As filed with the Securities and Exchange Commission on December 19, 2003.
Registration No. 333-110148
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No.1
to
FORM SB-2
Registration Statement
Under
The Securities Act of 1933
USA TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 7359 23-2679963
------------ ---- ----------
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355
(Address of principal executive offices and zip code)
George R. Jensen, Jr.
Chief Executive Officer
USA Technologies, Inc.
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355
(610) 989-0340
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Douglas M. Lurio, Esquire
Lurio & Associates, P. C.
One Commerce Square
2005 Market Street, Suite 2340
Philadelphia, PA 19103-7015
(215) 665-9300
Approximate date of proposed sale to the public:
From time to time after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, check the following box: [ ]
1
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
==============================================================================
CALCULATION OF REGISTRATION FEE
------------------------------------------------------------------------------
Title of each
class of Proposed Proposed
Securities Amount Maximum Maximum Amount of
to be to be Offering Price Aggregate Registration
Registered Registered Per Unit(9) Offering Price Fee
---------- ------------ --------------- ------------- ------------
Common Stock,
no par value 19,718,053 shares(1) $ .36 $ 7,098,499 $ 653.06
18,000,000 shares(2) $ .36 $ 6,480,000 $ 596.16
750,000 shares(3) $ .36 $ 270,000 $ 24.84
260,000 shares(4) $ .36 $ 93,600 $ 8.61
20,000,000 shares(5) $ .36 $ 7,200,000 $ 662.40
1,206,060 shares(6) $ .36 $ 434,182 $ 39.94
500,000 shares(7) $ .36 $ 180,000 $ 16.56
1,000,000 shares(8) $ .36 $ 360,000 $ 33.12
----------- ----------
Total 61,434,113 shares $22,116,291 $2,034.70 (10)
=========== ==========
(1) Represents 2,252,683 shares and 17,465,370 shares underlying warrants
issued to La Jolla Cove Investors, Inc.
(2) Represents 18,000,000 shares issued to clients of Wellington Management
Company, LLP.
(3) Represents 750,000 shares issued to Prophecy Asset Management LLC.
(4) Represents 260,000 shares issued to Fulcrum Global Partners, LLC.
(5) Represents 20,000,000 shares issued to Bayview Technology Group, LLC.
2
(6) Represents 603,030 shares issued to, and 603,030 shares underlying
warrants granted to, the holders of our senior notes who elected to receive
these securities in lieu of cash interest payments due for the calendar
quarter ended September 30, 2003.
(7) Represents 500,000 shares issued to Alpha Capital Aktiengesellschaft.
(8) Represent 1,000,000 shares issued to George O'Connell.
(9) Pursuant to Rule 457(c), the registration fee has been calculated at the
average of the bid and asked price within 5 days prior to the date of the
filing of the registration statement.
(10) The filing fee of $2,034.70 was paid in connection with the filing of the
previous registration statement on October 31, 2003.
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.
61,434,113 shares of Common Stock
THE OFFERING
The resale of up to 61,434,113 shares of common stock in the over-the- counter
market at the prevailing market price or in negotiated transactions. We will
receive no proceeds from the sale of the shares by the selling shareholders.
However, we will receive proceeds from the sale of shares issuable upon the
exercise of warrants or options by the selling shareholders. Because the selling
shareholders will offer and sell the shares at various times, we have not
included in this prospectus information about the price to the public of the
shares or the proceeds to the selling shareholders.
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
December 16, 2003 was $.21 per share.
In addition to the shares offered by this prospectus, we are concurrently
offering for resale by other selling shareholders 193,186,121 shares through two
additional prospectuses.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES ONLY
IF YOU CAN AFFORD A COMPLETE LOSS. Please refer to Risk Factors beginning on
Page 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities or passed on the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is December 19, 2003.
TABLE OF CONTENTS
Prospectus Summary .................................. 5
Risk Factors ........................................ 7
Use of Proceeds ..................................... 13
Managements Discussion And Analysis of
Financial Condition And Results
of Operations ..................................... 13
Business ............................................ 26
Management .......................................... 35
Principal Shareholders .............................. 41
Certain Transactions ................................ 45
Selling Shareholders ................................ 46
Market for Common Stock ............................. 69
Description of Securities ........................... 70
Plan of Distribution ................................ 76
Legal Matters ....................................... 77
Experts ............................................. 77
Financial Statements ................................ F-1
4
PROSPECTUS SUMMARY
OUR COMPANY
USA Technologies, Inc., a Pennsylvania corporation (the "Company"), was founded
in January 1992. The Company is a developer and supplier of cashless payment and
control network systems and provider of related services. The Company's patented
technologies include networked cashless transaction solutions and point of
purchases devices. In May 2002, the Company completed the acquisition of Stitch
Networks Corporation, a Delaware corporation ("Stitch"), and operates Stitch as
a wholly owned subsidiary of the Company. Stitch also is a developer and
supplier of cashless payment and control network technologies. Through the
acquisition of substantially all of the assets of Bayview Technology Group, LLC
(Bayview) in July 2003, the Company now designs and manufactures patented energy
conservation devices for equipment such as laser printers, monitors, office
peripherals, refrigerated vending machines and glass front merchandisers
(referred to as slide or visi coolers).
OUR BUSINESS
The Company's point of purchase device, called e-Port or TransAct, facilitates
the monitor and control, the cashless payment of product and/or services and the
collection of sales and inventory data for the host equipment it is connected to
or embedded in. Examples of host equipment include copiers, faxes, personal
computers, printers, vending machines and kiosks. Our customers connect these
devices to a network, developed and operated by the Company, which further
facilitates the control and monitoring, the settlement of cashless payments and
the reporting of sales and inventory data collected at the point of purchase.
The Company's systems support multiple cashless payments methods, such as
payments via credit/debit cards, smart cards, Radio Frequency Identification
(RFID), Personal Identification Numbers (PINs), and cellular telephones.
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 services and network. Service fees for access to
the Company's equipment and network are recognized on a monthly basis. Product
revenues are recognized from the sale of products from the Company's vending
machines upon purchase and acceptance by the vending customer. Product revenues
recognized from the sale of energy conservation products are recognized when
shipped to the customer.
OUR MARKET
The Company has focused on the Vending, Kiosk and Office Equipment industries in
which to sell its networked, cashless payment systems, and has developed product
offerings in each of these channels. The Company markets and sells its product
and services directly to the owner, operator of the equipment and/or to
equipment distributors and resellers established in each of the respective
markets.
5
Vending/Kiosk: The Company offers several variations of e-Port to the vending or
kiosk industry such as an audit only device and an audit device coupled with
cashless payment capabilities. Audit only devices allow the operator of the
vending machine to remotely monitor the sales, inventory and diagnostic
information of the machine it is embedded into. In addition, our point of
purchase device allows the operator of the machine to offer their customers an
alternative payment method to cash when purchasing product. Another variation of
our e-Port product is our multi-media device. The multi-media e-Port client
product is equipped with both the audit and cashless payment features, referred
to above, but also includes the capability of displaying interactive advertising
and content via a LCD color touch screen. Information obtained at the vending
machine by our e-Port client device is transferred back to our network and made
available to the operator via the Internet or email.
Office Equipment: The TransAct can be sold separately and connected to office
equipment already owned by the purchaser or it can be coupled with office
equipment sold by the Company. The combined TransAct and office equipment
product is called the Business Express and is sold to hotels wishing to provide
their guests with 24x7x365 access to business center services. The same benefits
of remote sales and inventory data monitoring, as described above, are available
from the TransAct or Business Express product.
Energy Conservation Products
With the acquisition of Bayview in July 2003, the Company has acquired the
following additional products:
- VendingMiser(TM)installs in a cold drink vending machine and reduces the
power consumption of the vending machine by an average of 46%;
- CoolerMiser reduces the energy used by sliding glass or pull open
glass-front coolers that contain non-perishable goods;
- SnackMiser reduces the amount of electricity used by non-refrigerated snack
vending machines;
- MonitorMiser Plus is a computer monitor power controller. It works with all
operating systems and performs by powering down the monitor based upon
keyboard or mouse activity;
- LaserMiser provides energy conservation to laser printers, shutting them
down when they are idle. It is a plug-and-play device that is software
transparent and capable of handling any laser printer with a parallel or
serial connection;
- Internal VendingMiser (IVM) is the second generation of the VendingMiser in
development. It installs into cold drink vending machines and has the
capability to control the cooling system and the advertising lights
separately.
Research and Development Costs
6
The Company continuously pursues new product offerings related to our existing
technology and accordingly invests resources and capital in research and
development. For the years ended June 30, 2003 and 2002, the Company expensed
approximately $1,505,000 and $1,187,000, respectively for the development of our
proprietary technology and is reflected in general and administrative expense in
the accompanying consolidated financial statements.
ABOUT OUR OFFERING
Our selling shareholders are as of the date of this prospectus as follows:
* holders of 43,365,713 shares
* holders of unexercised warrants which if exercised would represent 18,068,400
shares (based upon the price of our shares of $.21 on December 16, 2003, all of
these warrants have exercise prices less than this share price)
Based upon the shares outstanding as of September 30, 2003 of 281,237,382 if all
of these warrants are exercised, and all of these shares covered by this
prospectus were issued and outstanding, we would have 300,408,812 shares
outstanding.
These shares would be offered by our selling shareholders at the market price at
the time of resale. Our selling shareholders may also sell their shares to other
investors in a transaction not on the open market. There is no requirement that
our selling shareholders sell their shares pursuant to this prospectus.
We will not receive any of the proceeds raised by the offering. We would receive
proceeds from the exercise by the selling shareholders of the warrants or
options referred to above.
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, 2003, our cumulative losses are $84.5 million. For our
fiscal years ended June 30, 2002 and 2003, and for the three months ended
September 30, 2003, we have incurred net losses of $17,314,807, $21,965,499 and
$9,303,084, respectively. If we continue to incur losses, the price of our
common stock can be expected to fall.
2. Our existence is dependent on our ability to raise capital which may not be
available.
7
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. We are currently using
funds in our operations on a monthly basis of approximately $750,000 and would
require funds from the sales of securities of approximately $9,000,000 to fund
our operations for the next twelve months. Our inability to obtain needed
funding can be expected to have a material adverse effect on our operations and
our ability to achieve profitability. If we fail to generate increased revenues
or fail to sell additional securities you may lose all or a substantial portion
of your investment.
3. We received an opinion from our auditor which raises substantial doubt about
our ability to continue as a going concern.
Our auditors, Ernst and Young, LLP, have included an explanatory paragraph in
their report on our June 30, 2003 consolidated financial statements indicating
that as of June 30, 2003, there is substantial doubt about our ability to
continue as a going concern. We will require additional funds in the future, and
there can be no assurance that any independent auditors` report on our future
financial statements will not include a similar explanatory paragraph if we are
unable to raise sufficient funds or generate sufficient cash from operations to
cover the cost of our operations. The existence of the explanatory paragraph may
adversely affect our relationship with prospective customers, suppliers and
potential investors, and therefore could have a material adverse effect on our
business, financial condition and results of operations.
4. We depend on our key personnel and if they would leave us, our business could
be adversely affected.
We are dependent on key management personnel, particularly the Chairman and
Chief Executive Officer, George R. Jensen, Jr. The loss of services of Mr.
Jensen or other executive officers would dramatically affect our business
prospects. Certain of our employees are particularly valuable to us because:
o they have specialized knowledge about our company and operations;
o they have specialized skills that are important to our operations; or
o they would be particularly difficult to replace.
We have entered into an employment agreement with Mr. Jensen that expires in
June 30, 2005. We have also entered into employment agreements with other
executive officers, each of which contain non-compete agreements. We have
obtained a key man life insurance policy in the amount of $2,000,000 on Mr.
Jensen, and a key man life insurance policy in the amount of $1,000,000 on our
Vice-President-Research and Development, Haven Brock Kolls, Jr.
We do not have and do not intend to obtain key man life insurance coverage on
any of our other executive officers. As a result, we are exposed to the costs
associated with the death of these key employees.
5. USA's dependence on proprietary technology and limited ability to protect our
intellectual property may adversely affect our ability to compete.
8
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.
To date, we have 35 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
granted us forty-five patents as of September 30, 2003. See "Business - Patents,
Trademarks and Proprietary Information." There can be no assurance that:
o any of the remaining patent applications will be granted to us;
o we will develop additional products that are patentable or do not
infringe the patents of others;
o any patents issued to us will provide us with any competitive
advantages or adequate protection for our products;
o any patents issued to us will not be challenged, invalidated or
circumvented by others; or
o any of our products would not infringe the patents of others.
If any of the products are found to have infringed any patent, there can be no
assurance that we will be able to obtain licenses to continue to manufacture and
license such product or that we will not have to pay damages as a result of such
infringement. Even if a patent application is granted for any of our products,
there can be no assurance that the patented technology will be a commercial
success or result in any profits to us.
6. Competition from others with greater resources could prevent USA from
increasing revenue and achieving profitability.
Competition from other companies which are well established and have
substantially greater resources may reduce our profitability. Many of our
competitors have established reputations for success in the development, sale
and service of high quality products. We face competition from the following
groups:
o companies offering automated, credit card activated control systems in
connection with facsimile machines, personal computers, debit card
purchase/revalue stations, and use of the Internet and e-mail which
directly compete with our products. See "Business-Competition";
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.
9
We depend on arrangements with third parties for a variety of component parts
used in our products. We have contracted with RadiSys Corporation and Masterwork
Electronics to assist us to develop and manufacture our e-Port(TM) products. For
other components, we do not have supply contracts with any of our third-party
suppliers and we purchase components as needed from time to time. See
"Business-Procurement". We have contracted with IBM to develop our network
services so that these services are Internet capable as well as interact with
our proposed media capable e-Post(TM). We have contracted with IBM to host our
network in a secure, 24/7 environment to ensure reliability of our network
services. If these business relationships are terminated, the implementation of
our business plan may be delayed until an alternative supplier or service
provider can be retained. If we are unable to find another source or one that is
comparable, the content and quality of our products could suffer and our
business, operating results and financial condition could be harmed.
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. Although we issued a special stock dividend in August
1995 consisting of one-third of a share of common stock for each share of
outstanding series A preferred stock, 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
September 30, 2003, the unpaid and cumulative dividends on the series A
preferred stock equal $6,306,476. 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 September 30,
2003, $2,662,004 of unpaid and cumulative dividends on the Series A Preferred
Stock were converted into 286,377 shares of common stock. See "Description of
Securities-Series A Convertible Preferred Stock." This registration statement
does not cover the shares issued by us upon conversion of the dividends on our
preferred stock.
9. We may fail to gain widespread market acceptance of our products and not
generate sufficient revenues or profit margins to become successful.
There can be no assurance that demand for our products will be sufficient to
enable us to become profitable. Likewise, no assurance can be given that we will
be able to install the TransActs and e-Ports at enough locations or sell
equipment utilizing our network to enough locations to achieve significant
revenues or that our operations can be conducted profitably. Alternatively, the
locations which would utilize the network may not be successful locations and
our revenues would be adversely affected. We may in the future lose locations
utilizing our products to competitors, or may not be able to install our
products at competitor's locations. In addition, there can be no assurance that
our products could evolve or be improved to meet the future needs of the market
place.
10
10. The lack of an established trading market may make it difficult to transfer
our stock and you may not be able to sell your shares on our trading market.
Our Common Stock is traded on the OTC Bulletin Board. Although there is limited
trading in the Common Stock, there is no established trading market. Until there
is an established trading market, holders of the common stock may find it
difficult to dispose of, or to obtain accurate quotations for the price of the
common stock. See "Description of Securities - Shares Eligible For Future Sale"
and "Market For Common Stock."
11. There are rules governing low-priced stocks that may make it more difficult
for you to resell your shares.
Our common stock is currently considered a "penny stock" under federal
securities laws since its market price is below $5.00 per share. Penny stock
rules generally impose additional sales practice and disclosure requirements on
broker-dealers who sell our shares to certain investors.
Broker-dealers who sell penny stock to certain types of investors are required
to comply with the SEC's regulations concerning the transfer of penny stock. If
an exemption is not available, these regulations require broker-dealers to:
- make a suitability determination prior to selling penny stock to the
purchaser;
- receive the purchaser's written consent to the transaction; and -
provide certain written disclosures to the purchaser.
- These rules may affect the ability of broker-dealers to make a market
in or trade our shares. This, in turn, may affect your ability to
resell those shares in the public market.
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
September 30, 2003, these shares consisted of the following:
- 281,237,382 shares of Common Stock
- 524,492 shares of Preferred Stock
- 49,899,693 shares underlying Common Stock options and warrants; and
- 52,251,733 shares underlying our Convertible Senior Notes.
13. Sales of shares eligible for future sale from exercise of warrants and
options could depress the market price of our common stock.
We presently have issued and outstanding options to purchase 2,646,485 shares of
our common stock and warrants to purchase 47,253,208 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.
11
14. Our subsidiary Stitch Networks is currently in default on a bank loan which
may affect our liquidity and our ability to raise capital.
Since March 2003, our subsidiary, Stitch Networks has been in default under a
bank loan in the amount of approximately $167,000 for non-payment of this amount
to the bank. To date, the bank has not taken any legal action to collect the
amount due. The obligation due to the bank is secured by the accounts receivable
of Stitch Networks. The continuing failure of Stitch to pay the bank could
affect our ability to raise equity capital in the future. We have agreed to a
satisfactory payment arrangement with the bank and we intend to pay off this
debt in full from working capital. The funds required to repay the bank would
adversely affect our liquidity.
15. We are obligated to make substantial principal and interest payments to the
holders of the Senior Notes which may not be available or would use our
available working capital.
As of the date hereof, we have approximately $245,000 of unsecured senior notes
due on December 31, 2003, approximately $450,660 of unsecured senior notes due
on December 31, 2004, approximately $3,389,400 of unsecured notes due on
December 31, 2005, approximately $3,510,845 of unsecured notes due on December
31, 2006, and approximately $3,108,500 of unsecured notes due on December 31,
2007. These notes accrue cash interest at the rate of twelve percent (12%) per
year. We are required to make quarterly interest payments totaling approximately
$321,250 or $1,285,000 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 be paid from cash 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.
16. Our exchange of New Senior Notes to our 2004 Senior Note holders
may have been in violation of the registration provisions of the securities
laws. As a result, certain of our note holders may be granted the right to
rescind the exchange and demand the return of their old note to them by us which
matures in December 2004. The repayment of these notes in December 2004 would
adversely affect our liquidity.
12
The holders of $4,067,491 of our Senior Notes due December 31, 2007, may
have a right to rescind the exchange of these notes for notes originally due
December 31, 2004, and demand that we return to them the $4,067,491 of notes due
December 31, 2004. During the period from March 2003 through December 2004, we
granted to each holder of the notes due December 31, 2004 the right to extend
the notes until December 31, 2007 and in such event agreed that the conversion
rate of the note would be reduced from $.40 to $.20. On April 14, 2003 we filed
a Registration Statement which included the shares underlying the 2007 notes.
Because the exchange offering was not completed prior to the filing of this
registration statement, the exchange offer may be deemed to have been in
violation of the registration requirements of Section 5 of the Act. As a result,
we removed all of the shares underlying the 2007 Notes from that registration
statement. Generally, the statute of limitations for this type of claim is one
year after the date of the alleged violations and if successful, would entitle
the Note holders to rescind the issuance of the new notes to them and demand a
return of the 2004 Senior Notes. If all of the note holders demanded the return
of their notes, we would be obligated to repay the $4,067,491 principal amount
on December 31, 2004 rather than on December 31, 2007. This repayment could
significantly exceed our cash reserves and require us to borrow funds (which may
not be available) and would materially and adversely affect our results of
operations and financial condition.
17. The termination of our Kodak Agreement would reduce our revenues
which we may not be able to replace.
We are currently negotiating a settlement of our dispute with Maytag
and Dixie-Narco regarding the Kodak Agreement. We believe that any settlement
would involve the termination of the Kodak Agreement. In the event of the
termination of the agreement, revenues would be reduced by approximately $55,000
per month or $660,000 per year. In addition, the Company would be required to
reallocate three full time personnel to other operations of the Company and
retrieve and dispose of the vending machines used in the program. During the
fourth quarter of fiscal year 2003 the Company recorded a charge to reflect
these vending machines at their fair value. There can be no assurance that we
will be able to replace this lost revenue. In such event, we may have to reduce
personnel or raise additional funds through the sales of securities.
USE OF PROCEEDS
We will not receive any of the proceeds from the sales of our Common Stock by
the selling shareholders. The list of the selling shareholders entitled to
receive the net proceeds from any sales of our common stock begins on page 46 of
this prospectus. We will, however, receive proceeds from the exercise of any
warrants by the selling shareholders.
As of the date of this prospectus, we would receive $1,867,143 of proceeds from
the exercise of all these warrants at the stated exercise prices. Because all of
these warrants have exercise prices of less than $.21 per share, all of these
warrants are in the money as of the date of this prospectus.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
GENERAL
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and the accompanying notes. Actual results could differ
from those estimates. We believe the policies and estimates related to revenue
recognition, software development costs, impairment of long-lived assets,
goodwill and intangible assets, and investments represent our critical
accounting policies and estimates. Future results may differ from our estimates
under different assumptions or conditions.
REVENUE RECOGNITION
Revenue from the sale of equipment is recognized on the terms of
freight-on-board shipping point, or upon installation and acceptance of the
equipment if installation services are purchased for the related equipment.
Transaction processing revenue is recognized upon the usage of the Company's
cashless payment and control network. Service fees for access to the Company's
equipment and network services are recognized on a monthly basis. Product
revenues are recognized from the sale of products from Company owned vending
machines when there is purchase and acceptance by the vending customer.
Customers have the ability to return vending products for a full refund. The
Company estimates an allowance of product returns at the date of sale. Product
revenue recognized from the sale of energy conservation products are recognized
when shipped to the customer.
13
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs pursuant to Statement of
Financial Accounting Standards No. 86 (SFAS 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 client product and related enhanced network and, accordingly,
the Company commenced capitalization of software development costs related to
this product and network. Costs capitalized through 2002 were $5.1 million,
which included capitalized interest of approximately $493,000, pursuant to SFAS
No. 34, "Capitalization of Interest Costs".
During the fourth quarter of fiscal 2002, the multi-media e-Port(TM) client
product and enhanced network became available for general release to the
Company's customers. The multimedia e-port(TM) client product is equipped with
both the audit and cashless payment features, but also includes the capability
of displaying interactive advertising and content via a LCD screen. During this
quarter, Management performed an evaluation of the commercial success and
preliminary market acceptance of the multi-media e-Port(TM) client product 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 is being amortized over an estimated useful life of two
years. Amortization expense was approximately $1,331,000 during the year ended
June 30, 2003, $2,996,000 during the year ended June 30, 2002 (including the
above impairment adjustment of $2,663,000) and $333,000 for three months ended
September 30, 2003. Such amortization is reflected in cost of sales in the
accompanying consolidated statements of operations.
IMPAIRMENT OF LONG LIVED ASSETS
The Company adopted SFAS No. 144 on July 1, 2002. In accordance with SFAS No.
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. 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 use in the
Company's Kodak Program to sell disposable cameras and film. Management
determined that it was more likely than not that the vending machines would be
disposed of before the end ot their previously estimated useful lives. The
14
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 carrying value of the group of assets.
Such amount is reflected in depreciation expense in the 2003 consolidated
statement of operations.
GOODWILL AND INTANGIBLE ASSETS
On July 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142 (SFAS No. 142) "Goodwill and other Intangible Assets," under which
Goodwill is no longer permitted to be amortized to earnings, but instead is
subject to periodic testing for impairment. Intangible assets with finite lives
will continue to be amortized over their estimated useful lives. Although the
Company did not adopt Statement No. 142 until fiscal year 2003, the
non-amortization provisions of Statement No. 142 for combinations initiated
after June 30, 2001 were applicable for the Company effective July 1, 2001.
Under SFAS No. 142, the Company tested goodwill for impairment during fiscal
year 2003 using the transitional two-step process prescribed by SFAS No. 142.
The first step of the goodwill impairment test is used to identify potential
impairment by comparing the fair value of the Company with its net book value
(or carrying amount), including goodwill. If the fair value of the Company
exceeds its carrying amount, goodwill is considered not impaired and the second
step of the impairment test is unnecessary. If the carrying amount of the
Company exceeds its fair value, the second step of the goodwill impairment test
is performed to measure the amount of impairment loss, if any. The second step
of the goodwill impairment test compares the implied fair value of the Company's
goodwill with the carrying amount of that goodwill. If the carrying amount of
the Company's goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to that excess. Determining the
fair value of the Company under the first step of the goodwill impairment test
and determining the fair value of individual assets and liabilities of a the
Company (including unrecognized intangible assets) under the second step of the
goodwill impairment test is judgmental in nature and often involves the use of
significant estimates and assumptions. Similarly, estimates and assumptions are
used in determining the fair value of other intangible assets. These estimates
and assumptions could have a significant impact on whether or not an impairment
charge is recognized and also the magnitude of any such charge. To assist in the
process of determining goodwill impairment, the Company performed an internal
valuation and estimated fair value using a discounted cash flow analysis. This
approach uses significant estimates and assumptions, which include projected
future cash flows (including timing), discount rate reflecting the risk inherent
in future cash flows and a perpetual growth rate.
The Company performed an annual impairment test of goodwill as of April 1, 2003,
as prescribed by SFAS and concluded that there were no impairment indicators.
The Company will perform the impairment tests required under SFAS No. 142 on an
annual basis unless other indicators are present.
INVESTMENT
The Company's accounts for investments in accordance with Statement of Financial
Accounting Standards No. 115 (SFAS 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 in a
separate component of stockholders' equity in other comprehensive income (loss).
15
A judgmental aspect of accounting for investments involves determining whether
an other-than-temporary decline in value of the investment has been sustained.
If it has been determined that an investment has sustained an
other-than-temporary decline in its value, the investment is written down to its
fair value, by a charge to earnings. Such evaluation is dependent on the
specific facts and circumstances. Factors that are considered by the Company
each quarter in determining whether an other-than-temporary decline in value has
occurred include: the market value of the security in relation to its cost
basis; the financial condition of the investee; and the intent and ability to
retain the investment for a sufficient period of time to allow for recovery in
the market value of the investment. In evaluating the factors above for
available-for-sale securities, management presumes a decline in value to be
other-than-temporary if the quoted market price of the security is below the
investment's cost basis for a period of six months or more. However, the
presumption of an other-than-temporary decline in these instances may be
overcome if there is persuasive evidence indicating that the decline is
temporary in nature (e.g., strong operating performance of investee, historical
volatility of investee, etc.).
During the fiscal year ended June 30, 2003, the Company invested in the Jubilee
Investment Trust, PLC (Jubilee), a United Kingdom investment trust whose shares
trade on the London Stock Exchange. The investment in Jubilee has been accounted
for as "available for sale". At June 30, 2003, the Company determined in
accordance with SFAS 115, that the decline in the market value of this
investment was "other than temporary", as the security's quoted market price was
below the investments's cost basis for a period of six months or more.
Accordingly, the Company wrote down the investment to its fair value of
$904,049, realizing an impairment loss of $1,945,951.
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; or (viii) the ability of the Company to satisfy its
trade obligations included in accounts payable and accrued liabilities. 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.
16
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003:
The fiscal quarter ended September 30, 2003 resulted in a net loss of $9,303,084
(approximately $7.5 million non-cash) compared to a net loss of $3,574,218
(approximately $1.4 million non-cash) for the fiscal quarter ended September 30,
2002.
Revenues were $1,680,608 compared to $734,445 from the previous year's fiscal
quarter. This $946,163 or 129% increase was mainly due to the inclusion of our
energy conservation equipment revenues as such revenues did not exist in the
first quarter of the prior year, since the acquisition of Bayview occurred in
July 2003. The increase of $1,097,990 in equipment sales was primarily due to
approximately $945,000 of energy conservation equipment sales and an increase of
$126,000 in e-Port client equipment sales. License and transaction fees and
product sales decreased $23,004 and $128,823, respectively, as a result of a
decrease in the number of sited vending machines in the Kodak vending placement
program. The decrease in sited vending machines is principally due to the
removal of machines by the Company, at its discretion, or at the request of the
location owner where the machine is placed, as a result of lower than expected
sales activity. The decrease in sited vending machines is not due to the current
dispute with Stitch Networks. Revenue is still well below the level required for
the Company to be profitable.
Cost of sales for the period consisted of equipment, product and labor costs of
approximately $598,000, software development amortization of approximately
$333,000 and network and transaction related costs of $151,000. The increase in
cost of sales of $414,703 or 62% over the prior year period was directly
attributable to the increase in equipment sales.
Gross profit and gross profit margin of $598,445 and 36%, respectively,
increased from the same quarter last fiscal year directly due to increases in
equipment sales of our energy conservation and e-Port client equipment.
General and administrative expenses of $1,501,769 decreased by $140,609 or 9%
from the same quarter last fiscal year. The decrease was principally due to a
decrease in product development expense of $595,000, offset by an increase in
total general and administrative costs of approximately $352,000 related to the
newly acquired energy conservation equipment line, which consisted primarily of
consulting expense of approximately $145,000 and royalty expense of
approximately $52,000.
Compensation expense of $5,703,198 increased by $4,857,479 or 574% primarily due
to the issuance of 10,500,000 shares of Common Stock to the Company's Chief
Executive Officer in connection with the amendment of his employment agreement.
This was a one-time, non-cash payment valued at $4,620,000 representing 95% of
the total increase. Another component of this increase was due to approximately
$209,000 of additional compensation expense related to the operations of the
newly acquired energy conservation equipment line. Depreciation and amortization
expense increased by $147,875, largely due to $238,000 related to the property
and equipment and intangible assets purchased from Bayview. This increase was
offset by a decrease of approximately $90,000 related to other depreciable
assets due to a lower depreciable asset base.
During the quarter, the Company incurred a charge of $277,297 related to the
modification of debt terms for certain 2003 and 2004 12% Convertible 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 prior year's quarter
ended September 30, 2002.
The interest expense increase of $1,154,400 was due mainly to non-cash charges
of $1,031,232 related to expensing the unamortized debt discount and other
issuance costs on the 12% Senior Notes that were converted into Common Stock
during the quarter. The decrease in cash interest expense of $82,261 was mainly
due to the issuance of Common Stock in lieu of cash for payment of interest due
to Senior Note holders.
FISCAL YEAR ENDED JUNE 30, 2003:
The fiscal year ended June 30, 2003 resulted in a net operating loss of
$21,965,499 (approximately $12.6 million non-cash) compared to a net loss of
$17,314,807 (approximately $11.0 million non-cash) for the comparable period in
the prior fiscal year.
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 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 and Business Express.
The Company is continually increasing its sales efforts to sell its e-Port and
Business Express products.
Overall, operating expenses for the fiscal year ended June 30, 2003 were
$17,912,707, representing a $886,842 or 5% increase over the prior period. The
significant changes in each category were as follows:
The decrease of $1,091,458 or 27% in cost of sales is due primarily to
amortization of software development costs of $1,331,000 in 2003 compared to
$2,996,000 in 2002. The 2002 amortization included a one-time impairment charge
of $2,663,000 that was non-recurring in fiscal year 2003. The remaining increase
in cost of sales is attributable to the increase in e-Port sales during fiscal
year 2003.
The decrease in general and administrative expenses was $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. We have
continued to utilize consultants for general business activities, including
network services, and have attempted whenever possible to pay for these services
on a non-cash basis through the issuance of debt and equity instruments.
Compensation expense increased $318,548 or 7% over last 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 versus fiscal year ended June 30, 2002.
Depreciation and amortization expense increased by $811,478 for the fiscal year
ended June 30, 2003, which is 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.
17
The Company incurred a charge during the fiscal year ended June 30, 2003
relating to the modification of debt terms for certain 2000 and 2001 12%
Convertible Senior Notes in the amount of $1,521,654. There was no such
comparable charge in the prior year. This charge is for the unamortized debt
discount that remained on the Senior Notes that are scheduled to mature in
December 2003 and December 2004 whose terms were modified for those note holders
who agreed to extend the maturity of their notes in exchange for a reduction
in the conversion rate. The Company offered these note modifications (e.g.
extended maturity dates), 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 in the 2003 Consolidated Statement of Operations. 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.
FISCAL YEAR ENDED JUNE 30, 2002:
For the fiscal year ended June 30, 2002, the Company had a net loss of
$17,314,807 (approximately $11.0 million non-cash).
Revenues for the fiscal year ended June 30, 2002 were $1,682,701, an increase of
$231,699 or 16% from the prior year. This increase in revenues is directly
attributable to the acquisition of Stitch Networks Corporation, which accounted
for $210,068 of the increase. Other revenues remained flat with the prior year,
as the Company's sales efforts did not produce significant revenues due to
limited market acceptance, which was less than that anticipated by the Company.
The Company is continually increasing its sales efforts to sell its e-Ports and
its Business Express products.
Overall, operating expenses for the fiscal year ended June 30, 2002 were
$17,025,865, representing a $7,365,090 or 76% increase over the prior year. This
increase is due to the increases of $3,113,674 or 328% in cost of sales,
$2,332,938 or 42% in general and administrative expenses, $1,687,886 or 57% in
compensation expense, and $230,592 or 110% in depreciation and amortization
expense. The significant changes in each category are as follows:
The increase of $3,113,674 or 328% in cost of sales is due primarily to the
inclusion of amortization of software development costs and the cost of product
relating to Stitch Networks Corporation. In fiscal 2002, the Company recorded
software amortization of $2,996,000, including an impairment charge of
$2,663,000, in cost of sales as required by generally accepted accounting
principles. During the fourth quarter of fiscal year 2002, the Company
determined that the estimated future revenues less costs to complete and dispose
the enhanced e-Port client product was zero, and therefore recorded this
impairment charge to reflect software development costs at their net realizable
value. There was no amortization expense for software development costs in
fiscal year ended 2001. The remaining increase in cost of sales is attributable
to the increase in sales, primarily related to the Stitch revenues in fiscal
2002.
The increase in general and administrative expenses of $2,332,938 or 42% is due
primarily to the increase in non-cash (securities) compensation in the amount of
$555,482 paid to our investment banker, increase in the non-cash (securities)
compensation paid to our public relations consultants in the amount of
$1,601,915, and the increase in non-cash (securities) compensation in the amount
of $657,238 paid to our other business consultants. Although these expenses did
not result in increased revenues during the fiscal year, we believe that
increased revenues may occur in the future. Our investment banker provided us
with various financial advisory services during the fiscal year, including
identifying strategic acquisition opportunities. Our public relations
consultants assisted us to attempt to introduce the Company and its products as
well as communicate with our shareholders. Our other business consultants
assisted us during the fiscal year with technical development of and advice in
connection with our network and e-Port products. The increases in our general
and administrative expenses were offset by a substantial decrease in legal
expenses of $992,181, primarily associated with termination of the Mail Boxes
Etc. litigation, which was settled in fiscal year 2001.
18
The increase in compensation expense of $1,687,886 or 57% from the previous year
is mainly attributable to an increase in stock bonus expense to Company officers
and employees of $1,248,545, which was a non-cash expense. The stock bonuses
were issued in order to adequately compensate and attempt to retain the
Company's management team intact. Corporate salaries increased $342,921 or 113%,
due to increased headcount by 16% during the year, primarily due to the addition
of Stitch Network's personnel during the last one and one half months of 2002.
Depreciation and amortization expense of $440,238 increased by $230,592, which
is directly attributable to the increased depreciation expense of the assets
acquired in the Stitch acquisition.
Interest expense increased by $864,929, primarily as a result of the non-cash
amortization to interest expense relating to the debt discount and beneficial
conversion features on the Company's convertible Senior Notes.
Plan of Operations
During the fiscal year ended June 30, 2003, revenues generated from equipment
sales of Business Express and related hospitality offerings were approximately
$642,000. These revenues were a result of the Company's sales of equipment
directly to various hotel chains, and through distributors. With the acquisition
of Bayview on July 11, 2003, the Company now designs and manufactures patented
energy conservation devices for equipment such as laser printers, monitors,
office peripherals, refrigerated vending machines and glass front merchandisers
(referred to as slide or visi coolers). These energy conservation devices reduce
power consumption of various types of equipment by allowing the equipment to
operate in power saving mode when full power mode is not necessary. These
devices, which include the VendingMiser, CoolerMiser, SnackMiser, MonitorMiser
and LaserMiser can use activity, occupancy, temperature, timing or other various
methods to determine which mode the equipment should be in. Route to market for
the energy conservation devices is much the same as the Company's e-Port
technology, with the notable addition of governmental and utility rebate and
give-away programs, where by part or all of the cost of the energy management
device is covered by government funds allocated to energy conservation projects.
In August and September 2003, the Company fulfilled an order for over 3,400
VendingMiser units from Austin Energy in Austin Texas for a total sale of
approximately $486,000.
In October 2003, the Company signed a strategic alliance agreement with Conopco,
Inc. dba Unilever Home & Personal Care North America to be the exclusive
provider of laundry detergent for the e-Suds program to be used in colleges and
universities located in the United States. The agreement provides for the
Company to receive payments per injection of detergent as well as a series of
investment payments to be distributed to various operators who allow branding of
their machines with the Unilever "all" logo.
The Company's vending machines for the Kodak Program are purchased from
Dixie-Narco and the film and cameras are purchased directly from Eastman Kodak
Company. Product revenues through the fiscal year ended June 30, 2003 were
approximately $445,000 and approximately $75,000 for the three months ended
September 30, 2003. In May 2003, Stitch notified Maytag and Dixie-Narco that
they had breached the Kodak Agreement because Maytag had failed to create and
maintain during the term of the Kodak Agreement a customer focus team and Dixie
had failed to service, place and pick up the machines as required in the Kodak
Agreement. In June 2003, Maytag and Dixie-Narco indicated to Stitch that they
were not in breach of the Kodak Agreement and that Stitch had breached the
Agreement by failing to pay certain payments due thereunder. Maytag and Dixie
indicated that that the customer focus team was terminated due to Stitch's
breach of the Kodak Agreement by failing to pay fees due thereunder and Stitch's
not taking delivery of vending machines ordered from Dixie. The parties have
been negotiating a resolution of this matter although no settlement has been
finalized. The Company believes that any settlement would involve the
termination of the Kodak Agreement. In such event, although revenues of the
Company would be reduced, because the Kodak program is and has been operating at
a loss, the termination of the program would eliminate these ongoing losses. The
Company also believes that any settlement would involve the payment of the
amount due by Stitch to U.S. Bancorp by the other parties to the Kodak Agreement
and the forgiveness of the payments due by Stitch to Dixie in the approximate
amount of $123,716.
19
In March 2002, the Company signed an agreement with MEI (Mars Electronics), a
world leader in the manufacturing of electronic coin mechanisms and dollar bill
acceptors for the vending industry. MEI has agreed to sell and distribute an MEI
branded cashless payment system to be developed by the Company, as part of its
portfolio of vending solutions. Commercial availability is planned for winter
2003. To date, no revenue has been generated from this agreement.
In October 2002, the Company signed a Strategic Alliance Agreement with ZiLOG
Corporation, a semiconductor company, which is a supplier of microprocessors to
the retail point of sale industry. The agreement allows the Company's
proprietary network software (USALive) to be embedded on a chip produced by
ZiLOG. The Company licenses its software to the purchaser and is entitled to a
fee for the licensing of each such chip. A second revenue stream could be
generated from purchasers who buy the retail point of sales terminals and begin
to use them, if they elect to use the USA network embedded on the chip. To date,
no products have been available for commercial use and accordingly, no revenues
have been generated.
In laundry, American Sales Inc. (ASI) has signed a five-year agreement to
purchase units of Stitch's e-Suds laundry solution for their university
locations in the Midwest, with initial installations to begin in the fall of
2003. In October 2003, the Company installed a system at ASI's facilities for
final testing. The Company anticipates unit sales to begin during the second
quarter of fiscal year 2004.
On July 11, 2003, USA purchased Bayview pursuant to an asset purchase agreement.
Bayview designs and manufactures energy conservation devices for the vending
industry. The operating assets consist primarily of the patents and other
intellectual property relating to such devices and customer accounts. The
Bayview transaction adds a complementary product to the Company's available
offerings to the vending industry.
The purchase price for Bayview's assets was 20,000,000 shares of restricted
Common Stock of USA issued to Bayview, and a cash payment made by USA in the
amount of $631,247 to a creditor of Bayview (paid from USA's working capital).
The purchase price was determined as a result of an arms length negotiation
between Bayview and USA. To the best knowledge of USA, neither USA, any
affiliate, director, officer nor associate of any director or officer of USA had
any material relationship with Bayview prior to the transaction. The Company
also agreed to issue 170,000 shares to Robert McGarrah in exchange for his
introducing Bayview to the Company as a possible acquisition candidate. Such
shares have been included in the acquisition cost of Bayview.
Bayview has agreed not to sell any of the Common Stock 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
stock for resale by Bayview under the Act, for a period of one year (from July
11, 2004 through July 11, 2005).
20
Liquidity and Capital Resources
During the fiscal year ended June 30, 2003, the Company completed several
financing transactions. Net proceeds of $9,930,879 were realized from private
placement offerings of Common Stock including the exercise of Common Stock
Purchase Warrants and Options. Proceeds of $1,833,841 were realized from private
placement offerings of 12% Convertible Senior Notes. As of June 30, 2003, the
Company had a working capital deficit of $791,532.
During the fiscal year ended June 30, 2003, net cash of $9,228,899 was used by
operating activities, primarily due to the net loss of $21,965,499 offset by the
following non-cash charges: $2,573,301 for Common Stock, Common Stock Warrants
and Senior Notes issued for services; $2,743,083 of non cash depreciation and
amortization; $2,955,158 of non-cash amortization of the debt discount relating
to the 12% Convertible Senior Notes; $1,945,951 for a realized loss on the
investment in the Jubilee Trust; $1,521,654 loss realized on the modifications
of the Senior Notes; and $860,250 of interest expense on the Senior Notes paid
through the issuance of Common Stock.
During the fiscal year ended June 30, 2003, net cash used in investing
activities was $186,895 principally due to the investment in computer equipment
and furniture and equipment of $149,000 (a reduction of over $2 million from
2002 for investments in property, equipment and software development costs). The
net cash provided by financing activities of $11,242,279 was attributable
primarily to net proceeds generated from the issuance of Common Stock through
private placements, exercise of Common Stock Purchase Warrants, and net proceeds
generated through the issuance of the 12% Convertible Senior Notes offset by the
payment of long-term debt and capital leases of $557,441.
In connection with the May 2002 Stitch acquisition (Note 4 to the Consolidated
Financial Statements), the Company assumed long term debt of $3,976,000, which
included a vending equipment borrowing facility and working capital loans. The
Company repaid $2,165,000 of the working capital loans in June 2002 leaving an
outstanding balance of $275,000. These loans are secured by certain assets of
Stitch. At June 30, 2003 $166,765 of working capital loans are outstanding which
bear interest at 6.75% per annum. Such loans were payable on July 8, 2002.
During fiscal year 2003 the bank extended the due date on these loans on several
occasions under forbearance agreements. At June 30, 2003, the Company is in
default under this working capital loan agreement. We have agreed to a
satisfactory payment arrangement with the bank and we intend to pay off this
debt in full from working capital.
At June 30, 2003 and September 30, 2003 the Company also has a bank facility
(the Facility), which was utilized to fund the purchase of vending machines
placed at locations where Kodak film products are 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 has granted the bank a security interest in these vending
machines. Repayment of principal is also insured by a Surety Bond issued by a
third-party insurer in exchange for an initial fee paid by the Company.
21
For the three months ended September 30, 2003, net cash of $2,727,715 was used
by operating activities, primarily due to the net loss of $9,303,084 offset by
non-cash charges aggregating to $7,493,302 for transactions involving issuing
Common Stock for services, depreciation and amortization of assets, amortization
of debt discount, loss on debt modifications relating to the Senior Notes and
interest expense relating to the Senior Notes paid through the issuance of
Common Stock and Common Stock Warrants, offset by a gain on the sale of
investment. In addition, the Company's operating assets increased by $917,933
primarily due to accounts receivable and inventory increases related to the
addition of the energy conservation equipment line from the Bayview acquisition.
For the three months ended September 30, 2003, net cash used in investing
activities was $833,795, primarily due to the cash component of the investment
in Bayview of $727,969.
Proceeds from financing activities for the three months ended September 30, 2003
provided the funds necessary to support cash used in operating and investing
activities. Proceeds of $5,935,518 were realized from several private placement
offerings of Common Stock, the exercise of Common Stock Warrants and collection
of Common Stock subscriptions receivable. Payments of long-term debt and capital
leases totaled $140,043 for the quarter.
Long-term debt obligations of the Company as of September 30, 2003 were as
follows:
Bank facility $696,305
Working capital loans 166,765
Other, including capital lease obligations 52,175
--------
915,245
Less current portion 813,681
--------
$101,564
========
The bank facility (the Facility) was utilized to fund the purchase of vending
machines placed at locations where Kodak film products are 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 film products
vending machines. Repayment of principal is also insured by a Surety Bond issued
by a third-party insurer in exchange for an initial fee paid by the Company.
Final maturity of principal extends into the year ending June 30, 2005.
In connection with the Stitch acquisition, the Company assumed long-term debt
which included a vending equipment borrowing facility and working capital loans.
These loans are secured by certain assets of Stitch. At September 30, 2003,
$166,765 of the working capital loans remain outstanding, and bear interest at
6.75% per annum. Such loans were payable on July 8, 2002. During fiscal year
2003 the bank extended the due date on these loans on several occasions under
forbearance agreements. The Company was in default under this working capital
loan agreement, however, on November 6, 2003, the Company reached an agreement
with the bank to pay the remaining balance in installments over the next twelve
months.
The Company has incurred losses of $22.0 million (approximately $12.6 million
non-cash) and $17.3 million (approximately $11.0 million non-cash) during each
of the fiscal years ended June 30, 2003 and 2002, respectively, and cumulative
losses from inception through June 30, 2003 amounting to $75.2 million. For the
three months ended September 30, 2003, the net loss was $9,303,084 of which
$7,493,302 related to non-cash charges. Cumulative losses through September 30,
2003 amounted to approximately $84.5 million. The Company has continued to raise
capital through equity and debt offerings to fund operations.
The impact of the Bayview acquisition on cash flow for the three months ended
September 30, 2003 was a net cash outflow of approximately $1.5 million -
$760,000 of cash used in operations and $728,000 invested in operating assets
and liabilities in connection with the purchase. The structure of the
acquisition of the energy conservation equipment line from Bayview did not
include acquiring the working capital required to support the business. The
quarter's operating cash flows reflected an investment for this working capital.
Such amount was greater than that expected to support the on-going business
activities of the energy conservation equipment line by approximately $650,000
due to acquisition transition and integration. The Company has since reduced
working capital invested in October 2003 by that amount.
22
During the year ended June 30, 2003 cash used in operating activities was
approximately $750,000 per month. For the three months ended September 30, 2003
cash used in operating activities, excluding the excess working capital
investment related to Bayview, was approximately $700,000 per month. Using that
as a basis for estimating capital requirements for the remainder of the fiscal
year ending June 30, 2004, along with requirements for capital expenditures and
repayment of long-term debt, the Company anticipates cash needs of approximately
$9.1 million through September 30, 2004.
During the fiscal year ending June 30, 2004, the Company anticipates its cash
needs to be approximately $9 million. This estimate is based on the actual cash
requirements during fiscal year 2003 of approximately $750,000 per month. This
estimate does not consider the positive impact we believe the July 2003 Bayview
acquisition will have on the Company's operations, or any incremental revenues
from the Company's other products. Bayview is expected to generate $6 million of
revenues and operating cash flows of approximately $2.5 million during fiscal
year 2004. The increase in projected operating cash flows from the historical
cash flows achieved by Bayview in the calendar year ended December 31, 2002,
prior to the Company's ownership of Bayview is due to higher gross profit
margins projected from the sale of energy conservation products and a reduction
in operating expenses. The achievement of these higher margins is due to
efficiencies and synergies expected from the integration of the Bayview
operations into the Company's operations. Gross profit margins are expected to
increase from historical margins of 57% (Year ended December 31, 2002) and 52%
(Year ended December 31, 2001) as the Company expects to achieve installation
and distribution cost reductions due to the consolidation of operations. This
decrease in costs is expected to yield an additional $600,000 of cash flows from
the revenues projected of $6 million. In addition to the above cost savings, the
Company expects to save approximately $800,000 annually from the elimination of
duplicate executive, selling and administrative labor costs and approximately
$250,000 in general expense reductions such as travel, advertising, trade show
and professional fees as a result of the consolidation and synergies of
operations. As the Bayview acquisition only occurred in July 2003, we do not
have historical experience with this operation as integrated into the Company's
operations and, therefore, the achievement of the positive cash flow impact is
not certain at this early stage of integration and operation.
As of September 30, 2003, the Company had $4.6 million of cash and cash
equivalents, primarily as a result of proceeds from several private placements
of Common Stock entered into during the three months ended September 30, 2003.
Subscriptions receivable of $406,687 as of September 30, 2003 were collected in
October 2003. Working capital investment related to energy conservation
equipment of $650,000 was realized in cash due to the collection of accounts
receivable subsequent to September 30, 2003. In September 2003, the Company also
sold 700,000 shares of its investment in the Jubilee Trust generating net
proceeds of $395,000 and anticipates selling a substantial portion of the
remaining Jubilee shares during fiscal year 2004 creating additional cash of
approximately $700,000 based on the investment's current quoted market price.
These available sources of cash should be sufficient to meet the Company's cash
requirements for the remainder of the 2004 fiscal year.
The Company does not expect to rely on the proceeds from the exercise of
warrants to meet its capital requirements. To the extent that the sources of
capital described above are not sufficient to meet the Company's obligations
during the remainder of the year, the Company would reduce operating expenses
accordingly, primarily through reductions in discretionary expenditures such as
travel, marketing, advertising and research and development. In addition, the
Company will continue to employ means to minimize cash requirements such as (i)
issuing shares of Common Stock in lieu of cash for third-party services provided
to the Company, compensation to employees and interest on the 12% Convertible
Senior Notes, (ii) extending maturity dates on the 12% Convertible Senior Notes
by reducing the conversion terms to $0.20 per share on the 12% Convertible
Senior Notes and (iii) negotiating with vendors and suppliers to extend payment
terms of trade obligations.
23
The holders of $4,067,491 of our Senior Notes due December 31, 2007, may have a
right to rescind the exchange of these notes for notes originally due December
31, 2004, and demand that we return to them the $4,067,491 of Senior Notes due
December 31, 2004. During the period from March 2003 through December 2004, we
granted to each holder of the Senior Notes due December 31, 2004 the right to
extend the notes until December 31, 2007 and in such event agreed that the
conversion rate of the note would be reduced from $.40 to $.20. On April 14,
2003 we filed a registration statement which included all of the shares
underlying the 2007 notes. Because the exchange offering was not completed prior
to the filing of that Registration Statement, the exchange offer may be deemed
to have been in violation of the registration requirements of Section 5 of the
Act. As a result, we removed all of the shares underlying the 2007 Notes from
that registration statement. Generally, the statute of limitations for this type
of claim is one year after the date of the alleged violations and if successful,
would entitle the note holders to rescind the issuance of the new notes to them
and demand a return of the 2004 notes. If all of the note holders demanded the
return of their notes, we would be obligated to repay the $4,067,491 principal
amount on December 31, 2004 rather than on December 31, 2007. This repayment
could significantly exceed our cash reserves and require us to borrow funds
(which may not be available) and would materially and adversely affect our
results of operations and financial condition. Because of the reduced conversion
rate of $.20 per share granted in connection with the extension of the maturity
date of these notes, we do not anticipate that a significant number of the
noteholders, if any, would demand the return of their old note.
Commitments
During March 2003, the Company entered into a lease through December 31, 2008
for 12,864 square feet of space in Malvern, Pennsylvania for its principal
executive office. The operating lease 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. With the acquisition of Stitch
Networks in May 2002, the Company acquired 12,225 square feet of rented space in
Kennett Square, PA. The rent is $11,153 per month and the lease expires on March
2005. The Company consolidated facilities in Malvern, and vacated the rented
space in Kennett Square. For that reason, the Company has accrued for the
remaining payments of the lease of approximately $354,000 as part of the Stitch
purchase price as of June 30, 2002 (see Note 4 to the Consolidated Financial
Statements). Stitch is in default under the lease since August 2002. The Company
also signed a lease expiring in January 2004 at $4,000 per month (increased to
$6,000 per month in December 2002) for additional space in Malvern, Pennsylvania
for business activities.
24
As a result of the acquisition of Bayview, the Company assumed two additional
operating leases for office space located in Denver Colorado, which expire in
June 2005. The Denver office space leases 6,742 square feet of space for
approximately $6,000 per month. The lease agreements generally require the
Company to pay certain operating expenses, maintenance and property taxes.
Other Events
On May 12, 2003, we issued 2,252,683 shares to La Jolla Cove Investors, Inc.
upon exercise by La Jolla of warrants at $.07 per share. These warrants were
issued to La Jolla by us on May 12, 2003 in connection with and as a result of
the conversion by La Jolla of $15,494 principal amount of its convertible
debenture. As of the date of this prospectus, La Jolla also holds warrants to
purchase up to 17,465,370 shares at $.10 per share. These warrants were issued
to La Jolla by us in connection with and as a result of conversion by La Jolla
of its convertible debenture on April 18, 2003, April 24, 2003 and June 2, 2003.
All of the 2,252,683 shares held by La Jolla as well as the 17,465,370 shares
underlying the warrants are covered in this prospectus. The warrants and the
shares were issued pursuant to the exemption from registration set forth in
Section 4(2) of the Act. La Jolla Cove Investors, Inc. 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 for resale under the Act through November
2006. See "Description of Securities-Registration Rights."
On July 11, 2003, we issued 20,000,000 shares to Bayview Technology Group, LLC,
as part of our purchase of substantially all of the assets of Bayview. The
securities were offered and sold under the exemption from registration set forth
in Rule 506 promulgated under Section 4(2) the Act. Bayview 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, or (ii) that number of shares equal to
five percent (5%) of the immediately prior calendar month's trading volume of
the shares. USA has agreed to use its best efforts to register all of the shares
for resale by Bayview under the Act for a period of one year (from July 11, 2004
through July 11, 2005). All of these shares are covered by this prospectus.
During September 2003, we issued to four clients of Wellington Management
Company, LLP, an investor manager, 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. As investment manager, Wellington has sole 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. All of these shares are covered by this prospectus. See
"Description of Securities-Registration Rights."
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. All of these shares are covered by this prospectus. See
"Description of Securities-Registration Rights."
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. We
have agreed to register the shares for resale under the Act for a period of one
year. All of these shares are covered by this prospectus. See "Description of
Securities-Registration Rights."
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. We
have agreed to register the shares for resale under the Act for a period of one
year. All of these shares are covered by this prospectus. See "Description of
Securities-Registration Rights."
In October 2003, we issued 603,030 shares and 603,030 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 through June 30, 2004. 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 shareholders, and there was no general solicitation or advertising. All
of these shares are covered by this prospectus.
In October 2003, we issued to Alpha Capital Atkiengesellschaft, a current
shareholder, an aggregate of 500,000 shares due to Alpha as liquidated damages
under Section 8.4 of our Subscription Agreement with Alpha as a result of the
delay in the registration of the securities issued to Alpha in November 2002.
The securities were issued 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. We have agreed to register these shares for resale under the Act. All of
these shares are covered by this prospectus. See "Description of
Securities-Registration Rights."
25
BUSINESS
USA Technologies, Inc., a Pennsylvania corporation (the "Company"), was founded
in January 1992. Currently, the Company's core business is its cashless payment
and control network. The equipment component of the network consists of the
Company's client devices, e-Port and TransAct, and any associated equipment such
as copiers, computers or vending machines. When sold to hotels, the TransAct
plus office equipment is called the Business Express(R). The e-Port or TransAct
client device allows a consumer to use a credit card to make a purchase from
host equipment such as copiers, computers or vending machines and gathers
information about sales and operations of the host equipment. The e-Port client
products currently are targeted to the vending industry. USA Technologies has
historically generated some revenues from the direct sale of this equipment. A
second source of revenues is generated from product sales from our Kodak vending
machines. In addition, transaction processing revenue is recognized upon the
usage of the Company's cashless payment and control network. Service fees for
access to the Company's equipment and network services are recognized on a
monthly basis.
The Company's network brings additional benefits to the auditing and financial
services the Company provides its customers. The auditing feature of our e-Port
and TransAct client products, captures supply chain data (i.e. units sold,
product sold, price of units sold) and other machine diagnostic information, and
transmits this information back to either a customer's network or to the USA
network for reporting. The Company provides financial services consisting of
turnkey processing of unattended cashless transactions; 24x7x365 helpdesk
support for customer refunds and troubleshooting and the reporting of sales and
inventory data. This service generates monthly network fees, plus transaction
processing fees from the retention of a portion of the monies generated from all
credit card transactions conducted through its cashless payment and control
network.
Our cashless payment and control network operates as follows:
- The consumer swipes a credit card through the e-Port or TransAct.
- The e-Port or TransAct transmits the request to the credit card
processor.
- The e-Port or TransAct activates the equipment for use by the consumer.
- Once the consumer finishes using the e-Port or TransAct, the control
system transmits a record of the transaction to the credit card
processor.
- The credit card processor electronically transfers the proceeds derived
from the transaction, less the credit card processor's charge (i.e.
transaction fees), to us.
- Finally, we forward money (check or electronic) to each customer
representing its share of the proceeds.
26
CASHLESS PAYMENT PROCESSING
Each of the Company's cashless control systems records and transmits all
transaction data to the Company, which then forwards it to the credit card
processor and related system involving the banks and the credit card companies
such as Visa, MasterCard and American Express. Based on the transaction data,
the payment for services rendered or product purchased is then electronically
transferred to the Company's bank (less various financial charges). The Company
then forwards to the location it's agreed upon share of the funds, through check
or EFT. In hospitality, if the Company has sold the business center equipment to
the location, the portion retained by the Company is generally 5% of the gross
revenues. In cases where the Company continues to own the equipment, the portion
retained can be as high as 90% of gross revenues. In the Kodak program, charges
for product have been negotiated to give Stitch a reasonable margin. In addition
the Company charges a fixed monthly management fee which is generally $20-$25
per control system for existing hospitality locations.
PRODUCT LINES
27
THE E-PORT FOR VENDING
In general, our vending service enables:
- cashless transactions including credit cards, smart cards, student Ids,
PDAs and cell phones;
- real-time access to monitor inventory, sales, audit (cash and credit)
and machine maintenance via the Internet from any PC;
- the potential of an added revenue stream with a LCD color touch
screen for displaying interactive advertising and content on our
multi-media e-Port client product.
The e-Port allows a consumer to use a credit card or other forms of cashless
payment to make a purchase, and also gathers information about sales and
operations of the host equipment. Additional capabilities can include Internet
connectivity and wireless communications. With some additional effort, our
multi-media e-Port client product could offer the capability for public access
electronic commerce and advertising. The multi-media e-Port client device has
had limited market acceptance to date.
For the years ended June 30, 2003, June 30 2002, and the three months ended
September 30, 2003 the Company has expensed approximately $1,505,000,
$1,187,000, and $166,000, respectively for the development of its proprietary
technology. These amounts include the expense of outside consultants and
contractors as well as compensation paid to certain of the Company's employees
and is reflected in compensation and general and administrative expense in the
accompanying consolidated financial statements. Through March 31, 2003 the
Company capitalized approximately $5.3 million for the services of IBM, to
program the enhancements to the Company's proprietary "USAlive" server network
and for the development of the e-Port client product containing multi-media
capabilities. During the fourth quarter of fiscal 2002, the multi-media e-Port
product and the enhanced network became available for general release and thus
began marketing it to the Company's customers. Management performed an
evaluation of the commercial success and preliminary market acceptance of the
multi-media e-Port client product and the enhanced network and as a result of
this evaluation, due mainly to the limited market acceptance of the multi-media
e-Port(TR) client product, the Company determined that the estimated future
revenues less costs to complete and dispose of the multi-media e-Port (TM)
client product was zero. Accordingly, the Company recorded an impairment charge
of approximately $2.7 million of software development costs related to the
multi-media e-Port client product reflecting the software development costs at
its net realizable value. The Company continues to market the multi-media e-Port
client product, and to date, revenues generated from its sale have been
insignificant. See Note 2 to the Consolidated Financial Statements.
With the acquisition of Stitch Networks, the Company has acquired vending
business with Eastman Kodak. This consists of locating specially designed Kodak
vending machines in high profile venues across the United States such as
amusement parks, zoos, and sports stadiums. The vending machines dispense
disposable cameras and associated film. This agreement will terminate December
31, 2003, and after this date we will continue to receive on going revenues from
the approximately 286 placements in service. As discussed in Management's
Discussion and Analysis of Financial Condition and Results of Operations, the
Kodak agreement may be terminated prior to December 31, 2003.
THE BUSINESS EXPRESS (R) FOR HOTELS
The hotel/motel hospitality industry has become more competitive as chains
increase efforts to attract the most profitable customer: the business traveler
or conference attendee, who accounts for the majority of hotel occupancy, stays
longer and spends more per visit than the leisure traveler. For these reasons,
hotels have become responsive to the needs of the business traveler. The
Business Express enables a hotel to address some of these needs, while offering
the possibility of generating incremental revenue.
The Business Express utilizes the Company's existing applications for computers,
copiers, and facsimile equipment, and combines them into a branded product in a
functional kiosk type workstation. All devices are cashless, therefore
eliminating the need for an attendant normally required to provide such
services.
Our hotel service enables:
- cashless transactions using credit cards and room cards for payment;
- access to unattended 24/7 business center services for hotel guests;
- access to vending machines for hotel guests with the use of their room
card.
E-SUDS (TM) FOR LAUNDRY
28
With the acquisition of Stitch Networks, the Company acquired additional product
line enhancements. One such enhancement is our university laundry services,
which enable:
- students to go on-line and check the availability of laundry machines
and receive email or a page when their laundry cycles are complete;
- students to charge the cost of their laundry to their credit card or
student account;
- laundry operators to access inventory, sales, audit and maintenance via
the Internet from any PC;
- laundry operators to benefit from additional revenue through the sale
of detergent automatically added to the wash cycle.
There are minimal revenues in the year ended June 30, 2003 for this product due
to it currently being under development.
Through the acquisition of substantially all of the assets of Bayview Technology
Group, LLC (Bayview) in July 2003, the Company now designs and manufactures
patented energy conservation devices for equipment such as laser printers,
monitors, office peripherals, refrigerated vending machines and glass front
merchandisers (referred to as slide or visi coolers). These energy conservation
products reduce power consumption of various types of equipment by allowing the
equipment to operate in power saving mode when full power mode is not necessary.
These devices, which include the VendingMiser, CoolerMiser, SnackMiser,
MonitorMiser and LaserMiser can use activity, occupancy, temperature, timing or
other various methods of determining which mode it should be in. Route to market
for the energy conservation products is much the same as for the Company's
e-Port technology, with the notable addition of governmental and utility rebate
and give-away programs where part or all of the cost of the energy management
products is covered by government funds available for energy conservation
projects.
ENERGY CONSERVATION PRODUCTS
With the acquisition of Bayview in July 2003, the Company has acquired the
following additional products:
- VendingMiser(TM)installs in a cold drink vending machine and reduces
the power consumption of the vending machine by an average of 46%;
- CoolerMiser reduces the energy used by sliding glass or pull open
glass-front coolers that contain non-perishable goods;
- SnackMiser reduces the amount of electricity used by non-refrigerated
snack vending machines;
- MonitorMiser Plus is a computer monitor power controller. It works with
all operating systems and performs by powering down the monitor based
upon keyboard or mouse activity;
- LaserMiser provides energy conservation to laser printers, shutting
them down when they are idle. It is a plug-and-play device that is
software transparent and capable of handling any laser printer with a
parallel or serial connection;
- Internal VendingMiser (IVM) is the second generation of the
VendingMiser in development. It installs into cold drink vending
machines and has the capability to control the cooling system and the
advertising lights separately.
MARKETING
As of September 30, 2003, the Company was marketing and selling its products
through its full time staff consisting of five people. The Company is primarily
focused on the vending, hospitality, kiosk and laundry industries.
29
Within the vending industry, our e-Port (TM) client product is being purchased
by 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 with the top ten Coke and Pepsi bottlers, and
Dr. Pepper. Three of the premier national independent vending operators,
Compass, ARAMARK and Sodexho, have already installed e-Port (TM) in various
locations. One major vending operator, International Vending Management, has
signed a contract with the Company although nominal revenues have resulted to
date from this contract.
In March 2002, the Company signed an agreement with MEI (Mars Electronics), who
agreed to sell and distribute an MEI branded cashless payment system to be
developed by the Company, as part of its portfolio of vending solutions. By
contract, MEI has committed to buy a minimum of 10,000 unit of the USA product
over the course of 24 month agreement or pay the Company $4.00 per unit for any
shortfall. Commercial availability is planned for winter 2003 and through the
date hereof no revenues have been generated from this arrangement.
The Company continues to work with the top vending machine manufacturers (OEM)
in order to incorporate our e-Port (TM) technology into newly manufactured
vending machines coming off the factory assembly line. In addition, the Company
continues to sell to and increase the number of authorized resellers for its
products. In the hospitality industry, Business Express continues to be one of
the premier solutions for automated business centers. The addition of e-Port
(TM) technology for vending machines located in hotels now offers a "one-stop
shopping" experience to hotels that have or are considering purchasing a USA
business center.
Within the laundry industry, American Sales Inc. (ASI) has signed a five-year
agreement to purchase units of Stitch's e-Suds laundry solution for their
university locations in the Midwest. Through the date hereof, the Company is
finalizing product commercialization; therefore, ASI has not yet purchased units
under this contract. The Company anticipates unit sales to begin being realized
during the second quarter of fiscal year 2004.
In October 2002, the Company signed a Strategic Alliance Agreement with ZiLOG
Corporation, a semiconductor company that is a supplier of microprocessors to
the retail point of sale industry. The agreement allows the Company's
proprietary network software (USALive) to be embedded on a chip produced by
ZiLOG. The Company would license its software to the purchaser and would receive
a license fee. A second revenue stream could be generated when those who buy the
retail point of sales terminals begin to use them, because they could elect to
use the USA network which is embedded on the chip procurement. As of the date
hereof, no products have been available for commercial use and accordingly, no
revenues have been generated.
The Company utilizes independent third party companies for the manufacturing of
its e-Port(TM) product line. The Company purchases other components of its
business center (computers, printers, fax and copy machines) through various
manufacturers. Orders are regularly placed for expected orders weeks in advance.
COMPETITION
We are aware of three competitors who offer unattended business centers in the
hospitality industry in competition with the Business Express. We believe that
our products (currently located in over 400 locations) are in approximately
30
seventy-five percent of the locations currently utilizing unattended business
centers. We are aware of one competitor in regards to our e-Port control systems
for use in the beverage vending industry. There are at the present time very few
installations of this product.
In addition, the businesses which have developed unattended, credit card
activated control systems currently in use in connection with gasoline
dispensing, public telephones, prepaid telephone cards, ticket dispensing
machines, vending machines, or facsimile machines, might be capable of
developing products or utilizing their existing products in direct competition
with our e-port control systems targeted to the beverage vending industry. Many
of these businesses are well established, have substantially greater resources
than the Company and have established reputations for success in the
development, sale and service of high quality products. Any such increased
competition may result in reduced sales and/or lower percentages of gross
revenues being retained by the Company in connection with its licensing
arrangements, or otherwise may reduce potential profits or result in a loss of
some or all of its customer base. The Company is also aware of several
businesses that make available use of the Internet and use of personal computers
to hotel guests in their hotel rooms. Such services might compete with the
Company's Business Express, and the locations may not order the Business
Express, or if ordered, the hotel guest may not use it.
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 and e-Port(TM). The following
trademarks are pending federal registration: USALive, Dial-A-Vend, Dial-A-Snack,
Dial-A-Vend.com, e-Port The Next Generation in Vending and CineMachine. Through
its wholly owned subsidiary, Stitch Networks, the Company has secured one
registered trademark eVend.net and three trademarks that are pending
registration: eSuds.net, E-ppliance and Stitch Networks. In addition, due to the
July 2003 acquisition of Bayview, the Company has secured the VendingMiser
trademark and the trademark SnackMiser is pending federal registration.
Much of the technology developed or to be developed by the Company is subject to
trade secret protection. To reduce the risk of loss of trade secret protection
through disclosure, the Company has entered into confidentiality agreements with
its key employees. There can be no assurance that the Company will be successful
in maintaining such trade secret protection, that they will be recognized as
trade secrets by a court of law, or that others will not capitalize on certain
of the Company's technology.
Through September 30, 2003, 45 United States patents and 2 Canadian patents have
been issued to the Company (including 4 patents acquired in July 2003 from
Bayview). Thirty-five patents are pending (including 2 Canadian and 5 acquired
from Bayview) and 3 patents have received notices of allowance as of September
30, 2003.
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";
31
o U.S. Patent No. 5,637,845 entitled "Credit and Bank Issued Debit Card
Operating System and Method for Controlling a Prepaid Card
Encoding/Dispensing Machine";
o U.S. Patent No. D423,474 entitled "Dataport";
o U.S. Patent No. D415,742 entitled "Laptop Dataport Enclosure";
o U.S. Patent No. D418,878 entitled "Sign Holder";
o U.S. Patent No. 6,056,194 entitled "System and Method for Networking and
Controlling Vending Machines";
o U.S. Patent No. D428,047 entitled "Electronic Commerce Terminal Enclosure";
o U.S. Patent No. D428,444 entitled "Electronic Commerce Terminal Enclosure
for a Vending Machine";
o U.S. Patent No. 6,119,934 entitled "Credit Card, Smart Card and Bank Issued
Debit Card Operated System and Method for Processing Electronic
Transactions";
o U.S. Patent No. 6,152,365 entitled "Credit and Bank Issued Debit Card
Operated System and Method for Controlling a Vending Machine";
o U.S. Patent No. D437,890 entitled "Electronic Commerce Terminal Enclosure
with a Hooked Fastening Edge for a Vending Machine";
o U.S. Patent No. D441,401 entitled "Electronic Commerce Terminal Enclosure
with Brackets";
o U.S. Patent No. 6,321,985 entitled "System and Method for Networking and
Controlling Vending Machines";
o U.S. Patent No. 6,505,095 entitled "System for Providing Remote Audit,
Cashless Payment, and Interactive Transaction Capabilities in a Vending
Machine";
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";
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";
32
o U.S. Patent No. 6,615,186 entitled "Communicating interactive digital
content between vehicles and internet based data processing resources for
the purpose of transacting e-commerce or conducting e-business";
o U.S. Patent No. 6,615,183 entitled "Method of warehousing user data entered
at an electronic commerce terminal";
o U.S. Patent No. 6,611,810 entitled "Store display window connected to an
electronic commerce terminal";
o U.S. Patent No. 6,609,103 entitled "Electronic commerce terminal for
facilitating incentive-based purchasing on transportation vehicles";
o U.S. Patent No. 6,609,102 entitled "Universal interactive advertising and
payment system for public access electronic commerce and business related
products and services";
o U.S. Patent No. D478,577 entitled "Transceiver base unit";
o U.S. Patent No. 6,606,605 entitled "Method to obtain customer specific data
for public access electronic commerce services";
o U.S. Patent No. 6,606,602 entitled "Vending machine control system having
access to the internet for the purposes of transacting e-mail, e-commerce,
and e-business, and for conducting vending transactions";
o U.S. Patent No. 6,604,087 entitled "Vending access to the internet, business
application software, e-commerce, and e-business in a hotel room";
o U.S. Patent No. 6,604,086 entitled "Electronic commerce terminal connected
to a vending machine operable as a telephone";
o U.S. Patent No. 6,604,085 entitled "Universal interactive advertising and
payment system network for public access electronic commerce and business
related products and services";
o U.S. Patent No. 6,601,040 entitled "Electronic commerce terminal for
wirelessly communicating to a plurality of communication devices";
o U.S. Patent No. 6,601,039 entitled "Gas pump control system having access to
the Internet for the purposes of transacting e-mail, e-commerce, and
e-business, and for conducting vending transactions";
o U.S. Patent No. 6,601,038 entitled "Delivery of goods and services resultant
from an electronic commerce transaction by way of a pack and ship type
company";
o U.S. Patent No. 6,601,037 entitled "System and method of processing credit
card, e-commerce, and e-business transactions without the merchant incurring
transaction processing fees or charges worldwide";
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";
33
o U.S. Patent No. D476,036 entitled "Printer bracket for point of sale
terminal";
o U.S. Patent No. D475,751 entitled "User interface bracket for a point of
sale terminal";
o U.S. Patent No. D475,750 entitled "Paper guide for a point of sale
terminal";
o U.S. Patent No. D475,414 entitled "Printer bracket for point of sale
terminal";
o U.S. Patent No. 5,844,808 entitled "Apparatus and methods for monitoring and
communicating with a plurality of networked vending machines";
o U.S. Patent No. 6,581,396 entitled "Refrigerated vending machine exploiting
expanded temperature variance during power-conservation mode";
o U.S. Patent No. 6,389,822 entitled "Refrigerated vending machine exploiting
expanded temperature variance during power-conservation mode";
o U.S. Patent No. 6,243,626 entitled "External power management device with
current monitoring precluding shutdown during high current"; and
o U.S. Patent No. 5,477,476 entitled "Power conservation system for computer
peripherals";
o U.S. Patent No. 6,629,080 entitled "Transaction processing method of
fulfilling an electronic commerce transaction by an electronic commerce
terminal system";
o Canadian Patent No. D199-1014 entitled "Sign Holder";
o Canadian Patent No. D199-1038 entitled "Laptop Data Port Enclosure".
The Company believes that the U.S. patent No. 6,505,095 entitled "System for
providing remote audit, cashless payment, and interactive transaction
capabilities in a vending machine" is very important in protecting its
intellectual property used in its e-Port control system targeted to the vending
industry. The patent expires in July 2021.
Employees
On September 30, 2003, the Company had 29 full-time employees. In addition, as a
result of the purchase of Bayview on July 11, 2003, the Company continued the
services of 9 full-time independent contractors to Bayview.
Properties
During March 2003, the Company entered into a lease through December 31, 2008
for 12,864 square feet of space in Malvern, PA for its principal executive
office. The operating lease 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. With the acquisition of Stitch Networks
in May 2002, the Company acquired 12,225 square feet of rented space in Kennett
34
Square, PA. The rent is $11,153 per month and the lease expires on March 2005.
The Company consolidated facilities in Malvern, and vacated the rented space in
Kennett Square. For that reason, the Company has accrued for the remaining
payments of the lease of approximately $354,000 as part of the Stitch purchase
price as of June 30, 2002 (see Note 4 to the Consolidated Financial Statements).
Stitch is in default under the lease since August 2002. During the fiscal year,
the Company also signed a lease expiring in January 2004 at $4,000 per month
(increased to $6,000 per month in December 2002) for additional space in
Malvern, PA for business activities.
As a result of the July 2003 acquisition of Bayview, the Company assumed two
additional operating leases for office space located in Denver, Colorado, which
expire in June 2005. The Denver office space leases 6,742 square feet of space
for approximately $6,000 per month. The lease agreements generally require the
Company to pay certain operating expenses, maintenance and property taxes.
Where to get more information
We file annual, quarterly and special reports and other information with the
SEC. You may read and copy any document we file with the SEC at the SEC`s Public
Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information on the operation of the public reference room by calling the SEC at
1-800-SEC-0330. The same information may be obtained at the following Regional
Office of the SEC: 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material can also be obtained from the Public Reference Section
of the SEC`s Washington, D.C. office at prescribed rates.
Our filings may also be accessed through the SEC`s web site
(http://www.sec.gov). We will provide a copy of any or all documents
incorporated by reference herein (exclusive of exhibits unless such exhibits are
specifically incorporated by reference therein), without charge, to each person
to whom this prospectus is delivered, upon written or oral request to USA
Technologies, Inc., 100 Deerfield Lane, Suite 140, Malvern, Pennsylvania 19355,
Attn: George R. Jensen, Jr., Chief Executive Officer (telephone (610) 989-0340).
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.
MANAGEMENT
Directors and Executive Officers
Our Directors and executive officers, on September 30, 2003, together with their
ages and business backgrounds were as follows:
Name Age Position(s) Held
---- --- ----------------
George R. Jensen, Jr. 55 Chief Executive Officer,
Chairman of the Board of
Directors
Stephen P. Herbert 41 President, Director
Haven Brock Kolls, Jr. 37 Vice President - Research and
Development
David M. DeMedio 32 Chief Financial Officer
William W. Sellers (1)(2) 81 Director
William L. Van Alen, Jr. (1)(2) 69 Director
Steven Katz (1) 54 Director
Douglas M. Lurio (2) 47 Director
35
(1) Member of Compensation Committee
(2) Member of Audit Committee
Each Director holds office until the next Annual Meeting of shareholders and
until his successor has been elected and qualified.
George R. Jensen, Jr., has been our Chief Executive Officer and a Director since
our inception in January 1992. Mr. Jensen was Chairman, Director, and Chief
Executive Officer of American Film Technologies, Inc. ("AFT") from 1985 until
1992. AFT was in the business of creating color imaged versions of
black-and-white films. From 1979 to 1985, Mr. Jensen was Chief Executive Officer
and President of International Film Productions, Inc. Mr. Jensen was the
Executive Producer of the twelve hour miniseries, "A.D.", a $35 million dollar
production filmed in Tunisia. Procter and Gamble, Inc., the primary source of
funds, co-produced and sponsored the epic, which aired in March 1985 for five
consecutive nights on the NBC network. Mr. Jensen was also the Executive
Producer for the 1983 special for public television, "A Tribute to Princess
Grace". From 1971 to 1978, Mr. Jensen was a securities broker, primarily for the
firm of Smith Barney, Harris Upham. Mr. Jensen was chosen 1989 Entrepreneur of
the Year in the high technology category for the Philadelphia, Pennsylvania area
by Ernst & Young LLP and Inc. Magazine. Mr. Jensen received his Bachelor of
Science Degree from the University of Tennessee and is a graduate of the
Advanced Management Program at the Wharton School of the University of
Pennsylvania.
Stephen P. Herbert was elected a Director in April 1996, and joined USA on a
full-time basis on May 6, 1996. Prior to joining us and since 1986, Mr. Herbert
had been employed by Pepsi-Cola, the beverage division of PepsiCo, Inc. From
1994 to April 1996, Mr. Herbert was a Manager of Market Strategy. In such
position he was responsible for directing development of market strategy for the
vending channel and subsequently the supermarket channel for Pepsi-Cola in North
America. Prior thereto, Mr. Herbert held various sales and management positions
with Pepsi-Cola. Mr. Herbert graduated with a Bachelor of Science degree from
Louisiana State University.
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 and become Chief Financial Officer effective July 1, 2003. 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
companies turnkey banking services and maintaining and developing relationships
36
with credit card processors and card associations. 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.
William W. Sellers joined the Board of Directors of USA in May 1993. Mr. Sellers
founded The Sellers Company in 1949, which has been nationally recognized as the
leader in the design and manufacture of state-of-the-art equipment for the
paving industry. Mr. Sellers has been awarded five United States patents and
several Canadian patents pertaining to this equipment. The Sellers Company was
sold to Mechtron International in 1985. Mr. Sellers is Chairman of the Board of
Sellers Process Equipment Company, which sells products and systems to the food
and other industries. Mr. Sellers is actively involved in his community. Mr.
Sellers received his undergraduate degree from the University of Pennsylvania.
William L. Van Alen, Jr., joined the Board of Directors of USA in May 1993. Mr.
Van Alen is President of Cornerstone Entertainment, Inc., an organization
engaged in the production of feature films of which he was a founder in 1985.
Since 1996, Mr. Van Alen has been President and a Director of The Noah Fund, a
publicly traded mutual fund. Prior to 1985, Mr. Van Alen practiced law in
Pennsylvania for twenty-two years. Mr. Van Alen received his undergraduate
degree in Economics from the University of Pennsylvania and his law degree from
Villanova Law School.
Steven Katz joined the Board of Directors in May 1999. He is President of Steven
Katz & Associates, Inc., a management consulting firm specializing in strategic
planning and corporate development for technology and service-based companies in
the health care, environmental, telecommunications and Internet markets. Mr.
Katz`s prior experience includes five years with PriceWaterhouse & Co. in audit,
tax and management advisory services; two years of corporate planning with
Revlon, Inc.; five years with National Patent Development Corporation (NPDC) in
strategic planning, merger and acquisition, technology in-licensing and
out-licensing, and corporate turnaround experience as President of three NPDC
subsidiaries; and two years as a Vice President and General Manager of a
non-banking division of Citicorp, N.A.
Douglas M. Lurio joined the Board of Directors of USA in June 1999. Mr. Lurio is
President of Lurio & Associates, P.C., attorneys-at-law, which he founded in
1991. He specializes in the practice of corporate and securities law. Prior
thereto, he was a partner with Dilworth, Paxson LLP. Mr. Lurio received Bachelor
of Arts Degree in Government from Franklin & Marshall College, a Juris Doctor
Degree from Villanova Law School, and a Masters in Law (Taxation) from Temple
Law School.
The employment agreements of Leland P. Maxwell (former Chief Financial Officer
of USA) and Michael K. Lawlor (former Vice President - Marketing and Sales)
expired on June 30, 2003. Messrs. Maxwell and Lawlor each entered into a
Separation Agreement with the Company that provided a severance payment of
$77,273. The payments are due by the Company over a six-month period, or sooner
at the discretion of the Company, and are conditioned upon Messrs. Lawlor and
Maxwell each canceling an aggregate of 186,200 of the shares owned by each of
them. The Separation Agreements also provided a Common Stock based severance pay
37
based upon length of service to the Company. Mr. Lawlor received 333,070 shares
of Common Stock as part of the 2003-A Common Stock offering at $.10 per share.
Mr. Maxwell received 276,920 shares of Common Stock as part of the 2003-A Common
Stock offering at $.10 per share.
During June 2003, Kenneth C. Boyle resigned as a Director of USA and Edwin R.
Boynton resigned as a Director of USA.
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to compensation
paid or accrued by the Company during the fiscal years ended June 30, 2001, June
30, 2002 and June 30, 2003 to each of the executive officers and employee of the
Company named below.
Summary Compensation Table
Fiscal
Name and Principal Position Year Annual Compensation Long Term Compensation
------------------------------ ------ ---------------------------------------- ---------------------------
Salary Bonus Other Restricted Securities
(1) Annual Stock Underlying
Compensation Awards Options (3)
-------------------------------------------------------------------------------------------------------------------
George R. Jensen, Jr., 2003 $189,038 $250,000 $223,211(2) -- --
Chief Executive Officer, 2002 $135,000 $288,000 $ 80,000(2) -- 320,000
2001 $135,000 $140,000 -- -- 300,000
Stephen P. Herbert, 2003 $183,854 $225,000 $185,317(2) -- --
President 2002 $125,000 $270,000 $ 80,000(2) -- 300,000
2001 $125,000 $134,400 -- -- 80,000
Leland P. Maxwell, Chief 2003 $120,000 $ 85,845 $ 89,190(2) -- --
Financial Officer(4) 2002 $110,308 $151,200 -- -- 130,000
2001 $108,000 $ 44,240 -- -- 50,000
H. Brock Kolls, Senior Vice 2003 $150,000 $ 25,000 $ 64,493(2) -- --
President, Research & 2002 $125,769 $180,000 $ 50,000(2) -- 250,000
Development 2001 $120,000 $ 97,440 -- -- 80,000
Michael K. Lawlor, Senior 2003 $120,000 $103,252 $ 89,190(2) -- --
Vice President, Sales and 2002 $103,846 $151,200 -- -- 130,000
Marketing(4) 2001 $100,000 $ 38,640 -- -- 50,000
Adele H. Hepburn 2003 $ 91,000 $282,382 -- -- --
Director of Investor 2002 $ 91,000 $472,609 -- -- 500,000
Relations 2001 $ 91,000 $171,700 -- -- --
(1) For fiscal year 2001, represents shares of Common Stock issued to the
executive officers during the fiscal year valued at $1.12 per share, the closing
bid price on the date of issuance. For Mr. Lawlor, the bonus also includes
$1,265 sales commission. For fiscal year 2002, represents shares of Common Stock
issued to the executive officers valued at $0.45 per share, which was the market
value on the date of grant (Mr. Jensen-640,000 shares; Mr. Herbert-600,000
shares; Mr. Kolls-400,000 shares; Mr. Maxwell-260,000 shares; and Mr.
Lawlor-260,000 shares). For Mr. Maxwell and Mr. Lawlor in 2002, the bonus also
includes 90,000 shares of Common Stock valued at $0.38, which was the market
price on the day of grant. This stock was awarded to reimburse them for tax
payments incurred as a result of the award of a previous bonus. For Adele
Hepburn in fiscal 2002, the bonus includes $408,267 of non cash compensation, as
follows: 435,334 shares of Common Stock at $0.60; 384,334 shares at $0.10; and a
$108,834 2001 - D 12% Senior Notes due December 31, 2003. For fiscal year 2003,
includes a $100,000 Senior Note due 2005, including 200,000 shares valued at
$.20, and $150,000 cash bonus for Mr. Jensen and $100,000 Senior Note due 2005,
including 200,000 shares valued at $0.20 and $125,000 cash bonus for Mr. Herbert
and a $25,000 cash bonus for Mr. Kolls; and a $100,000 Senior Note due 2005,
including 200,000 shares valued at $.20 per share, a $41,095 Senior Note due
2004, and $100,000 cash bonus for Ms. Hepburn.
38
(2) Represents cash payments authorized to reimburse certain executive officers
for tax payments incurred from the award of a previous bonus as well as car
allowance payments.
(3) In July 1999, the Company extended the expiration dates until June 30, 2001
of the options to acquire Common Stock held by the following directors,
officers, and employee: Adele Hepburn - 77,000 options; H. Brock Kolls - 20,000
options; William Sellers - 15,500 options; and William Van Alen - 12,500
options. All of the foregoing options would have expired in the first two
calendar quarters of the year 2000 or the first calendar quarter of year 2001.
In February 2001, all these options were further extended until June 30, 2003,
and in addition the expiration dates of the following additional options were
also extended to June 30, 2003: H. Brock Kolls - 20,000 options; Stephen Herbert
- 40,000 options; Michael Lawlor - 3,750 options; George Jensen - 200,000
options. In October 2000, the Company issued to George R. Jensen, Jr., fully
vested options to acquire up to 200,000 shares of Common Stock at $1.50 per
share. The options were exercisable at any time within two years following
issuance. In February 2001, the Company extended the expiration date of these
options until June 30, 2003. Effective December 31, 2002, all of the outstanding
options (whether vested or unvested) then held by each of Messrs. Jensen,
Herbert, Kolls, Maxwell, Sellers, Van Alen, Katz, Lurio and Boynton were
voluntarily canceled by each of the foregoing individuals.
(4) Employed by the Company through June 30, 2003.
During the fiscal year ended June 30, 2003, there were no grants of stock
options to the executive officers or the employee named above.
TOTAL OPTIONS EXERCISED IN FISCAL YEAR ENDED JUNE 30, 2003 AND YEAR END VALUES
The following table gives information for options exercised by each of the named
executive officers and an employee in fiscal year 2003, and the number of
options held by these executive officers and an employee at fiscal year end:
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the -Money
Options at Options at
FY-End (#) FY-End($)
Shares Acquired Exercisable/ Exercisable/
Name On Exercise (#) Value Realized ($) Unexersisabble Unexercisable
--------------------------------------------------------------------------------------------------------
Adele H. Hepburn 0 0 77,000/0 0
--------------------------------------------------------------------------------------------------------
During the fiscal year ended June 30, 2003, there were no options exercised by
the executive officers and there were no options held by executive officers at
fiscal year end.
EXECUTIVE EMPLOYMENT AGREEMENTS
39
The Company has entered into an employment agreement with Mr. Jensen which
expires June 30, 2005, and is automatically renewed from year to year thereafter
unless canceled by Mr. Jensen or the Company. The agreement provides for an
annual base salary of $180,000. Mr. Jensen is entitled to receive such bonus or
bonuses as may be awarded to him by the Board of Directors. In determining
whether to pay such a bonus, the Board would use its subjective discretion. The
Agreement requires Mr. Jensen to devote his full time and attention to the
business and affairs of the Company, and obligates him not to engage in any
investments or activities which would compete with the Company during the term
of the Agreement and for a period of one year thereafter.
The agreement also grants to Mr. Jensen in the event a "USA Transaction" (as
defined below) occurs after the date thereof an aggregate of 14,000,000 shares
of Common Stock subject to adjustment for stock splits or combinations("Jensen
Shares"). Mr. Jensen is not required to pay any additional consideration for the
Jensen Shares. At the time of any USA Transaction, all of the Jensen Shares are
automatically deemed to be issued and outstanding immediately prior to any USA
Transaction, and are entitled to be treated as any other issued and outstanding
shares of Common Stock in connection with such USA Transaction.
The term USA Transaction is defined as (i) the acquisition of fifty-one percent
or more of the then outstanding voting securities entitled to vote generally in
the election of Directors of the Company by any person, entity or group, or (ii)
the approval by the shareholders of the Company of a reorganization, merger,
consolidation, liquidation, or dissolution of the Company, or the sale,
transfer, lease or other disposition of all or substantially all of the assets
of the Company. The Jensen Shares are irrevocable and fully vested, have no
expiration date, and will not be affected by the termination of Mr. Jensen`s
employment with the Company for any reason whatsoever. If a USA Transaction
shall occur at a time when there are not a sufficient number of authorized but
unissued shares of Common Stock, then the Company shall as a condition of such
USA Transaction promptly take any and all appropriate action to make available a
sufficient number of shares of Common Stock. In the alternative, the Company may
structure the USA Transaction so that Mr. Jensen would receive the same amount
and type of consideration in connection with the USA Transaction as any other
holder of Common Stock.
The Company has entered into an employment agreement with Mr. Herbert, which
expires on June 30, 2005, and is automatically renewed from year to year
thereafter unless canceled by Mr. Herbert or the Company. The Agreement provides
for an annual base salary of $165,000 per year. Mr. Herbert is entitled to
receive such bonus or bonuses as the Board of Directors may award to him. The
Agreement requires Mr. Herbert to devote his full time and attention to the
business and affairs of the Company and obligates him not to engage in any
investments or activities which would compete with the Company during the term
of the agreement and for a period of one year thereafter. In the event that a
USA Transaction (as defined in Mr. Jensen's employment agreement) shall occur,
then Mr. Herbert has the right to terminate his agreement upon 30 days notice to
USA.
Mr. Kolls has entered into an employment agreement with the Company, which
expires on June 30, 2004, 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 $150,000 per year. 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
40
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.
Ms. Hepburn has entered into an employment agreement with the Company, which
expires on June 30, 2005, and is automatically renewed from year to year
thereafter unless canceled by Ms. Hepburn or the Company. The agreement provides
for an annual base salary of $91,000 per year. 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.
The employment agreements of Messrs. Maxwell and Lawlor expired on June 30,
2003.
COMPENSATION OF DIRECTORS
Members of the Board of Directors receive cash and equity compensation for
serving on the Board of Directors.
In April 2002, the Company granted to each of the five outside Directors
(Messrs. Sellers, Van Alen, Katz, Lurio, and Boynton) options to purchase up to
100,000 shares of Common Stock at $0.40 per share as compensation for serving
the one-year term, which commenced March 21, 2002. The options are fully vested
and are exercisable at any time prior to April 12, 2005. Commencing on July 1,
2002 and at any and all times through June 30, 2003, each Director has been
granted the right, without the payment of the per share exercise price of such
options, to receive up to 50,000 shares represented by those options. In
September 2002, Edwin P. Boynton elected to receive 50,000 shares in lieu of the
above options.
In February 2001, the Company granted a total of 300,000 options to purchase
Common Stock at $1.00 per share to each of the then outside members of the Board
(Messrs. Sellers, Van Alen, Smith, Katz, Lurio, and Boynton). Of these, 120,000
options vested immediately; 90,000 options vested on June 30, 2001; and 90,000
vested on June 30, 2002. The options are exercisable at any time within five
years following the vesting.
On December 31, 2002, each of Messrs. Sellers, Van Alen, Katz, Lurio, and
Boynton voluntarily canceled all of the outstanding options then held by them.
During June 2003, we paid $50,000 to each of Messrs. Sellers, Van Alen, and Katz
for their services as Directors during the 2003 fiscal year. As a condition of
the cash payment, each of these Directors agreed to purchase from the Company
500,000 shares of Common Stock at $0.10 per share.
PRINICIPAL SHAREHOLDERS
Common Stock
The following table sets forth, as of September 30, 2003, the beneficial
ownership of the Common Stock of each of the Company's directors and executive
officers, the other employee named in the summary compensation table set forth
above, as well as by the Company's directors and executive officers as a group.
Except as set forth below, the Company is not aware of any beneficial owner of
more than five percent of the Common Stock. Except as otherwise indicated, the
Company believes that the beneficial owners of the Common Stock listed below,
based on information furnished by such owners, have sole investment and voting
power with respect to such shares, subject to community property laws where
applicable:
41
Number of Shares
Name and Address of Common Stock Percent
of Beneficial Owner Beneficially Owned(1) of Class(2)
------------------- --------------------- --------
George R. Jensen, Jr. 12,766,000 shares(3) 3.32%
517 Legion Road
West Chester, Pennsylvania 19382
Stephen P. Herbert 2,186,050 shares(4) *
536 West Beach Tree Lane
Strafford, Pennsylvania 19087
Haven Brock Kolls, Jr. 603,825 shares(5) *
1573 Potter Drive
Pottstown, Pennsylvania 19464
Steven Katz 500,000 shares *
20 Rebel Drive
East Brunswick NJ 08116
Adele H. Hepburn 8,454,595 shares(6) 2.20%
208 St. Georges Road
Ardmore, Pennsylvania 19003
Douglas M. Lurio 921,463 shares(7) *
2005 Market Street, Suite 2340
Philadelphia, Pennsylvania 19103
William W. Sellers 2,333,812 shares(8) *
394 East Church Road
King of Prussia, Pennsylvania 19406
William L. Van Alen, Jr. 1,148,340 shares(9) *
Cornerstone Entertainment, Inc.
P.O. Box 727 Edgemont, Pennsylvania 19028
La Jolla Cove Investors, Inc. 28,736,059 shares(10) 8.50%
7817 Herschel Avenue, Suite 200
La Jolla, California 92037
Kazi Management VI Inc. 22,857,145 shares(11) 6.76%
30 Dronnigens Gade Ste B
St. Thomas, Virgin Islands 00802
All Directors and Executive Officers
As a Group (8 persons) 28,414,085 shares(12) 7.39%
---------
* Less than one percent (1%)
42
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and derives from either voting or investment
power with respect to securities. Shares of Common Stock issuable upon
conversion of the Preferred Stock, shares issuable upon the conversion of
Convertible Senior Notes, or shares of Common Stock issuable upon exercise of
warrants and options currently exercisable, or exercisable within 60 days of
September 2003, are deemed to be beneficially owned for purposes hereof.
(2) On September 30, 2003 there were 281,237,382 shares of Common Stock and
524,492 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 Preferred Stock have been converted into 524,492 shares
of Common Stock, that all of the options to acquire Common Stock which have been
issued and are fully vested as of September 30, 2003 (or within 60-days of
September 30, 2003) have been converted into 2,646,485 shares of Common Stock.
For purposes of computing such percentages it has also been assumed that all of
the remaining Purchase Warrants have been exercised for 47,253,208 shares of
Common Stock; that all of the Senior Notes have been converted into 52,251,733
shares of Common Stock; and that all of the accrued and unpaid dividends on the
Preferred Stock as of September 30, 2003 have been converted, into 630,648
shares of Common Stock. Therefore, for purposes of computing the percentages
under this table, there are 384,543,948 shares of Common Stock issued and
outstanding.
(3) Includes 500,000 shares issuable upon conversion of Senior Notes, 311,000
shares of Common Stock beneficially owned by his spouse, 75,000 shares issuable
upon the exercise of warrants beneficially owned by his son and 80,000 and
50,000 shares issuable upon conversion of Senior Notes beneficially owned by his
son and spouse, respectively. Does not include the right granted to Mr. Jensen
under his Employment Agreement to receive Common Stock upon the occurrence of a
USA Transaction (as defined therein). See "Executive Employment Agreements".
(4) Includes 250,000 shares issuable to Mr. Herbert upon the conversion of
Senior Notes, 1,000 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 upon the conversion of Senior Notes beneficially owned by his
spouse.
(5) Includes 22,500 shares of Common Stock issuable to Mr. Kolls upon the
exercise of warrants, 12,000 shares of Common Stock owned by his spouse, 24,000
shares issuable to his spouse upon conversion of her Senior Note and 3,600
shares issuable upon the exercise of warrants beneficially owned by his spouse.
(6) Includes 473,044 shares of Common Stock owned by her spouse, 5,150 shares
underlying Series A Preferred Stock held by her and her spouse, 1,109,420 shares
issuable upon the conversion of her Senior Notes, 50,000 shares issuable to her
spouse upon the conversion of his Senior Notes, 300,000 shares issuable upon the
exercise of her warrants.
43
(7) Includes 225,000 shares issuable upon conversion of Senior Notes.
(8) Includes 17,846 shares of Common Stock owned by the Sellers Pension Plan of
which Mr. Sellers is a trustee, 4,952 shares of Common Stock owned by Sellers
Process Equipment Company of which he is a Director, and 10,423 shares of Common
Stock owned by Mr. Seller's wife. Includes 408,334 shares issuable upon
conversion of his Senior Notes.
(9) Includes 116,670 shares of Common Stock issuable to Mr. Van Alen upon
conversion of his Senior Notes and 4,000 shares of Common Stock beneficially
owned by his spouse.
(10) Includes 2,270,683 shares of Common Stock owned by La Jolla and 26,465,376
shares of Common Stock issuable to upon the exercise of Purchase Warrants. In
October 2003, warrants exercisable for 9,000,000 of these shares were cancelled.
(11) Includes 3,571,429 shares of Common Stock owned by Kazi and 19,285,716
shares of Common Stock issuable upon the exercise of Purchase Warrants.
(12) Includes all shares of Common Stock described in footnotes (3) through (9)
above.
Preferred Stock
The following table sets forth, as of September 30, 2003 the beneficial
ownership of the Preferred Stock by the Company's directors and executive
officers, the other employee named in the Summary Compensation Table set forth
above, as well as by the Company's directors and executive officers as a group.
Except as set forth below, the Company is not aware of any beneficial owner of
more than five percent of the Preferred Stock. Except as otherwise indicated,
the Company believes that the beneficial owners of the Preferred Stock listed
below, based on information furnished by such owners, have sole investment and
voting power with respect to such shares, subject to community property laws
where applicable.
Number of Shares
Name and Address of of Preferred Stock Percent
Beneficial Owner Beneficially Owned of Class(l)
------------------- ------------------ --------
Adele H. Hepburn
208 St. Georges Road
Ardmore, Pennsylvania 19003 5,150 shares (2) *
All Directors and
Executive Officers
As a Group (8 persons) 0 *
--------------
(1) There were 524,492 shares of Preferred Stock issued and outstanding as of
September 30, 2003.
(2) Ms. Hepburn is an employee of the Company.
44
CERTAIN TRANSACTIONS
On December 31, 2000, Stitch Networks Corporation ("Stitch") executed a Vending
Placement, Supply and Distribution Agreement with Eastman Kodak Company, Maytag
Corporation and Dixie Narco, Inc., which formed a strategic alliance to market
and execute a national vending program for the sale of one-time use camera and
film products. The Agreement provides for an initial term of three years ending
December 31, 2003, with additional provisions for early termination and
extensions as defined. Furthermore, the Agreement also provides for exclusivity
among the parties for the term of the Agreement relating to the sale of camera
and film products from vending machines within the Continental United States.
Pursuant to this agreement, Stitch, the Company`s subsidiary, purchases vending
machines from Dixie-Narco, Inc. ("Dixie"). Dixie is owned by Maytag Corporation
which is the owner of the Company`s shareholder, Maytag Holdings, Inc. Mr.
Boyle, a former Director of the Company, is a Vice President of Maytag
Corporation. There were purchases from Dixie of $201,000 and $8,000 for the
fiscal year ended June 30, 2003 and for the period May 14, 2002 through June 30,
2002, respectively.There were no purchase during the three months ended
September 30, 2003. Amounts payable to Dixie remains approximately $130,000 and
$124,000 and are included in accounts payable in the June 30, 2003 and 2002
consolidated balance sheets of the Company.
During the fiscal years ended June 30, 2003 and June 30, 2002, the Company
incurred charges to Lurio & Associates, P.C., of which Mr. Lurio is President
and a shareholder, for professional fees of approximately $305,000 and $213,000
respectively, for legal services rendered to the Company by such law firm.
During the years ended June 30, 2003 and 2002, the Company accrued approximately
$22,000 and $30,000, respectively, for these services. Mr. Lurio is a Director
of the Company.
In October 2002, the Company approved the issuance to each of George R.
Jensen, Jr., our Chief Executive Officer, and Stephen P. Herbert, our President
and Chief Operating Officer, of $100,000 of the Senior Note offering. Pursuant
thereto, each of them received a $100,000 12% Senior Note due December 31, 2005,
and the related 200,000 shares of Common Stock. Both Mr. Jensen and Mr. Herbert
earned the Note and related shares in fiscal 2003 for services rendered. In
October 2002, the Company approved the issuance of $100,000 of the Senior Note
offering and 200,000 related shares of Common Stock to Adele Hepburn for
services rendered during the 2002 calendar year. Ms. Hepburn earned the Note and
related shares in fiscal 2003 for services rendered.
In April and May 2003, the Company authorized the payment of $420,000 over
the following six months to its five executive officers. The payments are to
assist in the 2002 tax liability incurred by the executives due to common stock
bonuses received by them during calendar year 2002.
During June 2003, the Company approved the following cash payments as a
bonus for services rendered to the Company by the named executive during the
2003 fiscal year: Mr. Jensen-$150,000; Mr. Herbert-$125,000; Ms.
Hepburn-$100,000; and Mr. Kolls- $25,000. The payment of the bonus was
conditioned upon the executive investing the entire cash bonus in common stock
of the Company at $.10 per share.
On July 10, 2003, USA and George R. Jensen, Jr., Chief Executive Officer and
Chairman of USA, agreed upon an amendment to Mr. Jensen's employment agreement.
Pursuant thereto, the number of shares of Common Stock of USA issuable to Mr.
Jensen by USA upon the occurrence of a "USA Transaction" (as such term is
defined in his employment agreement) was fixed at 14,000,000 shares rather than
45
seven percent of the then issued and outstanding shares as previously provided.
USA also agreed to issue to Mr. Jensen an aggregate of 10,500,000 shares of
restricted Common Stock, 2,500,000 shares of which will be issued as
compensation to Mr. Jensen for future services, and 8,000,000 shares of which
will be issued to Mr. Jensen in connection with the employment agreement
amendment. Mr. Jensen has agreed to enter into a lock up agreement pursuant to
which he shall not sell 2,500,000 of the shares for a one-year period and
8,000,000 of the shares for a two-year period.
The Company does not have any policy with respect to entering into future
related party transactions.
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
options or upon conversion of the convertible senior notes 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 $30,000 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 shareholder will
be determined by the selling shareholder. 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.
46
LA JOLLA COMMON STOCK
Beneficial Ownership
After Offering
Common Stock --------------------
Selling Shareholder Offered Hereby Number Percent
------------------- -------------- ---------- -------
La Jolla Cove
Investors, Inc. (1) 19,718,053 0 *
-----------
*Less than 1%.
(1) Represents 17,465,370 shares underlying warrants exercisable at $.10 per
share which were issued by us in April 2003 and June 2003 and 2,252,683 shares
which were issued by us in May 2003 upon the exercise of warrants at a rate of
$.07 per share. We have agreed to register these shares for resale by the holder
thereof at our cost and expense through November 2006. The natural person who
exercises shared voting or dispositive powers with respect to the shares is
Norman Lizt.
WELLINGTON MANAGEMENT COMPANY COMMON STOCK
Beneficial Ownership
After Offering
Common Stock --------------------
Selling Shareholder (1) Offered Hereby Number Percent
------------------- -------------- ---------- -------
Madeira Partners, L.P. 1,200,000 0 *
Madeira Investors
(Bermuda) L.P. 700,000 0 *
Raytheon Master
Pension Trust 13,000,000 0 *
WTC-CIF Technical Equity
Portfolio 3,100,000 0 *
Total 18,000,000
-----------
*Less than 1%.
47
(1) Wellington Management Company, LLP is investment manager for each of
the selling shareholders and has dipositive power and shared voting
discretion over the shares. Represents 18,000,000 shares issued at $.25
per share. We have agreed to register these shares for resale by the
holder thereof at our cost and expense for a period of one year. The
natural person who exercises dispositive powers and shared voting
discretion with respect to the shares at Wellington Management Company
LLP, is Cynthia M. Clarke.
O'CONNELL COMMON STOCK
Beneficial Ownership
After Offering
Common Stock --------------------
Selling Shareholder Offered Hereby Number Percent
------------------- -------------- --------- -------
George O'Connell (1) 1,000,000 2,738,000 1.0%
-----------
*Less than 1%.
(1) Represents 1,000,000 shares issued by us in October, 2003 at $.25 per
share. We have agreed to register these shares for resale by the holder
thereof at our cost and expense for a period of one year.
PROPHECY ASSET MANAGEMENT COMMON STOCK
Beneficial Ownership
After Offering
Common Stock --------------------
Selling Shareholder Offered Hereby Number Percent
------------------- -------------- ------ -------
Prophecy
Asset Management(1) 750,000 0 *
-----------
*Less than 1%.
(1) Represents shares issued by us in October 2003 at $.25 per share. We have
agreed to register these shares for resale by the holder thereof at our cost and
expense for a period of one year. The natural person who exercises shared voting
or dispositive powers with respect to the shares is Jeffrey R. Spots.
FULCRUM GLOBAL PARTNERS COMMON STOCK
Beneficial Ownership
After Offering
Common Stock --------------------
Selling Shareholder Offered Hereby Number Percent
------------------- -------------- ------ -------
Fulcrum
Global Partners LLC (1) 260,000 0 *
-----------
*Less than 1%.
48
(1) Represents shares issued by us in October 2003 at $.25 per share. We have
agreed to register these shares for resale by the holder thereof at our cost and
expense for a period of one year. The natural person who exercises shared voting
or dispositive powers with respect to the shares is Allen Weichselbaum.
BAYVIEW COMMON STOCK
Beneficial Ownership
After Offering
Common Stock --------------------
Selling Shareholder Offered Hereby Number Percent
------------------- -------------- ------ -------
Bayview Technology
Group LLC(1) 20,000,000 0 *
-----------
*Less than 1%.
(1) Represents shares issued by us in exchange for substantially all of the
assets of Bayview in July 2003 valued at $.46 per share. We have agreed to
register these shares for resale by the holder thereof at our cost and expense
until July 11, 2005. The natural person who exercises shared voting or
dispositive powers with respect to the shares is Marc Geman.
ALPHA CAPITAL COMMON STOCK
Beneficial Ownership
After Offering
--------------------
Common Stock
Selling Shareholder Offered Hereby Number Percent
------------------- -------------- --------- -------
Alpha Capital
Aktiengesellschaft (1) 500,000 2,250,000 *
----------
* Less than one percent
(1) Consists of 500,000 shares of Common Stock issued to Alpha as
liquidated damages under our agreement with Alpha as a result in the
delay in the registration of the securities issued to Alpha in November
2002. We have agreed at our cost and expense to register these shares
for resale under the Act. The natural person who exercises sole and/or
shared voting or dispositive powers with respect to the shares held of
record by the entity, Alpha Capital, is Konrad Ackerman..
49
SEPTEMBER 2003 INTEREST COMMON STOCK
Beneficial Ownership
After Offering
Common Stock _________________
Selling Shareholder Offered Hereby (16) Number Percent
________________ _____________ ______ _______
DONALD T AANESTAD 6,000 0 *
VIJAY ALIMACHANDANI 9,000 0 *
ALAN ALPERT 1,500 0 *
HRUBALA ASSOCIATES 3,000 0 *
JOHN P AYERS 3,000 0 *
CHARLES F BELLAVIA 3,000 0 *
NANCY & EARL BESCH 3,000 0 *
GUNTER J BEYER (10) 2,367 0 *
BENJAMIN LEE BIRD 3,000 0 *
KATHLYNE K BIRDSALL 376 0 *
JOSEPH BOLITSKY 20,000 0 *
EDWIN R BOYNTON (1) 9,750 0 *
DAVID G BRAY 600 0 *
DOUGLAS & CAROLYN BRITTAIN 6,000 0 *
BRITTAIN FAMILY TRUST (11) 2,000 0 *
GORDON L BRODINE 12,000 0 *
MICHAEL J BUDINETZ 4,275 0 *
MOLUMPHY CAPITAL MGMT 3,000 0 *
CARLSON INVESTMENTS (15) 22,800 0 *
MICHAEL J CHIORDI 3,000 0 *
GERALD E CLARK JR 2,100 0 *
DIANE CLOUTIER 18,000 0 *
ROGER D COFFEY 3,000 0 *
MARC A COHEN 17,250 0 *
Cornerstone Public 0 *
Relations Group, M
Darlene Herbert Felt(12) 282
50
JIM CROSS 1,000 0 *
WILLIAM R CROTHERS 1,876 0 *
LORRAINE CROW 300 0 *
CLIFTON B CURRIN TRUST 6,000 0 *
BENJAMIN DEACON 750 0 *
DELTA WESTERN COMPANY(2) 11,250 0 *
DAVID DEMEDIO (3) 3,750 260,599 *
LOUIS E DI RENZO 1,500 0 *
ANEES T DIN 8,100 0 *
LEO J DOLAN 6,000 0 *
ROBERT F DRESS 2,200 0 *
HOWARD EFFRON 3,000 0 *
BENTLY ELLIOTT 3,000 0 *
ANTHONY J FANELLI 8,100 0 *
JOHN S FOSTER 20,500 0 *
HELEN K FOX 3,000 0 *
SAMANTHA HARRIS FULMER 300 0 *
DOROTHY GALVIN 300 0 *
MARGARET R GEDDIS 750 0 *
ROBERT G GIDDENS 31,370 0 *
FREDERICK F GLOCKNER 300 0 *
WILLIAM M GOLDSTEIN 9,000 0 *
EDWARD HALDEMAN 6,000 0 *
PAULINE E HALDEMAN 6,000 0 *
JOHN E HAMILTON 900 0 *
IRA FBO ROBERT A HAMILTON (4) 1,260 98,266 *
ROBERT A HAMILTON (4) 2,730 96,796 *
PETER & DEBORAH HARRIS 1,500 0 *
JOYCE HODGES 1,500 0 *
MICHELLE HOLLENSHEAD 626 0 *
JAMES M HOLMWOOD 6,000 0 *
HRUBALA ASSOCIATES (5) 3,000 0 *
51
GORDON F HUDSON 6,000 0 *
CHRISTINE F HUGHES 750 0 *
STEVE ILLES(6) 90,000 8,430,000 3.09%
WENDY JENKINS 6,000 0 *
WILLIAM ROBERT JOHNSTON 1,500 0 *
CHARLES T JONES 1,500 0 *
PERSHING TTEE FBO FRED KARAGOSIAN IRA ACCT# 0 *
7FP-0018377-007 3,000
GLORIA & FRED KARN 300 0 *
MICHAEL KATCHUR 2,250 0 *
THOMAS A KATCHUR 37,500 0 *
MAUDE WOOD KENT 3,000 0 *
THOMAS & MAUDE WOOD KENT 3,000 0 *
ROBERT A KILGORE 15,000 0 *
SHIRLEY K KNERR 2,700 0 *
GREGORY S KOBUS 3,000 0 *
PAUL G LANNI 3,000 0 *
WARREN D LEWIS 4,750 0 *
H MATHER LIPPINCOTT JR 3,000 0 *
ANTHONY F LOPEZ 6,000 0 *
ROBERT LOZOWSKI 600 0 *
DOUGLAS LURIO (7) 4,500 252,713 *
JAMES P MACCAIN 8,000 0 *
LEWIS F MADAN 600 0 *
KATHLEEN J MASON 26,000 0 *
BARRY N MCCABE 3,000 0 *
DUANE C MCCARTHY 300 0 *
G ELLARD MCCARTHY 1,500 0 *
BOB MCGARRAH (13) 9,000 449,000 *
JOHN P MCGONIGLE 300 0 *
MARY C MCGONIGLE 300 0 *
MEDIATECH PARTNERS (14) 108,030 0 *
JAMES F MERRIMAN 16,500 0 *
HARLEY MILLER 5,276 0 *
EILEEN MILLER 1,200 0 *
HARLEY & BROOK MILLER 1,050 0 *
GEORGE W MOFFITT JR 3,376 0 *
THOMAS MOLUMPHY 1,500 0 *
ROBERT H MONTGOMERY 8,000 0 *
MAC G MORRIS 1,500 0 *
JAMES MOSIER 6,000 0 *
ELIZABETH L NELSON 11,250 0 *
ROBERT F NEMETH 6,000 0 *
JEFFREY M NEWHUIS 2,100 0 *
GREGG J NEWHUIS 33,000 0 *
PATRICK NOLAN 7,043 0 *
PAUL NORDIN 1,000 0 *
GEORGE O'CONNELL 64,500 3,673,500 1.35%
OLDOM & CO 3,000 0 *
52
ROBERT PADRICK 12,000 0 *
ROBERT PADRICK TRUSTEE FBO 0 *
KELLIE NICOLE PADRICK 3,000
ROBERT PADRICK TRUSTEE FOR 0 *
ROBERT G PADRICK 6,000
MICHAEL A PARKER 1,000 0 *
NEIL L PARKER 1,500 0 *
RICHARD & LAURA PARKER 7,500 0 *
JOSEPH PELLEGRINO 60,000 0 *
ROBERT H POTTS 3,000 0 *
CHARLES W PROCTOR III 126 0 *
ERNEST L RANSOME III 1,500 0 *
HARRY RENNER IV 25,126 0 *
JOHN B RETTEW III 4,000 0 *
GARDINER ROGERS 3,300 0 *
MARIE G ROPER 1,500 0 *
GERALD B ROSENTHAL 6,000 0 *
KARL F RUGART 8,250 0 *
JOHN S RUPP 3,000 0 *
VALENTINA SAS 600 0 *
EDWARD L SCHOENHUT 6,000 0 *
WILLIAM F SCHOENHUT JR 8,000 0 *
STEPHEN SCHWARTZ 7,500 0 *
MARY L SCRANTON 1,750 0 *
NICHOLAS SELLERS 3,000 0 *
RAYMOND K SHOTWELL 1,650 0 *
LEONARD H SICHEL JR 3,000 0 *
RICHARD SMITH 36,000 0 *
KATHY SMITLEY 1,500 0 *
TERRY W STANGLEIN 10,800 0 *
ELINOR STEINHILBER 3,000 0 *
MICHAEL STEIR 2,250 0 *
MICHAEL & ELLEN STEIR 1,500 0 *
CPT ERIC W STETSON 1,500 0 *
GERTRUDE T STEVENS 7,500 0 *
HOMER N STEWART 3,000 0 *
PRISCILLA STITT 450 0 *
VIVIAN STROUD (8) 1,500 171,025 *
GEORGE E SZYCHOSKI 30 0 *
MICHAEL W SZYCHOSKI 75 0 *
CONSTANTINE TEOFIL SZYMBORSKI 3,000 0 *
53
ALFRED HUNTER THOMPSON 226 0 *
ANDREW THOMPSON 150 0 *
ALFRED & SUSAN THOMPSON 600 0 *
WILLIAM E THOROUGHGOOD 750 0 *
JAMES TURNER 12,000 0 *
WILLIAM L VAN ALEN JR (9) 7,000 277,005 *
DAVID L WEAVER 1,560 0 *
MICHAEL L WEAVER 300 0 *
DWANE M WEAVER 3,000 0 *
WESLEY R WEAVER 4,500 0 *
ARTHUR L WHEELER Acct #216-39U48 39,000 0 *
ARTHUR WIENER 970 0 *
ARTHUR & RUTH WIENER 4,098 0 *
J EDWARD WILLARD 29,500 0 *
KENNETH B WILSON 1,500 0 *
CLAUDINE W WOLFE 900 0 *
JOHN D WRIGHT 3,000 0 *
C EDWIN & JANET LYN WRIGHT 1,500 0 *
CRAIG YOSHIMOTO 3,000 0 *
JOSEPH ZIRBES 1,500 0 *
RUTH ZWEIGBAUM 3,762 0 *
TOTAL 1,206,060
54
* Less than 1%
(1) MR. BOYNTON IS A FORMER DIRECTOR OF THE COMPANY.
(2) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO THE SHARES HELD OF RECORD BY THE ENTITY, DELTA
WESTERN COMPANY, IS GEORGE W MOFFITT.
(3) MR. DEMEDIO IS THE CFO OF USA.
(4) MR. HAMILTON IS AN EMPLOYEE OF USA.
(5) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO THE SHARES HELD OF RECORD BY THE ENTITY, HRUBALA
ASSOCIATES, A PARTNERSHIP, IS DAVID R MOLUMPHY.
(6) MR. ILLES WAS A CONSULTANT OF THE COMPANY.
(10) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
(7) MR. LURIO IS A DIRECTOR AND HIS LAW FIRM, LURIO & ASSOCIATES, P.C., IS
GENERAL COUNSEL TO USA.
(8) MS. STROUD IS AN EMPLOYEE OF USA.
(9) MR. VAN ALEN JR. IS A DIRECTOR OF USA.
(10) MR. BEYER IS A CONSULTANT OF USA.
(11) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO SHARES HELD OF RECORD BY THE ENTITY, BRITTAIN FAMILY
TRUST, IS E. DOUGLAS BRITTAIN.
(12) THE NATURAL PERSON WHO EXERCISES SOLE AND/OR SHARED VOTING OR DISPOSITIVE
POWERS WITH RESPECT TO THE SHARES HELD OF RECORD BY THE ENTITY, CORNERSTONE
PUBLIC RELATIONS GROUP, IS M. DARLENE HERBERT FELT
(13) MR. MCGARRAH IS A CONSULTANT TO THE COMPANY.
(14) MEDIATECH CAPITAL IS THE SUCCESSOR TO TECHNOLOGY PARTNERS (HOLDINGS), LLC,
THE COMPANY'S FORMER INVESTMENT BANKER. THE NATURAL PERSON WHO EXERCISES
SOLE AND/OR SHARED VOTING OR DISPOSITIVE POWERS WITH RESPECT TO SHARES HELD
OF RECORD BY MEDIATECH CAPITAL IS PORTER BIBB.
(15) REPRESENTS 603,030 SHARES ISSUED AT THE RATE OF $.20 PER SHARE AND 603,030
SHARES UNDERLYING WARRANTS TO PURCHASE OUR SHARES AT $.20 PER SHARE AT ANY
TIME THROUGH JUNE 30, 2004. THESE SHARES AND WARRANTS WERE ISSUED TO OUR
SENIOR NOTEHOLDERS WHO ELECTED TO RECEIVE THESE SECURITIES IN LIEU OF CASH
FOR THE SEPTEMBER 30, 2003 QUARTERLY INTEREST PAYMENTS. WE HAVE AGREED TO
REGISTER THESE SHARES FOR RESALE UNDER THE ACT AT OUR COST AND EXPENSE
THROUGH JUNE 30, 2004. AS OF THE DATE OF THIS PROSPECTUS, NONE OF THESE
WARRANTS HAVE BEEN EXERCISED.
55
MARKET FOR COMMON STOCK
The Common Stock 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:
Fiscal
2002 High Low
---- ---- ---
First Quarter (through September 30, 2001) $ 1.05 $ 0.60
Second Quarter (through December 31, 2001) $ 0.74 $ 0.34
Third Quarter (through March 31, 2002) $ 0.80 $ 0.39
Fourth Quarter (through June 30, 2002) $ 0.41 $ 0.20
2003
----
First Quarter (through September 30, 2002) $ 0.39 $ 0.14
Second Quarter (through December 31, 2002) $ 0.23 $ 0.13
Third Quarter (through March 31, 2003) $ 0.22 $ 0.16
Fourth Quarter (through June 30, 2003) $ 0.64 $ 0.17
2004
----
First Quarter (through September 30, 2003) $ 0.54 $ 0.34
Such quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not represent actual transactions.
At September 30, 2003, there are 2,646,485 shares of Common Stock issuable upon
exercise of outstanding options. The following table shows the number of options
outstanding and their exercise price:
56
Option
Options Outstanding Exercise Price
------------------- --------------
2,475,318 $ 0.165
125,000 $ 1.00
5,000 $ 1.50
41,167 $ 2.00
------------------
Total 2,646,485
==================
All of the aforesaid options have been issued to our employees, former Stitch
option holders or consultants.
As of September 30, 2003, a total of 47,253,208 warrants were outstanding with
exercise prices ranging from $.07 per share to $4.00 per share. See Footnote 13
to the Consolidated Financial Statements.
As of September 30, 2003, there were 524,492 shares of Common Stock issuable
upon conversion of the outstanding Preferred Stock and 591,311 shares issuable
upon the conversion of cumulative preferred dividends.
As of September 30, 2003 there are $11,046,651 face value of Senior Notes
outstanding, which are convertible into 52,251,733 shares of Common Stock.
On June 30, 2003 there were 1,519 record holders of the Common Stock and 565
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 securities. No dividend may be
paid on the Common Stock until all accumulated and unpaid dividends on the
Preferred Stock have been paid. As of September 30, 2003, such accumulated
unpaid dividends amount to $6,306,476.
During fiscal year 2003, certain holders of the Company's Preferred Stock
converted 4,790 shares into 4,790 shares of Common Stock. Certain of these
shareholders also converted cumulative preferred dividends of $56,050 into 5,605
shares of Common Stock.
DESCRIPTION OF SECURITIES
General
We are authorized to issue up to 400,000,000 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 September 30, 2003, there were 281,237,382
shares of common stock issued and outstanding and 524,492 shares of series A
preferred stock issued and outstanding which are convertible into 524,492 shares
of common stock. Through September 30, 2003, a total of 586,658 shares of
preferred stock have been converted into 663,102 shares of common stock and
$2,662,004 of accrued and unpaid dividends thereon have been converted into
286,377 shares of common stock.
57
La Jolla Debenture and Warrants
During August 2001, the Company issued to La Jolla a $225,000 Convertible
Debenture (increased by $100,000 on June 18, 2002) bearing 9 3/4 percent
interest with a maturity date of August 2, 2003 (extended to August 2, 2004).
Interest is payable by the Company monthly in arrears. The Debenture is
convertible at the lower of $1.00 per share or 80% (later reduced to 72%) of the
lowest closing bid price of the Common Stock during the 20 days (changed to 270
calendar days) preceding exercise. If on the date of conversion the closing bid
price of the shares is $.40 or below, the Company shall have the right to prepay
the portion being converted at 150% of the principal amount being converted. In
such event, La Jolla shall have the right to withdraw its conversion notice. At
the time of conversion of the Debenture, the Company has agreed to issue to La
Jolla warrants to purchase an amount of Common Stock equal to ten times the
number of shares actually issued upon conversion of the Debenture. The warrants
are exercisable at any time for two years following issuance and at the related
conversion price of the Debenture. The Company has agreed to prepare and file at
its expense a registration statement covering the resale of the shares of Common
Stock underlying the Debenture as well as the related warrants issuable upon
conversion of the Debenture. From inception through June 30, 2003, La Jolla
converted the entire debenture for which the Company issued 2,800,903 shares of
Common Stock, and exercised 10,543,673 warrants to purchase Common Stock.
In March 2003, we issued to La Jolla a warrant to purchase up to 9,000,000 of
our shares at $.10 per share. We had agreed to register all of the shares
underlying these warrants for resale by La Jolla for a one year period. In
October 2003, the parties agreed to rescind and cancel this warrant.
As of the date of this prospectus, La Jolla is the holder of warrants to
purchase up to 17,465,370 shares at $.10 per share. These warrants were issued
at the time of conversion of the debenture. La Jolla is also the holder of
2,252,683 shares issued upon conversion of warrants at $.07 per share. This
prospectus covers the resale of these shares by La Jolla. See "Description of
Securities-Registration Rights"
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.
58
Series A Convertible Preferred Stock
The holders of shares of Series A preferred stock:
o have the number of votes per share equal to the number of shares of common
stock into which each such share is convertible (i.e., 1 share of series A
preferred stock equals 1 vote);
o are entitled to vote on all matters submitted to the vote of the
shareholders of USA, including the election of directors; and
o are entitled to an annual cumulative cash dividend of $1.50 per annum,
payable when, as and if declared by the Board of Directors.
The record dates for payment of dividends on the Series A Preferred Stock are
February 1 and August 1 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 September 30, 2003 the
accumulated and unpaid dividends were $6,306,476.
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 September 30, 2003 a total of 586,658 shares of series A
Preferred Stock have been converted into common stock and accrued and unpaid
dividends thereon have been converted into 286,377 shares of Common Stock. The
conversion rate of the Series A Preferred Stock (and any accrued and unpaid
dividends thereon) will be equitably adjusted for stock splits, stock
combinations, recapitalizations, and in connection with certain other issuances
of common stock by USA. Upon any liquidation, dissolution, or winding-up of USA,
the holders of Series A Preferred Stock are entitled to receive a distribution
in preference to the Common Stock in the amount of $10.00 per share plus any
accumulated and unpaid dividends.
We have the right, at any time, to redeem all or any part of the issued and
outstanding series A preferred stock for the sum of $11.00 per share plus any
and all unpaid and accumulated dividends thereon. Upon notice by USA of such
call, the holders of the series A preferred stock so called will have the
opportunity to convert their shares and any unpaid and accumulated dividends
thereon into shares of common stock. The $11.00 per share figure was the
redemption price approved by the Directors and shareholders of USA at the time
the series A preferred stock was created and first issued. We currently have no
plans to redeem the preferred stock.
12% Senior Notes
As of September 30, 2003, we had outstanding $3,523,492 of Senior Notes due
December 31, 2007, $3,156,000 of Senior Notes due December 31, 2006, $3,426,150
of Senior Notes due December 31, 2005, $571,009 of Senior Notes due December 31,
2004, and $370,000 of Senior Notes due December 31, 2003. The principal amount
of each senior note which is not voluntarily converted shall be payable on the
maturity date thereof, at which time any unpaid and accrued interest shall also
become due. Interest shall accrue at the rate of 12% per annum from and after
the date of issuance and shall be payable quarterly in arrears on December 31,
March 31, June 30, and September 30 of each year until maturity. The senior
notes are senior to all existing equity securities of USA, including the series
A preferred stock.
59
Of the Senior Notes due December 31, 2003, a total of $3,823,000 were purchased
through the exchange of $3,823,000 of the old senior notes previously due
December 31, 2001. The holders of these notes are not selling shareholders in
this prospectus. The principal amount of these notes is convertible at any time
into shares of common stock at the rate of $1.25 per share. The interest paid on
these notes is also convertible into shares of common stock at the rate of $1.00
per share. For the quarters ended September 31, 2001 and December 31, 2001, the
conversion rate relating to the interest payments was reduced to $.50 per share
and for the quarter ended March 31, 2002 to $.40 per share and for the quarters
ended June 30, 2002, September 30, 2002, December 31, 2002, March 31, 2003, June
30, 2003, and September 30, 2003, to $.20 per share together with one warrant at
$.20 per share for each share issued with an exercise termination date of June
30, 2004. We have agreed to use our best efforts to register these shares as
well as the shares underlying the warrants for resale under the Act. These
shares and shares underlying the warrants issued by us on account of the
September 30, 2003 quarter are included in this prospectus. In March 2003, each
holder of these senior notes was granted the right to have the conversion rate
reduced to $.20 in exchange for extending the maturity date for three additional
years or until December 31, 2006. The noteholder was required to make the
election on or prior to March 31, 2003 (later extended until December 31, 2003).
A total of $4,819,000 of these notes have been extended to December 31, 2006. In
connection with any extensions other than the reduction of the conversion rate,
there were no other payments or benefits exchanged between USA and the
noteholders. None of the shares underlying the 2006 Notes are covered by this
prospectus.
The principal amount of each Senior Note due December 31, 2004 is convertible at
any time into shares of Common Stock at the rate of $.40 per share. The holders
of these notes are not selling shareholders in this prospectus. In January 2002,
the Company agreed to provide the option to each holder of these senior notes to
elect to accept shares in lieu of receiving cash in satisfaction of the interest
payments otherwise due to them on account of the last three quarters of fiscal
2002. The conversion rate for this interest payment due for the quarter ended
March 31, 2002 was $.40 per share. The Company continued this option at $.20 per
share for the quarters ended June 30, 2002, September 30, 2002, December 31,
2002, March 31, 2003, June 30, 2003 and September 30, 2003, together with one
warrant at $.20 for each share issued with an exercise termination date of June
30, 2004. We have agreed to register these shares as well as the shares
underlying the warrants for resale under the Act. These shares and shares
underlying the warrants issued by us on account of the September 30, 2003
quarter are included in this prospectus. In March 2003, each holder of these
senior notes was granted the right to have the conversion rate reduced to $.20
in exchange for extending the maturity date for three additional years or until
December 31, 2007. The noteholder was required to make the election on or prior
to March 31, 2003 (later extended until December 31, 2003). A total of
$4,071,493 of these notes have been extended to December 31, 2007 and are
convertible at $.20 per share. In connection with any extensions other than the
reduction of the conversion rate, there were no other payments or benefits
exchanged between USA and the noteholders. None of the shares underlying the
2007 Notes are covered by this prospectus.
The principal amount of each Senior Note due December 31, 2005 is convertible at
any time into shares of Common Stock at the rate of $.20 per share. The holders
of these notes are not selling shareholders in this prospectus. The Company
agreed to provide the option to each holder of these senior notes to elect to
accept shares in lieu of receiving cash in satisfaction of the interest payments
otherwise due to them on account of the last quarter of fiscal 2002 at the rate
of $.20 per share. The Company continued this option at $.20 per share for the
quarters ended September 30, 2002, December 31, 2002, March 31, 2003, June 30,
2003, and September 30, 2003, together with one warrant at $.20 for each share
issued with an exercise termination date of June 30, 2004. We have agreed to
register these shares as well as the shares underlying the warrants for resale
under the Act. These shares and shares underlying the warrants issued by us on
account of the September 30, 2003 quarter are included in this prospectus.
60
The indebtedness evidenced in the Senior Note is subordinated to the prior
payment when due of the principal of, premium, if any, and interest on all
"Senior Indebtedness", as defined herein, of USA as follows: Upon any
distribution of its assets in a liquidation or dissolution of USA, or in
bankruptcy, reorganization, insolvency, receivership or similar proceedings
relating to USA, the Lender shall not be entitled to receive payment until the
holders of Senior Indebtedness are paid in full. Until a payment default occurs
with respect to any Senior Indebtedness, all payments of principal and interest
due to Lender under the senior note shall be made in accordance with this senior
note. Upon the occurrence of any payment default with respect to any Senior
Indebtedness then, upon written notice thereof to USA and Lender by any holder
of such Senior Indebtedness or its representative, no payments of principal or
interest on the senior note shall be made by USA until such payment default has
been cured to the satisfaction of the holder of such Senior Indebtedness or
waived by such holder, provided, however, that if during the 180 day period
following such default, the holder of Senior Indebtedness has not accelerated
its loan, commenced foreclosure proceedings or otherwise undertaken to act on
such default, then USA shall be required to continue making payments under the
senior note, including any which had not been paid during such 180 day period.
In the event that any institutional lender to USA at any time so requires, the
Lender shall execute, upon request of USA, any intercreditor or subordination
agreement(s) with any such institutional lender on terms not materially more
adverse to the Lender then the subordination terms contained in this senior
note.
The term "Senior Indebtedness" shall mean (a) all direct or indirect, contingent
or certain indebtedness of any type, kind or nature (present or future) created,
incurred or assumed by USA with respect to any future bank or other financial
institutional indebtedness of USA or (b) any indebtedness created, incurred, or
assumed, by USA secured by a lien on any of our assets.
Notwithstanding anything herein to the contrary, Senior Indebtedness does not
include:
o unsecured accounts payable to trade creditors of USA incurred in the
ordinary course of business;
o any debt owed by USA to any officer, director or stockholder of USA;
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 the date hereof, there are outstanding warrants to purchase 14,285,716
shares at $.07 per share, warrants to purchase 25,965,376 shares at $.10 per
share, warrants to purchase 1,500,000 shares at $.0665, warrants to purchase
3,196,288 shares at $.20 per share, warrants to purchase 650,000 shares at $.70
per share, warrants to purchase 1,200,000 shares at $.91 per share, warrants to
purchase 377,927 shares at $1.00 per share, warrants to purchase 2,901 shares at
$1.03 per share and warrants to purchase 75,000 shares at $1.25 per share.
61
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.
Registration Rights
Pursuant to our subscription agreement with Alpha Capital
Atkiengesellschaft, we agreed to register for resale the 1,500,000 shares and
750,000 shares underlying the warrants issued to Alpha Capital in November 2002
within 120 days of issuance of the shares and the warrants. In addition, the
subscription agreement with Alpha Capital provides that if the shares have not
been registered for resale within such 120 day period, the Company shall deliver
shares to Alpha Capital at the rate of four shares for every ten shares already
issued to Alpha Capital or issuable under the warrants to Alpha Capital. From
and after the date of issuance of these securities and until the date of this
prospectus there was no effective registration statement covering these shares.
Because of the delay in registering these shares, in October 2003, the Company
and Alpha agreed that the Company would issue to Alpha Capital an aggregate of
500,000 shares in full satisfaction of the above described provision of the
subscription agreement.
Pursuant to the registration rights agreement with La Jolla, the
Company agreed to maintain an effective registration statement for the resale of
the 2,252,683 shares and the 17,465,370 shares underlying the unexercised
warrants held by La Jolla on the date of this prospectus at all times from and
after the date of issuance of the shares or warrants, as the case may be. These
shares and warrants were issued by the Company to La Jolla in April, May and
June 2003. From and after the date of issuance of these securities and until the
date of this prospectus there was no effective registration statement covering
these shares. In October 2003, the Company received a letter from La Jolla
stating that the Company had failed to maintain an effective registration
statement for these shares and demanding that the Company cause the registration
statement to be declared effective as soon as possible. The registration rights
agreement did not specify any penalties for failure to maintain an effective
registration statement. Through the date of this prospectus, La Jolla has not
asserted any claim relating to our failure to register the shares.
The Company's registration rights agreement with Kazi Management VI,
Inc. requires the Company to use its best efforts to register for resale the
3,571,429 shares and the 19,285,716 shares underlying the warrants purchased by
Kazi in October 2002 within 90 days following purchase. In addition, the
subscription agreement with Kazi provides that if the shares have not been
registered for resale within such 90 day period, the Company shall deliver
additional shares to Kazi at the rate of 3% per month (i.e., approximately
686,000 shares per month). In September 2003, the Company received a letter from
counsel for Kazi requesting delivery of the penalty shares accrued through the
date of the letter. By letter dated October 16, 2003 Lurio & Associates, P.C.
counsel for the Company, advised Kazi that the penalty provisions set forth in
the subscription agreement are unenforceable under Pennsylvania law, and no
penalty shares are due to Kazi. Counsel's letter stated that the penalty
provision is unenforceable because the provision does not provide nor was it
ever intended to provide a reasonable estimate of the damages, if any, sustained
by Kazi as a result of such delay, and serves no purpose other than to punish
the Company for any such delay. The Company believes that because the Company
has used its best efforts to have the registration statement covering the Kazi
shares to be declared effective as required in the registration rights
agreement, the Company does not have any liability to Kazi as it is not probable
that such shares will be delivered to Kazi.
The Company's subscription agreements with each of Wellington
Management Company, LLP, and three other investors executed in September 2003 in
connection with the purchase of a total of 20,010,000 shares at $.25 per share
requires the Company to register these shares for resale within 90 days of
purchase (i.e., before December 22, 2003). If the Company fails to do so, the
Company has agreed to pay each investor a cash penalty of three percent of the
purchase price of the shares purchased by each investor, or an aggregate of
approximately $150,000. The Company believes that it will have the registration
statement covering these shares declared effective by this date, and there would
be no payments due to the investors.
In addition to each of the above-described agreements, the Company has
agreed to use its best efforts to register for resale the shares as well as the
shares underlying the warrants or notes covered by this prospectus as well as by
the two concurrent registration statements. The Company has, as required, used
and continues to use its best efforts to register these shares for resale and
management does not believe that it is probable that there will be incremental
consideration given to these security holders in connection with these matters.
Shares Eligible for Future Sale
Of the 281,237,382 shares of common stock issued and outstanding on September
30, 2003, a total of 145,630,801 are restricted securities of which 19,161,770
are currently eligible for sale under Rule 144 promulgated under the Act. Of
these restricted securities, we have agreed to use our best efforts to register
all of these shares for resale under the Act (of which 41,064,862 shares are
covered by this prospectus). As of the date hereof, there were 524,492 shares of
preferred stock issued and outstanding, all of which are freely transferable
without further registration under the Act (other than shares held by
"affiliates" of USA).
The shares of preferred stock issued and outstanding as of the date hereof, are
convertible into 524,492 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
62
As permitted by the Pennsylvania Business Corporation Law of 1988 ("BCL"), our
By-laws provide that Directors will not be personally liable, as such, for
monetary damages for any action taken unless the Director has breached or failed
to perform the duties of a Director under the BCL and the breach or failure to
perform constitutes self-dealing, willful misconduct or recklessness. This
limitation of personal liability does not apply to any responsibility or
liability pursuant to any criminal statute, or any liability for the payment of
taxes pursuant to Federal, State or local law. The By-laws also include
provisions for indemnification of our Directors and officers to the fullest
extent permitted by the BCL. Insofar as indemnification for liabilities arising
under the Act may be permitted to Directors, officers and controlling persons of
USA pursuant to the foregoing provisions, or otherwise, we have been advised
that in the opinion of the SEC such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our stock and warrants is American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005.
PLAN OF DISTRIBUTION
The selling shareholders are free to offer and sell the common shares at such
times, in such manner and at such prices as the selling shareholders may
determine. The types of transactions in which the common shares are sold may
include transactions in the over-the-counter market (including block
transactions), negotiated transactions, the settlement of short sales of common
shares, or a combination of such methods of sale. The sales will be at market
prices prevailing at the time of sale or at negotiated prices. Such transactions
may or may not involve brokers or dealers.
The selling shareholders may effect such transactions by selling common stock
directly to purchasers or through broker-dealers, which may act as agents or
principals. Such broker-dealers may receive compensation in the form of
discounts, concessions, or commissions from the selling shareholders. They may
also receive compensation from the purchasers of common shares for whom such
broker-dealers may act as agents or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions).
The selling shareholders and any broker-dealers or agents that are involved in
selling the shares may 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 Securities and
Exchange Act, provided they meet the criteria and conform to the requirements of
such Rule. We have agreed to bear all the expenses (other than selling
commissions) in connection with the registration and sale of the common stock
covered by this prospectus. In some circumstances, we have agreed to indemnify
the selling shareholders against certain losses and liabilities, including
liabilities under the Act.
We have advised the selling shareholders that while they are engaged in a
distribution of the shares included in this prospectus they are required to
comply with Regulation M promulgated under the Securities Exchange Act of 1934,
as amended. With certain exceptions, Regulation M precludes the selling
shareholders, any affiliated purchasers, and any broker-dealer or other person
who participates in such distribution from bidding for or purchasing, or
attempting to induce any person to bid for or purchase any security which is the
subject of the distribution until the entire distribution is complete.
63
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 of USA Technologies, Inc. at June 30, 2003
and 2002, and for each of the two years in the period ended June 30, 2003
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
(which contains an explanatory paragraph describing conditions that raise
substantial doubt about the Company's ability to continue as a going concern as
described in Note 2 to the consolidated financial statements) appearing
elsewhere herein, and are included in reliance upon such reports given on the
authority of such firm as experts in accounting and auditing.
The financial statements of Bayview Technology Group, LLC as of December 31,
2002 and 2001 and for each of the three years in the period ended December 31,
2002 included in this Prospectus and in the Registration Statement have been
audited by Anton Collins Mitchell, LLP, independent certified public
accountants, as set forth in their report thereon (which contains an explanatory
paragraph regarding the Company's ability to continue as a going concern)
appearing elsewhere herein and are included upon the authority of said firms as
experts in auditing and accounting.
64
USA Technologies, Inc.
Consolidated Financial Statements
Years ended June 30, 2003 and 2002
Contents
Report of Independent Auditors..............................................F-1
Consolidated Financial Statements
Consolidated Balance Sheets.................................................F-2
Consolidated Statements of Operations.......................................F-3
Consolidated Statements of Shareholders' Equity ............................F-4
Consolidated Statements of Cash Flows.......................................F-6
Notes to Consolidated Financial Statements..................................F-7
Report of Independent Auditors
USA Technologies, Inc.
Board of Directors and Shareholders
We have audited the accompanying consolidated balance sheets of USA
Technologies, Inc. as of June 30, 2003 and 2002, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
two years in the period ended June 30, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the 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, 2003 and 2002, and the consolidated results of its operations
and its cash flows for each of the two years in the period ended June 30, 2003,
in conformity with accounting principles generally accepted in the United
States.
The accompanying financial statements have been prepared assuming USA
Technologies, Inc. will continue as a going concern. As discussed in Note 2 to
the financial statements, the Company has incurred recurring operating losses
and has a working capital deficiency at June 30, 2003. 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 12, 2003,
except for Note 17, as to which
the date is September 30, 2003
F-1
USA Technologies, Inc.
Consolidated Balance Sheets
June 30 September 30
2003 2002 2003
--------------------------------- -------------
Assets (Restated) (Unaudited)
Current assets:
Cash and cash equivalents $ 2,384,455 $ 557,970 $ 4,618,420
Accounts receivable, less allowance for uncollectible accounts
of $69,000 (unaudited) at September 30, 2003 and
$65,000 and $37,000 in 2003 and 2002, respectively 414,796 340,293 1,466,017
Other receivable -- -- 395,249
Inventory 457,900 877,814 911,463
Prepaid expenses and other current assets 201,383 124,865 312,328
Subscriptions receivable 1,013,400 35,000 406,687
Investment 904,049 -- 658,264
--------------------------------- -------------
Total current assets 5,375,983 1,935,942 8,768,428
Property and equipment, net 943,784 1,932,427 1,150,959
Software development costs, at cost, less accumulated amortization
of $4,660,413 (unaudited) at September 30, 2003 and
$4,327,526 and $2,995,979 in 2003 and 2002, respectively 998,660 2,330,207 665,773
Goodwill 7,945,580 7,945,580 8,275,141
Intangibles, net 2,591,500 2,883,500 11,759,282
Other assets 37,174 29,117 10,094
--------------------------------- -------------
Total assets $ 17,892,681 $ 17,056,773 $ 30,629,677
================================= =============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 2,266,156 $ 3,081,495 $ 2,497,806
Accrued expenses 2,720,743 2,131,289 3,071,905
Current obligations under long-term debt 830,674 850,644 813,681
Convertible Senior Notes 349,942 -- 246,962
Deposits -- 480,000 --
--------------------------------- -------------
Total current liabilities 6,167,515 6,543,428 6,630,354
Convertible Senior Notes, less current portion 7,808,469 6,289,825 6,326,047
Long-term debt, less current portion 224,614 762,085 101,564
Convertible debenture -- 65,543 --
--------------------------------- -------------
Total liabilities 14,200,598 13,660,881 13,057,965
Shareholders' equity:
Preferred Stock, no par value:
Authorized shares--1,800,000
Series A Convertible Preferred--Authorized shares - 900,000
Issued and outstanding shares--524,492 (unaudited) at September
30, 2003 and 524,492 and 529,282 at June 30, 2003 and 2002,
respectively (liquidation preference of $11,551,396 (unaudited)
at September 30, 2003 and $11,158,027 at June 30, 2003) 3,715,246 3,749,158 3,715,246
Common Stock, no par value:
Authorized shares--400,000,000 at September 30, 2003 and
400,000,000 and 150,000,000 at June 30, 2003 and 2002, respectively
Issued and outstanding shares--281,237,382 (unaudited) at September
30, 2003 and 218,741,042 and 65,339,188 at
June 30, 2003 and 2002, respectively 78,790,405 56,588,503 101,855,015
Subscriptions receivable -- (149,750) --
Accumulated other comprehensive income -- -- 118,103
Accumulated deficit (78,813,568) (56,792,019) (88,116,652)
--------------------------------- -------------
Total shareholders' equity 3,692,083 3,395,892 17,571,712
--------------------------------- -------------
Total liabilities and shareholders' equity $ 17,892,681 $ 17,056,773 $ 30,629,667
================================= =============
See accompanying notes.
F-2
USA Technologies, Inc.
Consolidated Statements of Operations
Three months ended
Year ended June 30 September 30
2003 2002 2003 2002
------------------------------ ------------------------------
Revenues: (Unaudited)
Equipment sales $ 1,034,427 $ 795,938 $ 1,286,478 $ 188,488
License and transaction fees 1,373,573 778,906 319,649 342,653
Product sales 445,068 107,857 74,481 203,304
------------------------------ ------------------------------
Total revenues 2,853,068 1,682,701 1,680,608 734,445
Cost of sales (including amortization of software
development costs) 2,971,443 4,062,901 1,082,163 667,460
------------------------------ ------------------------------
Gross profit (118,375) (2,380,200) 598,445 66,985
Operating expenses:
General and administrative 7,194,684 7,868,064 1,501,769 1,642,378
Compensation 4,973,210 4,654,662 5,703,198 845,719
Depreciation and amortization 1,251,716 440,238 394,959 247,084
Loss on debt modification 1,521,654 -- 277,297 --
------------------------------ ------------------------------
Total operating expenses 14,941,264 12,962,964 7,877,223 2,735,181
------------------------------ ------------------------------
(15,059,639) (15,343,164) (7,278,778) (2,668,196)
Other income (expense):
Interest income 18,691 15,791 7,729 2,974
Loss on investment (1,945,951) -- 31,361 --
Interest expense:
Coupon or stated rate (1,163,192) (966,974) (265,491) (256,278)
Non-cash interest and amortization of debt discount (3,815,408) (1,513,118) (1,797,905) (652,718)
Less: amount capitalized -- 492,658
------------------------------ ------------------------------
Total interest expense (4,978,600) (1,987,434) (2,063,396) (908,996)
------------------------------ ------------------------------
Total other income (expense) (6,905,860) (1,971,643) (2,024,306) (906,022)
------------------------------ ------------------------------
Net loss (21,965,499) (17,314,807) (9,303,084) (3,574,218)
Cumulative preferred dividends (793,586) (822,561) (393,369) (396,962)
------------------------------ ------------------------------
Loss applicable to common shares $ (22,759,085) $ (18,137,368) $ (9,696,453) $ (3,971,180)
============================== ==============================
Loss per common share (basic and diluted) $ (0.20) $ (0.50) $ (0.04) $ (0.06)
============================== ==============================
Weighted average number of common shares outstanding (basic and
diluted) 111,790,358 35,994,157 249,989,212 71,192,921
============================== ==============================
See accompanying notes.
F-3
USA Technologies, Inc.
Consolidated Statements of Shareholders' Equity
(Restated)
Series A
Convertible Deferred Subscriptions Accumulated
Preferred Stock Common Stock Compensation Receivable Deficit Total
-----------------------------------------------------------------------------------------
Balance, June 30, 2001 $ 3,933,253 $32,977,922 $(103,000) - $ (39,209,072) $(2,400,897)
Conversion of 26,002 shares of Preferred
Stock to 26,002 shares of Common Stock (184,095) 184,095 - - - -
Conversion of $268,140 of cumulative
preferred dividends into 26,814
shares of Common Stock at $10.00 per
share - 268,140 - - (268,140) -
Issuance of 2,784,134 shares of Common
Stock for professional services - 1,330,944 - - - 1,330,944
Issuance of 500,000 Common Stock
Warrants for professional services - 115,000 - - - 115,000
Issuance of 2,340,000 shares of Common
Stock for Officer compensation - 981,000 - - - 981,000
Issuance of 200,000 Common Stock Options
for professional services - 66,000 - - - 66,000
Issuance of 498,000 shares of Common
Stock from the conversion of $622,500
of the 2000 12% Senior Notes at $1.25
per share - 622,500 - - - 622,500
Exercise of 2,333,529 Common Stock
Warrants at exercise prices ranging from
$0.10 to $0.50 per share, net of
offering costs - 336,921 - - - 336,921
Issuance of 333,678 shares of Common Stock from the
conversion of $82,000 of a 9-3/4% Convertible
Debenture, and the related exercise of Common
Stock Warrants at varying prices per share to
purchase 3,336,780 shares of Common Stock, net
of offering costs - 886,250 - - - 886,250
Issuance of 8,772,724 shares of Common
Stock in connection with Private
Placement Offerings at varying
offering prices, net of offering
costs of $343,944 - 4,747,223 - (149,750) - 4,597,473
Issuance of 674,431 shares of Common
Stock in lieu of cash payments for
interest on the Convertible Senior
Notes and the related issuance of
303,829 Common Stock Warrants - 301,856 - - - 301,856
Debt discount relating to beneficial
conversion feature on the 2001 12%
Senior Notes and on the $325,000
9-3/4% Convertible Debenture - 4,067,813 - - - 4,067,813
Issuance of Common Stock in connection
with Stitch acquisition - 8,710,816 - - - 8,710,816
Issuance of Common Stock Options and
Common Stock Warrants in connection
with Stitch acquisition - 963,583 - - - 963,583
Compensation expense related to deferred
stock awards - - 103,000 - - 103,000
Other - 28,440 - - - 28,440
Net loss - - - - (17,314,807) (17,314,807)
----------------------------------------------------------------------------------------
Balance, June 30, 2002 3,749,158 56,588,503 - (149,750) (56,792,019) 3,395,892
F-4
USA Technologies, Inc.
Consolidated Statements of Shareholders' Equity
Series A
Convertible Subscriptions Accumulated
Preferred Stock Common Stock Receivable Deficit Total
--------------------------------------------------------------------------------------------------------------------------------
Conversion of 4,790 shares of Preferred
Stock to 4,790 shares of Common Stock (33,912) 33,912 - - -
Conversion of $56,050 of cumulative
preferred dividends into 5,605 shares
of Common Stock at $10.00 per share - 56,050 - (56,050) -
Issuance of 5,749,442 shares of Common
Stock for professional services - 1,245,631 149,750 - 1,395,381
Exercise of 17,686,489 Common Stock
Warrants at $0.10 per share - 1,768,650 - - 1,768,650
Issuance of 5,727,383 shares of Common
Stock from the conversion of 12%
Senior Notes - 1,145,442 - - 1,145,442
Issuance off 2,467,225 shares of Common Stock
from the conversion of $243,000 of 9-3/4%
debentures, and the related exercise of
Common Stock Warrants at varying prices per
share to purchase 7,206,893 shares of Common
Stock, net of offering costs - 873,000 - - 873,000
Issuance of 89,207,511 shares of Common
Stock in connection with various
Private Placement Offerings at varying
prices per share - 8,750,058 - - 8,750,058
Issuance of 2,315,000 shares of Common
Stock in lieu of cash payments for
interest on the Convertible Senior Notes
and the issuance of 2,315,000 Common
Stock Warrants - 860,250 - - 860,250
Debt Discount relating to beneficial
conversion feature on the various 12%
Senior Notes - 2,947,130 - - 2,947,130
Issuance of 8,031,516 shares of Common
Stock in connection with the issuance
of 12% Senior Notes - 1,664,819 - - 1,664,819
Issuance of 15,000,000 shares of Common
Stock for the investment in Jubilee - 2,850,000 - - 2,850,000
Other - 6,960 - - 6,960
Net loss - - - (21,965,499) (21,965,499)
-------------------------------------------------------------------------------------
Balance, June 30, 2003 $ 3,715,246 $78,790,405 $ - $ (78,813,568) $ 3,692,083
F-5
Accumulated
Series A Other
Convertible Accumulated Comprehensive
Preferred Stock Common Stock Deficit Income Total
------------------------------------------------------------------------------------------------------------------------------------
Exercise of 535,258 Common Stock
Warrants at $0.10 per share (Unaudited) - 53,526 - - 53,526
Issuance of 7,500,834 shares of Common
Stock from the conversion of 12%
Senior Notes (Unaudited) - 1,500,167 - - 1,500,167
Issuance of 475,000 shares of Common
Stock in exchange for professional
services (Unaudited) - 177,000 - - 177,000
Issuance of 10,500,000 shares of Common
Stock to executive in connection with
employment agreement (Unaudited) - 4,620,000 - - 4,620,000
Issuance of 22,737,791 shares of Common Stock
with various private placement offerings
at varying prices per share (Unaudited) - 5,275,279 - - 5,275,279
Issuance of 577,457 shares of Common Stock
and related Common Stock
Warrants in lieu of cash payment for
interest on the 12% Senior Notes (Unaudited) - 363,831 - - 363,831
Debt discount relating to beneficial
conversion feature on 12% Senior
Notes (Unaudited) - 1,796,607 - - 1,796,607
Issuance of 20,170,000 shares of Common
Stock in connection with the Bayview
acquisition (Unaudited) - 9,278,200 - - 9,278,200
Net loss (Unaudited) - - (9,303,084) - (9,303,084)
Unrealized gain on investment (Unaudited) - - - 118,103 118,103
------------
Total comprehensive loss (Unaudited) (9,184,981)
------------------------------------------------------------------------------------
Balance, September 30, 2003 (Unaudited) $ 3,715,246 $ 101,855,015 $ (88,116,652) $ 118,103 $ 17,571,712
====================================================================================
See accompanying notes.
USA Technologies, Inc.
Consolidated Statements of Cash Flows
Three months ended
Year ended June 30 September 30
2003 2002 2003 2002
---------------------------------- ----------------------------------
(Restated) (Unaudited)
Operating activities:
Net loss $ (21,965,499) $ (17,314,807) $ (9,303,084) $ (3,547,218)
Adjustments to reconcile net loss to net cash
used in operating activities:
Charges incurred in connection with the
issuance of Common Stock, Common Stock
Warrants and Senior Notes 2,573,301 5,532,037 4,692,000 160,142
Interest expense on the Senior Notes paid
through the issuance of Common Stock 860,250 301,856 363,831 139,113
Interest amortization related to Senior
Notes and Convertible Debentures 2,955,158 1,513,699 1,434,074 513,605
Depreciation 1,119,536 403,738 143,356 174,084
Amortization 1,623,547 3,032,479 614,105 364,276
Gain on sale of investment -- -- (31,361) --
Loss on investment 1,945,951 -- 277,297 --
Loss on debt modification 1,521,654 -- -- --
Loss on property and equipment -- 195,722 -- --
Changes in operating assets and liabilities:
Accounts receivable (74,503) (232,653) (1,051,221) 47,524
Inventory 419,914 (36,642) (453,563) 21,970
Prepaid expenses, deposits and other assets (38,325) 774,845 4,039 (77,588)
Accounts payable (759,337) (259,627) 231,650 1,052,811
Accrued expenses 589,454 (44,413) 35,162 (122,811)
---------------------------------- ----------------------------------
Net cash used in operating activities (9,228,899) (6,133,766) (2,727,715) (1,301,092)
Investing activities:
Purchase of property and equipment (186,895) (102,917) (105,826) (45,468)
Cash acquired in connection with Stitch
Acquisition, net of financing costs -- 2,278,229 (727,969) --
Increase in software development costs -- (2,238,771) -- --
---------------------------------- ----------------------------------
Net cash used in investing activities (186,895) (63,459) (833,795) (45,468)
Financing activities:
Net proceeds from the issuance of Common Stock
and the exercise of Common
Stock Purchase Warrants and Options 9,930,879 3,912,765 4,933,355 294,931
Net proceeds from issuance of Senior Notes and
Convertible Debenture 1,833,841 4,269,223 -- 1,064,560
Net repayment of long-term debt (510,314) (2,472,324) (140,043) (175,834)
Collection of subscriptions receivable 35,000 29,000 1,002,163 35,000
Repayment of principal on capital lease obligations (47,127) (61,039) -- --
Proceeds received from deposits for future financings -- 500,000 -- --
Repayment of the Senior Notes -- (240,000) -- --
---------------------------------- ----------------------------------
Net cash provided by financing activities 11,242,279 5,937,625 5,795,475 1,218,657
---------------------------------- ----------------------------------
Net increase (decrease) in cash and cash equivalents 1,826,485 (259,600) 2,233,965 (127,903)
Cash and cash equivalents at beginning of year 557,970 817,570 2,384,455 557,970
---------------------------------- ----------------------------------
Cash and cash equivalents at end of year $ 2,384,455 $ 557,970 $ 4,618,420 $ 430,067
================================== ==================================
Supplemental disclosures of cash flow information:
Cash paid for interest $ 1,479,984 $ 603,312 $ 249,423 $ 347,752
================================== ==================================
Conversion of Convertible Preferred Stock to
Common Stock $ 33,912 $ 184,095 $ -- $ --
================================== ==================================
Conversion of Cumulative Preferred Dividends to
Common Stock $ 56,050 $ 268,140 $ -- $ --
================================== ==================================
Subscriptions receivable $ 1,013,400 $ 35,000 $ 406,687 $ --
================================== ==================================
Conversion of Senior Notes and Debenture to
Common Stock $ 1,388,442 $ 622,500 $ 1,500,167 $ 120,000
================================== ==================================
Purchase of investment in Jubilee through the
issuance of Common Stock $ 2,850,000 $ -- $ -- $ --
================================== ==================================
Beneficial conversion feature related to Senior
Notes and Convertible Debenture $ 2,947,130 $ 4,067,813 $ 1,796,607 $ 410,247
================================== ==================================
Issuance of Common Stock in connection with Senior
Note Conversions $ 1,664,819 $ -- $ -- $ --
================================== ==================================
Issuance of Common Stock, Common Stock Options
and Warrants in connection with Stitch acquisition $ -- $ 9,674,399 $ -- $ --
================================== ==================================
Capital lease obligations incurred $ -- $ 62,984 $ -- $ --
================================== ==================================
Prepaid stock expenses through issuance of
Common Stock $ 105,000 $ 204,000
==================================
Issuance of Common Stock in connection with the
Bayview acquisition $ 9,278,200 $ --
==================================
Other receivable for sale of Jubilee investment $ 395,249 $ --
==================================
Deposits used to fund debt and equity $ -- $ 360,000
==================================
Issuance of Common Stock related to Senior
Note Offering $ -- $ 854,288
==================================
See accompanying notes. F-6
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2003
1. Business
USA Technologies, Inc., a Pennsylvania corporation (the Company), was
incorporated on January 16, 1992. The Company provides unattended cashless
payment/control systems and associated network and services for the copy, fax,
debit card, smart card personal computer, laundry, and vending industries. The
Company's devices make available credit and debit card and other payment methods
in connection with the sale of a variety of products and services. The Company's
customers are principally located in the United States and are comprised of
hotels, chains, consumer package goods companies, information technology and
vending operators.
The Company offers the Business Express(R) and Business Express(R) Limited
Service (LSS) principally to the hospitality industry. The Business Express(R)
and Business Express(R) Limited Service (LSS) combines the Company's business
applications for computers, copiers and facsimile machines into a business
center unit. The Company has developed its next generation of cashless
control/payment systems (e-Port(TM)), which includes capabilities for
interactive multimedia and e-commerce, acceptance of other forms of electronic
payments and remote monitoring of host machine data and is being marketed and
sold to operators, distributors and original equipment manufacturers (OEM)
primarily in the vending industry.
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 $22 million
and $17.3 million during each of the fiscal years ended June 30, 2003 and 2002,
respectively, and a loss of $9.3 million (unaudited) during the three months
ended September 30, 2003. Cumulative losses from its inception through June 30,
2003 amount to approximately $75.2 million and the Company had a working capital
deficiency at June 30, 2003. Cumulative losses through September 30, 2003
amounted to approximately $84.5 million (unaudited) and the Company has a
positive working capital balace at September 30, 2003. Losses have continued
through September 2003 and are expected to continue during fiscal year 2004. The
Company's ability to meet its future obligations is dependent upon the success
of its products in the marketplace. Until the Company's products can generate
sufficient operating revenues, the Company will be required to raise capital to
meet its cash flow requirements. These factors raise substantial doubt about the
Company's ability
F-7
USA Technologies Inc.
Notes to Consolidated Financial Statements
2. Accounting Policies (continued)
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, additional private placement
offerings (Note 17) and continued efforts to reduce costs.
Interim Financial Information
The consolidated financial statements and disclosures included herein for the
three months ended September 30, 2003 and 2002 are unaudited. These financial
statements and disclosures have been prepared by the Company in accordance with
accounting principles generally accepted in the United States for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United
States 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, 2003 are not necessarily indicative of the results
that may be expected for the fiscal year ended June 30, 2004.
Restatement
The Company restated the June 30, 2002 balance sheet, statement of shareholders'
equity and statement of cash flows to correct the valuation of the marketable
equity securities issued in connection with the Company's May 2002 acquisition
of Stitch Corporation (Note 4) in accordance with EITF 99-12: "Determination of
the Measurement Date for the Market Price of Acquirer Securities Issued in a
Purchase Business Combination". The Company originally valued the marketable
securities issued in connection with this acquisition at the market price a few
days before and a few days after May 14, 2002, which was the date the Company's
shareholders approved the increase in the Company's Common Stock to allow for
this transaction to close. The restated June 30, 2002 balance sheet, statement
of shareholders' equity and statement of cash flows reflect the marketable
securities issued in connection with this transaction at the market price a few
days before and a few days after April 10, 2002, the date the definitive
agreement was signed. The restated June 30, 2002 consolidated financial
statements reflect an increase in Goodwill from $6,800,827 to $7,945,580 and an
increase in Common Stock from $55,443,750 to $56,588,503. The restatement did
not impact the net loss or loss per common share reported during 2002 or 2003.
Reclassification
Certain amounts in the prior year financial statements have been reclassified to
conform to the current year presentation.
Use of Estimates
The preparation of the financial statements in conformity with 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 accompanying notes. Actual results could differ from those
estimates.
Consolidation
The accompanying consolidated financial statements include the accounts of
Stitch. All significant intercompany accounts and transactions have been
eliminated in consolidation.
F-8
USA Technologies Inc.
Notes to Consolidated Financial Statements
2. Accounting Policies (continued)
Cash Equivalents
Cash equivalents represent all highly liquid investments with original
maturities of three months or less. Cash equivalents are comprised of a money
market fund and certificates of deposit.
Inventory
Inventory, which principally consists of finished goods, components, and
packaging materials, is stated at the lower of cost (first-in, first-out basis)
or market.
Property and Equipment
Property and equipment is recorded at cost. Property and equipment is
depreciated on a straight-line basis over the estimated useful lives of the
related assets. Leasehold improvements are amortized on a 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
acquired from Stitch. The Company adopted Statement of Financial Accounting
Standards No. 142 (SFAS No. 142), "Goodwill and Other Intangible Assets," on
July 1, 2002. Under SFAS No. 142, Goodwill is no longer permitted to be
amortized to earnings, but instead is subject to periodic testing for
impairment. The Company tests goodwill for impairment using the two-step process
prescribed by SFAS No. 142. The first step screens for potential impairment,
while the second step measures the amount of impairment, if any. The Company
uses a discounted cash flow analysis to complete the first step in this process.
The Company completed the transitional test of goodwill as of July 1, 2002, as
prescribed in SFAS No. 142, during the quarter ended December 31, 2002. The
Company concluded that there were no goodwill impairment indicators as a result
of the transitional test. The Company also performed an annual impairment test
of goodwill as of April 1, 2003 and concluded there was no goodwill impairment.
During the quarter ended September 30, 2003, no events or circumstances arose
indicating an impairment of goodwill may have occurred.
F-9
2. Accounting Policies (continued)
Goodwill and Intangible Assets (continued)
Intangible assets include patents and trademarks acquired in the Stitch
acquisition. The aggregate amortization expense was $292,000 and $36,500 during
the years ended June 30, 2003 and 2002, respectively and $281,218 (unaudited)
for the three months ended September 30, 2003. The intangible asset balance and
related accumulated amortization consists of the following:
June 30, 2003
---------------------------------------------------------------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Value
------------------------ -------------------------- -----------------------
Amortized intangible assets
Trademark $ 1,050,000 $ (118,125) $ 931,875
Patents 1,870,000 (210,375) 1,659,625
-------------------- ------------------- -------------------
Total $ 2,920,000 $ (328,500) $ 2,591,500
==================== =================== ===================
June 30, 2002
---------------------------------------------------------------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Value
------------------------ -------------------------- -----------------------
Amortized intangible assets
Trademark $ 1,050,000 $ (13,125) $ 1,036,875
Patents 1,870,000 (23,375) 1,846,625
-------------------- ------------------- -------------------
Total $ 2,920,000 $ (36,500) $ 2,883,500
==================== =================== ===================
September 30, 2003 (Unaudited)
---------------------------------------------------------------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Value
------------------------ -------------------------- -----------------------
Amortized intangible assets
Trademark $ 2,064,000 $ (144,375) $ 1,919,625
Patents 9,294,000 (420,772) 8,873,228
Non-Compete Agreement 1,011,000 (44,571) 966,429
-------------------- ------------------- -------------------
Total $ 12,369,000 $ (609,718) $ 11,759,282
==================== =================== ===================
At June 30, 2003, the expected amortization of the intangible assets is as
follows: $292,000 per year in fiscal year 2004 through fiscal year 2011, and
$255,500 in fiscal year 2012. The weighted average useful life of these
intangibles is 10 years at June 30, 2003 and 9.75 at September 30, 2003.
Concentration of Credit Risk
Financial instruments that subject the Company to a concentration of credit risk
consist principally of cash and cash equivalents and accounts receivable. The
Company maintains cash and cash equivalents with various financial institutions.
The Company performs periodic evaluations of the relative credit standing of
those financial institutions, and the Company's policy is designed to limit
exposure to any one institution. The Company's accounts receivable is net of an
allowance for uncollectible accounts. The Company does not require collateral or
other security to support credit sales, but provides an allowance for
uncollectible accounts based on historical experience and specifically
identified risks. Accounts receivable are determined to be 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 57% and 41% of the Company's accounts receivable at June 30, 2003
and 2002, and 35% and 12% of the Company's revenues for the years ended June 30,
2003 and 2003, respectively are concentrated with two customers.
F-10
USA Technologies Inc.
Notes to Consolidated Financial Statements
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. Service fees for access to the Company's
equipment and network services are recognized on a monthly basis. Product
revenues are recognized from the sale of products from Company owned vending
machines when there is purchase and acceptance of product by the vending
customer. Customers have the ability to return vending products for a full
refund. The Company estimates an allowance of product returns at the date of
sale.
Investment
The Company accounts for investments in debt and equity securities under the
provisions of Statement of Financial Accounting Standards No. 115, (SFAS 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 in a separate component of shareholders' equity in
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.
Software Development Costs
The Company capitalizes software development costs pursuant to Statement of
Financial Accounting Standards No. 86 (SFAS 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 client product and related enhanced network and, accordingly,
the Company commenced capitalization of software development costs related to
F-11
USA Technologies Inc.
Notes to Consolidated Financial Statements
2. Accounting Policies (continued)
Software Development Costs (continued)
this product and network. Costs capitalized through 2002 were $5.1 million,
which included capitalized interest of approximately $493,000, pursuant to SFAS
No. 34, "Capitalization of Interest Costs".
During the fourth quarter of fiscal 2002, the multi-media e-Port(TM) client
product and enhanced network became available for general release to the
Company's customers. The multimedia e-port(TM) client product is equipped with
both the audit and cashless payment features, but also includes the capability
of displaying interactive advertising and content via a LCD screen. During this
quarter, Management performed an evaluation of the commercial success and
preliminary market acceptance of the multi-media e-Port(TM) client product 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 is being amortized over an estimated useful life of two
years. Amortization expense for the three months ended September 30, 2003 was
$332,887 (unaudited). Amortization expense was approximately $1,331,000 during
the year ended June 30, 2003 and $2,996,000 during the year ended June 30, 2002
(including the above impairment adjustment of $2,663,000). Such amortization is
reflected in cost of sales in the accompanying consolidated statements of
operations.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable, other
current assets, accounts payable and accrued expenses reported in the
consolidated balance sheets equal or approximate fair value due to their short
maturities. The fair value of the Company's Senior Notes, Debenture, and other
Long-Term Debt approximates book value as such notes are at market rates
currently available to the Company.
Impairment of Long Lived Assets
The Company adopted Statement of Financial Accounting Standards No. 144 (SFAS
No. 144), "Accounting for the Impairment or Disposal of Long-Lived Assets" on
July 1, 2002. In accordance with SFAS No. 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. 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 Kodak Program to
sell disposable cameras and film. Management determined that it was more likely
than not that these vending machines would be disposed of before the end of
their previously estimated useful lives. The estimated undiscounted cash flows
for this group of assets was less than the carrying value of the related assets.
As a result, the Company recorded a charge of approximately $321,000
representing the difference between the fair value as determined from a quoted
market price and the carrying value of the group of assets. Such amount is
reflected in depreciation expense in the 2003 consolidated statement of
operations.
F-12
USA Technologies Inc.
Notes to Consolidated Financial Statements
2. Accounting Policies (continued)
Advertising Expenses
Advertising expenses for the years ended June 30, 2003 and 2002 were
approximately $72,000 and $429,000, respectively and were expensed as incurred.
Advertising expenses for the three months ended September 30, 2003 and 2002 were
approximately $20,000 (unaudited) and $1,000 (unaudited), respectively.
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
$1,505,000 and $1,187,000 for the years ended June 30, 2003 and 2002,
respectively and $166,000 (unaudited) and $673,000 (unaudited) for the three
months ended September 30, 2003 and 2002, respectively..
Accounting for Stock Options
Statement of Financial Accounting Standards No. 123 (SFAS No.123), "Accounting
for Stock-Based Compensation", provides companies with a choice to follow the
provisions of SFAS No. 123 in determination of stock-based compensation expense
or to continue with the provisions of APB No. 25, "Accounting for Stock Issued
to Employees and Related Interpretations in Accounting for Stock-Compensation
Plans" and the related FASB Interpretation No. 44. The Company has elected to
follow the provisions of APB 25. Under APB 25, if the exercise price of the
Company's stock options equals or exceeds the market price of the underlying
Common Stock on the date of grant, no compensation expense is recognized.
The effect of applying SFAS No. 123 to the Company's stock-based awards results
in the same net loss and net loss per common share for the year ended June 30,
2003 and for the three months ended September 30, 2003 on a pro-forma basis
under SFAS No. 123 and under APB 25. The effect of applying SFAS No. 123 to the
Company's stock-based awards resulted in a net loss and net loss per common
share for the year ended June 30, 2002 as follows:
Net loss applicable to common shares as reported
under APB 25 $(18,137,368)
Stock option expense per SFAS 123 (985,046)
------------
Pro forma net loss $(19,122,414)
============
Loss per common share as reported $ (0.50)
============
Pro forma net loss per common share $ (0.53)
============
The fair value for the Company's stock options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for fiscal year 2002: an expected life of 2 years;
no expected cash dividend payments on Common Stock, and a risk-free interest
rate of 4.5% to 5.5%, and volatility factors of the expected market price of the
Company's Common Stock, based on historical volatility of .85 to .95 for fiscal
2002.
F-13
USA Technologies Inc.
Notes to Consolidated Financial Statements
2. Accounting Policies (continued)
Accounting for Stock Options (continued)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. As noted above, the Company's stock options are vested over an
extended period. In addition, option models require the input of highly
subjective assumptions including future stock price volatility. Because the
Company's stock options have characteristics significantly different from those
of traded options, and because changes in the subjective assumptions can
materially affect the fair value estimates, in management's opinion, the
Black-Scholes model does not necessarily provide a reliable measure of the fair
value of the Company's stock options. The Company's pro forma information
reflects the impact of the reduction in price of certain stock options. The pro
forma results above are not necessarily reflective of the effects of applying
SFAS 123 in future periods.
Loss Per Common Share
Basic earnings per share is calculated by dividing income (loss) applicable to
common shares by the weighted average common shares outstanding for the period.
Diluted earnings per share is calculated by dividing income (loss) applicable to
common shares by the weighted average common shares outstanding for the period
plus the dilutive effect (unless such effect is anti-dilutive) of equity
instruments. No exercise of stock options, purchase rights, stock purchase
warrants, or the conversion of preferred stock, cumulative preferred dividends
or Senior Notes was assumed during fiscal year 2003 or 2002 because the assumed
exercise of these securities would be antidilutive.
New Accounting Pronouncements
In December 2002, Statement of Financial Accounting Standards No. 148 (SFAS No.
148), "Accounting for Stock-Based Compensation-Transition and Disclosure-an
amendment of FASB Statement No. 123" (SFAS No. 123) was issued. SFAS No. 148
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provided
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company has provided the prescribed disclosure
format required by SFAS No. 148 during the year ended June 30, 2003.
3. Investment in Jubilee Investment Trust
During February 2003, the Company issued 15,000,000 shares of its Common Stock
($2,850,000) for an investment of 1,870,091 shares in the Jubilee Investment
Trust, PLC ("Jubilee"), a United Kingdom Investment Trust whose shares trade on
the London Stock
F-14
USA Technologies Inc.
Notes to Consolidated Financial Statements
3. Investment in Jubilee Investment Trust (continued)
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 has 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 the investment declined in value below its
cost basis for a period of six months or more, 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 as of June 30, 2003 realizing an impairment loss of $1,945,951.
4. Acquisition of 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.
Stitch became a wholly-owned subsidiary of the Company effective May 14, 2002.
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 as of June
30, 2003. A total of 4,800,000 shares of the Common Stock issued to the former
stockholders of Stitch are 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
F-15
USA Technologies Inc.
Notes to Consolidated Financial Statements
4. Acquisition of Stitch Networks Corporation (continued)
EITF 99-12: "Determination of the Measurement Date for the Market Price of
Acquirer Securities Issued in a Purchase Business Combination".
The Company's vending machines for the Kodak Program are purchased from
Dixie-Narco (Dixie) and the film and cameras are purchased directly from Eastman
Kodak Company. Product revenues through the fiscal year ended June 30, 2003 were
approximately $445,000. In May 2003, Stitch notified Maytag and Dixie-Narco that
they had breached the Kodak Agreement because Maytag had failed to create and
maintain during the term of the Kodak Agreement a customer focus team and Dixie
had failed to service, place and pick up the machines as required in the Kodak
Agreement. In June 2003, Maytag and Dixie-Narco indicated to Stitch that they
were not in breach of the Kodak Agreement and that Stitch had breached the
Agreement by failing to pay certain payments due thereunder. Maytag and Dixie
indicated that the customer focus team was terminated due to Stitch's breach of
the Kodak Agreement by failing to pay fees due thereunder and Stitch's not
taking delivery of vending machines ordered from Dixie. The parties have been
negotiating a resolution of this matter although no settlement has been
finalized. The Company believes that any settlement would involve the
termination of the Kodak Agreement. In such event, although related revenues
would be reduced, because the Kodak program is and has been operating at a loss,
the termination of the program would eliminate these losses. The Company also
believes that any settlement would involve the payment of the amount due by
Stitch to U.S. Bancorp by the other parties to the Kodak Agreement and the
forgiveness of the payments due by Stitch to Dixie of approximately $124,000.
During June 2002, the Company determined that it would vacate the office space
previously occupied by Stitch. Accordingly, the Company accrued the remaining
lease exit costs relating to this property in the amount of approximately
$354,000 as part of the cost of Stitch. While the Company is attempting to
sublease this space, no provision for recovery was estimated.
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
===========
Unaudited pro-forma combined results of the Company as if the Company acquired
Stitch on July 1, 2001 is as follows:
Year ended June 30
2002
------------
Revenues $ 2,869,466
============
Net loss (19,583,216)
Cumulative preferred dividends
(822,561)
------------
Loss applicable to common shares $(20,405,777)
============
Loss per common share (basic and diluted) $ (0.36)
============
Weighted average number of common shares outstanding
(basic and diluted) 56,676,823
============
F-16
USA Technologies Inc.
Notes to Consolidated Financial Statements
5. Property and Equipment
Property and equipment consist of the following:
Useful June 30 September 30,
Lives 2003 2002 2003
---------------------------------------------------------- --------------
(Unaudited)
Computer equipment and purchased
software 3 years $ 1,931,912 $ 1,855,459 $ 2,086,886
Vending machines and related components 7 years 688,284 1,050,220 701,320
Control systems 3 years 980,759 982,371 971,428
Furniture and equipment 5-7 years 532,570 503,110 715,859
Leasehold improvements Lease term 16,140 94,031 16,140
Vehicles 5 years 10,258 10,258 10,258
--------------------------------------- --------------
4,159,923 4,495,449 4,501,891
Less accumulated depreciation (3,216,139) (2,563,022) (3,350,932)
--------------------------------------- --------------
$ 943,784 $ 1,932,427 $ 1,150,959
======================================= ==============
6. Accrued Expenses
Accrued expenses consist of the following:
June 30 September 30,
2003 2002 2003
--------------------------------------- --------------
(Unaudited)
Accrued professional fees $ 650,974 $ 628,372 $ 444,496
Accrued consulting fees 662,010 62,480 831,370
Accrued lease termination payments, net 344,934 344,934 344,934
Accrued compensation and related sales commissions 250,808 225,917 263,304
Accrued interest 291,315 209,885 276,193
Accrued software license and support costs 125,385 144,755 125,385
Accrued product warranty costs 104,406 85,827 104,797
Accrued taxes and filing fees 94,529 134,411 100,603
Advanced customer billings 62,540 30,190 67,119
Accrued other 133,842 264,518 513,704
--------------------------------------- --------------
$ 2,720,743 $ 2,131,289 $ 3,071,905
======================================= ==============
7. Related Party Transactions
During the years ended June 30, 2003 and 2002, the Company incurred
approximately $305,000 and $213,000, respectively, in connection with legal
services provided by a member of the Company's Board of Directors. During the
quarter ended September 30, 2003, the Company incurred approximately $150,000
(Unaudited) in connection with legal services provided by a member of the
Company's Board of Directors. At June 30, 2003 and 2002, approximately $22,000
and $30,000,
F-17
USA Technologies Inc.
Notes to Consolidated Financial Statements
7. Related Party Transactions (continued)
respectively, of the Company's accounts payable and accrued expenses were due to
this Board member. At September 30, 2003 approximately $28,000 (Unaudited) of
company's accounts payable and accrued expenses were due to this Board member.
During the years ended June 30, 2003 and 2002 and during the quarter ended
September 30, 2003, certain Board members participated in various debt or equity
offerings of the Company for a total investment of approximately $661,500,
$277,500 and $0 (unaudited) respectively. Stitch currently purchases parts and
services from Dixie-Narco, Inc. (Dixie), an affiliate of a shareholder (Maytag
Holdings, a subsidiary of Maytag Inc.) of the Company. There were purchases from
Dixie of $201,000 and $8,000, for the fiscal year ended June 30, 2003 and for
the period May 14, 2002 to June 30, 2002, respectively. Amounts payable to Dixie
included in accounts payable in the accompanying June 30, 2003 and 2002
consolidated balance sheets were approximately $130,000 and $124,000,
respectively. There were no additional purchases from Dixie during the qarter
ended September 30, 2003.
8. Commitments
o In July 2003 the Company and the Company's Chief Executive Officer (CEO)
amended the terms of his employment agreement (expiring June 2005). Under
the terms of the previous Executive Employment Agreement, the CEO would have
been granted seven percent (non-dilutive) of all the then issued and
outstanding shares of the Company's Common Stock in the event a "USA
Transaction" (as defined) occurs, which among other events includes a change
in control of the Company. The amended terms of the Executive Employment
Agreement, eliminates the seven percent (non-dilutive) right to receive
Common Stock upon a "USA Transaction" and now grants 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 an aggregate of 10,500,000
shares of its Common Stock to the CEO valued at $4,620,000 (Unaudited) or
$0.44 per share representing the quoted market price of the Company's Common
Stock on the date the purchase agreement was entered into and the shares
were valued. In connection with this amendment, the CEO also entered into a
lock-up agreement pursuant to which he shall not sell 2,500,000 of these
shares for a one-year period and 8,000,000 of these shares for a two-year
period. The CEO will not be required to pay any additional consideration for
these shares of Common Stock. At the time of a "USA Transaction", all of the
14,000,000 shares to be issued to the CEO in connection with this amendment
are automatically deemed to be issued and outstanding, and will be entitled
to be treated as any other issued and outstanding shares of Common Stock.
These shares will be irrevocable and fully vested, and have no expiration
date and will not be affected by the termination of the CEO with the Company
for any reason whatsoever.
o The Company conducts its operations from various facilities under operating
leases. During March 2003, the Company entered into a lease agreement for
its new corporate headquarters. The lease provides for escalating rent
payments and a period of free rent prior to the commencement of the lease
payments in January 2004. The Company has provided for deferred rent expense
for the difference between the rent payments to be made and the straight
line allocation of total rent payments to be made over the lease term. In
connection with this lease agreement, the Company has provided the landlord
with a security deposit comprised of shares in the Jubilee Investment Trust
valued at $100,000.
F-18
USA Technologies Inc.
Notes to Consolidated Financial Statements
8. Commitments (continued)
Rent expense under such arrangements was approximately $292,000 and $220,000
during the years ended June 30, 2003 and 2002, respectively. The Company has
$180,000 of equipment under capital lease agreements. Capital lease amortization
of approximately $46,000 and $54,000 is included in depreciation expense for the
years ended June 30, 2003 and 2002, respectively. Future minimum lease payments
subsequent to June 30, 2003 under capital and noncancelable operating leases are
as follows:
Capital Leases Operating Leases
---------------------------------------
2004 $ 15,960 $ 244,000
2005 1,779 346,000
2006 - 343,000
2007 - 313,000
2008 and thereafter - 480,000
---------------------------------------
Total minimum lease payments 17,739 $ 1,726,000
====================
Less amount representing interest 1,882
-------------------
Present value of net minimum lease payments 15,857
Less current obligations under capital leases 14,161
-------------------
Obligations under capital leases, less current portion $ 1,696
===================
9. Long-Term Debt
Long-term debt consists of the following:
June 30 September 30,
2003 2002 2003
---------------- ----------------- --------------
(Unaudited)
Bank facility $ 828,466 $ 1,255,113 $ 696,305
Working capital loans 166,765 275,000 166,765
Other, including capital lease obligations 60,057 62,984 52,175
IBM inventory financing - 19,632 --
---------------- ----------------- --------------
1,055,288 1,612,729 915,245
Less current portion 830,674 850,644 813,681
---------------- ----------------- --------------
$ 224,614 $ 762,085 101,564
================ ================= ==============
In connection with the Stitch acquisition (Note 4), the Company assumed
long-term debt of $3,976,000, which included a vending equipment borrowing
facility and working capital loans. The Company repaid $2,165,000 of the working
capital loans in June 2002 leaving an outstanding balance of $275,000 at June
30, 2002. These loans are secured by certain assets of Stitch. At June 30, 2003
and September 30, 2003, $166,765 of the working capital loans are outstanding
which bear interest at 6.75% per annum. Such loans were payable on July 8, 2002.
During fiscal year
F-19
USA Technologies Inc.
Notes to Consolidated Financial Statements
9. Long-Term Debt (continued)
2003 the bank extended the due date on these loans on several occasions under
forbearance agreements. At June 30, 2003, the Company is in default under this
working capital loan agreement and has agreed to satisfactory payment
arrangement .
The bank facility (the Facility) was utilized by Stitch to fund the purchase of
vending machines placed at locations where Kodak film products are 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 film products vending machines. Repayment of principal is also insured by a
Surety Bond issued by a third-party insurer in exchange for an initial fee paid
by the Company.
10. Income Taxes
At June 30, 2003 and 2002, the Company had net operating loss carryforwards of
approximately $76,211,000 and $54,769,000, respectively, to offset future
taxable income expiring through approximately 2023. At June 30, 2003 and 2002,
the Company recorded a net deferred tax asset of approximately $29,771,000 and
$20,546,000, respectively, which was reduced by a valuation allowance of the
same amount as the realization of the deferred tax asset is not certain,
principally due to the lack of earnings history.
The timing and extent in 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 $10,985,000 at the acquisition date. Such net
operating loss carryforwards are limited under these provisions as to the amount
available to offset future taxable income.
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
2003 2002
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 28,431,000 $ 19,837,000
Deferred research and development costs 730,000 480,000
Software development costs 1,324,000 1,008,000
Other 338,000 392,000
------------ ------------
30,823,000 21,717,000
Deferred tax liabilities:
Intangibles (1,052,000) (1,171,000)
------------ ------------
29,771,000 20,546,000
Valuation allowance (29,771,000) (20,546,000)
------------ ------------
Deferred tax asset, net $ -- $ --
============ ============
F-20
USA Technologies Inc.
Notes to Consolidated Financial Statements
10. Income Tax (continued)
Amounts assigned to intangibles acquired in the Stitch acquisition exceeded the
tax basis. Such excess will increase taxable income as the intangibles are
amortized. The net operating loss carryforwards will be used to offset the
increase in taxable income. Accordingly, the Company recorded a deferred tax
liability of $1,171,000 and a deferred tax asset in the same amount related to
these intangibles at the acquisition date.
11. Senior Notes and Debenture
During June 2002, the Company commenced a $2,500,000 2002-A private placement
offering (subsequently increased to 430 units or $4,300,000), consisting of 12%
Convertible Senior Notes due December 31, 2005 ("2002 Senior Notes"). Each
$10,000 Senior Note is convertible into Common Stock at $.20 per share and
interest is payable quarterly. Each Note holder initially received 20,000 Common
Stock warrants, however subsequent to June 30, 2002, the Board of Directors
amended the offering to replace the warrants with 20,000 shares of the Company's
Common Stock. The fair value of the Common Stock issued and the intrinsic value
of the beneficial conversion feature aggregating $2,881,847 have been allocated
to equity. This resulting debt discount is being amortized to interest expense
through December 31, 2005. Through June 30, 2003, the Company issued a total of
401.5 units in this offering, of which 7.5 units are reflected in subscriptions
receivable at June 30, 2003. During the year ended June 30, 2003, $489,608 of
the 2002 Senior Notes were converted into 2,448,215 shares of the Company's
Common Stock. During the three months ended September 30, 2003, $100,000
(unaudited) of the 2002 Senior Notes were converted into 500,000 shares of
Common Stock.
During fiscal year 2002, the Company commenced a $2,500,000 2001-D private
placement offering (subsequently increased to 650 units or $6,500,000),
consisting of 12% Convertible Senior Notes due December 31, 2004 ("2001 Senior
Notes"). Each $10,000 Senior Note is convertible into Common Stock at $.40 per
share and interest is payable quarterly. Certain shareholders of the Company,
who held warrants to purchase Common Stock of the Company as part of an earlier
private placement at $.50 per share, were offered the opportunity to cancel a
portion of such warrants and to receive an equivalent number of new Common Stock
warrants at $.10 expiring on December 31, 2002 (subsequently extended to August
31, 2003), if they invested in the 2001-D offering. The original warrants were
scheduled to expire on December 31, 2001 or March 31, 2002 (according to their
original terms) (Note 13). The estimated fair value of the new warrants was
determined to be $1,787,084 (using the Black-Scholes method) and the intrinsic
value of the beneficial conversion feature of $1,623,352 have been allocated to
equity. This resulting debt discount is being amortized to interest expense
through December 31, 2004. During fiscal year 2002, the Company issued a total
of 481.4 units, resulting in the issuance of $4,814,000 of 2001 Senior Notes.
During fiscal year 2001, the Company authorized a $6,700,000 private placement
offering ("2000 Senior Notes") of 670 units at $10,000 per unit. Each unit
consisted of a $10,000 12% Convertible Senior Note, maturing December 31, 2003,
and 2,000 shares of Restricted Common Stock. Each Note is convertible
F-21
USA Technologies Inc.
Notes to Consolidated Financial Statements
11. Senior Notes and Debentures (continued)
into Common Stock at $1.25 per share anytime through December 31, 2003. The
Company issued 1,136,300 shares of Common Stock in connection with this
Offering. The fair value of the Common Stock on the date such shares were
granted of $1,215,843 and the intrinsic value of the beneficial conversion
feature in the 2000 Senior Notes of $409,104 was allocated to equity. This
resulting debt discount is being amortized to interest expense through December
31, 2003. Through June 30, 2003, $647,500 of such Notes were converted into
518,000 shares of Common Stock. There have been no conversions subsequent to
June 30, 2003.
In March 2003, the Company granted to the holders of the 2000 Senior Notes and
2001 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 2000 Senior Notes and
from $0.40 to $0.20 per share for the 2001 Senior Notes. This offer has been
extended by the Company's Board of Directors until October 31, 2003. Through
June 30, 2003, $3,548,000 of the 2000 Senior Note holders and $3,363,397 of the
2001 Senior Note holders agreed to this offer and exchanged their Notes.
Subsequent to June 30, 2003 and through September 12, 2003, an additional
$456,000 of the 2000 Senior Notes and $276,701 of the 2001 Senior Notes have
been exchanged for the 2006 Senior Notes and 2007 Senior Notes, respectively.
From September 13, 2003 to September 30, 2003, an additional $660,000
(unaudited) of the 2000 Senior Notes and $430,390 (unaudited) of the 2001 Senior
Notes have been exchanged for the 2006 Senior Notes and 2007 Senior Notes,
respectively. For all 2000 Senior Note holders who agreed to exchange their
Notes, such amounts have been reflected as long-term in the accompanying June
30, 2003 consolidated balance sheet. The exchange of the 2000 Senior Notes and
2001 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
2000 and 2001 Senior Notes have been extinguished. Accordingly, at June 30, 2003
and September 30, 2003, the Company expensed $1,521,654 and $277,297 (unaudited)
of unamortized debt discount and other issuance costs remaining on the 2000
Senior Notes and 2001 Senior Notes. Such amounts have been reported as loss on
debt modification in the June and September 2003 statement of operations.
As the share price was greater than the conversion rate in the fourth quarter of
fiscal year 2003, the Company recorded the intrinsic value of this beneficial
conversion feature of $1,318,500 and $590,710 for the Senior Notes due in 2006
and 2007, respectively. For the three months ended September 30, 2003, an
additional $1,796,607 (unaudited) was recorded as beneficial conversion. Such
amount has been allocated to equity and the resulting debt discount is being
amortized to interest expense through the Notes maturity dates. During fiscal
year 2003, $332,500 and $323,334 of the Senior Notes maturing in 2006 and 2007,
respectively, were converted into 1,662,500 and 1,616,668, shares of the
Company's Common Stock. During the three months ended September 30, 2003
$1,175,500 (unaudited) and $224,667 (unaudited) of the Senior Notes maturing in
2006 and 2007, respectively, were converted into 7,000,834 shares of the
Company's Common Stock.
F-22
USA Technologies Inc.
Notes to Consolidated Financial Statements
11. Senior Notes and Debentures (continued)
A summary of the various Senior Note activities is as follows:
Senior Notes Maturing December 31,
-----------------------------------------------------------------------------------
2003 2004 2005 2006 2007
-----------------------------------------------------------------------------------
(2000 Senior (2001 Senior (2002 Senior (2006 Senior (2007 Senior
Notes) Notes) Notes) Notes) Notes)
Outstanding at June 30, 2001 $ 5,656,500 $ -- $ -- $ -- $ --
Issued for cash and services -- 4,814,593 444,083 -- --
Converted into Common Stock (622,500) -- -- -- --
Repaid at maturity -- -- -- -- --
Less: Unamortized debt discount
and other issuance costs (750,295) (2,928,567) (323,989) -- --
-----------------------------------------------------------------------------------
Balance at June 30, 2002 4,283,705 1,886,026 120,094 -- --
Issued for cash and services/
(rescinded) -- (172,091) 3,571,675 -- --
Exchange of 2000 and 2001 Senior
Notes for 2006 and 2007
Senior Notes (3,548,000) (3,363,397) -- 3,548,000 3,363,397
Converted into Common Stock -- -- (489,608) (332,500) (323,334)
Less: Unamortized debt discount
and other issuance costs, net
of accretion 670,062 2,474,637 (1,829,234) (1,104,169) (596,852)
-----------------------------------------------------------------------------------
Balance at June 30, 2003 $ 1,405,767 $ 825,175 $ 1,372,927 $ 2,111,331 $ 2,443,211
Exchange of 2000 and 2001 Senior
Notes for 2006 and 2007
Senior Notes (Unaudited) (1,116,000) (708,096) -- 1,116,000 708,096
Converted into Common Stock
(Unaudited) -- -- (100,000) (1,175,500) (224,667)
Less: Unamortized debt discount
and other issuance costs, net
of accretion (Unaudited) 68,570 295,414 269,972 (146,932) (572,259)
-----------------------------------------------------------------------------------
Balance at September 30, 2003
(Unaudited) $ 358,337 $ 412,493 $ 1,542,899 $ 1,904,899 $ 2,354,381
===================================================================================
The unamortized debt discount and other issuance costs represents fees paid in
connection with these financings, the estimated fair value of the detachable
equity instruments issued in connection with these financings, and any
beneficial conversion embedded in the debt at the commitment date. Such amounts
are being amortized over the remaining life of the respective debt instruments.
Debt discount amortization for the Senior Notes, which has been reflected as
interest expense in the consolidated statements of operations, was approximately
$2,690,000 and $1,513,000 for the years ended June 30, 2003 and 2002,
respectively. For the three months ended September 30, 2003 $1,434,074
(Unaudited) was charged to interest expense for the amortization of debt
discount on the Senior Notes.
During October 2002, the Company's Board of Directors approved that for the
quarterly interest payment payable by the Company on its 12% Convertible Senior
Notes (for all quarters in fiscal year 2003), at the option of the note holder,
the interest payment due can be used to purchase shares of the Company's Common
Stock at a rate of $.20 per share. Additionally, for each share purchased, the
note holder also received a warrant to purchase one share of the Company's
Common Stock at $.20 per share exercisable at any time prior to June 30, 2004.
During the years ended June 30, 2003 and 2002, 2,315,000 and 674,431 shares
respectively, were issued for the payment of the quarterly interest. A total of
2,315,000 and 303,831 warrants were also issued during the years ended June 30,
2003 and 2002, respectively. The estimated fair value of the
F-23
USA Technologies Inc.
Notes to Consolidated Financial Statements
11. Senior Notes and Debenture (continued)
warrants issued of approximately $279,000 and $43,000 was determined using a
Black-Scholes method and has been recorded as interest expense.
The Company executed a Securities Purchase Agreement with an investment company
for the purchase of $325,000 (as amended) of a 9.75% Convertible Debenture (the
Debenture) due August 2004. Interest on the Debenture was payable monthly in
arrears and the Debenture was convertible at a price equal to the lesser of
$1.00 or 72% (80% prior to June 18, 2002) of the lowest closing bid price of the
Company's Common Stock during the 20 day period prior to the conversion. The
Company reserved the right to prepay the portion of the Debenture that the
investment company elected to convert, plus interest, at 150% of such amount, if
the price of Common Stock is less than $0.40 per share. At the time of
conversion, the Company issued to the Debenture holder warrants to purchase an
amount of Common Stock equal to ten times the number of shares issued upon the
conversion of the Debenture. The warrants are exercisable at the same conversion
price as the Debenture. Due to the significance of the beneficial conversion
feature associated with this instrument, the entire $325,000 of proceeds was
allocated to the warrants and has been allocated to equity. This debt discount
is being amortized to interest expense over the term of the Debenture. During
the fiscal years ending June 30, 2003 and 2002, the investment company converted
$243,000 and $82,000, respectively of the Debenture, resulting in the issuance
of 2,467,225 and 333,678 shares, respectively of Common Stock. The investment
company also exercised warrants resulting in the issuance of 7,206,893 and
3,336,780 shares of Common Stock and generating net cash proceeds of $630,000
and $804,250 during the years ended June 30, 2003 and 2002, respectively. At
June 30, 2002, $280,000 of deposits represented funds advanced to the Company by
the investment company for future warrant exercises. Such funds were utilized
for this purpose during fiscal year 2003.
12. Series A 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, 2003 and 2002 amounted to
$5,913,107 and $5,175,571, respectively and $6,306,476 at September 30, 2003.
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,
2003 and 2002, certain holders of the Preferred Stock converted 4,790 and 26,002
shares, respectively, into 4,790 and 26,002 shares of Common Stock,
respectively. Certain of these shareholders also converted cumulative preferred
dividends of $56,050 and $268,140, respectively, into 5,605 and 26,814 shares of
Common Stock during the years ended June 30, 2003 and 2002, respectively. During
the three months ended September 30, 2003, there were no conversions of
preferred stock or cumulative preferred dividends. 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
F-24
USA Technologies Inc.
Notes to Consolidated Financial Statements
12. Series A Preferred Stock (continued)
of all accrued and unpaid dividends. No such redemption has occurred as of June
30, 2003 or September 30, 2003. 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.
13. Common Stock Transactions
During the years ended June 30, 2003 and 2002, the Company's Board of Directors
authorized various Common Stock private placement offerings as follows:
o 2003-A Private Placement Offering to sell up to 15,000,000 restricted
shares of Common Stock (subsequently amended to 86,000,000 shares in
August 2003). Through June 30, 2003, the Company issued 78,636,082
shares of its Common Stock generating net proceeds of $7,792,133
($7,863,082 less offering costs of $71,475). Included in this amount are
subscriptions receivable totaling $937,830. Such subscriptions are
reflected in current assets in the 2003 balance sheet as such amounts
were collected by the Company as of September 12, 2003. The Company also
issued 1,854,390 shares from this offering for services rendered by
consultants in the amount of $397,889. Subsequent to June 30, 2003 and
through September 12, 2003, the Company issued an additional 2,228,390
shares of Common Stock in this offering generating gross cash proceeds
of $222,839.
o Five private placement offerings during fiscal year 2003 to individual
investors aggregating 10,571,429 shares of Common Stock generating net
proceeds of $957,925 as follows:
i.) 2,500,000 million shares to an accredited investor at
$0.10 per share generating proceeds of $250,000;
ii.) 1,000,000 shares to an accredited investor at $0.10 per
share generating proceeds of $100,000, plus warrants to
purchase up to 4,000,000 shares of the Company's Common
Stock at $0.10 per share at any time through November
28, 2003;
iii.) 1,500,000 shares to an accredited investor at $0.10 per
share generating proceeds of $50,000, plus warrants to
purchase 750,000 shares of Common Stock at $0.15 per
share through October 2007. This investor has also
agreed to purchase an additional 1,500,000 shares of
Common Stock at $0.10 per share and receive an
additional 750,000 warrants upon the effectiveness of a
registration statement to register the initial 1,500,000
million shares purchased;
F-25
USA Technologies Inc.
Notes to Consolidated Financial Statements
13. Common Stock Transactions (continued)
iv.) 3,571,429 shares to an accredited investor at $.07 per
share generating net proceeds of $244,925 ($250,000
less offering costs of $5075). This investor also
received a warrant to purchase 7,142,858 shares of the
Company's Common Stock at $.07 per share at any time
before October 26, 2007, and an additional warrant to
purchase 5,000,000 shares at $0.10 per share expiring
October 2003; and
v.) 2,000,000 shares to an accredited investor at $0.12 per
share generating proceeds of $240,000. The investor
also received a warrant to purchase 2,000,000 shares of
Common Stock at $.10 per share through May 31, 2003. No
warrants were exercised during fiscal year 2003.
o 2001-C Private Placement Offering for the issuance of 4,500,000 shares
of Common Stock at $.50 per share. For each share purchased the holder
received a warrant to purchase one share of Common Stock at $.50 per
share expiring in May 2002. During fiscal year 2002, the Company issued
4,046,684 shares of Common Stock generating net proceeds of $1,992,852
($2,077,124 less offering costs of $84,272).
o 2001-B Private Placement Offering for the issuance of 8,400,000 shares
of Common Stock at $.60 per share. For each dollar invested in this
offering the Company also issued a Common Stock Warrant to the investor
at $.50 per share (subsequently reduced to $.10 if the shareholder
invested in the 2001 D Senior Note Offering). Through June 30, 2001,
the Company issued 2,669,400 shares of Common Stock generating net
proceeds of $1,546,885 ($1,601,640 less offering costs of $54,755).
During fiscal year 2002, the Company issued an additional 4,726,040
shares of Common Stock generating net proceeds of $2,754,371
($3,014,043 less offering costs of $259,672).
Participants in the 2001-B offering exercised 3,375,761 and 1,684,504 warrants
during the years ending June 30, 2003 and 2002, respectively, generating
proceeds of $337,577 and $168,451, respectively. Participants in the 2001-C
offering exercised 284,934 and 122,358 warrants at $0.10 per share during the
years ending June 30, 2003 and 2002, respectively, generating proceeds of
$28,494 and $12,236, respectively.
The Company also issued 2,855,042 and 2,784,134 shares of Common Stock for
professional services during the years ended June 30, 2003 and 2002,
respectively. Such shares were valued based on the fair value of the Company's
Common Stock on the date the shares were granted. During the year ended June 30,
2003 and 2002, the Company also issued 1,040,000 and 2,340,000 shares of Common
Stock to certain employees and officers for services. These shares were fully
vested on the date of grant; accordingly, the Company recorded compensation
expense of $166,400 and $981,000 during the years ended June 30, 2003 and 2002,
respectively, based on the fair value of the Company's Common Stock on the date
the shares were granted.
F-26
USA Technologies Inc.
Notes to Consolidated Financial Statements
13. Common Stock Transactions (continued)
During October 2002, the Company's Board of Directors authorized granting to all
of the holders of the 12% Convertible Senior Notes (hereinafter referred to as
Investors), 10,306,026 Common Stock warrants to purchase the Company's Common
Stock at $0.10 per share. The total number of the warrants issued was equal to
75% of the dollar amount of the Senior Notes held by the then Investors. These
warrants were exercisable through November 30, 2002 (subsequently extended
through October 31, 2003). Upon the exercise of the warrant by the Investor, the
Company granted an identical number of warrants to that Investor with an
exercise price of $0.10 per share exercisable through October 31, 2003. Through
June 30, 2003, the Investors exercised a total of 7,127,508 Common Stock
warrants, generating gross proceeds to the Company of $712,751. At June 30,
2003, an additional 7,127,508 warrants were granted upon the exercise of the
initial warrant to these Investors. Of the additional warrants, 6,898,296 were
exercised as of June 30, 2003, generating gross proceeds to the Company of
$689,830.
During the year ended June 30, 2003, the Company's shareholders approved the
increase in the Company's authorized Common Stock on several occasions. At June
30, 2003, the Company's shareholders approved an increase in the authorized
shares of Common Stock to 400,000,000.
A summary of Common Stock Warrant activity for the years ended June 30, 2003 and
2002 and three months ending September 30, 2003 is as follows:
Warrants
-------------------
Outstanding at June 30, 2001 8,233,028
Issued 22,602,593
Exercised (1,833,529)
Cancelled (22,162,272)
-------------------
Outstanding at June 30, 2002 6,839,820
Issued 76,286,145
Exercised (18,894,241)
Cancelled (2,104,000)
-------------------
Outstanding at June 30, 2003 62,127,724
Issued (unaudited) 577,457
Exercised (unaudited) (640,258)
Cancelled (unaudited) (14,811,715)
-------------------
Outstanding at September 30, 2003 (Unaudited) 47,253,208
===================
F-27
USA Technologies Inc.
Notes to Consolidated Financial Statements
13. Common Stock Transactions (continued)
The exercise price and exercise dates of outstanding and exercisable warrants
outstanding at June 30, 2003 are as follows:
Outstanding and
Exercisable Exercise Price Expiration Date
---------------------------------------------------------------------
5,796,973 $ 0.10 September 30, 2003
7,142,858 0.07 October 26, 2007
7,142,858 0.07 To Be Determined
5,000,000 0.10 To Be Determined
4,000,000 0.10 November 28, 2003
2,480,150 0.10 April 18, 2005
3,472,220 0.10 April 24, 2005
11,513,006 0.10 June 2, 2005
1,500,000 0.15 November 15, 2007
2,618,831 0.20 June 30, 2004
150,000 0.70 August 2, 2003
650,000 0.70 November 23, 2003
1,200,000 0.91 August 29, 2010
377,927 1.00 April 24, 2011
2,901 1.03 April 30, 2011
75,000 1.25 June 30, 2006
5,000 4.00 August 17, 2003
9,000,000 0.10 To Be Determined
--------------------
62,127,724
====================
During the years ended June 30, 2003 and 2002, the Company's Board of Directors
amended the terms of certain outstanding Common Stock Warrants whereby the
exercise price was reduced and the expiration dates were extended. The above
table reflects the status of the warrants as of June 30, 2003. Certain of the
warrant expiration dates will be determined upon the registration of the shares
of Common Stock underlying such warrants.
The exercise price and exercise dates of outstanding and exercisable warrants
outstanding at September 30, 2003 are as follows (Unaudited):
Outstanding and
Exercisable Exercise Price Expiration Date
---------------------------------------------------------------------
650,000 $ 0.07 November 23, 2003
3,196,288 0.20 June 30, 2004
75,000 1.25 June 30, 2006
1,200,000 0.906 August 29, 2010
377,927 1.00 April 24, 2011
2,901 1.03 April 30, 2011
7,142,858 0.07 To Be Determined
5,000,000 0.10 To Be Determined
3,500,000 0.10 November 28, 2003
2,480,150 0.1008 April 18, 2005
3,472,220 0.1008 April 24, 2005
11,513,006 0.1008 June 2, 2005
7,142,858 0.07 To Be Determined
1,500,000 0.067 November 15, 2007
--------------------
47,253,208
====================
14. Stock Options
The Company's Board of Directors has granted options to employees and its Board
members to purchase shares of Common Stock at or above fair market value. The
option term and vesting schedule are established by the contract that granted
the option.
The following table summarizes all stock option activity during the years ended
June 30, 2003 and 2002 and for the three months ended September 30, 2003:
Common Shares Under Exercise Price Per
Options Granted Share
-----------------------------------------------
Balance at June 30, 2001 4,886,667 $ 0.50-$5.00
Granted 4,505,318 $ 0.165-$.70
Canceled or expired (4,101,500) $ 0.40-$5.00
-----------------------------------------------
Balance at June 30, 2002 5,290,485 $ 0.165-$5.00
Canceled or expired (2,383,000) $ 0.40-$5.00
-----------------------------------------------
Balance at June 30, 2003 2,907,485 $ 0.165-$2.50
Canceled or expired (Unaudited) (261,000) $ 0.70-$2.50
-----------------------------------------------
Balance at September 30, 2003
(Unaudited) 2,646,485 $ 0.165-$2.50
===============================================
F-28
USA Technologies Inc.
Notes to Consolidated Financial Statements
14. Stock Options (continued)
The price range of the outstanding Common Stock options at June 30, 2003 is as
follows:
Weighted Average
Option Options Outstanding and Remaining Contract Life
Exercise Prices Exercisable (Yrs.)
--------------------------------------------------------------------------------
$ .165 2,475,318 3.87
$ .70 150,000 0.09
$ 1.00 125,000 2.85
$ 1.50 42,000 0.10
$ 2.00 41,167 1.25
$ 2.50 74,000 0.04
---------------------------
2,907,485
===========================
The price range of the outstanding Common Stock options at September 30, 2003 is
as follows (Unaudited):
Weighted Average
Option Options Outstanding and Remaining Contract Life
Exercise Prices Exercisable (Yrs.)
--------------------------------------------------------------------------------
$ .165 2,475,318 3.6192
$ 1.00 125,000 2.60
$ 1.50 5,000 0.20
$ 2.00 41,167 1.00
---------------------------
2,646,485
===========================
As of June 30, 2003, the Company has reserved shares of Common Stock for the
following:
Exercise of Common Stock options 2,907,485
Exercise of Common Stock warrants 62,127,724
Conversions of Preferred Stock and cumulative Preferred Stock dividends 1,115,803
Conversions of Senior Notes 53,295,128
------------
119,446,140
============
As of September 30, 2003, the Company has reserved shares of Common Stock for
the following (Unaudited):
Exercise of Common Stock options 2,646,485
Exercise of Common Stock warrants 47,253,208
Conversions of Preferred Stock and cumulative Preferred Stock dividends 1,155,140
Conversions of Senior Notes 52,251,733
------------
103,306,566
============
15. Retirement Plan
The Company's Savings and Retirement Plan (the Plan) allows employees who have
attained the age of 21 and have completed six months of service to make
voluntary contributions up to a maximum of 15% of their annual compensation, as
defined in the Plan. Through June 30, 2000, the Plan did not provide for any
matching contribution by the Company, however, starting at the beginning of
fiscal year 2001, the Company has amended the Plan to include a Company matching
contribution up to 10% of an employee's compensation. Effective January 1, 2003,
the matching contribution changed to a dollar-for-dollar matching contribution
on salary deferrals up to 3% of the employee's compensation then a fifty-cents
on the dollar matching contribution on salary deferrals from 3% to 5%. The
Company contribution for the years ended June 30, 2003 and 2002 was
approximately $67,000 and $48,000, respectively and for the three months ended
September 30, 2003 the Company contribution was approximately $17,000
(Unaudited).
F-29
USA Technologies Inc.
Notes to Consolidated Financial Statements
16. Contingencies
In the normal course of business, various legal actions and claims 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.
17. Subsequent Events
On July 11, 2003, the Company acquired substantially all of the assets of
Bayview Technology Group, LLC (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 (unaudited) to settle an obligation of
Bayview. The definitive agreement also provides for the Company to assume
certain obligations under a royalty agreement expiring May 31, 2006. 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 acquired energy control equipment reduces energy consumption in vending
machines, glass front coolers, laser printers, monitors and other office
peripherals throughout the United States. As a result of the acquisition, the
Company believes it will be a leading provider of end-to-end networked solutions
that includes wireless and internet connections, cashless transaction and
security/ID capability and interactive media functionality, and remote inventory
and auditing control and energy cost reductions and environmental emissions
reductions. The Company also expects to reduce costs through economies of scale.
The acquisition cost of Bayview was $10,030,894 (unaudited), which principally
was comprised of the issuance of 20,000,000 shares of restricted Common Stock
valued at $9,200,000 (unaudited) and a cash payment of $631,247 (unaudited). 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 (unaudited).
The following table summarizes the fair values of the assets acquired and
liabilities assumed at the date of acquisition (Unaudited):
Current assets $ 7,628
Property and equipment 244,704
Intangible assets 9,449,000
Goodwill 329,562
------------
Total assets acquired $ 10,030,894
==================
Of the $9,449,000 (Unaudited) of acquired intangible assets, $7,424,000
(Unaudited) was assigned to patents that are subject to amortization over a
10-year period, $1,011,000 (Unaudited) was assigned to non-compete agreements
that are subject to amortization over a 5-year period and $1,014,000 (Unaudited)
was assigned to trademarks and trade names that are not subject to amortization.
The acquisition was accounted for using the purchase method and, accordingly,
the results of operations of Bayview have been included in the accompanying
consolidated statements of operations since the date of acquisition. Results of
operations of the Company for the three months ended September 30, 2003 would
not have been significantly different than reported had the acquisition taken
place July 1, 2003. Pro-forma combined results for the three months ended
September 30, 2002 would have been as follows had the acquisition taken lace
July 1, 2002 - revenues of $2,431,270 (unaudited); net loss of $3,511,604
(unaudited); loss applicable to common shares of $3,908,566 (Unaudited); loss
per common share (basic and diluted) of $0.04 (Unaudited).
F-30
USA Technologies Inc.
Notes to Consolidated Financial Statements
17. Subsequent Events (continued)
Other Subsequent Events
On September 26, 2003, the Company completed a sale of 20,000,000 shares of
Common Stock to accredited investors at $0.25 per share generating gross
proceeds of $5,000,000. Of these shares, Wellington Management Company, LLP
purchased 18,000,000 on behalf of their clients, and the balance of the shares
were purchased by other investors.
During September 2003, the Company issued 500,000 shares of Common Stock to an
existing investor in connection with provision from a fiscal year 2003 equity
transaction. The Company also reduced the exercise price on 750,000 Common Stock
Warrants previously issued to this investor from $0.10 per share to $0.0665 per
share. Such shares were viewed as an adjustment to the original shares issued in
connection with the original private placement offering.
On September 16, 2003 and September 24, 2003, the Company sold an aggregate of
700,000 shares of its investment in Jubilee realizing net cash proceeds of
approximately $395,000.
During September 2003, the Company's Board of Directors authorized the
establishment of the 2003-A Stock Compensation Plan whereby 500,000 shares of
the Company's Common Stock shall be available for future issuance to Company
employees, directors or consultants as compensation.
During the period from September 12, 2003 through September 30, 2003, an
additional $660,000 of the 2000 Senior Notes and $430,390 of the 2001 Senior
Notes have been exchanged for the 2006 and 2007 Senior Notes, respectively. For
the 2000 Senior Noteholders who agreed to exchange their notes, such amounts
have been reflected as long-term in the accompanying June 30, 2003 consolidated
balance sheet.
F-31
USA Technologies Inc.
Notes to Consolidated Financial Statements
17. Subsequent Events (continued)
Other Subsequent Events (continued)
The following condensed consolidated pro forma balance sheet reflects the
effects of these subsequent events as if they have occurred as of June 30, 2003:
As Reported Proforma
Condensed Consolidated Proforma Balance Sheet June 30, 2003 Adjustments June 30, 2003
-----------------------------------------------------
Total current assets $ 5,375,983 $ 4,426,000 $ 9,801,983
Property and equipment 943,784 237,000 1,180,784
Intangibles, including goodwill 11,535,740 9,805,000 21,340,740
Other assets 37,174 -- 37,174
-----------------------------------------------------
Total assets $17,892,681 $14,468,000 $32,360,681
=====================================================
Current liabilities $ 6,215,108 $ 190,000 $ 6,405,108
Long-term liabilities 7,985,490 -- 7,985,490
Total shareholders' equity 3,692,083 14,278,000 17,970,083
-----------------------------------------------------
Total liabilities and shareholders' equity $17,892,681 $14,468,000 $32,360,681
=====================================================
The adjustment column reflects the recording of the operating assets of Bayview.
The purchase price is comprised of the issuance of 20,000,000 shares of the
Company's Common Stock valued at $9,200,000, a cash payment of $631,000, the
assumption of $40,000 of liabilities and the payment of acquisition related
expenses of $228,000. The adjustment column also reflects the issuance of
20,000,000 shares of the Company's Common Stock at $0.25 per share generating
gross proceeds of $5,000,000.
18. Subsequent Events (Unaudited)
Pursuant to the registration rights agreement with La Jolla, the
Company agreed to maintain an effective registration statement for the resale of
the 2,252,683 shares and the 17,465,370 shares underlying the unexercised
warrants held by La Jolla on the date of this prospectus at all times from and
after the date of issuance of the shares or warrants, as the case may be. These
shares and warrants were issued by the Company to La Jolla in April, May and
June 2003. From and after the date of issuance of these securities and until the
date of this prospectus there was no effective registration statement covering
these shares. In October 2003, the Company received a letter from La Jolla
stating that the Company had failed to maintain an effective registration
statement for these shares and demanding that the Company cause the registration
statement to be declared effective as soon as possible. The registration rights
agreement did not specify any penalties for failure to maintain an effective
registration statement. Through the date of this prospectus, La Jolla has not
asserted any claim relating to our failure to register the shares.
The Company's registration rights agreement with Kazi Management VI,
Inc. requires the Company to use its best efforts to register for resale the
3,571,429 shares and the 19,285,716 shares underlying the warrants purchased by
Kazi in October 2002 within 90 days following purchase. In addition, the
subscription agreement with Kazi provides that if the shares have not been
registered for resale within such 90 day period, the Company shall deliver
additional shares to Kazi at the rate of 3% per month (i.e., approximately
686,000 shares per month). In September 2003, the Company received a letter from
counsel for Kazi requesting delivery of the penalty shares accrued through the
date of the letter. By letter dated October 16, 2003 Lurio & Associates, P.C.,
counsel for the Company, advised Kazi that the penalty provisions set forth in
the subscription agreement are unenforceable under Pennsylvania law and no
penalty shares are due to Kazi. Counsel's letter stated that the penalty
provision is unenforceable because the provision does not provide nor was it
ever intended to provide a reasonable estimate of the damages, if any, sustained
by Kazi as a result of any such delay, and serves no purpose other than to
punish the Company for any such delay. The Company believes that because the
Company has used its best efforts to have the registration statement covering
the Kazi shares to be declared effective as required in the registration rights
agreement, the Company does not have any liability to Kazi as it is not probable
that such shares will be delivered to Kazi.
The Company's subscription agreements with each of Wellington
Management Company, LLP, and three other investors executed in September 2003 in
connection with the purchase of a total of 20,010,000 shares at $.25 per share
requires the Company to register these shares for resale within 90 days of
purchase (i.e., before December 22, 2003). If the Company fails to do so, the
Company has agreed to pay each investor a cash penalty of three percent of the
purchase price of the shares purchased by each investor, or an aggregate of
approximately $150,000. The Company believes that it will have the registration
statement covering these shares declared effective by this date, and there would
be no payments due to the investors.
F-32
Table of Contents
Independent Auditors' Report. F-33
Balance Sheets as of December 31, 2002 and 2001. F-34
Statements of Operations for year ended December 31, 2002
(Successor), period from June 1, 2001 (Commencement of Operations)
through December 31, 2001 (Successor) and period from January 1,
2001 through May 31, 2001 (Predecessor) F-35
Statements of Members' Equity/Stockholders' Equity for year ended
December 31, 2002 (Successor), period from June 1, 2001
(Commencement of Operations) through December 31, 2001 (Successor),
and period from January 1, 2001 through May 31, 2001 (Predecessor). F-36
Statements of Cash Flows for year ended December 31, 2002
(Successor), period from June 1, 2001 (Commencement of Operations)
through December 31, 2001 (Successor) and period from January 1,
2001 through May 31, 2001 (Predecessor). F-37
Summary of Accounting Policies. F-38
Notes to Financial Statements. F-44
Unaudited Financial Statements:
Balance Sheet as of June 30, 2003 (Unaudited). F-51
Statements of Operations for the six months ended June 30, 2003
and 2002 (Unaudited). F-52
Statements of Member's Equity (Deficit) for the six months
ended June 30, 2003 and 2002 (Unaudited). F-53
Statements of Cash Flows for the six months ended June 30, 2003
and 2002 (Unaudited). F-54
Summary of Significant Accounting Policies for the six months
ended June 30, 2003 and 2002 (Unaudited). F-55
Selected Notes to Financial Statements for the six months
ended June 30, 2003 and 2002 (Unaudited). F-58
(b) Pro Forma Financial Information (Unaudited):
Pro Forma Consolidated Balance Sheet as of June 30, 2003 (Unaudited). F-63
Pro Forma Consolidated Statement of Operations for the year ended
June 30, 2003 (Unaudited). F-64
Pro Forma Consolidated Statement of Operations for the year ended
June 30, 2002 (Unaudited). F-65
Notes to Pro Forma Consolidated Financial Statements (Unaudited) F-66
INDEPENDENT AUDITORS' REPORT
Members
Bayview Technology Group, LLC
Denver, Colorado
We have audited the accompanying balance sheets of Bayview Technology Group, LLC
(the "Company" and "Successor") as of December 31, 2002 and 2001, and the
related statements of operations, members' equity and cash flows for the year
ended December 31, 2002 and for the period from June 1, 2001 (commencement of
operations) through December 31, 2001, and the statements of operations,
stockholders' equity and cash flows of Bayview Technology Group, Inc.
("Predecessor") as described in Summary of Accounting Policies - Organization,
Description of Business and Basis of Presentation for the period from January 1,
2001 to May 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 Successor financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2002 and 2001, and the results of its operations and cash flows for
the year ended December 31, 2002 and for the period from June 1, 2001
(commencement of operations) through December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
Further, in our opinion, the Predecessor financial statements referred to above
present fairly, in all material respects the results of operations and cash
flows of the Predecessor for the period January 1, 2001 to May 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Summary of Accounting Policies - Organization, Description of
Business and Basis of Presentation, the Successor purchased certain assets and
assumed certain liabilities of the Predecessor on May 31, 2001, in a business
combination accounted for as a purchase. As a result, the financial statements
of the Sucessor are presented on a new basis of accounting from the financial
statements of Predecessor and, therefore, are not comparable.
As discussed in Summary of Accounting Policies, the Company changed its method
of accounting for goodwill in 2002.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As more fully described in the Summary of
Accounting Policies - Going Concern and Management's Plans, the Company sold
substantially all of its revenue producing assets in 2003 and is dependent on
funding from its members for its continuing operations. These conditions give
rise to substantial doubt about the Company's ability to continue as a going
concern. Management's Plans are also described in the Summary of Accounting
Policies, Going Concern and Management's Plans. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Anton Collins Mitchell LLP
Denver, Colorado
September 4, 2003
F-33
BAYVIEW TECHNOLOGY GROUP, LLC
BALANCE SHEETS
December 31
2002 2001
---------------------------------------
Assets (Notes 3 and 4)
Current Assets:
Cash $ 54,604 $ 3,242
Accounts receivable (Note 10) 858,397 970,478
Inventories 317,202 437,840
Prepaid expenses and other current assets 37,138 13,468
---------------------------------------
Total current assets 1,267,341 1,425,028
Goodwill (Note 1) 1,820,758 1,820,758
Deposits 27,577 42,672
Property and equipment, net (Note 2 and 13) 253,748 229,398
Patents and trademarks, net of $79,779 and $29,167 of accumulated
amortization (Notes 1 and 13) 701,758 720,833
---------------------------------------
Total assets $ 4,071,182 $ 4,238,689
=======================================
Liabilities and Members' Equity
Current Liabilities:
Accounts payable and accrued expenses (Notes 4 and 8) $ 458,473 $ 483,447
Line of credit (Note 3) - 320,578
Line of credit - related party (Note 3) 245,000 -
Commissions and royalties payable (Note 7) 224,164 231,779
Current maturities of long-term debt - related party (Note 4) 591,568 553,983
---------------------------------------
Total current liabilities 1,519,205 1,589,787
Long-Term Debt - related party, less current maturities (Note 4) 621,257 1,216,017
---------------------------------------
Total liabilities 2,140,462 2,805,804
Commitments and Contingencies (Notes 5, 7, 8 and 11)
Members' Equity (Note 6 and 13) 1,930,720 1,432,885
---------------------------------------
Total liabilities and members' equity $ 4,071,182 $ 4,238,689
=======================================
See accompanying independent auditors' report, summary of accounting policies
and notes to financial statements.
F-34
BAYVIEW TECHNOLOGY GROUP, LLC
STATEMENTS OF OPERATIONS
Period from
June 1, 2001 Period from
(Commencement of January 1, 2001
Year Ended Operations) through through
December 31, 2002 December 31, 2001 May 31, 2001
(Successor) (Successor) (Predecessor)
--------------------------------------------------------
Revenues (Note 10) $ 5,793,029 $ 2,364,787 $ 785,836
Cost of Sales (Note 8) 2,500,803 1,288,412 223,017
--------------------------------------------------------
Gross Profit 3,292,226 1,076,375 562,819
Operating Expenses:
Selling (Note 7) 1,228,465 456,512 170,596
General and administrative 1,323,979 709,652 336,821
Depreciation and amortization 118,407 116,919 6,900
--------------------------------------------------------
Total operating expenses 2,670,851 1,283,083 514,317
--------------------------------------------------------
Income (loss) from operations 621,375 (206,708) 48,502
Other (expense):
Interest expense (123,540) (73,685) (6,911)
--------------------------------------------------------
Net income (loss) $ 497,835 $ (280,393) $ 41,591
========================================================
See accompanying independent auditors' report, summary of accounting policies
and notes to financial statements.
F-35
BAYVIEW TECHNOLOGY GROUP, LLC
STATEMENTS OF MEMBERS' EQUITY/STOCKHOLDER'S EQUITY
PERIOD FROM JANUARY 1, 2001 THROUGH MAY 31, 2001 (PREDECESSOR)
Common Stock
---------------------
Retained Stockholders'
Shares Amount Earnings Equity
---------------------------------------------------
Balance, January 1, 2001 250,000 $ 25,000 $ 93,602 $ 118,602
Net income for the period - - 41,591 41,591
---------------------------------------------------
Balance, May 31, 2001 250,000 $ 25,000 $ 135,193 $ 160,193
===================================================
PERIOD FROM JUNE 1, 2001 (COMMENCEMENT OF OPERATIONS) THROUGH DECEMBER 31, 2002
(SUCCESSOR)
Total
Members'
Equity
--------------
Balance, June 1, 2001 (Commencement of Operations) $ -
Cash received for 60,000 membership units issued
to founders (Note 6) 1,000
Issuance of 35,000 membership units, net of issuance
costs of $37,722 (Note 6) 1,712,278
Net loss for the period (280,393)
--------------
Balance, December 31, 2001 $ 1,432,885
Net income for the period 497,835
--------------
Balance, December 31, 2002 $ 1,930,720
==============
See accompanying independent auditors' report, summary of accounting policies
and notes to financial statements.
F-36
BAYVIEW TECHNOLOGY GROUP, LLC
STATEMENTS OF CASH FLOWS
Period from
June 1, 2001 Period from
(Commencement of January 1, 2001
Year Ended Operations) through through
December 31, 2002 December 31, 2001 May 31, 2001
(Successor) (Successor) (Predecessor)
--------------------------------------------------------
Cash flows from Operating Activities
Net income (loss) for the period $ 497,835 $ (280,393) $ 41,591
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 118,407 116,919 6,900
Decrease (increase) in current assets:
Accounts receivable 112,081 (954,592) 166,534
Inventories 120,638 (247,134) (25,463)
Prepaid expenses and other current assets (23,670) (13,468) (3,948)
Increase (decrease) in current liabilities:
Accounts payable and accrued expenses (24,974) 347,000 64,173
Commissions and royalties payable (7,615) 231,779 (47,875)
-------------------------------------------------------
Net cash provided by (used in) operating activities 792,702 (799,889) 201,912
Cash flows from Investing Activities
Purchases of property and equipment (92,145) (168,478) (812)
Acquisition of the assets of
Bayview Technology Group, Inc (Note 2) - (1,023,959) -
Investment in patents and trademarks (31,537) - -
Other deposits 15,095 (38,288) -
-------------------------------------------------------
Net cash used in investing activities (108,587) (1,230,725) (812)
Cash flows from Financing Activities
Borrowings of bank revolving line of credit 795,000 520,578 -
Payments on bank revolving line of credit (1,115,578) (200,000) (148,387)
Proceeds from issuance of membership units - 1,751,000 -
Payment of issuance costs - (37,722) -
Payments on long-term debt (557,175) - (79,657)
Borrowings on line of credit - related party 470,000 - -
Payments on line of credit - related party (225,000) - -
-------------------------------------------------------
Net cash provided by (used in) financing activities (632,753) 2,033,856 (228,044)
-------------------------------------------------------
Net (decrease) increase in cash 51,362 3,242 (26,944)
Cash, beginning of period 3,242 - 26,944
-------------------------------------------------------
Cash, end of period $ 54,604 $ 3,242 $ -
=======================================================
See accompanying independent auditors' report, summary of accounting policies
and notes to financial statements.
F-37
BAYVIEW TECHNOLOGY GROUP, LLC
SUMMARY OF ACCOUNTING POLICIES
ORGANIZATION, DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Bayview Technology Group LLC (the "Company" or "Successor") was organized as a
Limited Liability Company ("LLC") under the laws of the State of Colorado in
December 2000. In July 2003, The Company changed its name to BT LLC. The Company
acquired Bayview Technology Group, Inc. (the "Predecessor," subsequently
changing its name to Bayview Ventures, Inc.) on May 31, 2001 (effectively June
1, 2001) and began operations on June 1, 2001. The Company is engaged in the
sale and distribution of energy saving devices, more particularly, plug load
controllers. The accompanying financial statements reflect the results of
operations and cash flows of the Predecessor for the period January 1, 2001
through May 31, 2001.
GOING CONCERN AND MANAGEMENT'S PLANS
As more fully described in Note 13, the Company sold substantially all of its
long-lived assets in July 2003 and does not currently anticipate continuing its
operations. Based on projections, management currently estimates that the
Company will not have the ability to meet all of its obligations as they come
due. The Company is attempting to raise additional funds from its members to
meet this budgeted shortfall but has not received a firm commitment from any of
its members to provide the necessary funding. These conditions give rise to
substantial doubt about the Company's ability to continue as a going concern. In
response to this condition, management is actively trying to secure the
necessary additional funds from its members, reduce or eliminate all
non-essential costs, and negotiate extensions and reductions in the Company's
obligations with various creditors. No assurances can be provided that the
Company will be successful in executing its plans.
The financial statements do not include any adjustments relating to the
recoverability or classification of asset carrying amounts or the amounts and
classification of liabilities that may result should the Company be unable to
continue as a going concern.
INVENTORIES
Inventories are stated at the lower of cost (using the first in, first out
method) or market, and consist primarily of saleable finished goods including
electronic components and devices.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Provisions for depreciation are
computed using the straight-line method over estimated useful lives ranging from
3 to 7 years. Maintenance and repairs are charged to expense as incurred.
F-38
INCOME TAXES
There is no provision for income taxes because, as a limited liability company,
the Company's taxable income is passed through to its members who pay income
taxes on their proportionate share of the taxable income.
STATEMENTS OF CASH FLOWS
The Company considers all short-term investments purchased with maturity of
three months or less and money market accounts to be cash equivalents.
PATENTS AND TRADEMARKS
Patents and trademarks were recorded at cost less accumulated amortization, and
were amortized using the straight-line method over their estimated life of
fifteen years.
Amortization expense on patents and trademarks was $50,612 for the year ended
December 31, 2002 and $29,167 for the period from June 1, 2001 (Commencement of
Operations) through December 31, 2001.
GOODWILL
Goodwill represents the excess of the cost over the fair value of net assets
acquired at the date of acquisition (Note 1) and was being amortized on the
straight-line method over fifteen years through December 31, 2001. (See Summary
of Account Policies - Recent Accounting Pronouncements for treatment of goodwill
as of January 1, 2002). Goodwill amortization was $73,672 for the period ended
December 31, 2001.
F-39
LONG-LIVED ASSETS AND LONG-LIVED ASSETS FOR SALE
Long-lived assets, including property and equipment and patents and trademarks
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. If the expected future cash
flow from the use of the assets and its eventual disposition is less than the
carrying amount of the assets, an impairment loss is recognized and measured
using the asset's fair value.
In the period when the plan of sale criteria of Statement of Financial
Accounting Standards ("SFAS") No. 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.
USE OF ESTIMATES
The preparation of the Company's financial statements, in conformity with
accounting principles generally accepted in the United States of America,
requires the Company's management to make estimates and assumptions that effect
the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of credit
risk consist of cash and cash equivalent balances in excess of the insurance
provided by governmental insurance authorities. The Company's cash and cash
equivalents are placed with financial institutions and are primarily in demand
deposit accounts.
Concentrations of credit risk with respect to accounts receivable are associated
with many customers dispersed across geographic areas. The Company reviews a
customer's credit history before extending credit and establishes an allowance
for doubtful accounts based upon the credit risk of specific customers,
historical trends and other information. No allowance for doubtful accounts was
established at December 31, 2002 and 2001.
F-40
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs amounted
to $54,525 for the year ended December 31, 2002 and $13,080 for the period from
June 1, 2001 (Commencement of Operations) through December 31, 2001.
REVENUE RECOGNITION
The Company recognizes revenue when its products are shipped to its customers,
at which time title passes to the customer and the risks and rewards of
ownership are transferred. Revenue from certain sales programs with utility
organizations are not recognized until the product has been installed at
designated locations and the Company has no remaining performance obligation.
RESEARCH AND DEVELOPMENT
Research and development expenditures are expensed in the period in which
incurred. For the period from June 1, 2001 (Commencement of Operations) through
December 31, 2001, research and development expenses were $9,432 and for the
year ended December 31, 2002 they were $32,676.
STOCK OPTION PLAN
The Company has a stock-based employee compensation plan, which is described
more fully in Note 6. The Company accounts for this plan under the recognition
and measurement principles of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. No
stock-based employee compensation is reflected in the Company's net income
(loss), as all options granted under this plan had an exercise price equal to
the market value of the underlying common stock on the date of grant. Had the
Company employed the fair value method of accounting prescribed by SFAS No. 123,
Accounting for Stock-Based Compensation, the pro forma net income (loss) of the
Company would not be materially different than the reported net income (loss)
for any period presented.
F-41
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (the "FASB") finalized
SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 requires the use of the purchase method of
accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS No. 141
also requires that companies recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria and, upon
adoption of SFAS No. 142, that companies reclassify the carrying amounts of
intangible assets and goodwill based on the criteria in SFAS No. 141. SFAS No.
142 requires, among other things, that companies no longer amortize goodwill,
but instead test goodwill for impairment at least annually. In addition, SFAS
No. 142 requires that companies identify reporting units for the purposes of
assessing potential future impairments of goodwill, reassess the useful lives of
other existing recognized intangible assets, and cease amortization of
intangible assets with an indefinite useful life. An intangible asset with an
indefinite useful life should be tested for impairment in accordance with the
guidance in SFAS No. 142.
Effective January 1, 2002 the Company adopted SFAS No. 142. As of December 31,
2001 the Company had $1,820,758 in unamortized goodwill. Upon the adoption of
SFAS No. 142, goodwill is no longer amortizable and will be subject to
impairment testing. As a result, the Company has not amortized goodwill for the
year ended December 31, 2002. Had the Company not amortized goodwill during the
period ended December 31, 2001, amortization expense would have decreased by
$73,672 and net loss would have decreased by $73,672 to ($206,721).
In accordance with SFAS No. 142, the Company completed a transitional impairment
test and an annual impairment test of goodwill and has determined goodwill and
other intangible assets were not impaired. Goodwill will be tested annually and
whenever events and circumstances occur indicating that the asset may be
impaired.
Upon the adoption of SFAS No. 142, the Company evaluated the useful lives of
existing intangible assets and determined that the existing useful lives are
appropriate.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires the fair value of a liability for an asset
retirement obligation to be recognized in the period in which it is incurred if
a reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
SFAS No. 143 is effective for the Company for fiscal years beginning after June
15, 2002. The Company's adoption of this statement had no material impact on the
Company's financial statements.
F-42
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 requires that those long-lived assets be
measured at the lower of carrying amount or fair value, less cost to sell,
whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. SFAS
144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, is to be applied prospectively.
In April 2002, the FASB issued SFAS No. 145, Rescissions of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections. SFAS
No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of
Debt, and an amendment of that Statement, SFAS No. 64, Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146 requires companies to recognize costs
associated with exit or disposal activities when they are incurred that at the
date of commitment to an exit or disposal plan. Examples of such costs covered
by the standard include lease termination costs and certain employee severance
costs associated with a restructuring, discontinued operation, plant closing or
other exit or disposal activity. SFAS No. 146 is effective prospectively for
exit and disposal activities initiated after December 31, 2002. As the
provisions of SFAS No. 146 are to be applied prospectively after its adoption
date, the Company cannot determine the potential effects that adoption of SFAS
No. 146 will have on its future results of operations or financial position.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure-an Amendment of FASB Statement No. 123.
SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company adopted the
disclosure requirements effective December 31, 2002 in its financial statements.
F-43
BAYVIEW TECHNOLOGY GROUP, LLC
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS COMBINATIONS
On May 31, 2001 the Company acquired substantially all of the assets of Bayview
Ventures, Inc., a California corporation, for a purchase price of $2,906,447.
The acquisition has been accounted for using the purchase method and the results
of operations are reflected in the financial statements from the date of
acquisition. Pursuant to the purchase agreement, the Company paid $1,000,000 in
cash, assumed liabilities of $136,447 and executed a note to the seller in the
amount of $1,770,000 (see Note 4). The Company incurred costs of $23,959 in
connection with the acquisition. Amounts in excess of the fair market value of
the assets acquired are accounted for as goodwill. The following represents the
allocation of the purchase price:
Amount
---------------
Accounts receivable $ 15,886
Inventory 190,706
Deposits 4,384
Fixed assets 75,000
Patents and trademarks 750,000
Goodwill 1,894,430
---------------
$ 2,930,406
===============
F-44
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31
2002 2001
-----------------------------------
Equipment $ 237,425 $ 147,846
Furniture and fixtures 98,198 95,632
-----------------------------------
335,623 243,478
Less accumulated depreciation 81,875 14,080
-----------------------------------
$ 253,748 $ 229,398
===================================
Depreciation expense for the year ended December 31, 2002 and for the period
from June 1, 2001 (Commencement of Operations) through December 31, 2001 was
$67,795 and $14,080.
3. LINE OF CREDIT AND LINE OF CREDIT - RELATED PARTY
The Company had a $500,000 revolving line of credit with a bank. The line of
credit was entered into on August 3, 2001 and expired on August 3, 2002. The
line of credit bore interest at a variable rate that was calculated based on an
index, which is the Bank Base Rate plus 1.5%. During the period August 3, 2001
through December 31, 2001 the rates ranged from 6.5% to 8.5% per annum. The Line
of Credit had an outstanding balance of $320,578 at December 31, 2001 and was
secured by substantially all of the assets of the Company. In addition, two of
the Company's members (who were also executive officers of the Company)
guaranteed the line of credit and pledged personal assets as additional
security.
Effective September 30, 2002, the Company entered into a new $500,000 line of
credit agreement with Bayview Ventures, Inc. (Note 1). The line of credit
expired on June 1, 2003. The line of credit bears interest at the prime rate as
published in the Wall Street Journal, plus 1.75%. The line of credit is secured
by substantially all of the assets of the Company. In addition, one of the
Company's members (who is also an executive officer) has guaranteed the line of
credit and pledged personal assets as additional security. The balance of the
line of credit at December 31, 2002 was $245,000 and the interest rate was
6.259%.
Effective June 1, 2003, Bayview Ventures, Inc. agreed to extend the repayment
date of the Line of Credit Agreement to November 8, 2003.
Interest expense recognized in connection with the line of credit - related
party, was $6,493 for the year ended December 31, 2002. Accrued interest payable
in connection with the line of credit - related party was $1,282 at December 31,
2002.
F-45
4. LONG-TERM DEBT - RELATED PARTY
Long-term debt consists of a note payable to Bayview Ventures, Inc. (see Note
1). The sole stockholder of Bayview Ventures, Inc. is an employee of the
Company. The note was in the original amount of $1,770,000 and bears interest at
the rate of 6.9% per annum and was originally payable in three annual
installments plus accrued interest beginning on June 1, 2002. The note is
secured, subject to certain subordination, by all inventories, accounts
receivable, and substantially all of the assets acquired in the business
combination (Note 1).
Effective April 30, 2002, the terms of the note payable were amended. An initial
payment of $250,000 was made June 30, 2002. Subsequent payments are to be made
based on 50% of excess cash flow defined as earnings before interest, taxes,
depreciation and amortization less fixed charges (interest expense for the
period of determination plus minimum rent payments under operating leases) and
total capital expenditures. The calculation is to be completed by the tenth day
of the subsequent month and reviewed and agreed to by the note holder. Payments
will be made immediately thereafter. During the year ended December 31, 2002,
the Company made principal payments of $557,175. Included in accounts payable
and accrued interest at December 31, 2002 and 2001 is $43,807 and $65,730 of
accrued interest due on the note.
The term of the note agreement was modified in both May and June 2003, pursuant
to which the maturity date of the note payable was extended to July 14, 2003.
Bayview Ventures, Inc. agreed to modify the repayment terms of the principal and
accrued interest on the note payable in connection with the acquisition of
certain assets of the Company by USA Technologies, Inc. ("USAT").(See Note 13)
In accordance with the modified terms, in July 2003, the Company paid Bayview
Ventures, Inc. approximately $631,000 and 1,200,000 shares of USAT common stock
having an agreed upon value of $333,333. The remaining balance owed to Bayview
Ventures, Inc. (including both principal and accrued interest) of $333,333 is to
be repaid no later than November 8, 2003.
F-46
5. LEASE OBLIGATIONS
The Company leases office space under three operating lease agreements. The
lease agreements generally require the Company to pay certain operating
expenses, maintenance, and property taxes. The lease agreements are
noncancellable. Two agreements expire in June 2005 and one agreement expires in
October 2003.
Rent expense was $48,324 for the period from June 1, 2001 (Commencement of
Operations) through December 31, 2001 and $111,633 for the year ended December
31, 2002.
Future minimum lease payments under the noncancellable operating leases are as
follows:
Years Ending
December 31, Amount
-----------------------------------------
2003 $ 121,560
2004 101,172
2005 51,864
--------------
$ 274,596
==============
6. MEMBERS' EQUITY
The Company issued 60,000 units to its founding members, for $1,000 at the
formation of the Company.
Pursuant to the terms of a private placement memorandum ("PPM") in 2001, the
Company issued 35,000 membership units at a per unit price of $50 for total
proceeds of $1,750,000. Issuance expenses in connection with the offering were
$37,722. Under terms of the PPM, the Company guaranteed the investors that the
value of their units would appreciate at no less than a 20% cumulative return
over the three-year period following the issuance of the units. In the event
that the overall value (as determined by a calculation defined in the PPM) of
the Company in June 2004 or the value received by the Company upon the sale of
its assets prior to that time does not provide for the minimum return, the
investors are to receive additional units as determined by a calculation
contained in the PPM. The PPM also granted the investors the right, after the
payment of amounts due to Bayview Ventures, Inc. (see Note 4), to an annual
preferential right to distributions of $200,000. No such distributions have been
paid through 2002.
F-47
6. MEMBERS' EQUITY (CONTINUED)
Option Plan
Effective May 30, 2001, the Company adopted The Bayview Technology Group, LLC
2001 Membership Option Plan (the "Plan"). The purpose of the Plan is to provide
a benefit to key employees and management. Participants of the Plan shall be
recommended by the President and Chief Executive Officer of the Company, and the
issuance of unit options are to be approved by the Personnel and Compensation
Committee of the Board of Directors. The membership units, which may be
delivered under the Plan, shall not exceed an aggregate of 15,000 units. During
2002, options to purchase 4,750 membership units at a per unit price of $52.63
ware granted. In March 2003, 1,189 of the options vested and 132 options will
vest each month thereafter until all 4,750 become vested. The options expire in
June 2007. The aggregate fair value of the options granted (determined using the
Black-Scholes option pricing model and assuming no dividends or volatility, a
discount rate of 4.5% and an expected life of five years) was estimated to be
approximately $37,000. Upon a merger of the Company or the sale of substantially
all of its assets, any unvested options become immediately vested and
exercisable. The options became fully vested in July 2003 upon the closing of
the USAT transaction (see Note 13).
Pro forma results of operations, assuming the Company had used the fair value
method of accounting for the 2002 option grant, are not presented as they do not
differ materially from the Companys historical results.
F-48
7. EMPLOYMENT AGREEMENTS
The Company has an employment agreement with the sole stockholder of Bayview
Ventures, Inc. (Note 1). Under the terms of the agreement, the Company is
required to pay a royalty to Bayview Ventures, Inc., based upon the sale of its
devices. The Company is also required to pay the employee an annual base salary
of $126,240. During the period ended December 31, 2001, the Company paid Bayview
Ventures, Inc. $24,027 in royalties and at December 31, 2001 royalties payable
to Bayview Ventures, Inc. were $179,174. During the year ended December 31,
2002, the Company paid Bayview Ventures, Inc. $374,136 in royalties and at
December 31, 2002, royalties payable to Bayview Ventures, Inc. totaled $157,271.
Effective May 20, 2002, the Company entered into an employment agreement with an
employee. Under the terms of the agreement, the Company is required to pay the
employee a base salary of $116,000 during the initial one-year term of the
employment period (as defined in the agreement). Employment is to be reviewed
annually for renewal and/or renegotiation. The employee also is to receive a
commission of 1.25% of certain sales revenue as defined in the agreement.
8. SUPPLIER AGREEMENT
Effective July 1, 2001, the Company entered into an agreement with an unrelated
entity for the manufacture of the Company's electronic devices. The agreement's
initial term is two years, and the agreement automatically renews for subsequent
one-year periods unless either party provides written notification of
termination. At June 30, 2003, the agreement is still in effect. In connection
with the agreement, the Company is required to provide the entity with
thirteen-week production forecasts and the Company is obligated to purchase the
manufactured devices and reimburse the entity, under certain terms of the
agreement. During the period from June 1, 2001 (Commencement of Operations)
through December 31, 2001, the Company purchased $309,775 from the entity, and
at December 31, 2001, the Company owed the entity $197,169. During the year
ended December 31, 2002, the Company purchased $1,817,383 from the entity and at
December 31, 2002, the Company owed the entity $285,656.
9. AGREEMENTS WITH UTILITY ORGANIZATIONS
The Company has an agreement with the Bonneville Power Administration ("BPA")
that expired April 30, 2003 to provide and install BPA's electronic devices.
Under the terms of this agreement, the Company is to receive a negotiated price
per unit and installation fee per unit, for each device installed. The
Bonneville Power Administration contract provides for total purchase price and
fees of $3,000,000. The agreement was not renewed.
F-48
10. SIGNIFICANT CONTRACTS
The Company has received greater than 10% of its revenues from certain
customers. A summary of significant customers is as follows:
December 31
Revenues: 2002 2001
-------------------------
Customer A 36% 33%
Customer B 12% 11%
Customer C -% 13%
Customer D -% 16%
-------------------------
December 31
Accounts Receivable: 2002 2001
-------------------------
Customer A 2% 79%
Customer B 44% 4%
Customer C -% 9%
Customer D -% 7%
-------------------------
11. CONTINGENCIES
In February 2003, a fire occurred in a facility in Idaho, in which the Company's
product was installed days before the fire. The insurance company representing
the company that occupied the facility is investigating the cause of the fire.
The Company has informed their insurance carrier of the incident and the Company
is currently in the process of investigating the matter and to what extent, if
any, the Company may be held responsible. The outcome of this contingency is
currently unknown. Any potential liability may be covered by the Company's
insurance carrier. No liability for the outcome of this contingency has been
recorded in the accompanying financial statements.
The Company occupied premises in California through June 1, 2002, at which time
the premises were vacated. The landlord is seeking rent from the Company for the
period from June 2002 through October 2003 (lease termination date), in the
aggregate amount of approximately $62,000. The Company does not believe it is
responsible for this amount, as it never formally assumed the lease. Bayview
Ventures, Inc. was the original lessee. At December 31, 2002, the Company has
accrued $26,000, which represents the Company's best estimate of its expected
liability to settle the matter.
F-49
12. SUPPLEMENTAL CASH FLOW INFORMATION
Period from
June 1, 2001
(Commencement of
Year ended Operations) through
December 31, 2002 December 31, 2001
--------------------------------------
Cash paid for interest $ 142,928 $ 5,744
======================================
13. SALE OF OPERATIONS
On July 11, 2003, the Company sold substantially all of its fixed assets and
intellectual property (including patents and trademarks), as well as other
various assets, to USAT in exchange for 20,000,000 shares of USAT common stock.
Additionally, USAT paid approximately $631,000 to Bayview Ventures, Inc.,
representing the amount currently due to Bayview Ventures, Inc. pursuant to its
note payable from the Company (see Note 4). Pursuant to the sale agreement, the
shares of USAT common stock received by the Company cannot be sold for a
one-year period, after which time a monthly limitation will be placed on the
maximum number of shares, that may be sold.
In connection with the sale, the Company issued an additional 9,534 units to
investors in the Company's 2001 PPM pursuant to guaranteed return provisions
contained in the PPM (see Note 6). Additionally, the Company granted 10,250
units to two employees.
Management determined that the plan of sale criteria in SFAS No. 144 was met in
April 2003, at which time depreciation and amortization of these assets ceased
and the assets began to be reported at the lower of their carrying amount or
fair value less cost to sell.
F-50
BAYVIEW TECHNOLOGY GROUP, LLC
BALANCE SHEET
(Unaudited)
June 30,
2003
-------------
Assets
Current assets:
Cash $ 54,201
Accounts receivable 1,295,947
Inventories 381,486
Prepaid expenses and other current assets 16,324
-------------
Total current assets 1,747,958
Goodwill 1,820,758
Deposits 16,977
Long-Lived Assets Held for Sale
Property and equipment, net 223,820
Patents and trademarks, net of $106,689 of accumulated amortization 689,641
-------------
Total assets $ 4,499,154
=============
Liabilities and Members' Equity
Current liabilities:
Accounts payable and accrued expenses $ 737,569
Line of credit - related party 438,000
Commissions and royalties payable 259,401
Current maturities of long-term debt - related party 591,568
-------------
Total current liabilities 2,026,538
Long-term debt - related party, less current maturities 621,257
-------------
Total Liabilities 2,647,795
Members' Equity 1,851,359
-------------
Total liabilities and members' equity $ 4,499,154
=============
See accompanying notes.
F-51
BAYVIEW TECHNOLOGY GROUP, LLC
STATEMENTS OF OPERATIONS
(Unaudited)
Six months ended June 30
2003 2002
-------------------------------------
Revenues $ 2,514,735 $ 2,673,642
Cost of Sales 1,143,397 1,237,622
-------------------------------------
Gross Profit 1,371,338 1,436,020
Operating expenses:
Selling 692,049 490,518
General and administrative 642,755 688,373
Depreciation and amortization 69,932 53,388
-------------------------------------
Total operating expenses 1,404,736 1,232,279
-------------------------------------
Income (loss) from operations (33,398) 203,741
Other expense:
Interest expense (45,963) (54,959)
-------------------------------------
Net income (loss) $ (79,361) $ 148,782
=====================================
See accompanying notes.
F-52
BAYVIEW TECHNOLOGY GROUP, LLC
STATEMENTS OF MEMBERS' EQUITY
(Unaudited)
Six months ended June 30,
2003 2002
-------------------------------
Balance, beginning of period $ 1,930,720 $ 1,432,885
Net income (loss) for period (79,361) 148,782
-------------------------------
Balance, end of period $ 1,851,359 $ 1,581,667
===============================
See accompanying notes.
F-53
BAYVIEW TECHNOLOGY GROUP, LLC
STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30
2003 2002
------------------------------------
Cash flows from operating activities
Net income (loss) $ (79,361) $ 148,782
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 69,932 53,388
Decrease (increase) in current assets:
Accounts receivable (437,550) 183,617
Inventories (64,284) (65,856)
Prepaid expenses and other current assets 20,814 (23,209)
Increase in current liabilities:
Accounts payable and accrued expenses 279,095 105,510
Commissions and royalties payable 35,237 3,052
------------------------------------
Net cash provided by (used in) operating activities (176,117) 405,284
Cash flows from investing activities
Purchase of property and equipment (2,493) (9,640)
Investment in patents and trademarks (14,793) -
Deposit on software under development - (11,066)
------------------------------------
Net cash used in investing activities (17,286) (20,706)
Cash flows from financing activities
Borrowings of bank revolving line of credit - 415,000
Payments on bank revolving line of credit - (650,000)
Payments on long-term debt - (137,320)
Borrowings on Line of Credit-Related Party 693,000 -
Payments on Line of Credit-Related Party (500,000) -
------------------------------------
Net cash provided by (used in) financing activities 193,000 (372,320)
------------------------------------
Net increase (decrease) in cash (403) 12,258
Cash, beginning of period 54,604 3,242
------------------------------------
Cash, end of period $ 54,201 $ 15,500
====================================
Supplemental disclosures of cash flow information:
Interest paid $ 9,492 $ 121,141
====================================
See accompanying notes.
F-54
BAYVIEW TECHNOLOGY GROUP, LLC
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
ORGANIZATION, DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Bayview Technology Group, LLC (the "Company" was organized as a Limited
Liability Company ("LLC") under the laws of the State of Colorado in December
2000. The Company is engaged in the sale and distribution of energy saving
devices, more particularly, plug load controllers.
GOING CONCERN AND MANAGEMENT'S PLANS
As more fully described in Note 8, the Company sold substantially all of its
long-lived assets in July 2003 and does not currently anticipate continuing its
operations. Based on projections, management currently estimates that the
Company will not have the ability to meet all of its obligations as they come
due. The Company is attempting to raise additional funds from its members to
meet this budgeted shortfall but has not received a firm commitment from any of
its members to provide the necessary funding. These conditions give rise to
substantial doubt about the Company's ability to continue as a going concern. In
response to this condition, management is actively trying to secure the
necessary additional funds from its members, reduce or eliminate all
non-essential costs, and negotiate extensions and reductions in the Company's
obligations with various creditors. No assurances can be provided that the
Company will be successful in executing its plans.
The financial statements do not include any adjustments relating to the
recoverability or classification of asset carrying amounts or the amounts and
classification of liabilities that may result should the Company be unable to
continue as a going concern.
INTERIM FINANCIAL INFORMATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six months ended June 30, 2003 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2003.
INVENTORIES
Inventories are stated at the lower of cost (using the first in, first out
method) or market, and consist primarily of saleable finished goods including
electronic components and devices.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Provisions for depreciation are
computed using the straight-line method over estimated useful lives ranging from
3 to 7 years. Maintenance and repairs are charged to expense as incurred.
Effective in April 2003, property and equipment was reflected as held for sale
and reported at the lower of carrying value or fair value, less cost to sell.
F-55
INCOME TAXES
There is no provision for income taxes because, as a limited liability company,
the Company's taxable income is passed through to its members who pay income
taxes on their proportionate share of the taxable income.
STATEMENTS OF CASH FLOWS
The Company considers all short-term investments purchased with maturity of
three months or less and money market accounts to be cash equivalents.
PATENTS AND TRADEMARKS
Patents and trademarks were recorded at cost less accumulated amortization, and
were amortized using the straight-line method over fifteen years.
Amortization expense on patents and trademarks was $26,911 and $25,000 for the
six months ended June 30, 2003 and 2002, respectively. Commencing in April 2003,
patents and trademarks are considered to be held for sale and carried at the
lower of carrying value or fair value less costs to sell.
GOODWILL
Goodwill represents the excess of the cost over the fair value of net assets
acquired at the date of acquisition. Goodwill is not amortized but is tested
annually to determine whether there is any impairment to its carrying value.
Impairment testing is also done if events or circumstances arise indicating that
impairment may have occurred.
LONG-LIVED ASSETS AND LONG-LIVED ASSETS FOR SALE
Long-lived assets, including property and equipment and patents and trademarks
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. If the expected future cash
flow from the use of the assets and its eventual disposition is less than the
carrying amount of the assets, an impairment loss is recognized and measured
using the asset's fair value.
In the period when the plan of sale criteria of SFAS No. 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.
F-56
USE OF ESTIMATES
The preparation of the Company's financial statements, in conformity with
accounting principles generally accepted in the United States of America,
requires the Company's management to make estimates and assumptions that effect
the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs amounted
to $53,932 and $15,631 for the six months ended June 30, 2003 and 2002,
respectively.
REVENUE RECOGNITION
The Company recognizes revenue when its products are shipped to its customers,
at which time title passes to the customer and the risks and rewards of
ownership are transferred. Revenue from certain sales programs with utility
organizations are not recognized until the product has been installed at
designated locations and the Company has no remaining performance obligation.
RESEARCH AND DEVELOPMENT
Research and development expenditures are expensed in the period in which
incurred. Research and development expenses were $39,370 and $14,147 for the six
months ended June 30, 2003 and 2002, respectively.
STOCK OPTION PLAN
The Company has a stock-based employee compensation plan. The Company accounts
for this plan under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation is reflected in
the Company's net income (loss), as all options granted under this plan had an
exercise price equal to the market value of the underlying membership units on
the date of grant. Had the Company employed the fair value method of accounting
prescribed by SFAS No. 123, Accounting for Stock-Based Compensation, the pro
forma net income (loss) of the Company for the six months ended June 30, 2003
and 2002 would not have been materially different from the reported net income
(loss).
F-57
BAYVIEW TECHNOLOGY GROUP, LLC
SELECTED NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
1. PROPERTY AND EQUIPMENT
Property and equipment as of June 30, 2003 consisted of the following:
Equipment $ 248,547
Furniture and fixtures 98,197
-------------
346,744
Less accumulated depreciation 122,924
-------------
$ 223,820
=============
Depreciation expense was $43,021 and $28,388 for the six months ended June 30,
2003 and 2002, respectively.
2. LINE OF CREDIT - RELATED PARTY
Effective September 30, 2002, the Company entered into a $500,000 line of credit
agreement with Bayview Ventures, Inc. The line of credit expired on June 1,
2003. The line of credit bears interest at the prime rate as published in the
Wall Street Journal, plus 1.75%. The line of credit is secured by substantially
all of the assets of the Company. In addition, one of the Company's members (who
is also an executive officer) has guaranteed the line of credit and pledged
personal assets as additional security.
Effective June 1, 2003, Bayview Ventures, Inc. agreed to extend the repayment
date of the line of Credit Agreement to November 8, 2003. At June 30, 2003, the
balance of the Line of Credit was $438,000 and the interest rate was 5.75%.
Interest expense recognized in connection with the line of credit - related
party, was $10,422 for the six months ended June 30, 2003.
F-58
3. LONG-TERM DEBT - RELATED PARTY
Long-term debt at June 30, 2003 consists of a note payable to Bayview Ventures,
Inc. The sole stockholder of Bayview Ventures, Inc. is an employee of the
Company. The note was in the original amount of $1,770,000 and bears interest at
the rate of 6.9% per annum and was originally payable in three annual
installments plus accrued interest beginning on June 1, 2002. The note is
secured, subject to certain subordination, by all inventories, accounts
receivable, and substantially all of the assets acquired from Bayview Ventures,
Inc.
Effective April 30, 2002, the terms of the note payable were amended. An initial
payment of $250,000 was made June 30, 2002. Subsequent payments are to be made
based on 50% of excess cash flow defined as earnings before interest, taxes,
depreciation and amortization less fixed charges (interest expense for the
period of determination plus minimum rent payments under operating leases) and
total capital expenditures. The calculation is to be completed by the tenth day
of the subsequent month and reviewed and agreed to by the note holder. Payments
will be made immediately thereafter. During the six months ended June 30, 2003,
the Company made no principal payments on this debt. Included in accounts
payable at June 30, 2003 is $81,536 of accrued interest due on the note.
The term of the note agreement was modified in both May and June 2003, pursuant
to which the maturity date of the note payable was extended to be July 14, 2003.
Bayview Ventures, Inc. agreed to modify the repayment terms of the principal and
accrued interest on the note payable in connection with the acquisition of
certain assets of the Company by USA Technologies, Inc. ("USAT").
In accordance with the modified terms, in July 2003, the Company paid Bayview
Ventures, Inc. approximately $631,000 and 1,200,000 shares of USAT common stock
having an agreed upon value of $333,333. The remaining balance owed to Bayview
Ventures, Inc. (including both principal and accrued interest) of $333,333 is to
be repaid no later than November 8, 2003.
F-59
4. EMPLOYMENT AGREEMENTS
The Company has an employment agreement with the sole stockholder of Bayview
Ventures, Inc. Under the terms of the agreement, the Company is required to pay
a royalty to Bayview Ventures, Inc., based upon the sale of its devices. The
Company is also required to pay the employee an annual base salary of $126,240.
During the six months ended June 30, 2003 and 2002, royalties earned by Bayview
Ventures, Inc. were $172,107 and $190,123, respectively. Royalties payable to
Bayview Ventures, Inc. as of June 30, 2003 totaled $153,462.
5. SUPPLIER AGREEMENT
Effective July 1, 2001, the Company entered into an agreement with an unrelated
entity for the manufacture of the Company's electronic devices. The agreement's
initial term is two years, and the agreement automatically renews for subsequent
one-year periods unless either party provides written notification of
termination. In connection with the agreement, the Company is required to
provide the entity with thirteen-week production forecasts and the Company is
obligated to purchase the manufactured devices and reimburse the entity, under
certain terms of the agreement. During the six months ended June 30, 2003 and
2002, the Company purchased $844,068 and $740,864, respectively from the entity.
6. AGREEMENTS WITH UTILITY ORGANIZATIONS
The Company has an agreement with the Bonneville Power Administration ("BPA")
that expired April 30, 2003 to provide and install BPA's electronic devices.
Under the terms of this agreement, the Company is to receive a negotiated price
per unit and installation fee per unit, for each device installed. The
Bonneville Power Administration contract provides for total purchase price and
fees of $3,000,000. The agreement was not renewed.
F-60
7. CONTINGENCIES
In February 2003, a fire occurred in a facility in Idaho, in which the Company's
product was installed days before the fire. The insurance company representing
the company that occupied the facility is investigating the cause of the fire.
The Company has informed their insurance carrier of the incident and the Company
is currently in the process of investigating the matter and to what extent, if
any, the Company may be held responsible. The outcome of this contingency is
currently unknown. Any potential liability may be covered by the Company's
insurance carrier. No liability for the outcome of this contingency has been
recorded in the accompanying financial statements.
The Company occupied premises in California through June 1, 2002, at which time
the premises were vacated. The landlord is seeking rent from the Company for the
period from June 2002 through October 2003 (lease termination date), in the
aggregate amount of approximately $62,000. The Company does not believe it is
responsible for this amount, as it never formally assumed the lease. Bayview
Ventures, Inc. was the original lessee. At June 30, 2003, the Company has
accrued $26,000, which represents the Company's best estimate of its expected
liability to settle the matter.
8. SALE OF OPERATIONS
On July 11, 2003, the Company sold substantially all of its fixed assets and
intellectual property (including patents and trademarks), as well as other
various assets, to USAT in exchange for 20,000,000 shares of USAT common stock.
Additionally, USAT paid approximately $631,000 to Bayview Ventures, Inc.,
representing the amount currently due to Bayview Ventures, Inc. pursuant to its
note payable from the Company. Pursuant to the sale agreement, the shares of
USAT common stock received by the Company cannot be sold for a one-year period,
after which time a monthly limitation will be placed on the maximum number of
shares, that may be sold.
The long-lived assets covered by the sales agreement have been reported in the
accompanying balance sheets as assets held for sale. Management determined that
the plan of sale criteria in SFAS No. 144 was met in April 2003, at which time
depreciation and amortization of these assets ceased and the assets began to be
reported at the lower of their carrying amount or fair value less cost to sell.
F-61
USA TECHNOLOGIES INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The Pro Forma Consolidated Balance Sheet as of June 30, 2003 and the Pro Forma
Consolidated Statements of Operations for the years ended June 30, 2003 and
2002, are based on the historical financial statements of USA Technologies, Inc.
(USAT) and Bayview Technology Group, LLC (Bayview). The acquisition of the
operating assets of Bayview has been accounted for using the purchase method of
accounting. The Pro Forma Consolidated Balance Sheet as of June 30, 2003 has
been prepared assuming the Bayview acquisition was completed on June 30, 2003.
The Pro Forma Consolidated Statements of Operations for the years ended June 30,
2003 and 2002 have been prepared assuming that the Bayview acquisition was
completed on July 1, 2002 and July 1, 2001, respectively.
The Unaudited Pro Forma financial statement information is presented for
informational purposes only. The Pro Forma Consolidated Balance Sheet and
Consolidated Statements of Operations do not purport to represent what USAT's
actual financial position or results of operations would have been had the
acquisition of Bayview occurred as of such dates, or to project USAT's financial
position or results of operations for any period or date, nor does it give
effect to any matters other than those described in the notes thereto. In
addition, the allocations of purchase price to the assets and liabilities of
Bayview are preliminary and the final allocations may differ from the amounts
reflected herein. The Unaudited Pro Forma Consolidated Balance Sheet and
Unaudited Pro Forma Consolidated Statements of Operations should be read in
conjunction with USAT's financial statements and notes thereto, and the
historical financial statements of Bayview which are included elsewhere herein.
F-62
USA Technologies Inc.
Pro Forma Consolidated Balance Sheet
June 30, 2003
(Unaudited)
Acquisition
Bayview USAT Adjustments Pro Forma
------- ---- ----------- ---------
Assets:
Current assets:
Cash and cash equivalents $ 54,201 $ 2,384,455 $ (833,448) $ 1,603,208
Accounts receivable, net 1,295,947 414,796 (1,295,947) 414,796
Inventory 381,486 457,900 (347,486) 497,900
Subscriptions receivable - 1,013,400 - 1,013,400
Prepaid expenses and other current assets 16,324 201,383 653 218,360
Investment - 904,049 - 904,049
-------------------------------------------------------------
Total current assets 1,747,958 5,375,983 (2,472,228) 4,651,713
Property and equipment, net 223,820 943,784 - 1,167,604
Software development costs - 998,660 - 998,660
Goodwill 1,820,758 7,945,580 (1,502,108) 8,264,230
Intangible assets 689,641 2,591,500 8,810,359 12,091,500
Other assets 16,977 37,174 (16,977) 37,174
-------------------------------------------------------------
Total assets $4,499,154 $17,892,681 $4,819,046 $27,210,881
=============================================================
Liabilities and shareholder's equity:
Current liabilities
Accounts payable $ 737,569 $ 2,266,156 $ (697,569) $ 2,306,156
Accrued expenses 259,401 2,720,743 (259,401) 2,720,743
Current portion of long-term debt 1,029,568 830,674 (1,029,568) 830,674
Convertible Senior Notes - 349,942 - 349,942
-------------------------------------------------------------
Total current liabilities 2,026,538 6,167,515 (1,986,538) 6,207,515
Convertible Senior Notes, less current portion - 7,808,469 - 7,808,469
Long-term debt, less current portion 621,257 224,614 (621,257) 224,614
-------------------------------------------------------------
Total liabilities 2,647,795 14,200,598 (2,607,795) 14,240,598
Shareholders'/Members' equity:
Series A convertible preferred stock, no par value;
1,800,000 shares authorized; 524,452 issued and
outstanding at June 30, 2003 - 3,715,246 - 3,715,246
Bayview Members' Equity, 95,000 units issued and outstanding at
June 30, 2003 1,851,359 - (1,851,359) -
USA Common Stock, no par value; 400,000,000 shares
authorized; 218,741,042 shares issued and outstanding shares at
June 30, 2003 - 78,790,405 9,278,200 88,068,605
Accumulated deficit - (78,813,568) - (78,813,568)
-------------------------------------------------------------
Total shareholders'/members' equity 1,851,359 3,692,083 7,426,841 12,970,283
-------------------------------------------------------------
Total liabilities and shareholders'/members' equity $4,499,154 $17,892,681 $ 4,819,046 $27,210,881
=============================================================
SEE NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
F-63
USA Technologies, Inc.
Pro Forma Consolidated Statement of Operations
For the year ended June 30, 2003
(Unaudited)
Acquisition
Bayview USAT Adjustments Pro Forma
------- ---- ----------- ---------
Revenue $ 5,634,122 $ 2,853,068 - $ 8,487,190
Operating expenses:
Cost of sales 2,406,578 2,971,443 - 5,378,021
General and administrative 1,407,380 7,194,684 - 9,903,041
Compensation 1,300,977 4,973,210 - 4,973,210
Depreciation and amortization 134,951 1,251,716 897,477 2,284,144
Loss on exchange of debt - 1,521,654 - 1,521,654
----------- ----------- ---------- ------------
Total operating expenses 5,249,886 17,912,707 897,477 24,060,070
----------- ----------- ---------- ------------
384,236 (15,059,639) (897,477) (15,572,880)
Other income (expense):
Interest income - 18,691 - 18,691
Loss on Investment - (1,945,951) - (1,945,951)
Interest expense (114,544) (4,978,600) 114,544 (4,978,600)
----------- ----------- ---------- ------------
Total other income (expense) (114,544) (6,905,860) 114,544 (6,905,860)
----------- ----------- ---------- ------------
Net income (loss) 269,692 (21,965,499) (782,933) (22,478,740)
Cumulative preferred dividends - (793,586) - (793,586)
----------- ----------- ---------- ------------
(Loss) income applicable to common shares $ 269,692 $(22,759,085) $(782,933) $(23,272,326)
=========== =========== ========== ============
Loss per common share (basic and diluted) $(0.20) $(0.18)
====== ======
Weighted average number of common shares
outstanding (basic and diluted) 111,790,358 20,170,000 131,960,358
=========== ========== ===========
F-64
USA Technologies, Inc.
Pro Forma Consolidated Statement of Operations
For the year ended June 30, 2002
(Unaudited)
Acquisition
Bayview USAT Adjustments Pro Forma
------- ---- ----------- ---------
Revenues $ 4,900,086 $ 1,682,701 - $ 6,582,787
Operating expenses:
Cost of sales 2,459,033 4,062,901 - 6,373,960
General and administrative 1,141,883 7,868,064 - 9,131,534
Compensation 1,085,481 4,654,662 - 5,740,143
Depreciation and amortization 154,723 440,238(5) 836,852 1,431,813
------------ ------------ ---------- ------------
Total operating expenses 4,841,120 17,025,865 836,852 22,677,450
------------ ------------ ---------- ------------
58,966 (15,343,164) (836,852) (16,094,663)
Other income (expense):
Interest income - 15,791 - 15,791
Interest expense (119,254) (1,987,434)(4) 119,254 (1,987,434)
------------ ------------ ---------- ------------
Total other income (expense) (119,254) (1,971,643) 119,254 (1,998,030)
------------ ------------ ---------- ------------
Net loss (60,288) (17,314,807) (717,598) (18,092,693)
Cumulative preferred dividends - (822,561) - (822,561)
------------ ------------ ---------- ------------
Loss applicable to common shares $ (60,288) $(18,137,368) $ (717,598) $(18,915,254)
============ ============ ========== ============
Loss per common share (basic and diluted) $(0.50) $(0.34)
====== ======
Weighted average number of common shares
outstanding (basic and diluted) 35,994,157 20,170,000 56,164,157
=========== ========== ===========
F-65
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) To record the acquisition of the operating assets of Bayview as defined in
the asset purchase agreement consisting primarily of the patents and other
intellectual property relating to Bayview's energy conservation devices for the
vending industry and customer accounts. The purchase price is assumed to be paid
by the issuance of 20,000,000 shares of USA Technologies, Inc. Common Stock
($9,200,000) and payment of $631,247 in cash. Costs associated with the
acquisition include the issuance of 170,000 shares of USA Technologies, Inc.
Common Stock ($78,200) and an estimate of $150,000 for payment of services
rendered to USAT in connection with the acquisition. The total estimated
investment of $10,059,447 plus an estimated liability of $40,000 assumed is
allocated among the assets acquired - property and equipment ($223,820),
inventory ($40,000), prepaid expenses ($16,977), intangibles assets ($9,500,000)
and goodwill ($318,650).
(2) The cash portion of the purchase price and costs associated with the
acquisition are assumed to have been paid from USAT cash as of June 30, 2003.
(3) To eliminate amortization of intangible assets recorded by Bayview and to
record amortization of intangible assets acquired in the acquisition as if the
acquisition had occurred on July 1, 2002. Acquired intangible assets are
comprised of patents, non-compete and consulting agreements and trademark and
tradenames and are amortized over five and ten years.
(4) To eliminate interest expense recorded by Bayview as the related debt was
not assumed by USAT under the asset purchase agreement.
(5) To eliminate amortization of intangible assets recorded by Bayview and to
record amortization of intangible assets acquired in the acquisition as if the
acquisition had occurred on July 1, 2001. Also to eliminate amortization of
goodwill recorded by Bayview pertaining to periods prior to the adoption of
Financial Accounting Standards Board Statement No. 142, Goodwill and other
Intangible Assets, as to which goodwill is no longer amortized.
F-66
PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 24. 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 25. 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 . $ 2,034.70
Printing and Engraving Expenses . . . . . . . . . . . $ 2,965.30
Accounting Fees and Expenses . . . . . . . . . . . $12,500.00
Legal Fees and Expenses . . . . . . . . . . . . . . . $12,500.00
----------
Total . . . . . . . . . . . . . . . . . . $30,000.00
==========
Item 26. 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 early 2001, we sold 568.15 units or a total of $5,681,500 principal
amount of 12% Convertible Senior Notes and 1,136,300 shares of common stock. Of
this amount, $3,823,000 of the senior notes were purchased through the exchange
of $3,823,000 of the old senior notes. Each unit consisted of a $10,000
principal amount Senior Note and 2,000 shares of common stock. Each 12%
65
Convertible Senior Note is convertible into Common Stock at $1.25 per share
anytime through its maturity date of December 31, 2003. Holders of the existing
12% Senior Notes due in December 2001 had the right in invest in the offering by
exchanging their existing Notes instead of paying cash. For each $10,000 face
amount existing Senior Note exchanged, the holder would receive one unit. The
offering was sold to accredited investors and did not involve any general
advertising or solicitation, and was therefore exempt from registration under
Rule 506 of Regulation D promulgated under the Act.
On April 20, 2001 the Company sold 450,000 shares of its Common Stock to 9
accredited investors for $1.00 per share for an aggregate of $450,000. The
offering was sold to accredited investors and did not involve any general
advertising or solicitation, and was therefore exempt from registration under
Rule 506 of Regulation D promulgated under the Act.
In April 2001, the Company issued shares of common stock to our executives as
follows: George R. Jensen, Jr.- 125,000 shares; Stephen P. Herbert - - 120,000
shares; H. Brock Kolls, Jr.- 87,000 shares; Leland P. Maxwell - 39,500 shares;
and Michael Lawlor - 34,500 shares. The Company issued the shares pursuant to
the exemption from registration set forth in Section 4(2) of the Act. All of
these investors are accredited investors and we obtained appropriate investment
representations and the securities contained appropriate restrictive legends
under the Act.
During July 2001, the Company issued to La Jolla Cove Investors, Inc. a warrant
to purchase up to 500,000 shares of Common Stock. The warrant can be exercised
at any time in whole or in part within one year following the effectiveness of
the registration statement covering the resale of the shares issuable upon
exercise of the warrant. The exercise price of the warrant is the lower of $1.00
or 80% of the lowest closing bid price of the Common Stock during the 20 trading
days prior to exercise. The Company has agreed to prepare and file at its cost
and expense a registration statement covering the resale of La Jolla of the
shares underlying the warrant. At the time of the issuance of the warrant, La
Jolla paid to the Company a non-refundable fee of $50,000 to be credited towards
the exercise price under the warrant. A broker-dealer received a commission of
$3,500 in connection with this warrant. The offering of the warrant and the
underlying shares was exempt from registration pursuant to Section 4(2) of the
Act. La Jolla is an accredited investor and we obtained appropriate investment
representation and the securities contained appropriate restrictive legends
under the Act.
During August 2001, the Company issued to La Jolla a $225,000 Convertible
Debenture bearing 9 3/4 percent interest with a maturity date of August 2, 2003.
Interest is payable by the Company monthly in arrears. The Debenture is
convertible at any time after the earlier of the effectiveness of the
registration statement referred to below or 90 days following issuance at the
lower of $1.00 per share or 80% of the lowest closing bid price of the Common
Stock during the 20 days preceding exercise. If on the date of conversion the
closing bid price of the shares is $.40 or below, the Company shall have the
right to prepay the portion being converted at 150% of the principal amount
being converted. In such event, La Jolla shall have the right to withdraw its
conversion notice. At the time of conversion of the Debenture, the Company has
66
agreed to issue to La Jolla warrants to purchase an amount of Common Stock equal
to ten times the number of shares actually issued upon conversion of the
Debenture. The warrants are exercisable at any time for two years following
issuance and at the related conversion price of the Debenture. The Company has
agreed to prepare and file at its expense a registration statement covering the
resale of the shares of Common Stock underlying the Debenture as well as the
related warrants issuable upon conversion of the Debenture. La Jolla paid to the
Company the sum of $100,000 at the time of the issuance of the Debenture and has
agreed to pay $125,000 at the time of the effective date of the registration
statement. The convertible debenture was issued pursuant to the exemption from
registration set forth in Section 4(2) of the Act. La Jolla is an accredited
investor and we obtained appropriate investment representation and the
securities contained appropriate restrictive legends under the Act.
During the period from March 2001 through September 2001, we sold a total of
739.54 units in the 2001-B Private Placement Offering at a price of $6,000 per
unit. Each unit consisted of 10,000 shares of common stock and 20,000 2001-B
common stock purchase warrants. The offering was sold to 193 accredited
investors, and did not involve any general advertising or solicitation, and was
therefore exempt from registration under Rule 506 of Regulation D promulgated
under the Act.
During the period from September 2001 through October 19, 2001, we sold for our
2001-C offering an aggregate of 4,212,350 shares of common stock at $.50 per
share for a total of $2,106,175. For each share of common stock purchased, each
investor also received a 2001-C warrant. The offering was sold to 102 accredited
investors, and did not involve any general advertising or solicitation, and was
therefore exempt from registration under Rule 506 of Regulation D promulgated
under the Act.
During October 2001, the Company issued 200,000 shares to Ratner & Prestia,
P.C., an accredited investor. The offering did not involve any general
advertising or solicitation, and was therefore exempt from registration under
Section 4(2) of the Act. The proceeds from the sales of the shares will be
applied by Ratner & Prestia towards the unpaid professional fees due to them by
the Company. The investor is an accredited investor and we obtained appropriate
investment representation and the securities contained appropriate restrictive
legends under the Act.
During the period from November 2001 through June 30, 2002, the Company sold
$4,814,593 principal amount of 12% Convertible Senior Notes due December 31,
2004. Each Senior Note is convertible into shares of common stock at $.40 per
share anytime through maturity. The notes were sold to 230 accredited investors
and the offer and sale thereof did not involve any general advertising or
solicitation and the offer and sale was therefore exempt from registration under
Rule 506 of the Regulation D promulgated under the Act.
In January 2002, the Company issued shares of common stock to the following
executive officers as a bonus: George R. Jensen, Jr.- 320,000 shares; Stephen P.
Herbert- 300,000 shares; H. Brock Kolls-200,000 shares; Leland Maxwell-130,000
shares; and Michael Lawlor- 130,000 shares. The issuance of the shares was
exempt from registration under Section 4(2) of the Act. All of these investors
are accredited and we obtained appropriate investment representations and the
securities contained appropriate restrictive legends under the Act.
In May 2002, we acquired Stitch Networks Corporation. Pursuant to the
transaction, Stitch become our wholly-owned subsidiary. In exchange for their
Stitch stock, the Stitch stockholders received an aggregate of 22,762,341 of our
shares of common stock and warrants to purchase up to 8,000,000 of our shares of
common stock at $.40 per share at any time through June 30, 2002. We also issued
to the former option holders of Stitch options to purchase up to 2,475,318
shares at $.165 per share at any time for five years following closing. The
67
offer and sale of the shares, warrants, and options was exempt from registration
under Section 4(2) of the Act.
The Stitch stockholders acquiring our shares and warrants are all accredited
investors and we obtained appropriate investment representations and the
securities contained appropriate restrictive legends under the Act. The
thirty-three former option holders of Stitch receiving our options consisted of
directors, officers or key employees of Stitch, all of whom were sophisticated
investors. In connection with the issuance of the options, we obtained
appropriate investment representations and the securities contained appropriate
restrictive legends under the Act.
In April 2002, the Company agreed to issue 400,000 shares of Common Stock to
Alex Consulting, Inc., a consultant to the Company. The offer and sale of the
shares was exempt from registration under Section 4(2) of the Act. The investor
is an accredited investor and we obtained appropriate investment representation
and the securities contained appropriate restrictive legends under the Act.
In April 2002, the Company agreed to issue 90,000 shares of Common Stock to
Larry Gershman, a consultant to the Company. The offer and sale of the shares
was exempt from registration under Section 4(2) of the Act. The investor is an
accredited investor and we obtained appropriate investment representation and
the securities contained appropriate restrictive legends under the Act.
In April 2002, the Company agreed to issue to Technology Partners (Holdings)
LLC, our investment banker, a total of 150,000 shares of Common Stock. The
shares are to be issued at the rate of 25,000 per month under the six month
extension of their consultant agreement. The offer and sale of the shares was
exempt from registration under Section 4(2) of the Act. The investor is an
accredited investor and we obtained appropriate investment representation and
the securities contained appropriate restrictive legends under the Act.
During September 2002, the Company sold 2,000,000 shares of restricted Common
Stock at $.12 per share for aggregate proceeds of $240,000 to an investor. In
addition, in October 2002, the Company granted to the investor warrants to
purchase up to 2,000,000 shares at $.10 per share through November 30, 2002
(later extended to March 31, 2003), and if all of these warrants are exercised,
the investor has been granted another identical warrant for 2,000,000 shares
exercisable at any time through March 31, 2003. The offer and sale of the shares
was exempt from registration under Section 4(2) of the Act. The investor is an
accredited investor and we obtained appropriate investment representation and
the securities contained appropriate restrictive legends under the Act.
Commencing during June 2002 and through October 2002, the Company sold to 186
accredited investors $4,144,008 principal amount of 12% Senior Notes due
December 31, 2005 and 8,288,016 shares of Common Stock. For each $10,000
invested, the subscriber received a $10,000 note and 20,000 shares of Common
Stock. The Company has received signed subscription documents for the 2002-A
Private Placement of Senior Notes for $4,114,008, of which $2,585,000 has been
deposited and the remainder for services. The notes were sold to accredited
investors and the offer and sale thereof did not involve any general advertising
or solicitation and the offer and sale was therefore exempt from registration
under Rule 506 of the Regulation D promulgated under the Act.
68
La Jolla Cove Investors converted Debentures and exercised warrants. The
investor utilized previously remitted funds to the Company which was reflected
as a deposit in the June 30, 2002 consolidated financial statements.
Specifically, from inception through June 30, 2003, La Jolla converted $325,000
of 9 3/4 percent Convertible Debentures, for which the Company issued 2,800,903
shares of stock, and exercised 10,543,673 warrants to purchase Common Stock at
an average price of $.16 per share. The Company had previously executed a
Securities Purchase Agreement with La Jolla for the purchase of $225,000
(increased by $100,000 on June 18, 2002) of Convertible Debentures bearing 9 3/4
percent interest with a maturity date of August 3, 2003 (extended to August 2,
2004 on June 18, 2002). Interest is payable by the Company monthly in arrears.
The Debenture is convertible at any time after the earlier of the effectiveness
of the registration statement or 90 days following issuance, at the lower of
$1.00 per share or 80% (later lowered to 72%) of the lowest closing bid price of
the Common Stock during the 30 days preceding exercise. The offer and sale of
the shares was exempt from registration under Section 4(2) of the Act.
In July 2002 the Company agreed to issue an aggregate of 234,600 shares to
employees as part of those employees` severance payments at the time of and as
part of the employee`s termination of employment. The offer and sale of the
shares was exempt from registration under Section 4(2) of the Act. All of these
eight former employees were sophisticated and were afforded access to all public
filings as well as to any other information reasonably obtainable by USA. We
received investment representations from all of these investors and all the
securities contained appropriate restrictive legends under the Act.
In July 2002, the Company agreed to issue to Karl Mynyk, a former employee, an
aggregate of 125,000 shares in settlement of litigation between he and the
Company. The shares were valued at $.20 per share. The offer and sale of the
shares was exempt from registration under Section 4(2) of the Act. Mr. Mynyk is
a sophisticated investor, was afforded access to all public filings as well as
to any other information reasonably obtainable by USA. We received investment
representations from him and the securities contained appropriate restrictive
legends under the Act.
In October 2002 and January 2003, the Company issued 529,324 and 593,634 shares,
respectively, (valued at $.20 per share) to the holders of the senior notes in
lieu of the cash quarterly interest payments due for the quarters ended
September 2002 and December 2002, respectively. In addition, for these two
quarters the Company granted warrants to purchase up to 1,122,958 shares at $.20
per share at any time prior to December 31, 2004. The offer and sale of the
shares and warrants was exempt from registration under Rule 506 promulgated
under the Act. All of these securities were sold to accredited investors and the
offer and sale did not involve any general advertising or solicitation.
In October 2002, the Company issued to Edwin P. Boynton 50,000 shares in lieu of
the 100,000 options granted to him in April 2002. The offer and sale of the
shares was exempt from registration under Section 4(2) of the Act. Mr. Boyton is
an accredited investor and a Director of the Company, we obtained investment
representations from him and the securities contained appropriate restrictive
legends under the Act.
In October 2002, the Company sold to an investor, Kazi Management VI, Inc.
3,571,429 shares of Common Stock at $.07 per share and issued the following
warrants: (1) warrants to purchase up to 7,142,858 shares of Common Stock at
$.07 at any time for a five year period; and (2) warrants to purchase up to
7,142,858 shares at $.07 per share and up to 5,000,000 shares at $.10 per share,
exercisable over a one year period. The offer and sale of the shares was exempt
from registration under Section 4(2) of the Act. The investor is an accredited
investor and we obtained appropriate investment representations from the
investor and the securities contained appropriate restrictive legends under the
Act.
In October 2002, the Company sold to an investor, Alpha Capital
Aktiengesellscharft, 1,500,000 shares at $.10 per share and granted warrants to
purchase up to 750,000 shares at $.15 per share at any time for five years.
69
Within seven days following the effectiveness of the registration statement
covering these shares, and provided that a Non-Registration Event (as defined in
our agreement with Alpha) has not occured, the Company has agreed to sell to the
investor an additional 1,500,000 shares at $.10 per share and grant warrants to
purchase up to 750,000 shares at the then closing price per share at any time
for five years. The securities were sold to an accredited investor and the offer
and sale thereof did not involve any general advertising or solicitation and the
offer and sale was therefore exempt from registration under Rule 506 of the
Regulation D promulgated under the Act.
In October 2002, the Company granted to the holders of the 12% senior notes
warrants to purchase that number of shares equal to 75% of the dollar amount of
the notes held by such holder. The total number of warrants issued was
10,360,025 and are exercisable at any time prior to October 31, 2003. If the
holder exercises all of such holder`s warrants, the holder shall receive another
identical warrant exercisable at any time prior to October 31, 2003. From
November 2002 through June 30, 2003, 14,025,804 of these warrants were exercised
at $.10 per share for a total of $1,402,851. The offer and sale of the warrants
and these shares was exempt from registration under Rule 506 promulgated under
the Act. All of the noteholders are accredited investors and already the holders
of our notes. The warrants and the shares all contained appropriate restrictive
legends under the Act.
On October 31, 2002, eight employees of and two consultants to USA entered into
subscription agreements with USA to receive an aggregate of 1,480,000 shares for
services to be rendered to USA. The shares were valued at $.125 per share and
were exempt from registration under Section 4(2) of the Act. All of the
employees and consultants were sophisticated investors, made appropriate
investment representations, were afforded access to all public filings and all
other information that USA could reasonably obtain, and the securities contained
appropriate restrictive legends under the Act.
During the 2003 fiscal year and through August 7, 2003, the Company issued an
aggregate of 85,601,130 shares to 398 accredited investors at $.10 per share for
an aggregate of $8,560,113. Of the $8,560,130, $8,345,674 were for cash proceeds
and $214,439 were for services rendered or to be rendered. The offer and sales
of the shares was exempt from registration under Rule 506 promulgated under
Section 4(2) of the Act. All of the investors were either pre-existing security
holders or business associates. The offer and sale thereof did not involve any
general advertising or solicitation and the securities contained appropriate
restrictive legends under the Act. In connection with the offering, we paid
$64,000 to Sloan Securities, Inc., a broker-dealer, in connection with the
8,000,000 shares sold by Sloan on our behalf. We have agreed to use our best
efforts to register all of these shares for resale under the Act for a period of
one year.
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
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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.
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
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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 Technology Group LLC,
as part of our purchase of substantially all of the assets of Bayview. The
securities were offered and sold under the exemption from registration set forth
in Rule 506 promulgated under the Act. Bayview was introduced to us through our
consultant Robert McGarrah, and there was no general solicitation or
advertising. Bayview has agreed not to sell any of the shares until July 11,
2004, at which time Bayview shall be permitted to sell during each calendar
month thereafter (on a non-cumulative basis) the greater of (i) 250,000 shares
of the Stock, or (ii) that number of shares of the Stock equal to five percent
(5%) of the immediately prior calendar month's trading volume of the shares of
Common Stock of USA. USA has agreed to use its best efforts to register all of
the shares for resale by Bayview under the Securities Act of 1933, as amended,
for a period of one year (from July 11, 2004 through July 11, 2005).
During September 2003, we issued to Wellington Management Company, LLP, on
behalf of several of its clients, an aggregate of 18,000,000 shares for $.25 per
share. The offer and sale of the shares was exempt from registration under
Section 4(2) of the Act. All of these clients are accredited investors. This
investor approached us regarding this investment and we did not solicit this
investor. We have agreed to register the shares for resale under the Act for a
period of one year.
During September 2003, we issued to George O'Connell, an accredited investor and
existing shareholder, an aggregate of 1,000,000 shares for $.25 per share. The
offer and sale of the shares was exempt from registration under Section 4(2) of
the Act. We have agreed to register the shares for resale under the Act for a
period of one year.
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
72
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 occurence of a Non-Registration Event as defined under our agreement with
Alpha because we failed to register within 120 days of issuance the securities
issued to Alpha in November 2002. The securities were sold to an accredited
investor and the offer and sale thereof did not involve any general advertising
or solicitation and the offer and sale was therefore exempt from registration
under Section 4(2) under the Act.
During the quarter ended June 30, 2003, the Company issued an aggregate of
8,497,819 shares to 464 holders of warrants at $0.10 per share for an aggregate
of $849,783. The offer and sales of the shares was exempt from the registration
requirements of the Act under Rule 506 promulgated thereunder. In this regard,
the offer and sale thereof did not involve any general advertising or
solicitation and the securities contained appropriate restrictive legends under
the Act. The Company agreed to use its best efforts to register the shares for
resale under the Act.
During the quarter ended June 30, 2003, the Company issued an aggregate of
4,462,918 shares to 13 holders of its Convertible Senior Notes at the rate of
$0.20 per share for aggregate conversions of $892,584. The offer and sales of
the shares was exempt from the registration requirements of the Act under Rule
506 promulgated thereunder. In this regard, the offer and sale thereof was to
existing security holders and did not involve any general advertising or
solicitation and the securities contained appropriate restrictive legends under
the Act.
During the quarter ended June 30, 2003, 50 holders of $2,196,000 principal
amount of the Senior Notes maturing in December 2003 elected to extend these
notes until December 31, 2006 and to have the conversion rate reduced from $1.25
per share to $0.20 per share. The note exchange was exempt from the registration
requirements of the Act pursuant to Section 3(a)(9) thereof.
During the quarter ended June 30, 2003, 56 holders of $1,296,397 principal
amount of the Senior Notes maturing in December 2004 elected to extend these
notes until December 31, 2007 and to have the conversion rate reduced from $0.40
per share to $0.20 per share. The shares were issued solely in exchange for our
securities and we paid no commissions in connection with the transaction. The
note exchange was exempt from the registration requirements of the Act pursuant
to Section 3(a)(9) thereof.
During the quarter ended June 30, 2003, the Company issued 3,340 shares of
Common Stock upon the conversion of 3,340 shares of Series A Preferred Stock and
issued 4,008 shares of Common Stock upon the conversion of $40,080 of cumulative
dividends accrued and unpaid on these shares of Preferred Stock. The shares were
issued solely in exchange for our securities and we paid no commissions in
connection with the transaction. The shares of Common Stock were issued pursuant
to the exemption from registration set forth in Section 3(a)(9) of the Act.
During the quarter ended September 30, 2003, the Company issued an aggregate of
535,258 shares of Common Stock to 7 holders of warrants at $0.10 per share for
an aggregate of $53,526. The Company issued 105,000 shares for consulting
services rendered or to be rendered to the Company, to the following warrants
holders upon exercise of their warrants: Rachel Glicksman- 72,000 shares;
Charlotte Given-30,000 shares; and Gary Nash- 3,000 shares. These warrants were
exercised at $.10 per share and no cash payment was required in connection with
their exercise. The shares issued for services were recorded at the market price
on the date of grant. The offer and sales of the shares was exempt from the
registration requirements of the Act under Rule 506 promulgated thereunder. In
this regard, the offer and sale thereof was to existing security holders and did
not involve any general advertising or solicitation and the securities contained
appropriate restrictive legends under the Act. The Company agreed to use its
best efforts to register the shares for resale under the Act.
During the quarter ended September 30, 2003, the Company issued an aggregate of
7,500,834 shares of Common Stock to 31 holders of its Convertible Senior Notes
upon their conversion at the rate of $0.20 per share for an aggregate of
$1,500,167. The offer and sales of the shares was exempt from the registration
requirements of the Act under Rule 506 promulgated thereunder. In this regard,
the offer and sale thereof was to existing security holders and did not involve
any general advertising or solicitation and the securities contained appropriate
restrictive legends under the Act.
During the quarter ended September 30, 2003, 54 holders of $1,116,000 principal
amount of the Senior Notes maturing in December 2003 elected to extend these
notes until December 31, 2006 and to have the conversion rate reduced from $1.25
per share to $0.20 per share. The note exchange was exempt from the registration
requirements of the Act pursuant to Section 3(a)(9) thereof.
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.
II. Stock Options
In October 2000, we issued to George R. Jensen, Jr., options to purchase up to
200,000 shares of our common stock at $1.50 per share. In February 2001, we
extended the expiration date of those options until June 30, 2003.
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During March 2001, the Company granted to Automated Merchandising Systems, Inc.
options to purchase up to 1,000,000 shares at $1.00 per share at any time
through June 30, 2001. The expiration date of these options was extended until
September 30, 2001. These options have expired.
During March 2001, the Company granted to each of the six Directors who were not
executive officers options to purchase up to 50,000 shares of Common Stock for
$1.00 at any time within five years of vesting.
During March 2001, the Company granted to employees of the Company who were not
executive officers fully vested options to purchase up to 85,000 shares of
Common Stock for $1.00 at any time within five years of vesting.
During April 2001, the Company issued options to the following executives:
George R. Jensen, Jr. - 100,000 options; Stephen P. Herbert - 80,000 options; H.
Brock Kolls, Jr. - 80,000 options; Leland P. Maxwell - 50,000 options; and
Michael Lawlor - 50,000 options. The options are exercisable at any time within
five years following vesting at $1.00 per share.
During April 2001, the Company issued to Marconi Online Systems, Inc. an option
to purchase up to 6,000,000 shares, of which 3,000,000 are exercisable at $1.00
per share through June 5, 2001, and 3,000,000 are exercisable at $1.25 through
September 5, 2001. None of these options were exercised.
During April 2001, the Company issued to Swartz Private Equity, LLC, a warrant
to purchase up to 377,927 shares of common stock at $1.00 per share. The
exercise price is subject to semi-annual reset provisions.
In August 2001, we issued to Larry Gershman, a marketing and financial
consultant, fully vested warrants to purchase an aggregate of 150,000 shares of
our common stock at $.70 per share exercisable at any time through August 2,
2003. In September 2001, we issued fully vested options to the following
employees or consultants: Adele Hepburn - 200,000 options; Frances Young -
100,000 options; and George O`Connell - 100,000 options. The options are
exercisable at $.70 per share at any time through June 30, 2003.
In November 2001, the Company authorized issuance of 1,080,000 fully vested
options to purchase its Common Stock to its Executive Officers, provided that
they were employed by the Company as of January 2, 2002. The amounts of options
authorized were: George R. Jensen, Jr. - 320,000 options; Stephen P. Herbert -
300,000 options; Haven Brock Kolls 200,000 options; Leland Maxwell - 130,000
options; and Michael Lawlor - 130,000 options. Each option is exercisable at
$.40 per share at any time and on or before June 30, 2003. These options vested
during March, 2002.
In November 2001, the Company issued the following fully vested options to
purchase an aggregate of 650,000 shares: Gary Oakland - 100,000 options; Adele
Hepburn - 300,000 options; and Frances Young - 250,000 options. These options
vested during March, 2002.
In April 2002, the Company granted to H. Brock Kolls an aggregate of fully
vested options to purchase up to 50,000 shares exercisable at $.40 per share for
a three year period following issuance.
On December 31, 2002, a total of 778,000 options to purchase Common Stock were
cancelled by members of the Board of Directors, and reported on Form 4 to the
SEC. No new options have been issued.
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On December 31, 2002, a total of 1,290,000 options to purchase Common Stock were
cancelled by executive officers, and reported on Form 4 to the SEC. No new
options have been issued.
The issuance of all of the foregoing options was made in reliance upon the
exemption provided by Section 4(2) of the Act as all of the options were issued
to officers, directors, employees or consultants of USA, each of such issuances
were separate transactions not part of any plan, and none of the issuances
involved any general solicitation or advertising.
Item 27. 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 Articles of Incorporation of USA filed on January 16, 1992
(Incorporated by reference to Exhibit 3.1 to Form SB-2
Registration Statement No. 33-70992).
3.1.1 First Amendment to Articles of Incorporation of USA filed on July
17, 1992 (Incorporated by reference to Exhibit 3.1.1 to Form SB-2
Registration Statement No. 33-70992).
3.1.2 Second Amendment to Articles of Incorporation of USA filed on July
27, 1992 (Incorporated by reference to Exhibit 3.1.2 to Form SB-2
Registration Statement No. 33-70992.
3.1.3 Third Amendment to Articles of Incorporation of USA filed on
October 5, 1992 (Incorporated by reference to Exhibit 3.1.3 to
Form SB-2 Registration Statement No. 33-70992).
3.1.4 Fourth Amendment to Articles of Incorporation of USA filed on
October 18, 1993 (Incorporated by reference to Exhibit 3.1.4 to
Form SB-2 Registration Statement No. 33-70992).
3.1.5 Fifth Amendment to Articles of Incorporation of USA filed on June
7, 1995 (Incorporated by Reference to Exhibit 3.1 to Form
SB-2 Registration Statement No. 33-98808).
3.1.6 Sixth Amendment to Articles of Incorporation of USA filed on May
1, 1996 (Incorporated by Reference to Exhibit 3.1.6 to Form SB-2
Registration Statement No. 333-09465).
3.1.7 Seventh Amendment to Articles of Incorporation of USA filed on
March 24, 1997 (Incorporated by reference to Exhibit 3.1.7 to Form
SB-2 Registration Statement No. 333-30853).
3.1.8 Eighth Amendment to Articles of Incorporation of USA filed on July
5, 1998 (Incorporated by reference to Exhibit 3.1.8 to Form 10-KSB
for the fiscal year ended June 30, 1998).
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3.1.9 Ninth Amendment to Articles of Incorporation of USA filed on
October 1, 1998 (Incorporated by reference to Exhibit 3.1.9 to
Form SB-2 Registration Statement No. 333-81591).
3.1.10 Tenth Amendment to Articles of Incorporation of USA filed on April
2, 1999 (Incorporated by reference to Exhibit 3.1.10 to Form SB-2
Registration Statement No. 333-81591).
3.1.11 Eleventh Amendment to Articles of Incorporation of USA filed on
June 7, 1999 (Incorporated by reference to Exhibit 3.1.11 to Form
SB-2 Registration Statement No. 333-81591).
3.1.12 Twelfth Amendment to Articles of Incorporation of USA filed on May
1, 2000 (Incorporated by reference to Exhibit 3.1.12 to Form SB-2
Registration Statement No. 333-101032).
3.1.13 Thirteenth Amendment to Articles of Incorporation of USA filed on
March 22, 2002 (Incorporated by reference to Exhibit 3.1.13 to
Form SB-2 Registration Statement No. 333-101032).
3.1.14 Fourteenth Amendment to Articles of Incorporation of USA filed on
May 14, 2002 (Incorporated by reference to Exhibit 3.1.14 to Form
SB-2 Registration Statement No. 333-101032).
3.1.15 Fifteenth Amendment to Articles of Incorporation of USA filed on
October 31, 2002 (Incorporated by reference to Exhibit 3.1.15 to
Form SB-2 Registration Statement No. 333-101032).
3.1.16 Sixteenth Amendment to Articles of Incorporation of USA filed on
February 14, 2003 (Incorporated by reference to Exhibit 3.1.16 to
Form SB-2 Registration Statement No. 333-101032).
3.1.17 Seventeenth Amendment to Articles of Incorporation of USA filed on
June 30, 2003 (Incorporated by reference to Exhibit 3.1.17 to Form
SB-2 Registration Statement No. 333-101032).
3.1.18 Eighteenth Amendment to Articles of Incorporation of USA filed on
July 11, 2003.(Incorporated by reference to Exhibit 3.1.18 to Form
SB-2 Registration Statement No. 333-101032).
3.2 By-Laws of USA (Incorporated by reference to Exhibit 3.2 to Form
SB-2 Registration Statement No. 33-70992).
4.1 Warrant Agreement dated as of June 21, 1995 between USA and
American Stock Transfer and Trust Company (Incorporated by
reference to Exhibit 4.1 to Form SB-2 Registration Statement N.
33-98808, filed October 31, 1995).
4.2 Form of Warrant Certificate (Incorporated by reference to Exhibit
4.2 to Form SB-2 Registration Statement, No. 33-98808, filed
October 31, 1995).
4.3 1996 Warrant Agreement dated as of May 1, 1996 between USA and
American Stock Transfer and Trust Company (Incorporated by
reference to Exhibit 4.3 to Form SB-2 Registration Statement No.
333-09465).
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4.4 Form of 1996 Warrant Certificate (Incorporated by reference to
Exhibit 4.4 to Form SB-2 Registration Statement No. 333-09465).
4.5 Form of 1997 Warrant (Incorporated by reference to Exhibit 4.1 to
Form SB-2 Registration Statement No. 333-38593, filed February 4,
1998).
4.6 Form of 12% Senior Note (Incorporated by reference to Exhibit 4.6
to Form SB-2 Registration Statement No. 333-81591).
4.7 Warrant Certificate of I. W. Miller Group, Inc. (Incorporated by
reference to Exhibit 4.7 to Form SB-2 Registration Statement No.
84513).
4.8 Warrant Certificate of Harmonic Research, Inc. (Incorporated by
reference to Exhibit 4.8 to Form SB-2 Registration Statement No.
333-84513).
4.9 Registration Rights Agreement dated August 3, 2001 by and between
the Company and La Jolla Cove Investors, Inc. (Incorporated by
reference to Exhibit 4.9 to Form 10-KSB filed on October 1, 2001).
4.10 Securities Purchase Agreement dated August 3, 2001 between the
Company and La Jolla Cove Investors, Inc. (Incorporated by
reference to Exhibit 4.10 to Form 10-KSB filed on October 1,
2001).
4.11 Form of Conversion Warrants to be issued by the Company to La
Jolla Cove Investors, Inc. (Incorporated by reference to Exhibit
4.11 to Form 10-KSB filed on October 1, 2001).
4.12 $225,000 principal amount 9 3/4% Convertible Debenture dated
August 3, 2001 issued by the Company to La Jolla Cove Investors,
Inc. (Incorporated by reference to Exhibit 4.12 to Form 10-KSB
filed on October 1, 2001).
4.13 Warrant certificate dated July 11, 2001 from the Company to La
Jolla Cove Investors, Inc. (Incorporated by reference to Exhibit
4.13 to Form 10-KSB filed on October 1, 2001).
4.14 August 2, 2001 letter from La Jolla Cove Investors, Inc. to the
Company (Incorporated by reference to Exhibit 4.14 to Form 10-KSB
filed on October 1, 2001).
4.15 Subscription Agreement dated October 26, 2001 by and between the
Company and Ratner & Prestia, P.C. (Incorporated by reference to
Exhibit 4.15 to Form SB-2 Registration Statement No. 333-72302).
4.16 Subscription Agreement dated October 26, 2002 by and between the
Company and Ratner & Prestia, P.C. (Incorporated by reference to
Exhibit 4.16 to Form SB-2 Registration Statement No. 333-101032).
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4.17 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).
4.18 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).
4.19 Registration Rights Agreement dated October 26, 2002 by and
between the Company and Kazi Management, Inc. (Incorporated by
reference to Exhibit 4.19 to Form SB-2 Registration Statement No.
333-101032).
4.20 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).
4.21 Subscription Agreement dated November 4, 2002 by and between the
Company and Alpha Capital Aktiengesellschaft (Incorporated by
reference to Exhibit 4.21 to Form SB-2 Registration Statement No.
333-101032).
4.22 Form of Common Stock Purchase Warrant dated November 4, 2002 in
favor of Alpha Capital Aktiengesellschaft (Incorporated by
reference to Exhibit 4.22 to Form SB-2 Registration Statement No.
333-101032).
4.23 Warrant Certificate (No. 196) dated March 17, 2003 in favor of La
Jolla Cove Investors, Inc.(Incorporated by reference to Exhibit
4.23 to Form SB-2 Registration Statement No. 333-101032).
4.24 Form of 2004 Senior Note (Incorporated by reference to Exhibit
4.24 to Form SB-2 Registration Statement No. 333-101032).
4.25 Form of 2005 Senior Note(Incorporated by reference to Exhibit 4.25
to Form SB-2 Registration Statement No. 333-101032).
4.26 Stock Purchase Agreement dated May 2, 2003 by and between USA and
Providence Investment Management (Incorporated by reference to
Exhibit 4.26 to Form SB-2 Registration Statement No. 333-101032).
4.27 Stock Purchase Agreement dated March, 2003 by and between USA and
Steve Illes (Incorporated by reference to Exhibit 4.27 to Form
SB-2 Registration Statement No. 333-101032).
4.28 Stock Purchase Agreement dated September 23, 2003 by and between
USA and Wellington Management Company, LLC. (Incorporated by
reference to Exhibit 4.28 to Form 10-KSB filed on October 14,
2003).
4.29 Stock Purchase Agreement dated September 26, 2003 by and between
USA and George O'Connell. (Incorporated by reference to Exhibit
4.29 to Form 10-KSB filed on October 14, 2003).
4.30 Stock Purchase Agreement dated September 24, 2003 by and between
USA and Fulcrum Global Partners, LLC. (Incorporated by reference
to Exhibit 4.30 to Form 10-KSB filed on October 14, 2003).
78
4.31 Stock Purchase Agreement dated September 2003 by and between USA
and Prophecy Asset Management, Inc. (Incorporated by reference to
Exhibit 4.31 to Form 10-KSB filed on October 14, 2003).
4.32 Letter Agreement between USA and La Jolla Cove Investors dated
October 9, 2003. (Incorporated by reference to Exhibit 4.32 to
Form SB-2 Registration Statement No. 333-101032)
4.33 Letter Agreement between USA and Alpha Capital Atkiengesellschaf
dated October 3, 2003. (Incorporated by reference to Exhibit 4.33
to Form SB-2 Registration Statement No. 333-101032)
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).
10.2 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).
10.3 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).
10.4 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).
10.4.1 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).
10.4.2 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).
10.5 H. Brock Kolls Common Stock Options dated as of May 1, 1994
(Incorporated by reference to Exhibit 10.42 to Form SB-2
Registration Statement No. 33-70992).
10.5.1 H. Brock Kolls Common Stock Options dated as of March 20, 1996
(Incorporated by reference to Exhibit 10.19 to Form SB-2
Registration Statement No. 33-70992)
10.6 Barry Slawter Common Stock Options dated as of August 25, 1994
(Incorporated by reference to Exhibit 10.43 to Form SB-2
Registration Statement No. 33-70992).
10.7 Employment and Non-Competition Agreement between USA and Michael
Lawlor dated June 7, 1996 (Incorporated by reference to Exhibit
10.28 to Form SB-2 Registration Statement No. 333-09465).
79
10.7.1 First Amendment to Employment and Non-Competition Agreement
between USA and Michael Lawlor dated February 22, 2000
(Incorporated by reference to Exhibit 10.5 to Form S-8
Registration Statement No. 333-34106).
10.7.2 Separation Agreement between USA and Michael Lawlor dated May 13,
2003. (Incorporated by reference to Exhibit 10.7.2 to Form 10-KSB
filed on October 14, 2003).
10.8 Michael Lawlor Common Stock Option Certificate dated as of June 7,
1996 (Incorporated by reference to Exhibit 10.29 to Form SB-2
Registration Statement No.333-09465).
10.9 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).
10.9.1 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).
10.9.2 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).
10.9.3 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).
10.10 Stephen P. Herbert Common Stock Option Certificate dated April 4,
1996 (Incorporated by reference to Exhibit 10.31 to Form SB-2
Registration Statement No. 333-09465).
10.11 RAM Group Common Stock Option Certificate dated as of August 22,
1996 (Incorporated by reference to Exhibit 10.34 to Form SB-2
Registration No. 33-98808).
10.12 RAM Group Common Stock Option Certificate dated as of November 1,
1996 (Incorporated by reference to Exhibit 10.35 to Form SB-2
Registration No. 33-98808).
10.13 Joseph Donahue Common Stock Option Certificate dated as of
September 2, 1996 (Incorporated by reference to Exhibit 10.37 to
Form SB-2 Registration No. 33-98808).
10.14 Employment and Non-Competition Agreement between USA and Leland P.
Maxwell dated February 24, 1997 (Incorporated by reference to
Exhibit 10.39 to Form SB-2 Registration No. 33-98808)
10.14.1 Second Amendment to Employment and Non-Competition Agreement
between USA and Leland P. Maxwell dated February 22, 2000
(Incorporated by reference to Exhibit 10.4 to Form S-8
Registration Statement No.
333-34106)
80
10.14.2 Separation Agreement between USA and Leland P. Maxwell dated May
9, 2003. (Incorporated by reference to Exhibit 10.14.2 to Form
10-KSB filed on October 14, 2003).
10.15 Leland P. Maxwell Common Stock Option Certificate dated February
24, 1997 (Incorporated by reference to Exhibit 10.40 to Form SB-2
Registration No. 33-98808).
10.16 Letter between USA and GEM Advisers, Inc. signed May 15, 1997
(Incorporated by reference to Exhibit 10.1 to Form 8-K filed on
May 22, 1997).
10.17 H. Brock Kolls Common Stock Option Certificate dated as of June 9,
1997 (Incorporated by reference to Exhibit 10.43 to Form SB-2
Registration Statement 333-30853).
10.18 Stephen Herbert Common Stock Option Certificate dated as of June
9, 1997 (Incorporated by reference to Exhibit 10.44 to Form SB-2
Registration Statement No. 333-30853).
10.19 Michael Feeney Common Stock Option Certificate dated as of June 9,
1997 (Incorporated by reference to Exhibit 10.46 to Form SB-2
Registration Statement No. 333-30853).
10.20 Joint Venture Agreement dated September 24, 1997 between USA and
Mail Boxes Etc. (Incorporated by reference to Exhibit 10.47 to
Form 10-KSB filed on September 26, 1997).
10.21 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).
10.21.1 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)
10.21.2 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).
10.21.3 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).
10.21.4 Fourth Amendment to Employment and Non-Competiton Agreement
between USA and George R. Jensen, Jr., dated April 15,
2002(Incorporated by reference to Exhibit 10.21.4 to Form SB-2
Registration Statement No. 333-101032).
10.21.5 Fifth Amendment to Employment and Non-Competiton 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).
81
10.21.6 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).
10.22 Agreement between USA and Promus Hotels, Inc. dated May 8, 1997
(incorporated by reference to Exhibit 10.49 to Form SB-2
Registration Statement No. 333-38593, filed on February 4, 1998).
10.23 Agreement between USA and Choice Hotels International, Inc. dated
April 24, 1997 (Incorporated by reference to Exhibit 10.50 to Form
SB-2 Registration Statement No. 333-38593, filed on February 4,
1998).
10.24 Agreement between USA and PNC Merchant Services dated July 18,
1997 (Incorporated by reference to Exhibit 10.51 to Form SB-2
Registration Statement No. 333-38593, filed on February 4, 1998).
10.25 Separation Agreement between USA and Keith L. Sterling dated April
8, 1998 (Incorporated by reference to Exhibit to Exhibit 10.1 to
Form 10-QSB filed May 12, 1998).
10.26 Phillip A. Harvey Common Stock Option Certificate dated as of
April 22, 1999 (Incorporated by reference to Exhibit 10.35 to Form
SB-2 Registration Statement No. 333-81591).
10.27 Consulting Agreement between Ronald Trahan and USA dated November
16, 1998 (incorporated by Reference to Exhibit 28 to Registration
Statement No. 333-67503 on Form S-8 filed on November 18, 1998)
10.28 Consulting Agreement between Mason Sexton and USA dated March 10,
1999 (incorporated by reference to Exhibit 28 to Registration
Statement No. 333-74807 on Form S-8 filed on March 22, 1999).
10.29 Financial Public Relations Agreement between USA and I. W. Miller
Group, Inc. dated August 1, 1999 (Incorporated by reference to
Exhibit 10.38 to Form SB-2 Registration Statement No. 333-84513).
10.30 Consulting Agreement between Harmonic Research, Inc. and USA dated
August 3, 1999 (Incorporated by reference to Exhibit 10.39 to Form
SB-2 Registration Statement No. 333-84513).
10.31 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).
10.32 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).
10.33 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).
10.34 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).
82
10.35 Agreement for Wholesale Financing and Addendum for Scheduled
Payment Plan with IBM Credit Corporation dated May 6, 1999
(incorporated by reference to Exhibit 10.40 to Form 10-KSB for the
fiscal year ended June 30, 1999).
10.36 Agreement and Plan of Merger dated April 10, 2002, by and among
the Company, USA Acquisitions, Inc., Stitch Networks Corporation,
David H. Goodman, Pennsylvania Early Stage Partners, L.P., and
Maytag Holdings, Inc. (Incorporated by reference to Exhibit 2.1 to
Form 10-QSB for the quarter ended March 31, 2002).
10.37 Cancellation of subscription Agreement between USA and Ratner &
Prestia, P.C. dated March 20, 2003 (Incorporated by reference to
Exhibit 10.37 to Form SB-2 Registration Statement No. 333-101032).
10.38 Agreement between USA and Mars Electronics, Inc. dated March 8,
2002 (Incorporated by reference to Exhibit 10.38 to Form SB-2
Registration Statement No. 333-101032).
10.39 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).
10.40 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).
10.41 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).
10.42 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).
10.43 Letter dated October 16, 2003 from Lurio & Associates, P.C. to
Gary L. Blum, Esquire (Incorporated by reference to Exhibit 10.43
to Form SB-2 Registration Statement No. 33-101032).
**23.1 Consent of Ernst & Young, LLP
**23.2 Consent of Anton Collins Mitchell, LLP
**23.3 Consent of Lurio & Associates, P.C.
-------------
** Filed Herewith
Item 28. 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:
83
(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.
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.
84
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 SB-2 and has duly caused this Amendment
No.1 to Registration Statement on Form SB-2 to be signed on its behalf by the
undersigned, thereunto duly authorized, in Malvern, Pennsylvania, on December
19, 2003.
USA TECHNOLOGIES, INC.
By: /s/ George R. Jensen, Jr.
------------------------------------
George R. Jensen, Jr.,
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No.1 to 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, December 19, 2003
---------------------------- and Chief Executive
George R. Jensen, Jr. Officer (Principal and Chief
Executive Officer) Director
/s/ David M. DeMedio Chief Financial Officer December 19, 2003
---------------------------- (Principal Accounting
David M. DeMedio Officer)
/s/ Stephen P. Herbert President, Chief December 19, 2003
---------------------------- Operating Officer,
Stephen P. Herbert Director
/s/ William W. Sellers Director December 19, 2003
-----------------------------
William W. Sellers
Director December __, 2003
----------------------------
William L. Van Alen, Jr.
Director December __, 2003
----------------------------
Steven Katz
85
/s/ Douglas M. Lurio Director December 19, 2003
----------------------------
Douglas M. Lurio
86
Exhibit Index
Exhibit
Number Description
------------------------------------------------------------------------------
23.1 Consent of Ernst & Young, LLP
23.2 Consent of Anton Collins Mitchell, LLP
23.3 Consent of Lurio & Associates, P.C.
87