
2004. We have agreed to register the shares and the shares underlying the
warrants under the Act for resale for a period of 2 years. The securities were
offered and sold under the exemption from registration set forth in Rule 506
promulgated under the Act. All of the noteholders are accredited investors and
existing security holders, and there was no general solicitation or advertising.
In October 2003, we issued to Alpha Capital Atkiengesellschaft, a current
shareholder, an aggregate of 500,000 shares due to Alpha as a result of the
occurrence of a Non-Registration Event as defined under our agreement with Alpha
because we failed to register within 120 days of issuance the securities issued
to Alpha in November 2002. The securities were sold to an accredited investor
and the offer and sale thereof did not involve any general advertising or
solicitation and the offer and sale was therefore exempt from registration under
Section 4(2) under the Act.
During the quarter ended June 30, 2003, the Company issued an aggregate of
8,497,819 shares to 464 holders of warrants at $0.10 per share for an aggregate
of $849,783. The offer and sales of the shares was exempt from the registration
requirements of the Act under Rule 506 promulgated thereunder. In this regard,
the offer and sale thereof did not involve any general advertising or
solicitation and the securities contained appropriate restrictive legends under
the Act. The Company agreed to use its best efforts to register the shares for
resale under the Act.
81
During the quarter ended June 30, 2003, the Company issued an aggregate of
4,462,918 shares to 13 holders of its Convertible Senior Notes at the rate of
$0.20 per share for aggregate conversions of $892,584. The offer and sales of
the shares was exempt from the registration requirements of the Act under Rule
506 promulgated thereunder. In this regard, the offer and sale thereof was to
existing security holders and did not involve any general advertising or
solicitation and the securities contained appropriate restrictive legends under
the Act.
During the quarter ended June 30, 2003, 50 holders of $2,196,000 principal
amount of the Senior Notes maturing in December 2003 elected to extend these
notes until December 31, 2006 and to have the conversion rate reduced from $1.25
per share to $0.20 per share. The note exchange was exempt from the registration
requirements of the Act pursuant to Section 3(a)(9) thereof.
During the quarter ended June 30, 2003, 56 holders of $1,296,397 principal
amount of the Senior Notes maturing in December 2004 elected to extend these
notes until December 31, 2007 and to have the conversion rate reduced from $0.40
per share to $0.20 per share. The shares were issued solely in exchange for our
securities and we paid no commissions in connection with the transaction. The
note exchange was exempt from the registration requirements of the Act pursuant
to Section 3(a)(9) thereof.
During the quarter ended June 30, 2003, the Company issued 3,340 shares of
Common Stock upon the conversion of 3,340 shares of Series A Preferred Stock and
issued 4,008 shares of Common Stock upon the conversion of $40,080 of cumulative
dividends accrued and unpaid on these shares of Preferred Stock. The shares were
issued solely in exchange for our securities and we paid no commissions in
connection with the transaction. The shares of Common Stock were issued pursuant
to the exemption from registration set forth in Section 3(a)(9) of the Act.
During the quarter ended September 30, 2003, the Company issued an aggregate of
535,258 shares of Common Stock to 7 holders of warrants at $0.10 per share for
an aggregate of $53,526. The Company issued 105,000 shares for consulting
services rendered or to be rendered to the Company, to the following warrants
holders upon exercise of their warrants: Rachel Glicksman- 72,000 shares;
Charlotte Given-30,000 shares; and Gary Nash- 3,000 shares. These warrants were
exercised at $.10 per share and no cash payment was required in connection with
their exercise. The shares issued for services were recorded at the market price
on the date of grant. The offer and sales of the shares was exempt from the
registration requirements of the Act under Rule 506 promulgated thereunder. In
this regard, the offer and sale thereof was to existing security holders and did
not involve any general advertising or solicitation and the securities contained
appropriate restrictive legends under the Act. The Company agreed to use its
best efforts to register the shares for resale under the Act.
During the quarter ended September 30, 2003, the Company issued an aggregate of
7,500,834 shares of Common Stock to 31 holders of its Convertible Senior Notes
upon their conversion at the rate of $0.20 per share for an aggregate of
$1,500,167. The offer and sales of the shares was exempt from the registration
requirements of the Act under Rule 506 promulgated thereunder. In this regard,
the offer and sale thereof was to existing security holders and did not involve
any general advertising or solicitation and the securities contained appropriate
restrictive legends under the Act.
82
During the quarter ended September 30, 2003, 54 holders of $1,116,000 principal
amount of the Senior Notes maturing in December 2003 elected to extend these
notes until December 31, 2006 and to have the conversion rate reduced from $1.25
per share to $0.20 per share. The note exchange was exempt from the registration
requirements of the Act pursuant to Section 3(a)(9) thereof.
During the quarter ended September 30, 2003, 23 holders of $708,096 principal
amount of the Senior Notes maturing in December 2004 elected to extend these
notes until December 31, 2007 and to have the conversion rate reduced from $0.40
per share to $0.20 per share. The note exchange was exempt form the registration
requirements of the Act pursuant to Section 3(a)(9) thereof.
From February through June 2004, the Company sold 28,290,833 shares of Common
Stock to 34 accredited investors at $.15 per share for an aggregate of
$4,243,625. During June 2004, the Company granted to each investor in the
offering a warrant to purchase one-half of a share for each share subscribed for
by such investor in the offering. The Company issued warrants to purchase a
total of 14,145,417 shares. The warrants were originally exercisable at $.20 per
share at any time through December 31, 2004. The exercise price was subsequently
reduced to $.10 per share. We have agreed to register the shares and the shares
underlying the warrants under the Act for resale for a period of two years. The
offer and sales of the shares was exempt from registration under Rule 506
promulgated under Section 4(2) of the Act. All of the investors were either
pre-existing security holders or business associates. The offer and sale thereof
did not involve any general advertising or solicitation and the securities
contained appropriate restrictive legends under the Act.
In January 2004, we issued 542,592 shares and 542,592 warrants to purchase up to
shares to the holders of our senior notes who elected to receive these
securities in lieu of the cash interest payment due for the quarter ended
December 31, 2003. The shares were purchased at the rate of $.20 per share and
the warrants are exercisable at $.20 per share at any time through June 30,
2004. We have agreed to register the shares and the shares underlying the
warrants under the Act for resale for a period of 2 years. The securities were
offered and sold under the exemption from registration set forth in Rule 506
promulgated under the Act. All of the noteholders are accredited investors and
existing security holders, and there was no general solicitation or advertising.
In June 2004, we issued warrants to purchase up to 3,716,496 shares of Common
Stock to the holders of our senior notes who elected to receive warrants in lieu
of the cash interest payment due for the quarters ended June 30, 2002, September
30, 2002, December 31, 2002, March 31, 2003, June 30, 2003, September 30, 2003
and December 31, 2003. The warrants are exercisable at $.20 per share at any
time through December 31, 2004 and were later reduced in price to $.10 per
share. We have agreed to register the shares underlying the warrants under the
Act for resale for a period of 2 years. The securities were offered and sold
under the exemption from registration set forth in Rule 506 promulgated under
the Act. All of the noteholders are accredited investors and existing security
holders of USA, and there was no general solicitation or advertising.
83
In January 2004, we issued to CEOCAST, Inc. a total of 150,000 shares for
services to be rendered to the Company. The offer and sale of the shares were
exempt from registration under Section 4(2) of the Act. The Company agreed to
use its best efforts to register the shares for resale under the Act.
On June 18, 2004, we entered into a Common Stock Purchase Agreement with Steve
Illes. During the one year period following the effectiveness of a registration
statement covering the shares, Mr. Illes has agreed to purchase from USA shares
of Common Stock, provided that the aggregate purchase price can not exceed
$7,500,000. Under the Agreement, Mr. Illes is permitted to purchase Common Stock
from USA at any time at the price per share of $.30. In addition, USA has the
right at any time to require Mr. Illes to purchase Common Stock from USA at the
lower of: (i) $.30; or (ii) 90% of the closing bid price per share on the date
prior to the date of the delivery by USA to Mr. Illes of notice of his
obligation to purchase. USA can require Mr. Illes to purchase shares under the
Agreement only if the shares have been registered by the Company for resale by
Mr. Illes under the Act. During any calendar month, Mr. Illes is not permitted
to purchase and can not be required by USA to purchase Common Stock for an
aggregate purchase price in excess of $700,000. We have agreed to register for
resale the shares purchased by Mr. Illes under the Agreement for a period of one
year from the date of the effectiveness of the initial registration statement
covering the shares to be purchased by Mr. Illes. We have agreed to pay to Mr.
Illes a due diligence fee of $45,000. The securities were offered and sold to
Mr. Illes under the exemption from registration set forth under Rule 506
promulgated under the Act. Mr. Illes is an existing shareholder and an
accredited investor, and there was no general solicitation or advertising.
In July 2004, the Staff of the Securities and Exchange Commission indicated that
because of the discretion given to Mr. Illes under the Agreement to purchase the
shares at any time for $.30 per share, it was not appropriate to register the
shares unless this discretion was eliminated. On August 6, 2004 the Company and
Mr. Illes entered into a subsequent agreement which superceded the prior
agreement and gave the Company the right to require Mr. Illes to purchase the
shares but did not give Mr. Illes any discretion to purchase shares. During the
one year period following the date of effectiveness of a registration statement
covering the shares, Mr. Illes has agreed to purchase from USA shares of Common
Stock, provided that the aggregate purchase price can not exceed $7,500,000.
Under the Agreement, USA has the right at any time to require Mr. Illes to
purchase Common Stock from USA at the lower of: (i) $.30; or (ii) 90% of the
closing bid price per share on the date prior to the date of the delivery by USA
to Mr. Illes of notice of his obligation to purchase. USA can require Mr. Illes
to purchase shares under the Agreement only if the shares have been registered
by the Company for resale by Mr. Illes under the Act. During any calendar month,
Mr. Illes is not permitted to purchase and can not be required by USA to
purchase Common Stock for an aggregate purchase price in excess of $700,000.
From November 3, 2004 through February 14, 2005, the Company sold $1,550,789 of
senior notes convertible into Common Shares at $.10 per share and maturing on
June 30, 2007. Interest is payable quarterly at a rate of 10% per annum. The
securities were offered and sold under the exemption from registration set forth
in Rule 506 promulgated under Section 4(2) of the Act. All of the purchasers of
the notes were accredited investors, were either pre-existing security holders
or business associates and there was no general solicitation or advertising. We
have agreed to use our best efforts to have the shares underlying the senior
notes registered for resale under the Act through June 30, 2007.
84
In March 2005, the Company exchanged $1,755,000 of principal amount 2005-B 10%
Senior Notes for a like principal amount of 2005-C 10% Convertible Senior Notes
("2010 Senior Notes"). The 2010 Senior Notes are convertible into Common Shares
at $.10 per share and due December 31, 2010. There are an aggregate of
17,550,000 shares underlying these senior notes. Interest is payable quarterly
at a rate of 10% per annum. We have agreed to register the shares underlying the
2010 Senior Notes under the Act for resale through April 30, 2006. The exchange
of the shares was exempt from registration under Section 3(a)(9) of the Act. All
of the investors receiving 2010 Senior Notes are existing security holders. No
commission or remuneration was paid or given directly or indirectly for
soliciting the exchange.
During March and April 2005, the Company sold 23,333,334 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 23,333,334
shares. To date, none of the warrants have been exercised. 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 and either pre-existing security
holders or business associates. The offer and sale thereof did not involve any
general advertising or solicitation and the securities contained appropriate
restrictive legends under the Act.
On April 4, 2005, the Company and Steve Illes entered into a new Common Stock
Purchase Agreement ("2005 Commmon Stock Ageement"). Pursuant to the 2005 Common
Stock Agreement, Mr. Illes 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 Mr. Illes 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 Mr. Illes of notice of his
obligation to purchase. The Company can require Mr. Illes to purchase shares
under the Common Stock Agreement only if the shares have been registered by the
Company for resale under the Act. During any calendar month, Mr. Illes cannot be
required by the Company to purchase Common Stock for an aggregate purchase price
in excess of $800,000. The Company issued 500,000 shares of Common Stock to Mr.
Illes as a due diligence/commitment fee in connection with the 2005 Common Stock
Agreement. The 2005 Common Stock Agreement terminates August 11, 2007. We have
agreed to register for resale the shares purchased by Mr. Illes under the
agreement until May 13, 2007. The securities offered and to be sold to Mr. Illes
are exempt from registration as set forth under Rule 506 promulgated under the
Act. Mr. Illes is an existing shareholder and an accredited investor, and there
was no general solicitation or advertising.
85
During October and November 2005, the Company sold $544,945 principal amount of
2005-G Convertible Senior Notes due December 31, 2008 to six investors. These
notes earn interest at 10% per annum, payable quarterly, and are convertible
into Common Shares at $.10 per share at any time prior to maturity. The offering
was made to the holders of the 2005-D Common Stock Warrants. The 2005-D Warrants
were exercisable at $.10 per share through November 30, 2005, and at $.15
through December 31, 2005. Each holder of the 2005-D Common Stock Warrants was
entitled to purchase the principal amount of the 2005-G Senior Notes equal to
the number of 2005-D Warrants held multiplied by $.10. Upon any investment in
the offering, the corresponding number of 2005-D Warrants were cancelled. There
are 5,449,443 shares underlying these 2005-G senior notes. For each $10,000 of
senior notes purchased, the investor also received a purchase right to purchase
up to 100,000 shares at $.20 per share at anytime prior to December 31, 2008.
The purchase rights could only be exercised if the shares issuable upon the
exercise of the purchase rights are made available through the prepayment by the
Company of outstanding convertible senior notes that are convertible at $.20 per
share. The Company issued purchase rights to acquire 5,449,443 shares. During
January 2006, the holder of each purchase right agreed to exchange the purchase
rights for warrants to purchase shares at $.20 at anytime prior to December 31,
2008. Pursuant thereto, warrants were issued for an aggregate of 5,449,443
shares. We have agreed to register the shares underlying the 2005-G Senior Notes
and the shares underlying the warrants under the Act for resale, and to keep the
registration statement current and effective through November 30, 2006. The
offer and sale of the 2005-G Senior Notes and purchase rights 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. The issuance by us of the
warrants was exempt from registration under Section 3(a)(9) of the Act. All of
the investors were existing holders of the purchase rights. No commission or
remuneration was paid or given directly or indirectly for soliciting the
exchange.
On December 13, 2005, the Company entered into a Stock Purchase Agreement with
Wellington Management Company, LLP, a large Boston-based institutional investor,
on behalf of certain of its clients ("Wellington"). Pursuant thereto, the
Company sold to Wellington 40,000,000 shares of Common Stock for $.10 per share
for an aggregate of $4,000,000. The offer and sale of the shares was exempt from
registration under Rule 506 promulgated under Section 4(2) of the Act. As
investment manager, Wellington has shared dispositive and shared voting power
over the shares. All of these clients are accredited investors. We have agreed
to register the shares for resale under the Act for a period of one year. The
Stock Purchase Agreement provides that if the registration statement is not
declared effective by the SEC within 60 days from the date of the Stock Purchase
Agreement, then the Company will pay to Wellington as liquidated damages two
percent of the purchase price for the shares for each month beyond 60 days that
the registration statement is not effective. As a condition of its investment,
Wellington required the Company to approve and call a special meeting of its
shareholders to consider approval of a 1-to-100 reverse stock split of its
Common Stock.
86
In October and November, 2005, the Company offered for sale up to $1,000,000 of
principal amount of 10% Bridge Notes due January 6, 2006. Interest accrued on
the Bridge Notes at the rate of 10% per annum from and after the date of
issuance with all accrued and unpaid interest paid on January 6, 2006. The
Company sold $770,000 Bridge Notes to 8 investors. On January 6, 2006, the
Bridge Notes were automatically exchanged for a like principal amount of new
2006-A Convertible Senior Notes due December 31, 2010. The 2006-A Notes bear
interest at 10% and are convertible at any time prior to maturity at $.10 per
share. For each $10,000 of 2006-A Convertible Senior Notes received in exchange
for the Bridge Notes, the Company also issued purchase rights enabling the
holder to purchase up to 100,000 shares of Common Stock at $.20 per share at
anytime prior to December 31, 2008. The purchase rights could only be exercised
if the shares issuable upon the exercise of the purchase rights are made
available through the prepayment by the Company of outstanding convertible
senior notes that are convertible at $.20 per share. The Company issued purchase
rights to acquire 7,700,000 shares. During January 2006, the holder of each
purchase right agreed to exchange the purchase right for a warrant to purchase
one share at $.20 at anytime prior to December 31, 2008. Pursuant thereto,
warrants were issued for an aggregate of 7,770,000 shares. The offer and sale of
the Bridge Notes 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. The
issuance by us of the 2006-A Senor Notes and purchase rights in exchange for the
Bridge Notes, and the warrants in exchange for the purchase rights was exempt
from registration under Section 3(a)(9) of the Act. All investors were existing
security holders of the Company. No commission or remuneration was paid or given
directly or indirectly for soliciting the exchange. We have agreed to register
the shares underlying the 2006-A Senior Notes and the shares underlying the
warrants under the Act for resale, and to keep the registration statement
current and effective through November 30, 2006.
On January 9, 2006, the Company entered into a Stock Purchase Agreement with
Rationalwave On Shore Equity Fund, L.P. ("Rationalwave"), an accredited
investor. Pursuant thereto, the Company sold to Rationalwave 4,000,000 shares of
Common Stock for $.10 per share for an aggregate of $400,000. The offer and sale
of the shares was exempt from registration under Rule 506 promulgated under
Section 4(2) of the Act. We have agreed to register the shares for resale under
the Act through January 9, 2007.
STOCK OPTIONS
On April 28, 2004 the Company issued to Mary West Young options to purchase
300,000 shares of Common Stock for $.30 per share which vest ratably over a two
year period.
On April 12, 2005 the Company issued to David DeMedio options to purchase
300,000 shares of Common Stock for $.20 per share which vest ratably over a two
year period.
The issuance of all of the foregoing options was made in reliance upon the
exemption provided by Section 4(2) of the Act as all of the options were issued
to officers, directors, employees or consultants of USA, each of such issuances
were separate transactions not part of any plan, and none of the issuances
involved any general solicitation or advertising.
87
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
EXHIBITS
Exhibit
Number Description
- --------------------------------------------------------------------------------
2.1 Asset Purchase Agreement dated July 11, 2003 by and between USA and
Bayview Technology Group LLC (Incorporated by reference to Exhibit 2.1
to Form 8-K filed July 14, 2003)
3.1 Amended and Restated Articles of Incorporation of USA filed January 26,
2004 (Incorporated by reference to Exhibit 3.1.19 to Form 10-QSB filed
on February 12, 2004).
3.1.1 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).
**3.1.2 Second Amendment to Amended and Restated Articles of Incorporation of
USA filed on December 13, 2005.
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).
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).
88
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).
4.18 Stock Purchase Agreement dated December 13, 2005 by and between the
Company and certain clients of Wellington Management Company, LLC
(Incorporated by reference to Exhibit to Form 8-K filed December 19,
2005).
**4.19 Stock Purchase Agreement dated January 9, 2006, by and between the
Company and Rationalwave On Shore Equity Fund, L.P.
**4.20 Form of 2006-A 10% Convertible Senior Note due December 31, 2010
**4.21 Form of 2006-A Warrant
**4.22 Form of 2005-G Warrant
**5.1 Opinion of Lurio & Associates, P.C.
10.1 Employment and Non-Competition Agreement between USA and Adele Hepburn
dated as of January 1, 1993 (Incorporated by reference to Exhibit 10.7
to Form SB-2 Registration Statement No. 33-70992).
10.1.1 First Amendment to Employment and Non-Competition Agreement between USA
and Adele Hepburn dated as of February 4, 2004. (Incorporated by
reference to Exhibit 10.1.1 to Form 10-QSB filed on February 12, 2004).
10.2 Certificate of Appointment of American Stock Transfer & Trust Company
as Transfer Agent and Registrar dated October 8, 1993 (Incorporated by
reference to Exhibit 10.23 to Form SB-2 Registration Statement No.
33-70992).
10.3 Employment and Non-Competition Agreement between USA and H. Brock Kolls
dated as of May 1, 1994 (Incorporated by reference to Exhibit 10.32 to
Form SB-2 Registration Statement No. 33-70992).
10.3.1 First Amendment to Employment and Non-Competition Agreement between USA
and H. Brock Kolls dated as of May 1, 1994 (Incorporated by reference
to Exhibit 10.13.1 to Form SB-2 Registration Statement No. 333-09465).
10.3.2 Third Amendment to Employment and Non-Competition Agreement between USA
and H. Brock Kolls dated February 22, 2000 (Incorporated by reference
to Exhibit 10.3 to Form S-8 Registration Statement No. 333-341006).
10.3.3 Fourth Amendment to Employment and Non-Competition Agreement between
USA and H. Brock Kolls dated April 15, 2002. (Incorporated by reference
to Exhibit 10.4.3 to Form 10-QSB filed on February 12, 2004).
89
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).
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).
90
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).
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).
91
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.
- ------------
** Filed herewith
92
ITEM 16(b). FINANCIAL STATEMENT SCHEDULES
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
- --------------------------------------------------------------------------------
93
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the Securities
Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
94
For purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 that is incorporated by reference in this
registration statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
95
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing this Form S-1 and has duly caused this
Registration Statement on Form S-1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in Malvern, Pennsylvania, on January 12,
2006.
USA TECHNOLOGIES, INC.
By: /s/ George R. Jensen, Jr.
--------------------------------
George R. Jensen, Jr., Chairman
and Chief Executive Officer
96
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints George R. Jensen, Jr. and Stephen P. Herbert, and
each of them, his or her true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him or her and in his or her name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the SEC, granting unto such attorneys-in-fact and agents, full
power and authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them or
their or his substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been duly signed below by the following persons in
the capacities and dates indicated.
SIGNATURES TITLE DATE
- ----------- ----- ----
/s/ George R. Jensen, Jr. Chairman of the Board of Directors, January 12, 2006
- ------------------------- Chief Executive Officer
George R. Jensen, Jr. (Principal Executive Officer)
/s/ David M. DeMedio Chief Financial Officer (Principal January 12, 2006
- -------------------------- Accounting Officer)
David M. DeMedio
/s/ William W. Sellers Director January 12, 2006
- --------------------------
William W. Sellers
/s/ Stephen P. Herbert Director January 12, 2006
- --------------------------
Stephen P. Herbert
/s/ William L. Van Alen, Jr. Director January 12, 2006
- ----------------------------
William L. Van Alen, Jr.
/s/ Douglas M. Lurio Director January 12, 2006
- --------------------------
Douglas M. Lurio
/s/ Steven Katz Director January 12, 2006
- --------------------------
Steven Katz
97
Exhibit Index
Exhibit
Number Description
- -----------------------------------------------------------------------------
3.1.2 Second Amendment to Amended and Restated Articles of Incorporation of
USA filed on December 13, 2005
4.19 Stock Purchase Agreement dated January 9, 2006 by and between the
Company and Rationalwave On Shore Equity Fund L.P.
4.20 Form of 2006-A 10% Convertible Senior Note due December 31, 2010
4.21 Form of 2006-A Warrant
4.22 Form of 2005-G Warrant
5.1 Opinion of Lurio & Associates, P.C.
23.1 Consent of Ernst & Young LLP
23.2 Consent of Goldstein Golub Kessler LLP
98
FINANCIAL STATEMENTS
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-9
Notes to Consolidated Financial Statements...............................F-11
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
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 16(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 sheet 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 16(b). These
consolidated financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of USA Technologies,
Inc. at June 30, 2004 and 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
----------------------------- September 30,
2005 2004 2005
------------- ------------- -------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 2,097,881 $ 3,019,214 $ 829,248
Accounts receivable, less allowance for
uncollectible accounts of $196,000,
$240,000, and $210,000 (unaudited) as of
June 30, 2005 and 2004 and September 30,
2005, respectively 744,041 771,722 879,048
Finance receivables 255,595 162,874 253,757
Inventory 1,697,236 1,707,684 1,566,731
Prepaid expenses and other current assets 240,324 234,448 189,003
Subscriptions receivable 35,723 300,000 --
Investment 39,467 68,636 30,535
Assets held for sale -- 46,200 --
------------- ------------- -------------
Total current assets 5,110,267 6,310,778 3,748,322
Finance receivables, less current portion 269,722 141,262 251,588
Property and equipment, net 684,927 602,953 749,779
Intangibles, net 9,595,232 10,831,832 9,286,082
Goodwill 7,663,208 7,985,208 7,663,208
Other assets 68,409 8,544 68,409
------------- ------------- -------------
Total assets $ 23,391,765 $ 25,880,577 $ 21,767,388
============= ============= =============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 3,265,928 $ 2,929,491 $ 2,794,381
Accrued expenses 1,479,352 1,569,368 1,443,246
Current obligations under long-term debt 100,646 240,764 89,460
Convertible Senior Notes 1,252,161 401,887 1,164,836
------------- ------------- -------------
Total current liabilities 6,098,087 5,141,510 5,491,923
Convertible Senior Notes, less current portion 7,897,314 6,617,987 8,091,894
Long-term debt, less current portion 87,179 12,418 64,346
------------- ------------- -------------
Total liabilities 14,082,580 11,771,915 13,648,163
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 June 30, 2005 and 2004 and 521,642
(unaudited) as of September 30, 2005
(liquidation preference of $12,688,713,
$11,904,600 and $13,052,450 as of 2005 and
2004 and September 30, 2005, respectively) 3,702,856 3,702,856 3,695,068
Common Stock, no par value:
Authorized shares- 560,000,000 as of
September 30 and June 30, 2005 and
475,000 as of June 30, 2004
Issued and outstanding shares- 433,567,931
351,654,131, and 449,233,378 as of
June 30, 2005 and 2004 and September 30,
2005, respectively 121,598,475 110,635,743 123,693,427
Subscriptions receivable (233,850) -- (233,850)
Accumulated other comprehensive income (loss) 3,080 32,249 (5,852)
Accumulated deficit (115,761,376) (100,262,186) (118,975,568)
------------- ------------- -------------
Total shareholders' equity 9,309,185 14,108,662 8,119,225
------------- ------------- -------------
Total liabilities and shareholders' equity $ 23,391,765 $ 25,880,577 $ 21,767,388
============= ============= =============
See accompanying notes.
F-3
USA Technologies, Inc.
Consolidated Statements of Operations
Three months ended
Year ended June 30 September 30
----------------------------------------------- ------------------------------
2005 2004 2003 2005 2004
------------- ------------- ------------- ------------- -------------
(unaudited)
Revenues:
Equipment sales $ 3,535,064 $ 4,349,566 $ 1,034,427 $ 1,072,370 $ 765,346
License and transaction fees 1,142,925 977,651 1,373,573 291,516 267,232
Product sales and other -- 305,598 445,068 -- --
------------- ------------- ------------- ------------- -------------
Total revenues 4,677,989 5,632,815 2,853,068 1,363,886 1,032,578
Cost of sales (including
amortization of software
development costs Note 2) 3,478,673 4,329,692 2,971,443 1,048,959 902,044
------------- ------------- ------------- ------------- -------------
Gross profit (loss) 1,199,316 1,303,123 (118,375) 314,927 130,534
Operating expenses:
General and administrative 6,429,458 6,747,824 7,194,684 1,107,503 1,442,178
Compensation 5,559,945 10,071,354 4,973,210 1,353,596 1,300,022
Depreciation and amortization 1,600,120 1,632,330 1,251,716 409,793 396,178
Loss on debt modification -- 318,915 1,521,654 -- --
------------- ------------- ------------- ------------- -------------
Total operating expenses 13,589,523 18,770,423 14,941,264 2,870,892 3,138,378
------------- ------------- ------------- ------------- -------------
Operating loss (12,390,207) (17,467,300) (15,059,639) (2,555,965) (3,007,844)
Other income (expense):
Interest income 61,068 40,789 18,691 20,492 10,537
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) (345,002) (296,591)
Non-cash interest and
amortization of debt
discount (1,870,752) (3,853,029) (3,815,408) (316,397) (346,739)
------------- ------------- ------------- ------------- -------------
Total interest expense (3,127,751) (5,032,351) (4,978,600) (661,399) (643,330)
Total other income (expense) (3,108,983) (3,958,878) (6,905,860) (640,907) (632,793)
------------- ------------- ------------- ------------- -------------
Net loss (15,499,190) (21,426,178) (21,965,499) (3,196,872) (3,640,637)
Cumulative preferred
dividends (784,113) (786,513) (793,586) (392,057) (392,057)
------------- ------------- ------------- ------------- -------------
Loss applicable to common
shares $ (16,283,303) $ (22,212,691) $ (22,759,085) $ (3,588,929) $ (4,032,694)
============= ============= ============= ============= =============
Loss per common share (basic
and diluted) $ (0.04) $ (0.08) $ (0.20) $ (0.01) $ (0.01)
============= ============= ============= ============= =============
Weighted average number of
common shares outstanding
(basic and diluted) 389,420,433 288,476,158 111,790,358 402,765,774 355,719,640
============= ============= ============= ============= =============
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)
SERIES A
CONVERTIBLE COMMON SUBSCRIPTIONS ACCUMULATED
PREFERRED STOCK STOCK RECEIVABLE 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 CCUMULATED
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 Shareholders' Equity (Continued)
(Unaudited)
SERIES A ACCUMULATED
CONVERTIBLE OTHER
PREFERRED COMMON SUBSCRIPTIONS COMPREHENSIVE ACCUMULATED
STOCK STOCK RECEIVABLE INCOME DEFICIT TOTAL
----------- ------------ -------------- ------- ------------- -----------
Issuance of 14,426,900 shares of Common
Stock to an accredited investor at
varying prices per share -- 1,807,990 -- -- -- 1,870,990
Conversion of 1,100 shares of Preferred
Stock to 1,100 shares of Common Stock (7,788) 7,788 -- -- -- --
Conversion of $17,320 of cumulative
preferred dividends into 1,732 shares
of Common Stock at $10.00 per share -- 17,320 -- -- -- --
Issuance of 1,185,715 shares of Common
Stock from the conversion of
Senior Notes -- 197,143 -- -- -- 197,143
Issuance of 50,000 shares of Common
Stock for employee compensation -- 7,200 -- -- -- 7,200
Stock option compensation charges -- 3,511 -- -- -- 3,511
Comprehensive loss:
Net loss -- -- -- -- (3,196,872) (3,196,872)
Unrealized loss on investment -- -- -- (8,932) -- (8,932)
-----------
Total comprehensive loss (3,205,804)
----------- ------------ -------------- ------- ------------- -----------
Balance, September 30, 2005 $ 3,695,068 $123,639,427 $ (233,850) $(5,852) $(118,975,568) $ 8,119,225
=========== ============ ============== ======= ============= ===========
F-8
USA Technologies, Inc.
Consolidated Statements of Cash Flows
Three months ended
Year ended June 30 September 30
-------------------------------------------- ----------------------------
2005 2004 2003 2005 2004
------------ ------------ ------------ ------------ ------------
(unaudited)
OPERATING ACTIVITIES:
Net loss $(15,499,190) $(21,426,178) $(21,965,499) $ (3,196,872) $ (3,640,637)
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 7,200 8,500
Charges incurred in connection
with stock option compensation 3,511 --
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 2,955,158 316,397 346,739
Depreciation 363,520 469,418 1,119,536 100,643 87,028
Amortization 1,236,600 2,207,329 1,623,547 309,150 309,150
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 (135,007) (112,474)
Finance receivables (221,181) (73,353) (191,451) 19,972 (56,965)
Inventory 10,448 (1,249,784) 419,914 130,505 (188,922)
Prepaid expenses, deposits
and other assets (85,541) (1,732) (38,325) 51,321 (48,852)
Accounts payable 336,437 843,680 (759,337) (471,547) 5,496
Accrued expenses (90,016) (796,342) 589,454 (36,106) (154,567)
------------ ------------ ------------ ------------ ------------
Net cash used in operating
activities (11,900,521) (12,557,456) (9,228,899) (2,900,833) (3,445,504)
INVESTING ACTIVITIES
Purchase of property and
equipment (248,043) (358,033) (186,895) (165,495) (93,904)
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 -- -- 23,700
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
investing activities (224,343) 1,101,186 (186,895) (165,495) (70,204)
See accompanying notes.
F-9
USA Technologies, Inc.
Consolidated Statements of Cash Flows (Continued)
Three months ended
Year ended June 30 September 30
-------------------------------------------- ----------------------------
2005 2004 2003 2005 2004
------------ ------------ ------------ ------------ ------------
(unaudited)
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 $ 1,807,990 $ 933,411
Collection of subscriptions
receivable 300,000 1,013,400 35,000 35,723 300,000
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) (46,018) (110,278)
------------ ------------ ------------ ------------ ------------
Net cash provided by financing
activities 11,203,531 12,091,029 11,242,279 1,797,695 1,123,133
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents (921,333) 634,759 1,826,485 (1,268,633) (2,392,575)
Cash and cash equivalents at
beginning of year 3,019,214 2,384,455 557,970 2,097,881 3,019,214
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end
of year $ 2,097,881 $ 3,019,214 $ 2,384,455 $ 829,248 $ 626,639
============ ============ ============ ============ ============
Supplemental disclosures of
cash flow information:
Cash paid for interest $ 1,187,833 $ 1,098,727 $ 1,479,984 $ 355,039 $ 299,848
============ ============ ============ ============ ============
Purchases of equipment with
long-term debt $ 197,450 $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
Conversion of Convertible
Preferred Stock to Common Stock $ -- $ 12,390 $ 33,912 $ 7,788 $ --
============ ============ ============ ============ ============
Conversion of Cumulative
Preferred Dividends to Common
Stock $ -- $ 22,440 $ 56,050 $ 17,320 $ --
============ ============ ============ ============ ============
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 $ 197,143 $ 10,000
============ ============ ============ ============ ============
Issuance (cancellation) of
Common Stock in connection
with Bayview acquisition $ (322,000) $ 9,278,200 $ -- $ -- $ (322,000)
============ ============ ============ ============ ============
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-10
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 and a loss of $3.2 million (unaudited) during the
three months ended September 30, 2005. Cumulative losses from its inception
through June 30, 2005 amounted to approximately $112.9 million. Cumulative
losses through September 30, 2005 amounted to approximately $116.1 million
(unaudited). Losses have continued through December 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.
INTERIM FINANCIAL INFORMATION
The consolidated financial statements and disclosures included herein for the
three months ended September 30, 2005 and 2004 are unaudited. These financial
statements and disclosures have been prepared by the Company in accordance with
U.S. generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by U.S. generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended September 30, 2005
are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 2006.
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-11
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-12
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 September 30 and 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-13
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 and 40% (unaudited) as of
September 30, 2005 was 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. Approximately 32% (unaudited) of the Company's revenues for
the three months ended September 30, 2005 were concentrated with two customers
(16% with one customer and 16% with another customer). The Company's customers
are principally located in the United States.
F-14
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, and $220,000 (unaudited) and $129,000
(unaudited) for the three months ended September 30, 2005 and 2004,
respectively.
ACCOUNTING FOR STOCK OPTIONS
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.
On July 1, 2006, the Company adopted FAS123(R) using the Modified Prospective
Application method. For outstanding nonvested share-based awards as of July 1,
2006, compensation expense for the portion of the award for which the requisite
services have not been rendered will be recognized in the Statement of
Operations as the services are rendered. Compensation expense will be recognized
based on the grant-date fair value of the share-based award as previously
calculated under FAS 123 at the time of the grant, however, the Company is
required to adjust the compensation expense for expected forfeitures. Awards
granted subsequent to July 1, 2005 will be based on the guidance provided by FAS
123(R).
Due to the adoption of FAS 123(R), the Company has recognized $3,511 (unaudited)
of compensation expense related to a single grant of 300,000 common stock
options during the prior fiscal year for which were not fully vested as of the
date of adoption. The remainder of the outstanding common stock options were
fully vested as of the date of adoption. The effect of the adoption on the
Company's operating loss and net loss for the quarter ended September 30, 2005
was $3,511 (unaudited). There was no impact on cash flows or basic and diluted
earnings per share.
There were no stock options granted during the quarter ended September 30, 2005
and 2004. The pro-forma disclosures required by FAS 123(R) have not been
included as the pro-forma compensation expense related to the vesting of options
during the quarter ended September 30, 2004 was not considered to be material.
F-15
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
2. ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR STOCK OPTIONS (CONTINUED)
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.
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 or the
three months ended September 30, 2005 and 2004 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 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-16
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, $32,249, and $21,230 (unaudited) on the remaining shares held by the
Company is reflected in shareholders' equity as accumulated other comprehensive
income at June 30, 2005 and 2004 and September 30, 2004, respectively. An
unrealized loss of $5,852 (unaudited) on the remaining shares held by the
Company is reflected in shareholders' equity as accumulated other comprehensive
income at September 30, 2005. The 70,000 remaining shares are recorded at their
fair value of $39,467, $68,636 and $30,535 (unaudited) at June 30, 2005 and 2004
and September 30, 2005, 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-17
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-18
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, and $309,150 (unaudited) and $309,150 (unaudited) for the three
months ended September 30, 2005 and 2004, respectively. The intangible asset
balance and related accumulated amortization consisted of the following:
SEPTEMBER 30, 2005
(UNAUDITED)
---------------------------------------------
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION VALUE
-------------- ------------ ------------
Intangible assets:
Trademarks $ 2,064,000 $ (354,375) $ 1,709,625
Patents 9,294,000 (2,279,572) 7,014,428
Non-Compete agreement 1,011,000 (448,971) 562,029
-------------- ------------ ------------
Total $ 12,369,000 $ (2,082,918) $ 9,286,082
============== ============ ============
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-19
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
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 September 30 and June 30, 2005 and June 30, 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
September 30 and June 30, 2005 and June 30, 2004.
5. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consist of the following:
SEPTEMBER 30
USEFUL 2005 JUNE 30
LIVES (UNAUDITED) 2005 2004
------- ----------- ---------------------------
Computer equipment and
purchased software 3 years $ 2,670,947 $ 2,536,990 $ 2,206,759
Vending machines and
related components 7 years 4,427 4,427 4,427
Control systems 3 years 479,530 479,530 479,530
Furniture and equipment 5-7 years 835,278 816,537 745,341
Leasehold improvements Lease term 80,158 74,576 59,575
Vehicles 5 years 29,066 29,066 --
----------- ----------- -----------
4,099,406 3,941,126 3,495,632
Less accumulated depreciation (3,349,627) (3,256,199) (2,892,679)
----------- ----------- -----------
$ 749,779 $ 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 and $6,000 (unaudited) and
$86,000 (unaudited) as of September 30, 2005 and 2004. Capital lease
amortization of approximately $2,000, $20,000, $46,000, $1,000 (unaudited) and
$1,000 (unaudited) included in depreciation expense for the years ended June 30,
2005, 2004 and 2003, and for the three months ended September 30, 2005 and 2004,
respectively.
F-20
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
SEPTEMBER 30
2005 JUNE 30
(UNAUDITED) 2005 2004
------------ -----------------------
Accrued compensation and related
sales commissions $ 367,207 $ 404,485 $ 444,302
Accrued interest 435,459 445,495 376,350
Accrued professional fees 94,551 151,220 192,633
Accrued taxes and filing fees 100,461 97,860 108,362
Accrued consulting fees 60,000 122,500 104,438
Accrued rent -- -- 66,662
Advanced customer billings 82,325 65,385 58,811
Accrued other 303,243 192,407 217,810
------------ ---------- ----------
$ 1,443,246 $1,479,352 $1,569,368
============ ========== ==========
7. RELATED PARTY TRANSACTIONS
During the years ended June 30, 2005, 2004, and 2003 and the three months ended
September 30, 2005 and 2004, the Company incurred approximately $284,000,
$391,000, $305,000, $54,000 (unaudited), and $65,000 (unaudited), respectively,
in connection with legal services provided by a member of the Company's Board of
Directors. At June 30, 2005 and 2004 and September 30, 2005, approximately
$25,000, $32,000, and $20,000 (unaudited), 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 September 30 and June 30, 2005, approximately $53,000
(unaudited) and $73,000 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. There was no participation by Board members in debt or equity
offerings during the three months ended September 30, 2005 and 2004.
8. LONG-TERM DEBT
Long-term debt consists of the following:
SEPTEMBER 30
2005 JUNE 30
(UNAUDITED) 2005 2004
------------ ---------- ----------
Bank facility $ -- $ -- $ 170,987
Working capital loans -- -- 46,765
Software licensing and other 153,806 186,768 28,881
Capital lease obligations -- 1,057 6,549
------------ ---------- ----------
153,806 187,825 253,182
Less current portion 89,460 100,646 240,764
------------ ---------- ----------
$ 64,346 $ 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-21
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-22
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 and three months ended September 30, 2005,
$21,000, $514,359, $489,608, and $147,143 (unaudited), respectively, of the 2005
Senior Notes were converted into 105,000, 2,571,797, 2,448,215 and 735,715
(unaudited) 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 and the three months ended September 30,
2005, $1,478,000 and $10,000 (unaudited), respectively, of the 2006 Senior Notes
were converted into 7,390,000 and 50,000 (unaudited) 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-23
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
the 2004-B Senior Notes convertible into shares of Common Stock at $0.10 per
share and maturing on June 30, 2007. 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 2010 Senior Notes convertible into shares
of Common Stock at $.10 per share maturing on December 31, 2010. 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 year ended June 30, 2005 and the three
month period ended September 30, 2005, $415,000 and $40,000 (unaudited),
respectively, of the 2010 Senior Notes were converted into 4,150,000 and 400,000
(unaudited) shares, respectively, 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-24
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
(2003 Senior (2004 Senior (2005 Senior (2006 Senior
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
Repayment (10,000) -- -- --
2003 and 2004 Senior Notes
exchanged for 2006 and 2007
Senior Notes (1,476,000) (827,953) -- 1,476,000
Conversions to Common Stock -- -- (514,359) (1,478,000)
------------ ------------ ------------ ------------
Balance, June 30, 2004 -- 451,152 3,011,791 3,213,500
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)
2005-B Senior Notes issued
for cash and subsequently
exchanged for 2010 Senior
Notes -- -- -- --
Conversions to Common Stock -- -- (21,000) --
------------ ------------ ------------ ------------
Balance, June 30, 2005 $ -- $ -- $ 1,057,405 $ 1,693,500
Repayment -- -- (12,000) --
Conversions to Common Stock -- -- (147,143) (10,000)
------------ ------------ ------------ ------------
Balance, September 30, 2005
(Unaudited) $ -- $ -- $ 898,262 $ 1,683,500
============ ============ ============ ============
Senior Notes Maturing December 31,
----------------------------------------------------------
2007 2008 2009 2010
(2007 Senior (2008 Senior (2009 Senior (2010 Senior
Notes) Notes) Notes) Notes)
------------ ------------ ------------ ------------
Face amount of Senior Notes
Balance, June 30, 2003 $ 3,040,063 $ -- $ -- $ --
Repayment -- -- -- --
2003 and 2004 Senior Notes
exchanged for 2006 and 2007
Senior Notes 827,953 -- -- --
Conversions to Common Stock (848,619) -- -- --
------------ ------------ ------------ ------------
Balance, June 30, 2004 3,019,397 -- -- --
Issued for cash -- -- -- --
Repayment -- -- -- --
2004 Senior Notes exchanged
for June 30, 2006 Senior
Notes -- -- -- --
2005 and 2006 Senior Notes
exchanged for 2008 and 2009
Senior Notes -- 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 (34,381) -- -- (415,000)
------------ ------------ ------------ ------------
Balance, June 30, 2005 $ 2,985,016 $ 1,920,651 $ 1,520,000 $ 1,340,000
Repayment -- -- -- --
Conversions to Common Stock -- -- -- (40,000)
------------ ------------ ------------ ------------
Balance, September 30, 2005
(Unaudited) $ 2,985,016 $ 1,920,651 $ 1,520,000 $ 1,300,000
============ ============ ============ ============
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 and
September 30, 2005(Unaudited) $ 320,000 $ 1,089,962
========== ==============
F-25
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
10. SENIOR NOTES (CONTINUED)
Senior Notes Maturing December 31,
------------------------------------------------------------
2003 2004 2005 2006
(2003 Senior (2004 Senior (2005 Senior (2006 Senior
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)
Amortization and write-off
of unamortized costs upon
conversions to Common Stock 448,934 1,004,748 1,104,157 183,580
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)
Debt discount from issuances -- -- -- (1,155,475)
Amortization and write-off of
unamortized costs upon
conversions to Common Stock 32,803 133,180 1,052,231 1,329,255
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)
Debt discount from issuance -- -- 358,659 308,052
Amortization and write off
of unamortized costs upon
conversions to Common
Stock -- 49,265 617,089 328,148
------------ ------------ ------------ ------------
Unamortized costs at
June 30, 2005 $ -- $ -- $ (125,244) $ (294,189)
Amortization and write off
of unamortized costs upon
conversions to Common
Stock -- -- 71,818 50,478
------------ ------------ ------------ ------------
Unamortized costs at
September 30, 2005 $ -- $ -- $ (53,426) $ (243,711)
============ ============ ============ ============
Senior Notes reflected in the
Consolidated Balance Sheet:
June 30, 2004
Face amount $ -- $ 451,152 $ 3,011,791 $ 3,213,500
Unamortized costs -- (49,265) (1,100,992) (930,389)
------------ ------------ ------------ ------------
$ -- $ 401,887 $ 1,910,799 $ 2,283,111
============ ============ ============ ============
June 30, 2005
Face amount $ -- $ -- $ 1,057,405 $ 1,693,500
Unamortized costs -- -- (125,244) (294,189)
------------ ------------ ------------ ------------
$ -- $ -- $ 932,161 $ 1,399,311
============ ============ ============ ============
September 30, 2005 (Unaudited)
Face amount $ -- $ -- $ 898,262 $ 1,683,500
Unamortized costs -- -- (53,426) (243,711)
------------ ------------ ------------ ------------
$ -- $ -- $ 844,836 $ 1,439,789
============ ============ ============ ============
Senior Notes Maturing December 31,
------------------------------------------------------------
2007 2008 2009 2010
(2007 Senior (2008 Senior (2009 Senior (2010 Senior
Notes) Notes) Notes) Notes)
------------ ------------ ------------ ------------
Debt discount and other
issuance costs
Unamortized costs at
June 30, 2002 $ -- $ -- $ -- $ --
Debt discount (created) reduced
for (issuances) rescissions (621,459) -- -- --
Amortization and write-off
of unamortized costs upon
conversions to Common Stock 24,607 -- -- --
Loss on modification for
exchanges Of 2003 and 2004
Senior Notes for 2006 and 2007
Senior Notes -- -- -- --
------------ ------------ ------------ ------------
Unamortized costs at
June 30, 2003 (596,852) -- -- --
Debt discount from issuances (825,532) -- -- --
Amortization and write-off of
unamortized costs upon
conversions to Common Stock 827,064 -- -- --
Loss on modification for
exchanges of 2003 and 2004
Senior Notes for 2006 and
2007 Senior Notes -- -- -- --
------------ ------------ ------------ ------------
Unamortized costs at
June 30, 2004 (595,320) -- -- --
Debt discount from issuance -- (358,659) (308,052) (1,394,200)
Amortization and write off
of unamortized costs upon
conversions to Common
Stock 174,933 23,911 16,213 376,778
------------ ------------ ------------ ------------
Unamortized costs at
June 30, 2005 $ (420,387) $ (334,748) $ (291,839) $ (1,017,422)
Amortization and write off
of unamortized costs upon
conversions to Common
Stock 42,039 23,911 16,213 75,285
------------ ------------ ------------ ------------
Unamortized costs at
September 30, 2005 $ (378,348) $ (310,837) $ (275,626) $ (942,137)
============ ============ ============ ============
Senior Notes reflected in the
Consolidated Balance Sheet:
June 30, 2004
Face amount $ 3,019,397 $ -- $ -- $ --
Unamortized costs (595,320) -- -- --
------------ ------------ ------------ ------------
$ 2,424,077 $ -- $ -- $ --
============ ============ ============ ============
June 30, 2005
Face amount $ 2,985,016 $ 1,920,651 $ 1,520,000 $ 1,340,000
Unamortized costs (420,387) (334,748) (291,839) (1,017,422)
------------ ------------ ------------ ------------
$ 2,564,629 $ 1,585,903 $ 1,228,161 $ 322,578
============ ============ ============ ============
September 30, 2005 (Unaudited)
Face amount $ 2,985,016 $ 1,920,651 $ 1,520,000 $ 1,300,000
Unamortized costs (378,348) (310,837) (275,626) (942,137)
------------ ------------ ------------ ------------
$ 2,606,668 $ 1,609,814 $ 1,244,374 $ 357,863
============ ============ ============ ============
F-26
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
10. SENIOR NOTES (CONTINUED)
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)
Amortization and write off
of unamortized costs upon
conversions to Common
Stock -- 36,654
----------- --------------
Unamortized costs at
September 30, 2005 (Unaudited) $ -- $ (256,576)
=========== ==============
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
=========== ==============
Senior Notes reflected in the
Consolidated Balance Sheet:
September 30, 2005
Face amount $ 320,000 $ 1,089,962
Unamortized costs -- $ (256,576)
----------- --------------
$ 320,000 $ 833,386
=========== ==============
F-28
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
==========
Aggregate maturities of Senior Notes as of September 30, 2005 are as follows:
2006 $ 1,218,262
2007 2,773,462
2008 2,985,016
2009 1,920,651
2010 1,520,000
2011 1,300,000
----------
$11,717,391
Less discount 2,460,661
----------
$ 9,256,730
==========
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 and September 30, 2005,
amounted to $7,461,293, $6,677,180, and $7,836,030 (unaudited), respectively.
Cumulative unpaid dividends are convertible into common shares at $10.00 per
common share at the option of the shareholder. During the years ended June 30,
2004 and 2003 and the three months ended September 30, 2005, certain holders of
the Preferred Stock converted 1,750, 4,790, and 1,100 (unaudited) shares,
respectively, into 1,750, 4,790, and 1,100 (unaudited) shares of Common Stock,
respectively. Certain of these shareholders also converted cumulative preferred
dividends of $22,440, $56,050, and $17,320 (unaudited), respectively, into
2,244, 5,605, and 1,732 (unaudited) shares of Common Stock during the years
ended June 30, 2004 and 2003 and the three months ended September 30, 2005,
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.
F-29
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
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 had been exercised as of September 30 and June 30,
2005. The Company incurred $73,103 of stock issuance costs in connection
with the 2005-D Private Placement Offering.
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. During the
three months ended September 30, 2005, the Company issued 14,426,900 shares of
Common Stock under the 2005 Common Stock Agreement for total gross proceeds of
$1,807,990.
F-30
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
12. COMMON STOCK (CONTINUED)
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.
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.
F-31
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
12. COMMON STOCK (CONTINUED)
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.
As of June 30, 2005, the Company had 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
===========
As of September 30, 2005 (unaudited), the Company had 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 1,305,245
Conversions of Senior Notes 72,136,765
Issuance under 2005 Common Stock Agreement 2,573,100
Issuance under 2004-B Stock Compensation Plan 58,693
-----------
Total shares reserved for future issuance 110,215,794
===========
F-32
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
13. COMMON STOCK WARRANTS AND OPTIONS
Common Stock Warrant activity for the years ended June 30, 2005, 2004 and 2003
and the three months ended September 30, 2005 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 and
September 30, 2005 (unaudited) 32,132,019
===========
All Common Stock warrants outstanding as of September 30 and June 30, 2005 were
exercisable. The following table shows exercise prices and expiration dates for
warrants outstanding as of September 30 (unaudited) and 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
==========
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.
F-33
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
13. COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)
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 September 30 and June 30, 2005, there were 441,307 and
391,307 (unaudited) shares, respectively, issued under the 2004-B Plan.
F-34
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. No activity occurred during the three months ended September 30,
2005.
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 and
September 30, 2005 (unaudited) 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
===========
The following table shows exercise prices and the weighted average remaining
contractual life for options outstanding as of September 30, 2005. All Common
Stock Options outstanding as of September 30, 2005 were exercisable except for
the options granted at an exercise price of $.20 per share, 37,500 of which were
exercisable as of September 30, 2005.
OPTIONS EXERCISE PRICE WEIGHTED AVERAGE REMAINING
OUTSTANDING PER SHARE CONTRACTUAL LIFE (YEARS)
- -------------------------------------------------------------------------
1,465,805 $0.165 1.62
300,000 $0.20 2.70
112,500 $0.30 1.06
125,000 $1.00 0.60
6,667 $2.00 0.71
- -----------
2,009,972
===========
F-35
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
13. COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)
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
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, $1,092,167, $0 (unaudited), and $0 (unaudited), for the years
ended June 30, 2005, 2004 and 2003 and the three months ended September 30, 2005
and 2004, respectively.
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.
F-36
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
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 and the
three months ended September 30, 2005 and 2004, was approximately $96,000,
$78,000, $67,000, $34,000 (unaudited), and $29,000 (unaudited), 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.
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.
F-37
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
16. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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, and
$117,000 (unaudited) and $115,000 (unaudited) for the three months ended
September 30, 2005 and 2004, 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 and September 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.
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.
F-38
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
16. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 by Swartz Private
Equity, LLC ("Swartz") alleging that the Company breached various agreements
entered into with Swartz in August and September 2000 in connection with the
so-called equity line of credit provided by Swartz to the Company. 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 Company's response to the Complaint denied any liability to Swartz and
asserted various counterclaims against Swartz that seek money damages and other
affirmative relief against Swartz. The Company's response, among other things,
states that the entire transaction is 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. In September 2005, the Company served various
discovery requests upon Swartz that has been partially responded to by Swartz as
of the date hereof.
The Company intends to vigorously defend this action and to prosecute its
counterclaims. In particular, the Company believes it has a substantial defense
to the Complaint because Swartz was not registered as a broker-dealer, and
intends to vigorously pursue this defense. 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.
F-39
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
17. SUBSEQUENT EVENTS (UNAUDITED)
From October 1 through November 8, 2005, the Company issued an additional
2,572,998 shares of Common Stock to an investor under the 2005 Common Stock
Agreement (Note 12) for total gross proceeds of $244,700.
During October 2005, the Company approved a temporary reduction in the exercise
price of the 2005-D Common Stock Warrants from $0.15 to $0.10 per share through
November 30, 2005. The Company received $368,000 and issued 3,680,000 shares of
Common Stock as a result of the exercise of the 2005-D Common Stock Warrants at
$.10 per share.
During October 2005, the Company approved a non-dilutive private placement
offering of up to $2,333,333 of principal amount 10% Convertible Senior Notes
due June 30, 2008 (the "2008-C Senior Notes") to the holders of the 2005-D
Common Stock Warrants, which were received in connection with an offering that
commenced on March 22, 2005 and ended on April 15, 2005 ("2005-D Private
Placement Offering) in which accredited investors purchased Common Stock at
$0.15 per share. The 2008-C Senior Note offering terminated on November 30,
2005. The holders of the 2005-D Common Stock Warrants had the right to purchase
the principal amount of the 2008-C Senior Notes equal to the number of 2005-D
Common Stock Warrants multiplied by $0.10. Upon the investment in the offering,
the corresponding 2005-D Common Stock Warrants were cancelled, resulting in a
non-dilutive offering. Interest on the 2008-C 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-C Senior Notes together with all accrued and unpaid
interest thereon to be paid in full no later than June 30, 2008. The 2008-C
Senior Notes are convertible at any time into Common Stock at the rate of $0.10
per share. For each $10,000 investment in the 2008-C Senior Notes, the
subscriber received 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. The
Company issued $544,944 of the 2008-C Senior Notes and issued special purchase
rights to acquire up to 5,449,443 shares of Common Stock at $.20 per share.
During January 2006, the holder of each special purchase right agreed to
exchange the purchase rights for warrants to purchase shares of Common Stock at
$.20 at anytime prior to December 31, 2008.
During October 2005, the Company approved a non-dilutive private placement
offering of up to $1,000,000 of Notes ("Bridge Notes") due January 6, 2006 with
interest payable on the due date at a rate of 10% per annum. The offering
terminated on November 30, 2005. The Company issued $770,000 of the Bridge
Notes. As all of the aforementioned 2008-C Senior Notes were not subscribed on
the due date of the Bridge Notes, the Bridge Notes were automatically exchanged
for a like principal amount of new Convertible Senior Notes due December 31,
2010 ("2010-B Senior Notes"). Interest on the 2010-B Senior Notes is payable
quarterly at 10% per annum and is convertible into Common Shares at $0.10 per
share. In addition, for each $10,000 of 2010-B Senior Notes issued in exchange
for the Bridge Notes, the Company also issued special purchase rights that
enable the holder to purchase up to 100,000 shares of Common Stock at $0.20 per
share through December 31, 2008. The Company issued $770,000 of the 2010-B
Senior Notes and issued special purchase rights to acquire up to 7,700,000
shares of Common Stock at $.20 per share. During January 2006, the holder of
each special purchase right agreed to exchange the purchase rights for warrants
to purchase shares of Common Stock at $.20 at anytime prior to December 31,
2008.
On December 13, 2005, the Company entered into a Stock Purchase Agreement with
Wellington Management Company, LLP, a large Boston-based institutional investor,
on behalf of certain of its clients ("Wellington"). Under this agreement, the
Company sold to Wellington 40,000,000 shares of Common Stock for $.10 per share
for an aggregate of $4,000,000.
On January 9, 2005, the Company entered into a Stock Purchase Agreement with
Rationalwave Onshore Equity Fund, LP ("Rationalwave"). Under this agreement, the
Company sold to Rationalwave 4,000,000 shares of Common Stock for $.10 per share
for an aggregate of $400,000.
F-40
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement is made this 9th day of January 2006, by and
between USA TECHNOLOGIES, INC., a Pennsylvania corporation ("USA" or "Company"),
and Rationalwave OnShore Equity Fund, L.P. ("Buyer").
BACKGROUND
----------
As more fully set forth herein, Buyer has purchased from the Company
4,000,000 shares of Common Stock of USA (the "Securities") for $.10 per share,
for an aggregate of $400,000.
AGREEMENT
---------
NOW THEREFORE, intending to be legally bound hereby, the parties hereto
agree as follows:
1. SUBSCRIPTION. Buyer hereby purchases the Securities from the Company
and the Company hereby sells and issues the Securities to Buyer. In full payment
for the Securities, Buyer has delivered to USA a check payable to USA or wire
transfer of immediately available funds in the amount of $400,000. USA has
delivered to Buyer a certificate representing 4,000,000 shares of USA Common
Stock duly registered in the name of Buyer.
No later than January 12, 2006, USA shall at its cost and expense prepare
and file and thereafter use its best efforts to have declared effective, an
appropriate Registration Statement with the Securities and Exchange Commission
("SEC") registering all of the Securities for resale by the holder under the
Securities Act of 1933, as amended ("Act"). The registration statement shall be
prepared as a "shelf" registration statement under Rule 415, and the Company
shall use its best efforts to have the registration statement maintained
effective until the earlier of (i) one year from the date hereof, or (ii) the
date that all of the Securities are resold pursuant to the registration
statement or otherwise.
2. VERIFICATION OF STATUS AS "ACCREDITED INVESTOR". Buyer hereby
represents to USA that it qualifies as an "accredited investor" as such term is
defined in Rule 501 promulgated under the Act because Buyer is a corporation or
partnership not formed for the specific purpose of acquiring the Securities with
total assets in excess of $5,000,000.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby makes
the following representations and warranties to Buyer:
(a) Issuance of Securities. The issuance of the Securities has been
duly authorized by USA, and are validly issued, fully paid and non-assessable.
(b) Corporate Organization. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania, with all requisite power, authority and licensing
to own, operate and lease its properties and carry on its business as now being
conducted.
(c) Authority. The execution and delivery of this Agreement, and the
consummation of the transactions contemplated hereby have been duly authorized
by the Board of Directors of the Company and no other corporate proceedings on
the part of the Company are necessary to authorize this Agreement or to carry
out the transactions contemplated hereby.
4. REPRESENTATIONS BY BUYER. Buyer represents and warrants to the Company
as follows:
(a) Buyer has received, read and understands the provisions of each
of the following: (i) the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2005; (ii) the Company's Current Report on Form
8-K filed with the Commission on September 28, 2005; (iii) the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2005;
(iv) the Company's Registration Statement on Form S-1 filed with the
Commission on May 13, 2005 (File No. 333-124078); (v) the risk factors
incorporated by reference herein in Section 4(i) hereof; and (vi) the
definitive proxy statement of the Company filed with the SEC on November
17, 2005. Buyer understands that all of the foregoing together with this
Subscription Agreement shall be referred to herein as "Offering
Materials".
(b) Buyer has relied only upon the information presented and
contained in the Offering Materials. Buyer has had the opportunity to ask
of the person or persons acting on behalf of the Company any and all
relevant questions in connection with any aspect of the Company including,
but not limited to, the Securities offered by the Offering Materials and
has received answers which it considers to be reasonably responsive to
such questions. Buyer has had the opportunity to verify the accuracy of
the information contained in the Offering Materials.
(c) Buyer understands that it is subscribing for the Securities
without being furnished any literature or prospectus in connection with
the offering of the Securities other than the Offering Materials, and that
the offering of the Securities presented in the Offering Materials will
not have been scrutinized by the securities administrator or similar
bureau, agency, or department of the state of his residence.
(d) Buyer understands (i) that the Securities have not been
registered under the Act or registered or qualified under the securities
laws of the state of domicile of Buyer; (ii) that except as otherwise
provided herein, Buyer has no right to require such registration or
qualification; and (iii) that therefore Buyer must bear the economic risk
of the investment for an indefinite period of time because the Securities
may not be sold unless so registered or qualified or unless an exemption
from such registration and qualification is available.
Although the Company has agreed to use its best efforts to register for
resale the Securities with the Securities and Exchange Commission, and to
use its best efforts to keep such registration statement current and
effective, there can be no assurance that such efforts will be successful.
In any such event, the Securities would not be registered for resale under
the Act, and could only be sold by the holder in reliance upon exemptions
from registration under the Act.
(e) Subject to being resold pursuant to an effective registration
statement, the Securities are being purchased for Buyer's own account for
investment purposes only and not for the interest of any other person and
are not being purchased with a view to or for the resale, distribution,
subdivision or fractionalization thereof. Although the Common Stock of USA
is currently traded on the OTC Bulletin Board under the symbol USTT, Buyer
also understands that there may not be any established public trading
market for the sale of the Securities.
(f) Buyer recognizes that the purchase of the Securities involves a
high degree of risk including those special risks set forth under the
caption "Risk Factors" and "Forward Looking Statements" in the Form S-1
Registration Statement of the Company (File No. 333-124078) filed with the
Securities and Exchange Commission on May 13, 2005, all of which are
incorporated herein by reference.
(g) Subject to the registration rights set forth above, Buyer
understands that its right to transfer the Securities will be restricted
as set forth on the stock certificates. Such restrictions include
provisions against transfer unless such transfer is not in violation of
the Act, or applicable state securities laws (including investor
suitability standards). Buyer is familiar with Regulation M promulgated
under the Act and agrees to comply with its obligations thereunder.
(h) All information which Buyer has provided to the Company
including, but not limited to, its tax identification number, its
financial position, and status as an accredited investor, and its
knowledge of financial and business matters is true, correct and complete
as of the date of execution of this Stock Purchase Agreement. Buyer
understands that USA will rely in a material degree upon the
representations contained herein.
(i) Buyer maintains a principal place of business at the address
shown on the signature page of this Stock Purchase Agreement, at which
address Buyer has subscribed for the Shares.
(j) Buyer understands that legends may be placed on any certificate
representing the Securities substantially to the following effect:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES STATUTES AND
REGULATIONS. SUCH SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD,
TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR SUCH SHARES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES STATUTES AND REGULATIONS, UNLESS, IN THE OPINION
(WHICH SHALL BE IN FORM AND SUBSTANCE SATISFACTORY TO THE CORPORATION) OF
COUNSEL SATISFACTORY TO THE CORPORATION, SUCH REGISTRATION IS NOT REQUIRED.
(k) The execution and delivery of this Agreement, and the
consummation of the transactions contemplated hereby has been duly
authorized by Buyer.
5. SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS, AGREEMENTS AND
REMEDIES. Except as specifically provided otherwise herein, all representations,
warranties, covenants, agreements and remedies of the parties hereto, shall
survive the date hereof.
6. ENTIRE AGREEMENT. This Agreement constitutes the entire understanding
and agreement between the parties hereto with respect to the transactions
contemplated herein, supersedes all prior and contemporaneous agreements,
understandings, negotiations and discussions, whether oral or written, of the
parties, and there have been no warranties, representations or promises, written
or oral, made by any of the parties hereto except as herein expressly set forth
herein.
7. BINDING AGREEMENT. This Agreement shall be binding upon and inure to
the benefit of the parties hereto, as well as their respective heirs, personal
representatives, successors and assigns but no party may assign its obligations
hereunder.
8. PENNSYLVANIA LAW CONTROLS. This Agreement shall be construed in
accordance with and shall be governed by the laws of the Commonwealth of
Pennsylvania without regard to its conflicts of law rules.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Stock Purchase Agreement on the date first above written.
BUYER:
RATIONALWAVE ONSHORE EQUITY FUND, L.P.
Witness: /s/ D.Schafer /s/ Mark Rosenblatt
----------------------------- -----------------------------------
Print Name: Mark Rosenblatt
Title:
Address:
Rationalwave Associates
230 Park Rd., Suite 928
NY, NY 10169
Tax Identification Number:
41-2077424
USA TECHNOLOGIES, INC.
By: /s/ George R. Jensen, Jr.
-------------------------------
George R. Jensen, Jr.,
Chief Executive Officer
10% CONVERTIBLE SENIOR NOTE
No. 2006-A-___
$_________ DATED: January 6, 2006
FOR VALUE RECEIVED, the undersigned, USA Technologies, Inc., a
Pennsylvania corporation ("USA"), hereby promises to pay to the order of
_______________________ ("Lender"), at _________________________, or at such
other place as the Lender may designate in writing, the principal sum of
________________ Dollars ($_______), together with interest (computed on the
basis of a 360-day year of twelve 30-day months) from the date hereof on the
outstanding principal balance hereof, to be fixed at a rate equal to 10% per
annum, in accordance with the following terms:
1. Principal Amount. The principal amount of this 10% Convertible Senior
Note ("Convertible Senior Note") shall be due and payable on December 31, 2010,
at which time all unpaid interest that has accrued on the Convertible Senior
Note shall also be due and payable ("Maturity Date"). USA shall not be required
to pay to the holder hereof any principal amount of this Convertible Senior Note
which has been converted into shares of Common Stock of USA ("Common Stock")
pursuant to Section 7 hereof.
2. Interest. Interest on the outstanding principal balance of this
Convertible Senior Note shall accrue at the rate of 10% per annum and shall be
payable quarterly in arrears on March 31, June 30, September 30, and December 31
of each year until the Maturity Date, commencing on the date hereof. From and
after the date of any conversion of the principal amount of this Convertible
Senior Note pursuant to Section 7 hereof, no interest shall accrue on the amount
of principal which has been so converted. USA shall pay any unpaid and accrued
interest on any principal amount of this Convertible Senior Note which has been
converted into Common Stock pursuant to Section 7 hereof through the date of
such conversion, payable by USA to the holder hereof on the quarterly payment
date immediately following the date of conversion.
3. Restrictive Legend. Neither this Convertible Senior Note nor the Common
Stock into which this Convertible Senior Note may be converted may be offered
for sale or sold, or otherwise transferred in any transaction which would
constitute a sale thereof within the meaning of the Securities Act of 1933, as
amended (the "Act"), unless: (i) such security has been registered for sale
under the Act and registered or qualified under applicable state securities laws
relating to the offer and sale of securities; or (ii) exemptions from the
registration requirements of the Act and the registration or qualification
requirements of all such state securities laws are available, and USA shall have
received an opinion of counsel reasonably satisfactory to USA that the proposed
sale or other disposition of such securities may be effected without
registration under the Act and would not result in any violation of any
applicable securities laws relating to the registration or qualification of
securities for sale.
4. Subordination.
A. Senior Debt. The indebtedness (including unpaid principal of, and
interest on, this Convertible Senior Note as well as all other obligations and
liabilities of USA to Lender hereunder) evidenced in this Convertible Senior
Note is subordinated to the prior payment, when due, of the principal of,
premium, if any, and interest on, all "Senior Indebtedness" (as defined below)
of USA as follows: Upon distribution of assets in a liquidation or dissolution
of USA, or in bankruptcy, reorganization, insolvency, receivership or similar
proceedings relating to USA, the Lender shall not be entitled to receive payment
until the holders of Senior Indebtedness are paid in full. Until a payment
default occurs with respect to any Senior Indebtedness, all payments of
principal and interest due to Lender under this Convertible Senior Note shall be
made in accordance with this Convertible Senior Note. Upon the occurrence of any
payment default with respect to any Senior Indebtedness, and upon written notice
thereof to USA and Lender by any holder of such Senior Indebtedness or its
representative, no payments of principal or interest on this Convertible Senior
Note shall be made by USA until such payment default has been cured to the
satisfaction of the holder of such Senior Indebtedness or waived by such holder,
provided, however, that if, during the 180-day period following such default,
the holder of Senior Indebtedness does not accelerate its loan, commence
foreclosure proceedings or otherwise undertake to act on such default, then USA
shall be required to continue making payments under this Convertible Senior
Note, including any that had not been made during such 180-day period. In the
event that any Bank Or Other Financial Institution so requires, the Lender shall
execute, upon request of USA, any inter-creditor or subordination agreement(s)
with any such Bank Or Other Financial Institution on terms not materially more
adverse to the Lender than the subordination terms contained in this Convertible
Senior Note.
B. Definitions.
"Senior Indebtedness" means (a) all direct or indirect, and
contingent or certain, indebtedness of any type, kind or nature (present or
future) created, incurred or assumed by USA with respect to any present or
future Bank Or Other Financial Institution, or (b) any indebtedness created,
incurred, or assumed, by USA, and secured by a lien on any assets of USA. Senior
Debt, as described in the prior sentence, shall be deemed to exist whether such
indebtedness is or is not specifically designated by USA as being "Senior Debt"
in its defining instruments.
2
Notwithstanding anything herein to the contrary, Senior Indebtedness
does not include (i) unsecured accounts payable to trade creditors of USA
incurred in the ordinary course of business, (ii) any debt owed by USA to any
officer, director or stockholder of USA, (iii) any obligation of USA issued or
contracted for as payment in consideration of the purchase by USA of the capital
stock or substantially all of the assets of another person, or in consideration
for the merger or consolidation with respect to which USA was a party, (iv) any
operating lease obligations of USA, (v) any other indebtedness which, by its
terms, is subordinated to this Senior Note, or (vi) any "other indebtedness"
which is subordinated to all indebtedness to which this Senior Note is
subordinated in substantially like terms as this Senior Note, and which "other
indebtedness" shall be treated as equal with the indebtedness evidenced by this
Senior Note.
"Bank Or Other Financial Institution" means a bank as defined in Section
3(a)(2) of the Act, whether acting in its individual or fiduciary capacity; an
insurance company as defined in Section 2(a)13 of the Act; an investment company
registered under the Investment Company Act of 1940, or a business development
company as defined in Section 2(a)(48) of that Act; a Small Business Investment
Company licensed by the Small Business Administration; or a bank, insurance
company, or registered investment adviser, which, as a plan fiduciary, as
defined in Section 3(21) of the Employee Retirement Income Security Act of 1974,
makes the investment decision in an employee benefit plan, including an
individual retirement account, which is subject to the provisions of such Act.
5. Event of Default. An "Event of Default" under this Convertible Senior
Note means the occurrence of any of the following events (whether the reason for
such Event of Default is voluntary or involuntary, and effected by operation of
law or pursuant to any judgment, decree or order of any court or any order, rule
or regulation of any administrative or governmental body): (i) nonpayment of any
principal or interest installment, when and as due, hereunder which is not cured
by USA within thirty (30) days after the due date; (ii) any other breach of the
terms hereof which is not cured by USA within thirty (30) days after notice from
Lender; (iii) the institution of any proceedings by or against USA under any law
relating to bankruptcy, insolvency, reorganization or other form of debtor
relief, or the making of an assignment, by USA, for the benefit of creditors, or
the appointment of a receiver, trustee, conservator or other judicial
representative for USA or any of its respective properties, or the admission, in
writing, by USA, of its inability to pay its debts generally as they become due;
or (iv) any default by USA under any agreement for borrowed money, which default
continues after expiration of the applicable notice and grace period, if any,
provided in the agreement, and which permits the holder thereof to accelerate
the indebtedness due thereunder.
3
Upon the occurrence of an Event of Default, the entire principal, and any
accrued interest due hereunder, shall accelerate and become immediately due and
payable without presentation, demand, protest or further demand or notice of any
kind, all of which are expressly waived by USA, and Lender shall thereupon have
all rights and remedies provided hereunder or otherwise available at law or in
equity. The period of time, between the date of occurrence of an Event of
Default and the date such default is cured, shall be referred to as the "Default
Period."""During any Default Period, any late interest or principal payments
will accrue interest at the rate of 1% per month, cumulative and compounding,
until all accrued and unpaid principal and interest is paid in full.
6. Prepayment. USA shall have the right to prepay this Convertible Senior
Note in whole or in part, at any time, and from time to time prior to the
Maturity Date, and in its sole and absolute discretion, without incurring any
penalties or additional obligations of any kind. If, at any time, USA elects to
prepay this Convertible Senior Note in an amount less than the then outstanding
principal amount hereof, the holders of the Convertible Senior Notes to be
prepaid shall be selected by USA on a random basis. If USA elects to prepay this
Convertible Senior Note in whole or in part any time prior to the Maturity Date,
the holder hereof shall have the right to convert all of (but not less than all
of) the principal amount to be prepaid by USA into shares of Common Stock
pursuant to the terms and conditions of Section 7 hereof. Such right to convert
must be exercised within thirty (30) days following receipt by the holder hereof
from USA of notice of prepayment pursuant to this Section 6.
7. Conversion Rights.
A. Conversion. Subject to the terms and conditions hereof, the
holder hereof may convert all or any portion of the principal amount hereof at
any time, or from time to time prior to the Maturity Date, into fully-paid and
non-assessable shares of USA's Common Stock, without par value (the "Common
Stock"), subject to adjustment as provided in Section 7.F. hereof ("Conversion
Rights"). The number of shares of Common Stock to be issued upon any such
conversion shall be determined by dividing the principal amount of this
Convertible Senior Note to be converted by the Conversion Price (as defined
herein).
4
B. Conversion Price. The Conversion Rights shall be exercised by
delivery to USA, prior to the Maturity Date, of this Certificate and the
completed Election To Convert Form which is attached hereto. The Conversion
Price shall be $.10 per share of Common Stock, subject to adjustment as provided
in Section 7.F. hereof ("Conversion Price").
C. Exercise. Upon the surrender of this Certificate and the
completed Election To Convert Form as aforesaid, USA shall issue and cause to be
delivered with all reasonable dispatch to, or upon the written order of, the
registered holder of this Convertible Senior Note, a certificate or certificates
for the number of full shares of Common Stock so purchased upon the exercise of
the Conversion Rights. Such certificate or certificates shall be deemed to have
been issued, and any person so designated to be named therein shall be deemed to
have become a holder of record of such Common Stock, on and as of the date of
the delivery to USA of this certificate of Senior Convertible Note (the
"Certificate") and the completed Election To Convert Form as aforesaid. If,
however, at the date of surrender of this Certificate and the completed Election
To Convert Form, the transfer books for the Common Stock, issuable upon the
exercise of the Conversion Rights, shall be closed, the certificates for the
Common Stock, in respect to which any such Conversion Rights are then exercised,
shall be issued and the owner of such Common Stock shall become a record owner
of such Common Stock on, and as of, the next date on which such books shall be
opened, and until such date USA shall be under no duty to deliver any
certificate for such Common Stock.
D. Partial Conversion. The Conversion Rights under this Convertible
Senior Note shall be exercisable, at the election of the registered holder
hereof, either in their entirety, or, from time to time, for any part of the
outstanding principal amount of this Convertible Senior Note. In the event that
the Conversion Rights are exercised prior to the Maturity Date, and with respect
to less than the entire amount of the then outstanding principal of this
Convertible Senior Note, a new certificate will be issued to such registered
holder in the amount of the remaining principal of this Convertible Senior Note.
5
E. Maturity Date. All of the Conversion Rights must be exercised in
accordance with the terms hereof prior to the Maturity Date. At the Maturity
Date, any and all unexercised rights hereunder shall expire and all such
unexercised Conversion Rights shall, without any action on behalf of USA, become
null and void. The Conversion Rights shall automatically expire without any
required prior notice from USA to the holder hereof.
F. Adjustments. Pursuant to the provisions of this subsection F, the
Conversion Price shall be subject to adjustment from time to time only as set
forth hereinafter:
i. In the event that USA declares a Common Stock dividend on
the Common Stock, then the Conversion Price shall be proportionately decreased,
as of the close of business on the date of record of the said Common Stock
dividend, in proportion to such increase of outstanding shares of Common Stock.
ii. If USA shall at any time subdivide its outstanding Common
Stock by recapitalization, reclassification or split-up thereof, the Conversion
Price immediately prior to such subdivision shall be proportionately decreased,
and, if USA shall at any time combine the outstanding shares of Common Stock by
recapitalization, reclassification, reverse stock split, or combination thereof,
the Conversion Price immediately prior to such combination shall be
proportionately increased. Any such adjustment to the Conversion Price shall
become effective at the close of business on the record date for such
subdivision or combination. The Conversion Price shall be proportionately
increased or decreased, as the case may be, in proportion to such increase or
decrease, as the case may be, of outstanding shares of Common Stock.
iii. Whenever the Conversion Price is adjusted as herein
provided, USA shall promptly mail to the registered holder of this Convertible
Senior Note a statement signed by an officer of USA setting forth the adjusted
Conversion Price, determined as so provided.
iv. The form of this Certificate need not be changed because
of any adjustment that is required pursuant to this Section F. However, USA may,
at any time in its sole discretion (which shall be conclusive), make any change
in the form of this Certificate that USA may deem appropriate and that does not
affect the substance hereof; and any Certificate thereafter issued, whether in
exchange or substitution for this Certificate or otherwise, may be in the form
as so changed.
6
G. Reservation. There has been reserved, and USA shall at all times
keep reserved out of the authorized and unissued shares of Common Stock, a
number of shares of Common Stock sufficient to provide for the exercise of
Conversion Rights under this Convertible Senior Note. USA agrees that all shares
of Common Stock issued upon exercise of this Convertible Senior Note shall be,
at the time of delivery of the Certificates for such Common Stock, validly
issued and outstanding, fully paid and non-assessable.
H. Fractional Shares. USA shall not issue any fractional shares of
Common Stock pursuant to any conversion of this Convertible Senior Note, and
shall pay cash to the holder of this Convertible Senior Note in lieu of any such
fractional shares.
8. No Rights Prior to Issuance of Common Stock. The holder of this
Convertible Senior Note shall not be entitled to any of the rights of a
shareholder of USA prior to the date of issuance of the Common Stock by USA
pursuant to any conversion of this Convertible Senior Note or any exercise of
the Purchase Rights.
9. Registration Rights. As set forth above, neither this Convertible
Senior Note nor the Common Stock into which this Convertible Senior Note is
convertible shall be registered under the Act or any state securities laws, and
shall constitute restricted securities as defined under Rule 144 promulgated
under the Act. Notwithstanding the foregoing, following the issuance of this
Convertible Senior Note, and not later than January 12, 2006, USA shall, at its
expense, file, and thereafter use its best efforts to have declared effective, a
registration statement under the Act covering the resale of the Common Stock
underlying this Convertible Senior Note. Thereafter, USA shall use its best
efforts to keep the registration statement current and effective through
November 30, 2006.
10. Securities Laws. As a condition to the issuance of any Common Stock
pursuant to this Convertible Senior Note, the holder of such Common Stock shall
execute and deliver such representations, warranties, and covenants, as may be
required by applicable federal and state securities laws, or that USA determines
is reasonably necessary in connection with the issuance of such Common Stock. In
addition, the certificates representing the Common Stock shall contain such
legends, or restrictive legends, or stop-transfer instructions, as shall be
required by applicable Federal or state securities laws, or as shall be
reasonably required by USA or its transfer agent.
7
11. Choice of Law. This Convertible Senior Note shall be construed and
enforced in accordance with, and governed by, the laws of the Commonwealth of
Pennsylvania without regard to Pennsylvania"s conflict of laws provisions.
12. Choice of Forum. Lender irrevocably consents and agrees that any legal
action or proceeding against USA or brought by Lender, under, arising out of, or
in any manner relating to, this Convertible Senior Note, shall be brought solely
and exclusively in the Court of Common Pleas of the Commonwealth of Pennsylvania
located in the County of Philadelphia, Pennsylvania, or in the United States
District Court for the Eastern District of Pennsylvania, located in
Philadelphia, Pennsylvania. Lender expressly and irrevocably consents to the
personal jurisdiction of such Courts in any such action or proceeding, and
waives any claim or defense in any such action or proceeding based upon any
alleged lack of personal jurisdiction, improper venue, or forum non conveniens.
13. Waiver. No failure or delay on the part of the Lender to insist on
strict performance of USA"s obligations hereunder or to exercise any remedy
shall constitute a waiver of the Lender"s rights in that or any other instance.
No waiver of any of the Lender"s rights shall be effective unless in writing,
and the waiver of a default of any instance of non-compliance shall be limited
to its express terms and shall not extend to any other default or instance of
non-compliance.
14. Lost, Mutilated Certificate. In case this Certificate shall become
mutilated, lost, stolen or destroyed, USA shall issue, in exchange and
substitution for, and upon cancellation of, the mutilated certificate, or in
lieu of, and in substitution for, the Certificate that is lost, stolen, or
destroyed, a new Certificate of like tenor, and representing an equivalent right
or interest, but only upon receipt of evidence satisfactory to USA of the loss,
theft or destruction of such certificate, and indemnity, if requested, also
satisfactory to USA.
15. Illegality. Any part of this Convertible Senior Note found to be
illegal, invalid or unenforceable for any reason whatsoever shall not affect the
validity, legality or enforceability of the remainder hereof.
16. Usury. If the effective interest rate on this Convertible Senior Note
would otherwise violate any applicable usury law, then the interest rate shall
be reduced to the maximum permissible rate, and any payment received by the
Lender in excess of the maximum permissible rate shall be treated as a
prepayment of the principal of this Convertible Senior Note.
8
17. Expenses. USA agrees to reimburse Lender for all costs and expenses,
including reasonable attorneys' fees, incurred by the Lender and relating to the
enforcement of this Convertible Senior Note.
18. Subscription Agreement. This Convertible Senior Note has been issued
by USA pursuant to, and subject to the terms of, the Subscription Agreement
between USA and Lender, dated ___________, 2005, the terms of which are
incorporated herein by reference. Pursuant thereto, this Convertible Senior Note
was automatically issued in exchange for the 2005-H Bridge Note of the identical
principal amount.
19. Assigns, Etc. This Convertible Senior Note shall be binding upon USA"s
successors and assigns, and, subject to Section 3 hereof, shall inure to the
benefit of each holder of this Convertible Senior Note and such holder"s
successors, endorsees and assigns.
Intending to be legally bound, USA has caused this Convertible Senior Note
to be executed in its corporate name, by its duly authorized representatives,
and to be dated as of the date and year first above written.
USA TECHNOLOGIES, INC.
By:
-----------------------------------
George R. Jensen, Jr.,
Chief Executive Officer
By:
-----------------------------------
Stephen P. Herbert,
Secretary
9
USA TECHNOLOGIES, INC.
100 Deerfield Lane
Suite 140
Malvern, Pennsylvania 19355
Attn: George R. Jensen, Jr.,
Chief Executive Officer
ELECTION TO CONVERT FORM
------------------------
The undersigned hereby irrevocably elects to exercise the rights of
conversion represented by the attached Convertible Senior Note Certificate No.
2006-A-___ of USA. The undersigned desires to convert $ of the principal amount
of the attached Certificate into shares of Common Stock, all as provided for
therein, and tenders herewith the original Convertible Senior Note, all in
accordance with the Certificate. The undersigned requests that a certificate
representing such shares of Common Stock be issued to, and registered in the
name of, the undersigned and delivered to the undersigned at the address set
forth below. If less than the entire principal amount of the Convertible Senior
Note represented by the attached Certificate has been converted, then a new
Convertible Senior Note Certificate, in the amount of the remaining principal of
the Convertible Senior Note, shall be issued to, and registered in the name of,
the undersigned and delivered to the undersigned at the address set forth below.
Dated: , 20 Signature:
------------- -- ----------------------------
Print Name:
---------------------------
Print Address:
------------------------
---------------------------------------
---------------------------------------
THESE WARRANTS AND THE COMMON STOCK ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAW. THESE WARRANTS AND THE COMMON STOCK ISSUABLE UPON THE EXERCISE
HEREOF MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE
OF A REGISTRATION STATEMENT IN EFFECT UNDER SUCH ACT AND SUCH LAWS WITH RESPECT
TO THESE WARRANTS AND THE COMMON STOCK ISSUABLE UPON THE EXERCISE HEREOF, OR AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED.
2006-A WARRANT _________ COMMON
CERTIFICATE NO. ___ STOCK WARRANTS
USA TECHNOLOGIES, INC.
----------------------
COMMON STOCK WARRANTS
---------------------
(These Warrants will be void if not exercised
by the Termination Date specified below.)
1. Warrants. Subject to the terms and conditions hereof, this
certifies that ___________________________, or any subsequent holder hereof, is
the owner of __________ Warrants (the "Warrants") of USA Technologies, Inc., a
Pennsylvania corporation (the "Company"). Each Warrant entitles the holder
hereof to purchase from the Company at any time prior to 5:00 p.m. on December
31, 2010(the "Termination Date"), one fully paid and non-assessable share of the
Company's Common Stock, without par value (the "Common Stock"), subject to
adjustment as provided in Section 7 hereof.
2. Warrant Price. The Warrants shall be exercised by delivery to the
Company (prior to the Termination Date) of the Warrant price for each share of
Common Stock being purchased hereunder (the "Warrant Price"), this Certificate,
and the completed Election To Purchase Form, which is attached hereto. The
Warrant Price shall be $.20 per share of Common Stock. The Warrant Price shall
be subject to adjustment as provided in Section 7 hereof. The Warrant Price is
payable either in cash or by certified check or bank draft payable to the order
of the Company.
3. Exercise. Upon the surrender of this Certificate and payment of
the Warrant Price as aforesaid, the Company shall issue and cause to be
delivered with all reasonable dispatch to or upon the written order of the
registered holder of this Warrant and in such name or names as the registered
holder may designate, a certificate or certificates for the number of full
shares of Common Stock so purchased upon the exercise of any Warrant. Such
certificate or certificates shall be deemed to have been issued and any person
so designated to be named therein shall be deemed to have become a holder of
record of such Common Stock on and as of the date of the delivery to the Company
of this Certificate and payment of the Warrant Price as aforesaid. If, however,
at the date of surrender of this Certificate and payment of such Warrant Price,
the transfer books for the Common Stock purchasable upon the exercise of any
Warrant shall be closed, the certificates for the Common Stock in respect to
which any such Warrant are then exercised shall be issued and the owner of such
Common Stock shall become a record owner of such Common Stock on and as of the
next date on which such books shall be opened, and until such date the Company
shall be under no duty to deliver any certificate for such Common Stock.
4. Partial Exercise. The rights of purchase represented by the
Warrants shall be exercisable, at the election of the registered holder hereof,
either as an entirety, or from time to time for any part of the Common Stock
specified herein and, in the event that the Warrants are exercised with respect
to less than all of the Common Stock specified herein at any time prior to the
Termination Date, a new Certificate will be issued to such registered holder for
the remaining number of Warrants not so exercised.
5. Termination Date. All of the Warrants must be exercised in
accordance with the terms hereof prior to the Termination Date. At and after the
Termination Date any and all unexercised rights hereunder shall become null and
void and all such unexercised Warrants shall without any action on behalf of the
Company become null and void.
6. Lost, Mutilated Certificate. In case this Common Stock Warrant
Certificate shall become mutilated, lost, stolen or destroyed, the Company shall
issue in exchange and substitution for and upon cancellation of the mutilated
certificate, or in lieu of and in substitution for the Certificate lost, stolen,
or destroyed, a new Certificate of like tenor and representing an equivalent
right or interest, but only upon receipt of evidence satisfactory to the Company
of such loss, theft or destruction of such certificate and indemnity, if
requested, also satisfactory to the Company.
7. Adjustments. Subject and pursuant to the provisions of this
Section 7, the Warrant Price and number of shares of Common Stock subject to the
Warrants shall be subject to adjustment from time to time only as set forth
hereinafter:
a. In case the Company shall declare a Common Stock dividend
on the Common Stock, then the Warrant Price shall be proportionately decreased
as of the close of business on the date of record of said Common Stock dividend
in proportion to such increase of outstanding shares of Common Stock.
b. If the Company shall at any time subdivide its outstanding
Common Stock by recapitalization, reclassification or split-up thereof, the
Warrant Price immediately prior to such subdivision shall be proportionately
decreased, and, if the Company shall at any time combine the outstanding shares
of Common Stock by recapitalization, reclassification, reverse stock split, or
combination thereof, the Warrant Price immediately prior to such combination
shall be proportionately increased. Any such adjustment to the Warrant Price
shall become effective at the close of business on the record date for such
subdivision or combination. The Warrant Price shall be proportionately increased
or decreased, as the case may be, in proportion to such increase or decrease, as
the case may be, of outstanding shares of Common Stock.
c. Upon any adjustment of the Warrant Price as hereinabove
provided, the number of shares of Common Stock issuable upon exercise of the
Warrants remaining unexercised immediately prior to any such adjustment, shall
be changed to the number of shares determined by dividing (i) the appropriate
Warrant Price payable for the purchase of all shares of Common Stock issuable
upon exercise of all of the Warrants remaining unexercised immediately prior to
such adjustment by (ii) the Warrant Price per share of Common Stock in effect
immediately after such adjustment. Pursuant to this formula, the total sum
payable to the Company upon the exercise of the Warrants remaining unexercised
immediately prior to such adjustment shall remain constant.
d. (i) If any capital reorganization or reclassification of
the capital stock of the Company, or consolidation or merger of the Company with
another corporation, person, or entity, or the sale of all or substantially all
of its assets to another corporation, person, or entity, shall be effected in
such a way that holders of Common Stock shall be entitled to receive stock,
securities, cash, property, or assets with respect to or in exchange for Common
Stock, and provided no election is made by the Company pursuant to subsection
(ii) hereof, then, as a condition of such reorganization, reclassification,
consolidation, merger or sale, the Company or such successor or purchasing
corporation, person, or entity, as the case may be, shall agree that the
registered holder of the Warrants shall have the right thereafter and until the
Termination Date to exercise such Warrants for the kind and amount of stock,
securities, cash, property, or assets receivable upon such reorganization,
reclassification, consolidation, merger, or sale by a holder of the number of
shares of Common Stock for the purchase of which such Warrants might have been
exercised immediately prior to such reorganization, reclassification,
consolidation, merger or sale, subject to such subsequent adjustments which
shall be equivalent or nearly equivalent as may be practicable to the
adjustments provided for in this Section 7.
(ii) Notwithstanding subsection (i) hereof and in lieu
thereof, the Company may elect by written notice to the registered holder
hereof, to require such registered holder to exercise all of the Warrants
remaining unexercised prior to any such reorganization, reclassification,
consolidation, merger or sale. If the holder of this Warrant shall not exercise
all or any part of the Warrants remaining unexercised prior to such event, such
unexercised Warrants shall automatically become null and void upon the
occurrence of any such event, and of no further force and effect. The Common
Stock issued pursuant to any such exercise shall be deemed to be issued and
outstanding immediately prior to any such event, and shall be entitled to be
treated as any other issued and outstanding share of Common Stock in connection
with such event. If an election is not made by the Company pursuant to this
subsection (ii) in connection with any such event, then the provisions of
subsection (i) hereof shall apply to such event.
e. Whenever the Warrant Price and number of shares of Common
Stock subject to this Warrant is adjusted as herein provided, the Company shall
promptly mail to the registered holder of this Warrant a statement signed by an
officer of the Company setting forth the adjusted Warrant Price and the number
of shares of Common Stock subject to this Warrant, determined as so provided.
f. This form of Certificate need not be changed because of any
adjustment which is required pursuant to this Section 7. However, the Company
may at any time in its sole discretion (which shall be conclusive) make any
change in the form of this Certificate that the Company may deem appropriate and
that does not affect the substance hereof; and any Certificate thereafter
issued, whether in exchange or substitution for this Certificate or otherwise,
may be in the form as so changed.
8. Reservation. There has been reserved, and the Company shall at
all times keep reserved out of the authorized and unissued shares of Common
Stock, a number of shares of Common Stock sufficient to provide for the exercise
of the right of purchase represented by the Warrants. The Company agrees that
all shares of Common Stock issued upon exercise of the Warrants shall be, at the
time of delivery of the Certificates for such Common Stock, validly issued and
outstanding, fully paid and non-assessable.
9. Fractional Shares. The Company shall not issue any fractional
shares of Common Stock pursuant to any exercise of any Warrant and shall pay
cash to the holder of any Warrant in lieu of any such fractional shares.
10. No Right. The holder of any Warrants shall not be entitled to
any of the rights of a shareholder of the Company prior to the date of issuance
of the Common Stock by the Company pursuant to an exercise of any Warrant.
11. Securities Laws. As a condition to the issuance of any Common
Stock pursuant to the Warrants, the holder of such Common Stock shall execute
and deliver such representations, warranties, and covenants, that may be
required by applicable federal and state securities law, or that the Company
determines is reasonably necessary in connection with the issuance of such
Common Stock. In addition, the certificates representing the Common Stock shall
contain such legends, or restrictive legends, or stop transfer instructions, as
shall be required by applicable Federal or state securities laws, or as shall be
reasonably required by the Company or its transfer agent.
12. Registration Rights. No later than January 13, 2006, the Company
shall prepare and file, at its sole cost and expense, and thereafter use its
best efforts to have declared effective, an appropriate registration statement
with the Securities and Exchange Commission registering all of the shares of
Common Stock underlying this Warrant certificate for resale by the holder under
the Act. The Company shall use its best efforts to have the registration
statement maintained effective through November 30, 2006.
13. Transferability. Subject to compliance with applicable
securities laws, the Warrants represented by this Certificate and this
Certificate shall inure to the benefit of and be exercisable by any holder's
heirs, personal representatives, successors and assigns, and shall be fully
assignable and transferable by any holder at any time and from time to time,
including by will, intestacy or otherwise. Any such assignee or transferee shall
be entitled to all the benefits hereof and shall be the holder hereof.
14. Applicable Law. The Warrants and this Certificate shall be
deemed to be a contract made under the laws of the Commonwealth of Pennsylvania
and for all purposes shall be construed in accordance with the laws thereof
regardless of its choice of law rules.
15. Exchange Agreement. This Warrant has been issued in exchange for
a common stock purchase right issued to the original holder hereof pursuant to
the 2006-A Purchase Rights Exchange Agreement dated of even date herewith
between the Company and the original holder hereof.
IN WITNESS WHEREOF, USA TECHNOLOGIES, INC., has executed and
delivered this Warrant Certificate as of the date written below.
USA TECHNOLOGIES, INC.
By:
-----------------------------------
George R. Jensen, Jr.,
Chief Executive Officer
Attest:
-------------------------------
Stephen P. Herbert, Secretary
Dated: January 9, 2006
USA TECHNOLOGIES, INC.
100 Deerfield Lane, Suite 140
Malvern, PA 19355
Attn: George R. Jensen, Jr.,
Chief Executive Officer
ELECTION TO PURCHASE
--------------------
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the attached Warrant Certificate No. of the Company. The
undersigned desires to purchase shares of Common Stock provided for therein and
tenders herewith full payment of the Warrant Price for the shares of Common
Stock being purchased, all in accordance with the Certificate. The undersigned
requests that a Certificate representing such shares of Common Stock shall be
issued to and registered in the name of, and delivered to, the undersigned at
the address set forth in the attached certificate. If said number of shares of
Common Stock shall not be all the shares purchasable under the Certificate, then
a new Common Stock Warrant Certificate for the balance remaining of the shares
of Common Stock purchasable shall be issued to and registered in the name of,
and delivered to, the undersigned at the address set forth in the attached
certificate.
Dated: Signature:
----------- ----------------------------
THESE WARRANTS AND THE COMMON STOCK ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAW. THESE WARRANTS AND THE COMMON STOCK ISSUABLE UPON THE EXERCISE
HEREOF MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE
OF A REGISTRATION STATEMENT IN EFFECT UNDER SUCH ACT AND SUCH LAWS WITH RESPECT
TO THESE WARRANTS AND THE COMMON STOCK ISSUABLE UPON THE EXERCISE HEREOF, OR AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED.
2005-G WARRANT ___________ COMMON
CERTIFICATE NO. ___ STOCK WARRANTS
USA TECHNOLOGIES, INC.
----------------------
COMMON STOCK WARRANTS
---------------------
(These Warrants will be void if not exercised
by the Termination Date specified below.)
1. Warrants. Subject to the terms and conditions hereof, this
certifies that ___________________________, or any subsequent holder hereof, is
the owner of __________ Warrants (the "Warrants") of USA Technologies, Inc., a
Pennsylvania corporation (the "Company"). Each Warrant entitles the holder
hereof to purchase from the Company at any time prior to 5:00 p.m. on December
31, 2008(the "Termination Date"), one fully paid and non-assessable share of the
Company's Common Stock, without par value (the "Common Stock"), subject to
adjustment as provided in Section 7 hereof.
2. Warrant Price. The Warrants shall be exercised by delivery to the
Company (prior to the Termination Date) of the Warrant price for each share of
Common Stock being purchased hereunder (the "Warrant Price"), this Certificate,
and the completed Election To Purchase Form which is attached hereto. The
Warrant Price shall be $.20 per share of Common Stock. The Warrant Price shall
be subject to adjustment as provided in Section 7 hereof. The Warrant Price is
payable either in cash or by certified check or bank draft payable to the order
of the Company.
3. Exercise. Upon the surrender of this Certificate and payment of
the Warrant Price as aforesaid, the Company shall issue and cause to be
delivered with all reasonable dispatch to or upon the written order of the
registered holder of this Warrant and in such name or names as the registered
holder may designate, a certificate or certificates for the number of full
shares of Common Stock so purchased upon the exercise of any Warrant. Such
certificate or certificates shall be deemed to have been issued and any person
so designated to be named therein shall be deemed to have become a holder of
record of such Common Stock on and as of the date of the delivery to the Company
of this Certificate and payment of the Warrant Price as aforesaid. If, however,
at the date of surrender of this Certificate and payment of such Warrant Price,
the transfer books for the Common Stock purchasable upon the exercise of any
Warrant shall be closed, the certificates for the Common Stock in respect to
which any such Warrant are then exercised shall be issued and the owner of such
Common Stock shall become a record owner of such Common Stock on and as of the
next date on which such books shall be opened, and until such date the Company
shall be under no duty to deliver any certificate for such Common Stock.
4. Partial Exercise. The rights of purchase represented by the
Warrants shall be exercisable, at the election of the registered holder hereof,
either as an entirety, or from time to time for any part of the Common Stock
specified herein and, in the event that the Warrants are exercised with respect
to less than all of the Common Stock specified herein at any time prior to the
Termination Date, a new Certificate will be issued to such registered holder for
the remaining number of Warrants not so exercised.
5. Termination Date. All of the Warrants must be exercised in
accordance with the terms hereof prior to the Termination Date. At and after the
Termination Date any and all unexercised rights hereunder shall become null and
void and all such unexercised Warrants shall without any action on behalf of the
Company become null and void.
6. Lost, Mutilated Certificate. In case this Common Stock Warrant
Certificate shall become mutilated, lost, stolen or destroyed, the Company shall
issue in exchange and substitution for and upon cancellation of the mutilated
certificate, or in lieu of and in substitution for the Certificate lost, stolen,
or destroyed, a new Certificate of like tenor and representing an equivalent
right or interest, but only upon receipt of evidence satisfactory to the Company
of such loss, theft or destruction of such certificate and indemnity, if
requested, also satisfactory to the Company.
7. Adjustments. Subject and pursuant to the provisions of this
Section 7, the Warrant Price and number of shares of Common Stock subject to the
Warrants shall be subject to adjustment from time to time only as set forth
hereinafter:
a. In case the Company shall declare a Common Stock dividend
on the Common Stock, then the Warrant Price shall be proportionately decreased
as of the close of business on the date of record of said Common Stock dividend
in proportion to such increase of outstanding shares of Common Stock.
b. If the Company shall at any time subdivide its outstanding
Common Stock by recapitalization, reclassification or split-up thereof, the
Warrant Price immediately prior to such subdivision shall be proportionately
decreased, and, if the Company shall at any time combine the outstanding shares
of Common Stock by recapitalization, reclassification, reverse stock split, or
combination thereof, the Warrant Price immediately prior to such combination
shall be proportionately increased. Any such adjustment to the Warrant Price
shall become effective at the close of business on the record date for such
subdivision or combination. The Warrant Price shall be proportionately increased
or decreased, as the case may be, in proportion to such increase or decrease, as
the case may be, of outstanding shares of Common Stock.
c. Upon any adjustment of the Warrant Price as hereinabove
provided, the number of shares of Common Stock issuable upon exercise of the
Warrants remaining unexercised immediately prior to any such adjustment, shall
be changed to the number of shares determined by dividing (i) the appropriate
Warrant Price payable for the purchase of all shares of Common Stock issuable
upon exercise of all of the Warrants remaining unexercised immediately prior to
such adjustment by (ii) the Warrant Price per share of Common Stock in effect
immediately after such adjustment. Pursuant to this formula, the total sum
payable to the Company upon the exercise of the Warrants remaining unexercised
immediately prior to such adjustment shall remain constant.
d. (i) If any capital reorganization or reclassification of
the capital stock of the Company, or consolidation or merger of the Company with
another corporation, person, or entity, or the sale of all or substantially all
of its assets to another corporation, person, or entity, shall be effected in
such a way that holders of Common Stock shall be entitled to receive stock,
securities, cash, property, or assets with respect to or in exchange for Common
Stock, and provided no election is made by the Company pursuant to subsection
(ii) hereof, then, as a condition of such reorganization, reclassification,
consolidation, merger or sale, the Company or such successor or purchasing
corporation, person, or entity, as the case may be, shall agree that the
registered holder of the Warrants shall have the right thereafter and until the
Termination Date to exercise such Warrants for the kind and amount of stock,
securities, cash, property, or assets receivable upon such reorganization,
reclassification, consolidation, merger, or sale by a holder of the number of
shares of Common Stock for the purchase of which such Warrants might have been
exercised immediately prior to such reorganization, reclassification,
consolidation, merger or sale, subject to such subsequent adjustments which
shall be equivalent or nearly equivalent as may be practicable to the
adjustments provided for in this Section 7.
(ii) Notwithstanding subsection (i) hereof and in lieu
thereof, the Company may elect by written notice to the registered holder
hereof, to require such registered holder to exercise all of the Warrants
remaining unexercised prior to any such reorganization, reclassification,
consolidation, merger or sale. If the holder of this Warrant shall not exercise
all or any part of the Warrants remaining unexercised prior to such event, such
unexercised Warrants shall automatically become null and void upon the
occurrence of any such event, and of no further force and effect. The Common
Stock issued pursuant to any such exercise shall be deemed to be issued and
outstanding immediately prior to any such event, and shall be entitled to be
treated as any other issued and outstanding share of Common Stock in connection
with such event. If an election is not made by the Company pursuant to this
subsection (ii) in connection with any such event, then the provisions of
subsection (i) hereof shall apply to such event.
e. Whenever the Warrant Price and number of shares of Common
Stock subject to this Warrant is adjusted as herein provided, the Company shall
promptly mail to the registered holder of this Warrant a statement signed by an
officer of the Company setting forth the adjusted Warrant Price and the number
of shares of Common Stock subject to this Warrant, determined as so provided.
f. This form of Certificate need not be changed because of any
adjustment which is required pursuant to this Section 7. However, the Company
may at any time in its sole discretion (which shall be conclusive) make any
change in the form of this Certificate that the Company may deem appropriate and
that does not affect the substance hereof; and any Certificate thereafter
issued, whether in exchange or substitution for this Certificate or otherwise,
may be in the form as so changed.
8. Reservation. There has been reserved, and the Company shall at
all times keep reserved out of the authorized and unissued shares of Common
Stock, a number of shares of Common Stock sufficient to provide for the exercise
of the right of purchase represented by the Warrants. The Company agrees that
all shares of Common Stock issued upon exercise of the Warrants shall be, at the
time of delivery of the Certificates for such Common Stock, validly issued and
outstanding, fully paid and non-assessable.
9. Fractional Shares. The Company shall not issue any fractional
shares of Common Stock pursuant to any exercise of any Warrant and shall pay
cash to the holder of any Warrant in lieu of any such fractional shares.
10. No Right. The holder of any Warrants shall not be entitled to
any of the rights of a shareholder of the Company prior to the date of issuance
of the Common Stock by the Company pursuant to an exercise of any Warrant.
11. Securities Laws. As a condition to the issuance of any Common
Stock pursuant to the Warrants, the holder of such Common Stock shall execute
and deliver such representations, warranties, and covenants, that may be
required by applicable federal and state securities law, or that the Company
determines is reasonably necessary in connection with the issuance of such
Common Stock. In addition, the certificates representing the Common Stock shall
contain such legends, or restrictive legends, or stop transfer instructions, as
shall be required by applicable Federal or state securities laws, or as shall be
reasonably required by the Company or its transfer agent.
12. Registration Rights. No later than January 13, 2006, the Company
shall prepare and file, at its sole cost and expense, and thereafter use its
best efforts to have declared effective, an appropriate registration statement
with the Securities and Exchange Commission registering all of the shares of
Common Stock underlying this Warrant certificate for resale by the holder under
the Act. The Company shall use its best efforts to have the registration
statement maintained effective through November 30, 2006.
13. Transferability. Subject to compliance with applicable
securities laws, the Warrants represented by this Certificate and this
Certificate shall inure to the benefit of and be exercisable by any holder's
heirs, personal representatives, successors and assigns, and shall be fully
assignable and transferable by any holder at any time and from time to time,
including by will, intestacy or otherwise. Any such assignee or transferee shall
be entitled to all the benefits hereof and shall be the holder hereof.
14. Applicable Law. The Warrants and this Certificate shall be
deemed to be a contract made under the laws of the Commonwealth of Pennsylvania
and for all purposes shall be construed in accordance with the laws thereof
regardless of its choice of law rules.
15. Exchange Agreement. This Warrant has been issued in exchange for
a common stock purchase right issued to the original holder hereof pursuant to
the 2005-G Purchase Rights Exchange Agreement dated of even date herewith
between the Company and the original holder hereof.
IN WITNESS WHEREOF, USA TECHNOLOGIES, INC., has executed and
delivered this Warrant Certificate as of the date written below.
USA TECHNOLOGIES, INC.
By:
-----------------------------------
George R. Jensen, Jr.,
Chief Executive Officer
Attest:
-------------------------------
Stephen P. Herbert, Secretary
Dated: January 9, 2006
USA TECHNOLOGIES, INC.
100 Deerfield Lane, Suite 140
Malvern, PA 19355
Attn: George R. Jensen, Jr.,
Chief Executive Officer
ELECTION TO PURCHASE
--------------------
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the attached Warrant Certificate No. of the Company. The
undersigned desires to purchase shares of Common Stock provided for therein and
tenders herewith full payment of the Warrant Price for the shares of Common
Stock being purchased, all in accordance with the Certificate. The undersigned
requests that a Certificate representing such shares of Common Stock shall be
issued to and registered in the name of, and delivered to, the undersigned at
the address set forth in the attached certificate. If said number of shares of
Common Stock shall not be all the shares purchasable under the Certificate, then
a new Common Stock Warrant Certificate for the balance remaining of the shares
of Common Stock purchasable shall be issued to and registered in the name of,
and delivered to, the undersigned at the address set forth in the attached
certificate.
Dated: Signature:
-------------------------- ----------------------------
Exhibit 5.1
January 12, 2006
USA Technologies, Inc.
100 Deerfield Lane, Suite 140
Malvern, PA 19355
Attn: Mr. George R. Jensen, Jr., Chief Executive Officer
Re: USA Technologies, Inc. - Registration Statement on Form S-1
Dear Mr. Jensen:
We have acted as counsel to USA Technologies, Inc., a Pennsylvania corporation
(the "Company"), in connection with a Registration Statement on Form S-1, filed
with the Securities and Exchange Commission on the date hereof (the
"Registration Statement"). The Registration Statement covers 146,499,634 shares
of Common Stock ("Common Stock") which are either currently outstanding,
issuable upon conversion of senior notes, issuable upon exercise of common stock
purchase warrants, or issuable to Steve Illes under the Common Stock Purchase
Agreement.
In rendering this opinion, we have examined (i) the Articles of Incorporation,
as amended, and By-Laws of the Company; (ii) the resolutions of the Board of
Directors evidencing the corporate proceedings taken by the Company to authorize
the issuance of the Common Stock pursuant to the Registration Statement; (iii)
the Registration Statement (including all exhibits thereto); and (iv) such other
documents as we have deemed appropriate or necessary as a basis for the opinion
hereinafter expressed.
In rendering the opinion expressed below, we assumed the authenticity of all
documents and records examined, the conformity with the original documents of
all documents submitted to us as copies and the genuineness of all signatures.
We have also assumed that at all relevant times, the Company shall have a
sufficient number of authorized shares of Common Stock to cover the issuance by
the Company of all shares underlying warrants and senior notes covered by the
Registration Statement.
Based upon and subject to the foregoing, and such legal considerations as we
deem relevant, we are of the opinion that when resold as contemplated by the
Registration Statement, and subject to effectiveness of the Registration
Statement and compliance with applicable state securities laws, the Common Stock
when issued will be legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to references made to this firm under the heading
"Legal Matters" in the Prospectus contained in the Registration Statement and
all amendments thereto.
Sincerely,
/s/ LURIO & ASSOCIATES, P.C.
----------------------------
LURIO & ASSOCIATES, P.C.
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated September 10, 2004, in the Registration Statement (Form
S-1 No. 333-00000) and related Prospectus of USA Technologies, Inc. dated
January 12, 2006.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
January 12, 2006
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated September 2, 2005, in the Registration Statement (Form
S-1 No. 333-00000) and related Prospectus of USA Technologies, Inc. dated
January 12, 2006.
/s/ Goldstein Golub Kessler LLP
New York, NY
January 12, 2006