REGISTRATION NO. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
USA TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania
(State or other jurisdiction of incorporation or organization)
7359
(Primary Standard Industrial Classification Code Number)
23-2679963
(I.R.S. Employer Identification Number)
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355
(610) 989-0340
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)
George R. Jensen, Jr.
Chief Executive Officer
USA Technologies, Inc.
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355
(610) 989-0340
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Douglas M. Lurio, Esquire
Lurio & Associates, P. C.
One Commerce Square
2005 Market Street, Suite 2340
Philadelphia, PA 19103-7015
(215) 665-9300
(Approximate date of proposed sale to the public)
From time to time after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: x
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.¨
CALCULATION OF REGISTRATION FEE | ||||||||||
Proposed | ||||||||||
Title of each | Proposed | Maximum | ||||||||
class of | Maximum | Aggregate | Amount of | |||||||
Securities to | Amount to be | Offering Price | Offering | Registration | ||||||
be Registered | Registered | Per Unit (9) | Price | Fee | ||||||
Common Stock, | ||||||||||
no par value | 1,020,000 shares | (1) | $5.75 | $5,865,000 | $ 627.56 | |||||
400,000 shares | (2) | $5.75 | $2,300,000 | $ 246.10 | ||||||
71,428 shares | (3) | $5.75 | $ 410,711 | $ 43.95 | ||||||
40,000 shares | (4) | $5.75 | $ 230,000 | $ 24.61 | ||||||
33,184 shares | (5) | $5.75 | $ 190,808 | $ 20.42 | ||||||
2,536 shares | (6) | $5.75 | $ 14,582 | $ 1.56 | ||||||
36,040 shares | (7) | $5.75 | $ 207,230 | $ 22.17 | ||||||
16,667 shares | (8) | $5.75 | $ 95,835 | $ 10.25 | ||||||
TOTAL | 1,619,855 shares | $9,314,166 | $996.62 | |||||||
(10) |
(1) | Represents shares issuable by us to Steve Illes under the 2006-B Common Stock Purchase Agreement between Mr. Illes and us dated September 25, 2006 including the 20,000 shares issued to Mr. Illes as a due diligence/commitment fee. |
(2) | This registration statement amends our registration statement on Form S- 1, Commission File No. 333-130992, and pursuant to Rule 429 of the Securities Act of 1933, as amended, carries forward 400,000 shares issued to Wellington Management Company, LLP, as investment adviser for certain of its clients. |
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(3) | This registration statement amends our registration statement on Form S- 1, Commission File No. 333-101032, and pursuant to Rule 429 of the Securities Act of 1933, as amended, carries forward 71,428 shares issuable to Kazi Management upon exercise of warrants. |
(4) | This registration statement amends our registration statement on Form S- 1, Commission File No. 333-130992, and pursuant to Rule 429 of the Securities Act of 1933, as amended, carries forward 40,000 shares issued to Rationalwave On Shore Equity Fund, L.P. |
(5) | Represents shares issued by us to Swartz Private Equity, LLC, pursuant to our September 25, 2006 Settlement Agreement. |
(6) | Represents shares issued by us to Erica Bender pursuant to our September 22, 2006 Settlement Agreement. |
(7) | Represents 25,000 shares issued to George Jensen under his employment agreement and 11,040 shares issued to him in lieu of cash salary under his employment agreement. |
(8) | Represents 16,667 shares issued to Stephen Herbert under his employment agreement. |
(9) | Pursuant to Rule 457c, the registration fee has been calculated at the average of the bid and ask price within 5 days prior to the date of the filing of the registration statement. |
(10) | $356.45 of the filing fee is being paid at the time of filing this registration statement. $470.80 of the filing fee was previously paid and is offset against the currently due filing fee in connection with the Company’s registration statement No. 333-130992 filed on January 12, 2006 relating to the 400,000 shares described in footnote (2) to this table. $122.29 of the filing fee was previously paid and is offset against the currently due filing fee in connection with the Company’s registration statement No. 333-130992 filed on January 12, 2006 relating to the 71,428 shares described in footnote (3) to this table. $47.08 of the filing fee was previously paid and is offset against the currently due filing fee in connection with the Company’s registration statement No. 333-130992 filed on January 12, 2006 relating to the 40,000 shares described in footnote (4) to this table. |
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.
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PROSPECTUS
USA TECHNOLOGIES, INC.
1,619,855 shares of Common Stock
THE OFFERING
The resale of up to 1,619,855 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. We will receive proceeds from the sale of shares issuable upon the sale of shares to Steve Illes under the 2006-B Common Stock Purchase Agreement dated September 25, 2006, and from the sale of shares issuable upon the exercise of warrants by a selling shareholder. 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.
Steve Illes is an “underwriter” within the meaning of the Act in connection with the sale of shares purchased from us under his agreement with us. Mr. Illes will receive a ten percent discount from us in connection with his purchase of shares from us. See “Other Events”.
Our common stock is included for quotation on the over-the-counter bulletin board under the symbol "USAT." The closing bid price for the common stock on October 12, 2006, was $5.75 per share.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES ONLY IF YOU CAN AFFORD A COMPLETE LOSS. Please refer to Risk Factors beginning on Page 7.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
The date of this prospectus is October 20, 2006.
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TABLE OF CONTENTS | ||
Contents | Page | |
Prospectus Summary | 6 | |
Risk Factors | 7 | |
Use of Proceeds | 14 | |
Selected Financial Data | 15 | |
Quarterly Financial Data | 15 | |
Quantitative and Qualitative Disclosures About Market Risk | 16 | |
Management’s Discussion And Analysis of Financial Condition | ||
And Results of Operations | 16 | |
Other Events | 29 | |
Business | 32 | |
Management | 48 | |
Principal Shareholders | 57 | |
Certain Transactions | 59 | |
Selling Shareholders | 60 | |
Market for Common Stock | 62 | |
Plan of Distribution | 64 | |
Description of Securities | 65 | |
Legal Matters | 69 | |
Experts | 70 | |
Where You Can Find Additional Information | 70 | |
Financial Statements | F-1 |
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PROSPECTUS SUMMARY
OUR COMPANY
USA Technologies, Inc. (the “Company”, “We” and “Our”) was incorporated in the Commonwealth of Pennsylvania in January 1992. The Company offers a suite of networked devices and associated wireless non-cash payment, control/access management, remote monitoring and data reporting services. As a result of the acquisition of the assets of Bayview Technology Group, LLC ("Bayview") in July 2003, our Company also manufactures and sells energy management products which reduce the power consumption of various equipment, such as refrigerated vending machines and glass front coolers, thus reducing the energy costs associated with operating this equipment.
OUR BUSINESS
Our networked devices and associated services enable the owners and operators of everyday, stand-alone, distributed assets, such as vending machines, personal computers, copiers, faxes, kiosks and laundry equipment, the ability to remotely monitor, control and report on the results of these distributed assets, as well as the ability to offer their customers alternative cashless payment options.
OUR MARKET
Our customers fall into the following categories; vending machine owners and/or operators, business center operators which include hotels and audio visual companies, commercial laundry operators servicing colleges and universities, brand marketers wishing to provide their products or services via kiosks or vending machines and equipment manufacturers such as consumer electronics, appliances, building control systems, factory equipment and computer peripherals that would like to incorporate the technological features of our networked devices (i.e. remote monitoring, reporting and control as well as cashless payments) into their products. Customers for our energy management products also include energy utility companies and operators of glass front coolers.
RESEARCH AND DEVELOPMENT COSTS
Research and development expenses, which are included in general and administrative and compensation expense in the Consolidated Statements of Operations, were approximately $974,000, $1,364,000, and $688,000 for the years ended June 30, 2006, 2005 and 2004, respectively.
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ABOUT OUR OFFERING
Our selling shareholders are, as of the date of this prospectus, as follows:
* | the holders of 495,720 shares; |
* | a holder of unexercised warrants which, if exercised, would represent 71,428 shares (based upon the price of our shares of $5.75 on October 12, 2006, none of these warrants are in the money); |
* | up to 1,000,000 shares that Steve Illes has agreed to purchase under the Common Stock Purchase Agreement dated September 25, 2006; |
* | 36,040 shares held by our Chairman and Chief Executive Officer, George R. Jensen, Jr.; and |
* | 16,667 shares held by our President and Chief Operating Officer, Stephen P. Herbert. |
Based upon the shares outstanding as of September 15, 2006 of 6,586,487 shares of Common Stock, if Mr. Illes purchases all of the shares covered by this prospectus, and all of the warrants are exercised, we would have 7,649,023 shares outstanding.
The shares covered by this prospectus would be offered by our selling shareholders at the market price at the time of resale. Our selling shareholders may also sell their shares to other investors in a transaction not on the open market. There is no requirement that our selling shareholders sell their shares pursuant to this prospectus.
We will not receive any of the proceeds raised by the offering. We would receive proceeds from the purchase by Mr. Illes of the shares referred to above and from the exercise of the warrants referred to above.
RISK FACTORS
We have a history of losses since inception and if we continue to incur losses the price of our shares can be expected to fall.
We have experienced losses since inception. We expect to continue to incur losses for the foreseeable future as we expend substantial resources on sales, marketing, and research and development of our products. From our inception through June 30, 2006, our cumulative losses are approximately $128 million. For our fiscal years ended June 30, 2004, 2005 and 2006, we have incurred net losses of $21,426,178, $15,499,190, and $14,847,076, respectively. If we continue to incur losses, the price of our common stock can be expected to fall.
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Our existence is dependent on our ability to raise capital that may not be available.
There is currently limited experience upon which to assume that our business will prove financially profitable or generate sufficient revenues to cover our expenses. From inception, we have generated funds primarily through the sale of securities. Although we believe that we have adequate existing resources to provide for our funding requirements through at least June 30, 2007, there can be no assurances that we will be able to continue to generate sufficient funds thereafter. 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. During the year ended June 30, 2006, cash used in operating activities was approximately $924,000 per month. Using the actual cash requirements for the prior fiscal year for estimating cash requirements for the entire year ending June 30, 2006 (which assumes a static level of revenues), cash requirements for fiscal year 2007, including requirements for capital expenditures and repayments of long-term debt, would be approximately $11,600,000. Subsequent to June 30, 2007, 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.
We received an opinion from our auditor which raises substantial doubt about our ability to continue as a going concern.
Our auditors, Goldstein Golub Kessler LLP, have included an explanatory paragraph in their report on our June 30, 2006 consolidated financial statements indicating that as of June 30, 2006, 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.
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.
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We have entered into an employment agreement with Mr. Jensen that expires in June 30, 2009. 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 President, Stephen P. Herbert.
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.
USA's dependence on proprietary technology and limited ability to protect our intellectual property may adversely affect our ability to compete.
A successful challenge to our ownership of our technology could materially damage our business prospects. Our technology may infringe upon the proprietary rights of others. Our success is dependent in part on our ability to obtain patent protection for our proprietary products, maintain trade secret protection and operate without infringing the proprietary rights of others.
Through August 31, 2006, we have 29 pending patent applications, and intend to file applications for additional patents covering our future products, although there can be no assurance that we will do so. In addition, there can be no assurance that we will maintain or prosecute these applications. The United States Government and other countries have granted us 64 patents as of August 31, 2006. There can be no assurance that:
o any of the remaining patent applications will be granted to us;
o we will develop additional products that are patentable or do not infringe the patents of others;
o any patents issued to us will provide us with any competitive advantages or adequate protection for our products;
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.
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Competition from others with greater resources could prevent USA from increasing revenue and achieving profitability.
Competition from other companies that are well established and have substantially greater resources may reduce our profitability. Many of our competitors have established reputations for success in the development, sale and service of high quality products. We face competition from the following groups:
o companies offering automated, credit card activated control systems in connection with facsimile machines, personal computers, debit card purchase/revalue stations, and use of the Internet and e-mail which directly compete with our products;
o companies which have developed unattended, credit card activated control systems currently used in connection with public telephones, prepaid telephone cards, gasoline dispensing machines, or vending machines and are capable of developing control systems in direct competition with USA; and
o businesses which provide access to the Internet and personal computers to hotel guests. Although these services are not credit card activated, such services would compete with USA's Business Express(R).
Competition may result in lower profit margins on our products or may reduce potential profits or result in a loss of some or all of our customer base. To the extent that our competitors are able to offer more attractive technology, our ability to compete could be adversely affected.
The termination of any of our relationships with third parties upon whom we rely for supplies and services that are critical to our products could adversely affect our business and delay achievement of our business plan.
We depend on arrangements with third parties for a variety of component parts used in our products. We have contracted with Masterwork Electronics to assist us to develop and manufacture our e-Port(R) products and with various sources to manufacture our energy miser products. For other components, we do not have supply contracts with any of our third-party suppliers and we purchase components as needed from time to time. 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.
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Our reliance on our telecommunication service provider exposes us to a number of risks over which we have no control, including risks with respect to increased prices and termination of essential services.
The operation of our network depends upon the capacity, reliability and security of services provided to us by our telecommunication services provider, Cingular. We have no control over the operation, quality or maintenance of these services or whether the vendor will improve its services or continue to provide services that are essential to our business. In addition, our telecommunication services provider may increase its prices at which it provides services, which would increase our costs. If our telecommunication services provider were to cease to provide essential services or to significantly increase its prices, we could be required to find alternative vendors for these services. With a limited number of vendors, we could experience significant delays in obtaining new or replacement services, which could lead to slowdowns or failures of our network. In addition, we may have to replace our existing e-Port devices that are already installed in the marketplace. This could significantly harm our reputation and could cause us to lose customers and revenues.
We may not be able to adapt to changing technology and our customers’ technology needs.
We face rapidly changing technology and frequent new service offerings by competitors that can render existing services obsolete or unmarketable. Our future success depends on our ability to enhance existing services and to develop, introduce and market, on a timely and cost effective basis, new services that keep pace with technological developments and customer requirements.
We do not expect to pay cash dividends in the foreseeable future and therefore investors should not anticipate cash dividends on their investment.
The holders of our common stock and series A preferred stock are entitled to receive dividends when, and if, declared by our board of directors. Our board of directors does not intend to pay cash dividends in the foreseeable future, but instead intends to retain any and all earnings to finance the growth of the business. To date, we have not paid any cash dividends on the common stock or series A preferred stock and there can be no assurance that cash dividends will ever be paid on the common stock.
In addition, our articles of incorporation prohibit the declaration of any dividends on the Common Stock unless and until all unpaid and accumulated dividends on the Series A preferred stock have been declared and paid. Through June 30, 2006, the unpaid and cumulative dividends on the series A preferred stock equal $8,226,261. The unpaid and cumulative dividends on the series A preferred stock are convertible into shares of common stock at the rate of $1000 per share at the option of the shareholder. Through June 30, 2006, $2,702,764 of unpaid and cumulative dividends on the Series A Preferred Stock were converted into 2,903 shares of common stock.
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Our products may fail to gain widespread market. As a result, we may not generate sufficient revenues or profit margins to become successful.
There can be no assurance that demand for our products will be sufficient to enable us to become profitable. Likewise, no assurance can be given that we will be able to install the TransActs and e-Ports at enough locations or sell equipment utilizing our network or our energy management products to enough locations to achieve significant revenues or that our operations can be conducted profitably. Alternatively, the locations which would utilize the network may not be successful locations and our revenues would be adversely affected. We may in the future lose locations utilizing our products to competitors, or may not be able to install our products at competitors’ 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.
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.
The substantial market overhang of our shares 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. As of June 30, 2006, these shares consisted of the following:
- 6,327,175 shares of Common Stock
- 5,215 shares of Preferred Stock
- 8,226 shares issuable upon conversion of the accrued and unpaid dividends on the Series A Preferred Stock
- 398,414 shares underlying Common Stock options and warrants
- 140,000 shares issuable to Mr. Jensen, our Chief Executive Officer, under his employment agreement upon the occurrence of a USA Transaction
- 669,635 shares underlying our Convertible Senior Notes
- 715,571 shares issuable under the 2006 Common Stock Agreement with Steve Illes; and
- 16,587 shares issuable under our 2006-A Stock Compensation Plan.
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Sales of shares eligible for future sale from exercise of warrants and options and our 2006 Common Stock Agreement could depress the market price of our common stock.
As of June 30, 2006, we had issued and outstanding options to purchase 178,933 shares of our common stock, warrants to purchase 219,481 shares, and 715,571 shares eligible for sale under our 2006 Common Stock Agreement. The shares underlying 78,933 of these options, all of these warrants, and all of the shares underlying the 2006 Common Stock Agreement 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, or the increase of the number of shares eligible for sale to Mr. Illes under our agreements with him, 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.
We are obligated to make substantial principal and interest payments to the holders of the Senior Notes for which funds may not be available or would use our available working capital.
As of June 30, 2006, we had $320,000 of unsecured senior notes due on June 30, 2009, $983,826 of unsecured senior notes due on June 30, 2007, $2,962,516 of unsecured senior notes due on December 31, 2007, $2,096,919 of unsecured senior notes due on December 31, 2008, $1,520,000 of unsecured senior notes due on December 31, 2009, and $2,012,000 of unsecured senior notes due on December 31, 2010. These notes accrue cash interest at the rate of twelve percent (12%) per year with the exception of the notes due June 30, 2007, December 31, 2010 and $181,611 of the December 31, 2008 notes, which accrue cash interest at the rate of ten percent (10%) per year. We are required to make quarterly interest payments totaling approximately $281,000 or $1,124,000 each year.
Until the Senior Notes have been paid by us, they will be reflected as a liability on our financial statements, net of the related unamortized discount and other issuance costs.
Our ability to satisfy the debt obligations is dependent on our future performance, the success of our product lines and on our ability to raise capital. Our performance is also subject to financial, business and market factors affecting our business and operations.
We anticipate that the Senior Notes will either be converted into Common Stock or be paid from cash generated from operations, as well as proceeds from securities offerings. However, there can be no assurance that we will meet our obligations to pay quarterly interest on or the principal amount of the senior notes at maturity. The payment of the interest and principal on these notes would utilize our available working capital, which would not be available for other purposes.
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Credit card issuers have promulgated credit card security guidelines as part of their ongoing efforts to battle identity theft and credit card fraud.
We continue to work with credit card issuers to assure that our products and services comply with these rules. These can be no assurances, however, that our products and services are invulnerable to unauthorized access or hacking. When there is unauthorized access to credit card data that results in financial loss, there is the potential that parties could seek damages from us.
We are subject to laws and regulations that affect the products, services and markets in which we operate. Failure by us to comply with these laws or regulations would have an adverse effect on our business, financial condition, or results of operations.
The Company is, among other things, subject to banking regulations and credit card association regulations. Failure to comply with these regulations may result in the suspension or revocation of our business, the limitation, suspension or termination of service, and/or the imposition of fines that could have an adverse effect on our financial condition. Additionally, changes to legal rules and regulations, or interpretation or enforcement thereof, could have a negative financial effect on the Company and our product offerings. The payment processing industry may become subject to regulation as a result of recent data security breaches that have exposed consumer data to potential fraud. To the extent this occurs, we could be subject to additional technical, contractual or other requirements as a condition of our continuing to conduct our payment processing business. These requirements could cause us to incur additional costs, which could be significant, or to lose revenues to the extent we do not comply with these requirements.
USE OF PROCEEDS
We will not receive any of the proceeds from the sales of our Common Stock by the selling shareholders. The selling shareholders entitled to receive the net proceeds from any sales of our common stock begins on page 60 of this prospectus. We will, however, receive proceeds from the exercise of any warrants by a selling shareholder and the purchase by Mr. Illes of shares under the 2006-B Common Stock Agreement dated September 25, 2006.
As of the date of this prospectus, we would receive $500,000 of proceeds from the exercise of all of the warrants at the stated exercise price of $7.00 per share (none of which are in the money as of the date of this prospectus).
Based upon the price of our shares as of October 12, 2006, we would receive $5,175,000 of proceeds from the purchase by Steve Illes of all 1,000,000 shares issuable to him under his agreement with us at $5.175 per share. The maximum amount of purchases by Mr. Illes under his agreement with us is $15,000,000. Therefore, if our share price would be in excess of $33 per share when purchases were made by Mr. Illes, we would receive $15,000,000 of proceeds from the purchase by Mr. Illes of 500,000 shares issuable to him at $30 per share.
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SELECTED FINANCIAL DATA
The following selected financial data for the five years ended June 30, 2006 are derived from the audited consolidated financial statements of USA Technologies, Inc. The data should be read in conjunction with the consolidated financial statements, related notes, and other financial information.
Year ended June 30 | ||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | ||||||
OPERATIONS DATA | ||||||||||
Revenues | $ 6,414,803 | $ 4,677,989 | $ 5,632,815 | $ 2,853,068 | $ 1,682,701 | |||||
Net loss | (14,847,076) | (15,499,190) | (21,426,178) | (21,965,499) | (17,314,807) | |||||
Cumulative preferred dividends | (783,289) | (784,113) | (786,513) | (793,586) | (822,561) | |||||
Loss applicable to common shares | $(15,630,365) | $(16,283,303) | $(22,212,691) | $(22,759,085) | $(18,137,368) | |||||
Loss per common share (basic and diluted) | $ (3.15) | $ (4.18) | $ (7.70) | $ (20.36) | $ (50.39) | |||||
Cash dividends per common share | $ -- | $ -- | $ -- | $ -- | $ -- | |||||
BALANCE SHEET DATA | ||||||||||
Total assets | $ 23,419,466 | $ 23,391,765 | $ 25,880,577 | $ 17,892,681 | $ 17,056,773 | |||||
Convertible Senior Notes and other | ||||||||||
long-term debt | $ 7,780,853 | $ 9,337,300 | $ 7,273,056 | $ 9,213,699 | $ 7,968,097 | |||||
Shareholders' equity | $ 11,177,064 | $ 9,309,185 | $ 14,108,662 | $ 3,692,083 | $ 3,395,892 |
(a) In May 2002 the Company acquired Stitch Networks Corporation. In July 2003 the Company acquired substantially all the assets of Bayview Technology Group, LLC. Both acquisitions have been accounted for using the purchase method and, accordingly, are included in the Company's results of operations from their respective dates of acquisition.
QUARTERLY FINANCIAL DATA
Unaudited quarterly results of operations for the years ended June 30, 2006 and 2005 follow and should be read in conjunction with the consolidated financial statements, related notes and other financial information and the Company's quarterly reports on Form 10-Q for the fiscal years 2006 and 2005.
First | Second | Third | Fourth | |||||||
Quarter | Quarter | Quarter | Quarter | Year | ||||||
YEAR ENDED JUNE 30, 2006 | ||||||||||
Revenues | $ 1,363,886 | $ 1,957,753 | $ 1,618,776 | $ 1,474,388 | $ 6,414,803 | |||||
Gross profit | $ 314,927 | $ 787,882 | $ 687,749 | $ 219,788 | $ 2,010,346 | |||||
Net loss | $(3,196,872) | $(2,864,091) | $(3,313,868) | $(5,472,245) | $(14,847,076) | |||||
Cumulative preferred dividends | $ (392,057) | $ -- | $ (391,232) | $ -- | $ (783,289) | |||||
Loss applicable to common shares | $(3,588,929) | $(2,864,091) | $(3,705,100) | $(5,472,245) | $(15,630,365) | |||||
Loss per common share (basic and diluted) | $ (0.90) | $ (0.61) | $ (0.74) | $ (0.96) | $ (3.15) | |||||
YEAR ENDED JUNE 30, 2005 | ||||||||||
Revenues | $ 1,032,578 | $ 1,135,449 | $ 1,122,330 | $ 1,387,632 | $ 4,677,989 | |||||
Gross profit | $ 130,534 | $ 342,705 | $ 566,720 | $ 159,357 | $ 1,119,316 | |||||
Net loss | $(3,640,637) | $(3,805,004) | $(3,702,049) | $(4,351,500) | $(15,499,190) | |||||
Cumulative preferred dividends | $ (392,057) | $ -- | $ (392,056) | $ -- | $ (784,113) | |||||
Loss applicable to common shares | $(4,032,694) | $(3,805,004) | $(4,094,105) | $(4,351,500) | $(16,283,303) | |||||
Loss per common share (basic and diluted) | $ (1.14) | $ (1.01) | $ (1.02) | $ (1.12) | $ (4.18) |
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risks for interest rate changes is not significant. Interest rates on its Senior Notes and long-term debt are generally fixed and its investments in cash equivalents and other securities are not significant. Market risks related to fluctuations of foreign currencies are not significant and the Company has no derivative instruments.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
GENERAL
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. We believe the policies and estimates related to revenue recognition, software development costs, impairment of long-lived assets, goodwill and intangible assets, and investments represent our critical accounting policies and estimates. Future results may differ from our estimates under different assumptions or conditions.
REVENUE RECOGNITION
Revenue from the sale of equipment is recognized on the terms of freight-onboard shipping point, or upon installation and acceptance of the equipment if installation services are purchased for the related equipment. Transaction processing revenue is recognized upon the usage of the Company's cashless payment and control network. License fees for access to the Company's devices and network services are recognized on a monthly basis. Product revenues are recognized for the sale of products from Company owned vending machines when there is purchase and acceptance of product by the vending customer. In all cases, revenue is only recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed and determinable, and collection of the resulting receivable is reasonably assured. The Company estimates an allowance for product returns at the date of sale.
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SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs pursuant to Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed", after technological feasibility of the software is established and through the product's availability for general release to the Company's customers. All costs incurred in the research and development of new software and costs incurred prior to the establishment of technological feasibility are expensed as incurred. Amortization of software development costs commences when the product becomes available for general release to customers. Amortization of software development costs is calculated as the greater of the amount computed using (i) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues of that product or (ii) the straight-line method over the remaining estimated economic life of the product. The Company reviews the unamortized software development costs at each balance sheet date and, if necessary, will write down the balance to net realizable value if the unamortized costs exceed the net realizable value of the asset.
During May 2000, the Company reached technological feasibility for the development of the multi-media e-Port(TM) product and related internal network and, accordingly, the Company commenced capitalization of software development costs related to this product and network. Costs capitalized through 2002 were $5.3 million, which included capitalized interest of approximately $493,000 pursuant to SFAS No. 34, "Capitalization of Interest Costs".
During the fourth quarter of fiscal year 2002, the multi-media e-Port(TM) client product and enhanced network became available for general release to the Company's customers. During this quarter, management performed an evaluation of the commercial success and preliminary market acceptance of the multi-media e-Port(TM) and enhanced network and as a result of this evaluation the Company determined that the estimated future revenues less costs to complete and dispose of the multi-media e-Port client product was zero. Therefore, the Company wrote down $2,663,000 of software development costs related to the multi-media e-Port client product. The unamortized balance of the software development costs after the impairment charge was amortized over an estimated useful life of two years and was fully amortized during the year ended June 30, 2004. Accumulated amortization was $5,326,186 at June 30, 2006, 2005, and 2004. Amortization expense was approximately $999,000 during the year ended June 30, 2004. Such amortization is reflected in cost of sales in the accompanying consolidated statements of operations.
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IMPAIRMENT OF LONG LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets" ("FAS 144"), the Company reviews its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the carrying amount of an asset or group of assets exceeds its net realizable value, the asset will be written down to its fair value. In the period when the plan of sale criteria of FAS 144 are met, long-lived assets are reported as held for sale, depreciation and amortization cease, and the assets are reported at the lower of carrying value or fair value less costs to sell.
During the fourth quarter of fiscal year 2003, the Company reviewed certain long-lived assets (vending machines) and determined that such assets were impaired. These vending machines were used and intended for use in connection with the Company's program with Kodak to sell disposable cameras and film pursuant to the Kodak Vending Placement Agreement. Management determined that it was more likely than not that these vending machines would be disposed of before the end of their previously estimated useful lives. The estimated undiscounted cash flows for this group of assets were 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. Effective December 31, 2003, the Kodak agreement was terminated. As a result, the carrying value of the vending machines were further impaired and a charge of approximately $367,000 was recorded as a component of the gain on contract settlement in the June 30, 2004 Consolidated Statement of Operations to reflect these assets at their realizable value. The remaining value of these vending machines was then recorded as assets held for sale in the Consolidated Balance Sheets as of June 30, 2004. During the year ended June 30, 2005, the Company wrote off the remaining value of the vending machines that had not been sold during the year as a loss on contract settlement.
GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of cost over fair value of the net assets purchased in acquisitions. The Company accounts for goodwill in accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). Under FAS 142, goodwill is not amortized to earnings, but instead is subject to periodic testing for impairment. The Company tests goodwill for impairment using a two-step process. The first step screens for potential impairment, while the second step measures the amount of impairment. The Company uses a discounted cash flow analysis to complete the first step in this process. Testing for impairment is to be done at least annually and at other times if events or circumstances arise that indicate that impairment may have occurred. The Company has selected April 1 as its annual test date. The Company has concluded there has been no impairment of goodwill as a result of its testing on April 1, 2004, April 2005 and April 1, 2006.
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Patents, trademarks and the non-compete agreement are carried at cost less accumulated amortization, which is calculated on a straight-line basis over their estimated economic life. The Company reviews intangible for impairment whenever events or changes in circumstances indicate that they carrying amount may not be recoverable. An asset is considered to be impaired when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. The amount of the impairment loss, if any, is measured as the difference between the net book value of the asset and its estimated fair value.
Intangible assets include patents, trademarks and non-compete arrangements purchased in acquisitions. Amortization expense related to these intangible assets was $1,236,600, $1,236,600, and $1,208,668 during the years ended June 30, 2006, 2005, and 2004, respectively.
INVESTMENTS
The Company's accounts for investments in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("FAS 115"). Management determines the appropriate classifications of securities at the time of purchase and reevaluates such designation as of each balance sheet date. Available for sale securities are carried at fair value, with the unrealized gains and losses reported as a separate component of stockholders' equity in other comprehensive income (loss). A judgmental aspect of accounting for investments involves determining whether an other-than-temporary decline in value of the investment has been sustained. If it has been determined that an investment has sustained an other-than-temporary decline in its value, the investment is written down to its fair value, by a charge to earnings. Such evaluation is dependent on the specific facts and circumstances. Factors that are considered by the Company each quarter in determining whether an other-than-temporary decline in value has occurred include: the market value of the security in relation to its cost basis; the financial condition of the investee; and the intent and ability to retain the investment for a sufficient period of time to allow for recovery in the market value of the investment. In evaluating the factors above for available-for-sale securities, management presumes a decline in value to be other-than-temporary if the quoted market price of the security is below the investment's cost basis for a period of six months or more. However, the presumption of an other-than-temporary decline in these instances may be overcome if there is persuasive evidence indicating that the decline is temporary in nature (e.g., strong operating performance of investee, historical volatility of investee, etc.).
During the year ended June 30, 2003, the Company issued 150,000 shares of its Common Stock ($2,850,000) for an investment in 1,870,091 shares in the Jubilee Investment Trust, PLC ("Jubilee"), a United Kingdom Investment Trust whose shares trade on the London Stock Exchange. The Company agreed not to sell the Jubilee shares for a period of 90 days from January 24, 2003 and to sell a maximum of 10% of the Jubilee shares during each month thereafter. Jubilee agreed not to sell the Company's shares of Common Stock for a period of two years from the date of issuance unless agreed to by the Company.
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During fiscal year 2004, the Company sold 1,669,091 of the Jubilee shares for net proceeds of $1,471,140 and realized a gain of $603,480, with the cost of the securities calculated by the specific identification method. An unrealized gain of $3,080 and $32,249 on the shares held by the Company was reflected in shareholders' equity as accumulated other comprehensive income at June 30, 2005 and 2004, respectively. During fiscal year 2006, the Company sold the remaining 70,000 shares for net proceeds of $19,243 and realized a loss of $16,087, with the cost of the securities calculated by the specific identification method.
FORWARD LOOKING STATEMENTS
This Prospectus contains certain forward looking statements regarding, among other things, the anticipated financial and operating results of the Company. For this purpose, forward looking statements are any statements contained herein that are not statements of historical fact and include, but are not limited to, those preceded by or that include the words, "believes," "expects," "anticipates," or similar expressions. Those statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward looking information is based on various factors and was derived using numerous assumptions. Important factors that could cause the Company's actual results to differ materially from those projected, include, for example (i) the ability of the Company to generate sufficient sales to generate operating profits, or to sell products at a profit, (ii) the ability of the Company to raise funds in the future through sales of securities, (iii) whether the Company is able to enter into binding agreements with third parties to assist in product or network development, (iv) the ability of the Company to commercialize its developmental products, or if actually commercialized, to obtain commercial acceptance thereof, (v) the ability of the Company to compete with its competitors to obtain market share, (vi) the ability of the Company to obtain sufficient funds through operations or otherwise to repay its debt obligations including but not limited to Senior Notes, or to fund development and marketing of its products; (vii) the ability of the Company to obtain approval of its pending patent applications, (viii) the ability of the Company to satisfy its trade obligations included in accounts payable and accrued liabilities, and (ix) the ability of the Company to predict or estimate its future quarterly or annual revenues given the developing and unpredictable market for its products and the lack of established revenues. Although the Company believes that the forward looking statements contained herein are reasonable, it can give no assurance that the Company's expectations will be met.
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RESULTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 2006
Revenues for the fiscal year ended June 30, 2006 were $6,414,803, an increase of $1,736,814 or 37% from the fiscal year ended June 30, 2005. This increase was primarily attributed to increased sales in our energy, vending and laundry product lines. Revenues are discussed in more detail as follows:
Equipment sales: Revenues from equipment sales increased to $5,198,360 from $3,535,064 in the prior fiscal year, an increase of $1,663,296 or 47%. This increase was primarily attributed to increased sales in our energy ($784,000), vending ($497,000) and laundry ($311,000) equipment sales.
License and transaction fees: Revenues from license and transaction fees increased $73,518 or 6% from $1,142,925 to $1,216,443 for the fiscal years ended June 30, 2005 and 2006, respectively. This increase was primarily due to an increase in license and transaction fees from our Intelligent Vending and eSuds products due to the increased number of devices connected to our USALive® network.
Cost of sales consisted of equipment, product and labor costs of approximately $3,547,000 and $2,431,000 for the fiscal years ended June 30, 2006 and 2005, respectively, an increase of $1,116,000 and network and transaction related costs of approximately $857,000 and $1,048,000 for the years ended June 30, 2006 and 2005, respectively, a decrease of $191,000. The total increase of $925,000 or 27% in cost of sales from $3,478,673 to $4,404,457 for the years ended June 30, 2005 and 2006, respectively, was principally attributable to the increase in equipment sales.
Gross profit for the fiscal year ended June 30, 2006 was $2,010,346, compared to $1,199,316 for the fiscal year ended June 30, 2005. The increase of $811,030 was due to an increase in sales of our higher margin energy management products.
Total operating expenses for the fiscal year ended June 30, 2006 was $13,792,145, an increase of $202,622 or 2% over the prior fiscal year. The components of operating expenses (General and administrative, Compensation, and Depreciation and amortization) and the causes of this increase are explained in further detail, below:
General and administrative expenses decreased from $6,429,458 for the fiscal year ended June 30, 2005 to $5,200,116 for the fiscal year ended June 30, 2006, a decrease of $1,229,342 or 19%. The decrease is due to a reduction in consulting services of approximately $918,000 and a reduction in public relations expenses of approximately $204,000.
Compensation expense increased from $5,559,945 to $6,892,436 for the fiscal year ended June 30, 2005 and 2006, respectively, a $1,332,491 or 24% increase over the prior fiscal year. This increase is primarily due to stock bonuses and options awarded to executives as well as stock options awarded to members of the board of directors. In addition, the Company increased the number of full-time employees during the fiscal year.
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Depreciation and amortization expense for the fiscal year ended June 30, 2006 was $1,699,593, compared to $1,600,120 for the prior fiscal year, a $99,473 or 6% increase. This increase was attributable to an increased amount of depreciation expense resulting from approximately $842,000 in property, plant and equipment purchases during the fiscal year. The majority of the purchases relate to the purchase and implementation of Oracle’s e-Business Suite, an enterprise management system.
Total interest expense decreased from $3,127,751 to $2,878,966 for the fiscal year ended June 30, 2005 and 2006, respectively, a decrease of $248,785 or 8%. The decrease is a result of a reduction in the number of conversions of Senior Notes into shares of the Company's Common Stock by Senior Note Holders. In the prior fiscal year, these conversions resulted in additional interest expense due to the accelerated amortization of debt discount charged to interest expense at the time of the conversion of the Senior Notes.
For the fiscal year ended June 30, 2006, the Company recorded a contingent loss accrual related to a proposed settlement agreement with Swartz Private Equity, LLC, as more fully described above, resulting in a contingent loss of $270,000. There were no such losses in the prior fiscal year.
The fiscal year ended June 30, 2006 resulted in a net loss of $14,847,076 (approximately $4.0 million of non-cash charges) compared to a net loss of $15,499,190 (approximately $3.6 million of non-cash charges) for the prior fiscal year.
FISCAL YEAR ENDED JUNE 30, 2005
Revenues for the fiscal year ended June 30, 2005 were $4,677,989, a decrease of $954,826 or 17% from the fiscal year ended June 30, 2004. This decrease was primarily attributed to a decrease in sales of our energy management products. Revenues are discussed in more detail as follows:
Equipment sales: Revenues from equipment sales decreased to $3,535,064 from $4,349,566 in the prior fiscal year, a decrease of $814,502 or 19%. This decrease was primarily attributed to a decrease in sales of our energy management products of approximately $1,000,000. This was a result of approximately $686,000 in sales from three large customer orders in the current fiscal year as compared to approximately $1,691,000 in sales from five large customer orders during fiscal year 2004.
License and transaction fees: Revenues from license and transaction fees increased $165,274 or 17% from $977,651 to $1,142,925 for the fiscal years ended June 30, 2004 and 2005, respectively. This increase was primarily due to an increase in license and transaction fees from our Intelligent Vending products, which was offset by the decrease in revenues from the termination of the Kodak Vending Placement Agreement in the prior fiscal year.
Product sales and other: Revenues from product sales and other decreased to $0 from $305,598 in the prior fiscal year. This decrease was due to a decrease in camera and film sales from Company owned vending machines of approximately $105,000 as a result of the termination of the Kodak Vending Placement Agreement and a decrease of $200,000 relating to a one-time payment in the prior fiscal year related to the agreement with Unilever.
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Cost of sales consisted of equipment, product and labor costs of approximately $2,431,000 and $2,503,000 for the fiscal years ended June 31, 2005 and 2004, respectively, a decrease of $72,000; software development amortization of approximately $0 and $999,000 for the fiscal years ended June 30, 2005 and 2004, respectively; and network and transaction related costs of $1,048,000 and $828,000 for the years ended June 30, 2005 and 2004, respectively, an increase of $220,000. The total decrease of $851,019 or 20% in cost of sales from $4,329,692 to $3,478,673 for the years ended June 30, 2004 and 2005, respectively, was principally attributable to the decrease in equipment sales and the lack of software development costs.
Gross profit for the fiscal year ended June 30, 2005 was $1,119,316, compared to $1,303,123 for fiscal year ended June 30, 2004. The decrease of $183,807 was due to a reduction in sales of our higher margin energy management products.
Total operating expenses for the fiscal year ended June 30, 2005 was $13,589,523, a decrease of $5,180,899 or 28% over the prior fiscal year. The components of operating expenses (General and administrative, Compensation, Depreciation and amortization and Loss on debt modification) and the causes of this decrease are explained in further detail, below:
General and administrative expenses decreased from $6,747,824 for the fiscal year ended June 30, 2004 to $6,429,458 for the fiscal year ended June 30, 2005, a decrease of $318,366 or 5%. The decrease is due to decrease in bad debt expense and consulting fees, which is partially offset by increases in public relations expenses.
Compensation expense decreased from $10,071,354 to $5,559,945 for the fiscal year ended June 30, 2004 and 2005, respectively, a $4,511,409 or 45% decrease over the prior fiscal year. This decrease is primarily due to the one-time issuance of 10,500,000 shares of Common Stock, valued at $4,620,000, to the Company's Chief Executive Officer in connection with the amendment of his employment agreement in the prior fiscal year. Additionally compensation expense increased by approximately $108,000 related to an increase in medical insurance costs.
Depreciation and amortization expense for the fiscal year ended June 30, 2005 was $1,600,120, compared to $1,632,330 for the prior fiscal year, a $32,210 or 2% decrease. This decrease was attributable to assets becoming fully depreciated during the fiscal year ended June 30, 2005.
During the prior fiscal year, the Company incurred a charge of $318,915 related to the modification of debt terms for certain 2003 and 2004 Senior Notes. This charge represents the unamortized debt discount that remained on the Senior Notes that were scheduled to mature in December 2003 and 2004, and whose terms were substantially modified when the note holders agreed to extend the maturity date of their notes in exchange for a reduction in the conversion rate on the note. There was no such comparable charge in the fiscal year ended June 30, 2005.
During the fiscal year ended June 30, 2004, the Company sold 1,669,091 shares of its investment in the Jubilee Investment Trust for net proceeds of $1,471,140, resulting in a gain of $603,480. There were no sales of such investments during the year ended June 30, 2005.
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During the fiscal year ended June 30, 2004, a gain of $429,204 was recorded relating to the termination of the Kodak Vending Placement Agreement. This gain is comprised of the payment from Kodak of approximately $675,000 plus the cancellation of Stitch's obligation to the supplier of the vending machines of approximately $124,000 less a write down of the carrying value of vending machines of approximately $367,000 and a net write-off of amounts due to and from Kodak of $3,000. During the year ended June 30, 2005, the Company wrote off the remaining value of the vending machines that had not been sold during the year as a loss on contract settlement totaling $42,300.
Total interest expense decreased from $5,032,351 to $3,127,751 for the fiscal year ended June 30, 2004 and 2005, respectively, a decrease of $1,904,600 or 38%. The decrease is a result of a reduction in the number of conversions of the Senior Notes into shares of the Company's Common Stock by Senior Note Holders. In the prior fiscal year, these conversions resulted in additional interest expense due to the accelerated amortization of debt discount charged to interest expense at the time of the conversion of the Senior Notes.
The fiscal year ended June 30, 2005 resulted in a net loss of $15,499,190 (approximately $3.6 million of non-cash charges) compared to a net loss of $21,426,178 (approximately $10.9 million of non-cash charges) for the prior fiscal year.
FISCAL YEAR ENDED JUNE 30, 2004
Revenues for the fiscal year ended June 30, 2004 were $5,632,815, an increase of $2,779,747 or 97% from the fiscal year ended June 30, 2003. This increase was primarily attributed to sales of the Company's energy management equipment during the fiscal year ended June 30, 2004. Such revenues did not exist in fiscal year ended June 30, 2003 since the acquisition of Bayview occurred in July 2003. The increase was also due to increases in the sale of our networked devices and related services. Revenues are discussed in more detail as follows:
Equipment sales: Revenues from equipment sales increased to $4,349,566 from $1,034,427 in the prior fiscal year, an increase of $3,315,139 or 320%. This increase is mainly due to sales of approximately $3,025,000 of the Company's energy management equipment for the fiscal year ended June 30, 2004. As noted above, such revenues did not exist in the prior fiscal year. In addition, sales of the Company's cashless technology equipment, which includes e-Port, e-Suds and Kiosk systems, increased to $736,000, approximately $349,000 or 90% over the prior fiscal year. The increases in sales were offset by a decrease in Business Center equipment sales of approximately $59,000.
License and transaction fees: Revenues from license and transaction fees decreased $395,922 or 29% from $1,373,573 to $977,651 for the fiscal years ended June 30, 2003 and 2004, respectively. This decrease was primarily due to a decrease in fees earned from the Kodak Vending Placement Agreement of approximately $387,000, which resulted from the termination of the contract on December 31, 2003.
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Product sales and other: Revenues from product sales and other decreased to $305,598 from $445,068, a decrease of $139,470 or 31% from the prior fiscal year. This decrease was due to a decrease in camera and film sales from Company owned vending machines of approximately $340,000 as a result of the termination of the Kodak Vending Placement Agreement. This decrease was offset by $200,000 of revenue relating to the Strategic Alliance Agreement executed in October 2003 between the Company and Conopco, Inc dba Unilever Home & Personal Care North America.
Cost of sales consisted of equipment, product and labor costs of approximately $2,503,000 and $1,085,000 for the fiscal years ended June 31, 2004 and 2003, respectively, an increase of $1,418,000; software development amortization of approximately $999,000 and $1,331,000 for the fiscal years ended June 30, 2004 and 2003, respectively, a decrease of $332,000; and network and transaction related costs of $828,000 and $555,000 for the years ended June 30, 2004 and 2003, respectively, an increase of $273,000. The total increase of $1,358,249 or 46% in cost of sales from $2,971,443 to $4,329,692 for the years ended June 30, 2003 and 2004, respectively, was principally attributable to the increase in equipment sales.
Gross profit for the fiscal year ended June 30, 2004 was $1,303,123, compared to a gross loss of $118,375 for fiscal year ended June 30, 2003. The increase of $1,421,498 was due to increases in hardware sales, particularly the addition of energy management equipment sales, which yield a higher profit margin and were not present in the prior fiscal year, as well as a decrease of approximately $332,000 related to the amortization of software development costs, which were fully amortized as of March 31, 2004.
Total operating expenses for the fiscal year ended June 30, 2004 was $18,770,423, an increase of $3,829,159 or 26% over the prior fiscal year. The components of operating expenses (General and administrative, Compensation, Depreciation and amortization and Loss on debt modification) and the causes of this increase are explained in further detail, below:
General and administrative expenses decreased from $7,194,684 for the fiscal year ended June 30, 2003 to $6,747,824 for the fiscal year ended June 30, 2004, a decrease of $446,860 or 6%. The decrease is due to decreases of $1,717,000 of professional fees, primarily related to business consulting, promotion and public relations and decreases of $134,000 in IT consulting fees, offset by increases in overall general and administrative expenses of approximately $1,184,000 related to the acquired energy management operations, as such expenses did not exist in the prior fiscal year, an increase of $118,000 in expenses related to the recruitment of executive personnel, and an increase of $164,000 in bad debt expense related to an increase in the allowance for uncollectible accounts as a result of the increase in sales and accounts receivable.
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Compensation expense increased to $10,071,354 for the fiscal year ended June 30, 2004, a $5,098,144 or 103% increase over the prior fiscal year. This increase is primarily due to the one-time issuance of 10,500,000 shares of Common Stock, valued at $4,620,000, to the Company's Chief Executive Officer in connection with the amendment of his employment agreement. Additionally, approximately $845,000 and $376,000 of this increase relates to additional compensation, including salaries, employee benefits and sales commissions, from the Bayview acquisition in July 2003 and existing operations, respectively. These increases were offset by a $742,000 reduction in compensation expense due to a reduction in bonuses awarded during the fiscal year ended June 30, 2004 as compared to the prior year.
Depreciation and amortization expense for the fiscal year ended June 30, 2004 was $1,632,330, compared to $1,251,716 for the prior fiscal year, a $380,614 or 30% increase. This increase was attributable to amortization of intangible assets of $917,000 and depreciation of property and equipment of $122,000 acquired from Bayview in July 2003, offset by a decrease in depreciation of approximately $337,000 related to existing assets that have reached the end of their estimated useful life. Additionally there was an impairment charge of $321,476 recorded on a group of vending machines during fiscal year 2003.
The Company incurred charges during the fiscal year ended June 30, 2004 and 2003 relating to the modification of debt terms for certain of the Senior Notes in the amount of $318,915 and $1,521,654, respectively. This charge reflects the write-off of the unamortized debt discount remaining for Senior Notes scheduled to mature in December 2003 and December 2004, for which the conversion and maturity terms were modified. The Company offered these note modifications to manage short-term cash flows, which resulted in a non-cash charge.
During the fiscal year ended June 30, 2004, the Company sold 1,669,091 shares of its investment in the Jubilee Investment Trust for net proceeds of $1,471,140, resulting in a gain of $603,480. During the fiscal year ended June 30, 2003, the Company determined that the decline in the market value of the investment in the Jubilee Investment Trust was "other than temporary." Accordingly, the Company recorded a loss of $1,945,951 on the investment during fiscal year 2003.
During the fiscal year ended June 30, 2004, a gain of $429,204 was recorded relating to the termination of the Kodak Vending Placement Agreement. This gain is comprised of the payment from Kodak of approximately $675,000 plus the cancellation of Stitch's obligation to the supplier of the vending machines of approximately $124,000 less a write down of the carrying value of vending machines of approximately $367,000 and a net write-off of amounts due to and from Kodak of $3,000.
Total interest expense increased from $4,978,600 to $5,032,351 for the fiscal year ended June 30, 2003 and 2004, respectively, an increase of $53,751 or 1%. Although the average principal balances were lower on the Company's 12% Senior Notes during fiscal year ended June 30, 2004 versus 2003, as the result of conversions of the Senior Notes into shares of the Company's Common Stock by Senior Note Holders, interest expense increased due to the accelerated amortization of debt discount charged to interest expense at the time of the conversion of the Senior Notes.
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The fiscal year ended June 30, 2004 resulted in a net loss of $21,426,178 (approximately $10.9 million of non-cash charges) compared to a net loss of $21,965,499 (approximately $12.6 million of non-cash charges) for the prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended June 30, 2006, net cash of $11,082,407 was used by operating activities, primarily due to the net loss of $14,847,076 offset by non-cash charges totaling $3,966,080 for transactions involving the issuance of Common Stock for services, stock option compensation charges, depreciation and amortization of assets, amortization of debt discount, and a loss on the sale of an investment. In addition to these non-cash charges, the Company's net operating assets increased by $419,925 (primarily a decrease in accounts payable and an increase in both accounts and finance receivables).
For the year ended June 30, 2006, net cash used in investing activities was $823,227, comprised of purchases of property and equipment (primarily consisting of our purchase and implementation of Oracle’s e-Business Suite, an enterprise management system), reduced slightly by the proceeds from the sale of an investment.
Proceeds from financing activities for the year ended June 30, 2006 provided $12,674,554 of funds, which were necessary to support cash used in operating activities. Net proceeds of $14,150,335 were realized from the issuance of Common Stock and the collection of Common Stock subscriptions receivable. Net proceeds of $1,314,944 were realized from the issuance of Senior Notes. These proceeds were reduced by payments of long-term debt and Senior Notes totaling $2,790,725, including $927,405 of Senior Notes due December 31, 2005, and $1,683,500 of Senior Notes due December 31, 2006.
The Company has incurred losses since inception. Cumulative losses through June 30, 2006 amounted to approximately $127,900,000. The Company has continued to raise capital through equity and debt offerings to fund operations.
During the year ended June 30, 2006, cash used in operating activities was approximately $925,000 per month. Using the prior fiscal year as a basis for estimating cash requirements for the year ending June 30, 2007 (which assumes a static level of revenues), cash requirements for the fiscal year 2007, including requirements for capital expenditures and repayments of long-term debt, would be approximately $11,600,000.
As of June 30, 2006, the Company had approximately $2,900,000 of cash and cash equivalents on hand.
On February 17, 2006, the Company entered into a Common Stock Purchase Agreement (the “2006 Common Stock Agreement”) with Mr. Illes, as more fully disclosed in the Consolidated Financial Statements. From July 1 to September 15, the Company issued 258,040 shares of Common Stock under the 2006 Common Stock Agreement for total gross proceeds of $1,653,500. As of September 15, 2006, 401,975 registered shares remain issuable under this agreement. The 2006-B Common Stock Agreement referred to below replaced the 2006 Common Stock Agreement and provided that no further shares are to be registered under the 2006 Common Stock Agreement.
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On September 25, 2006, the Company entered into a Common Stock Purchase Agreement (the “2006-B Common Stock Agreement”) with Mr. Illes, as more fully described in “Other Events” on page 29 of this prospectus, pursuant to which he agreed to purchase shares with an aggregate purchase price not to exceed $15,000,000.
Funding sources in place to meet the Company's cash requirements for the year ending June 30, 2007 are primarily comprised of approximately $2,900,000 in cash and cash equivalents on hand as of June 30, 2006 and the proceeds that are available under the 2006 and 2006-B Common Stock Agreements referred to above. The Company believes these existing sources will provide sufficient funds to meet its cash requirements through at least June 30, 2007.
COMMITMENTS
The Company conducts its operations from various facilities under operating leases. In March 2003, the Company entered into a lease for 12,864 square feet of space located in Malvern, Pennsylvania for its principal executive office and used for general administrative functions, sales activities, and product development. The lease term extends through December 31, 2008 and provides for escalating rent payments and a period of free rent prior to the commencement of the monthly lease payment in January 2004 of approximately $25,000 per month. During April 2005, the Company entered into an amendment to the lease covering 4,385 additional square feet that is contiguous to its existing space. The lease term was extended to December 31, 2010, and the amendment provides for a period of free rent for the additional space with rent of approximately $31,000 per month commencing in September 2005 with escalating rental payments thereafter.
The Company also leases 9,084 square feet of space, located in Malvern, Pennsylvania, on a month-to-month basis for a monthly payment of approximately $8,000. During prior years, the facility was solely used to warehouse product. All product warehousing, shipping and customer support was transferred to this location from the executive office location during the first quarter of fiscal year 2005.
In December 2004, the Company entered into a lease for 2,837 square feet of space located in Denver, Colorado to be used for administrative functions, sales activities and product warehousing associated with our energy management products. The lease term extends through May 31, 2009 and provides for five months of free rent followed by rent payments of $1,200 per month and escalating payments beginning on June 1, 2006. The lease provides for additional rent for a prorated share of operating costs for the entire facility.
During the fourth quarter of fiscal year 2006, the Company committed to purchase approximately $1,334,000 of inventory from a third party manufacturer through December 31, 2007. The Company expects to begin taking delivery of the inventory during the third quarter of fiscal year 2007 upon completion of manufacturing.
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OTHER EVENTS
Pursuant to a Common Stock Purchase Agreement dated September 25, 2006 between Mr. Illes and the Company ("2006-B Common Stock Agreement"), Mr. Illes agreed to purchase shares of the Company's Common Stock with an aggregate purchase price not to exceed $15,000,000. As of the date of this prospectus, Mr. Illes has not purchased any shares under the 2006-B Common Stock Agreement. The Company issued 20,000 shares of Common Stock to Illes as a due diligence/commitment fee in connection with the 2006-B Common Stock Agreement. The 1,000,000 shares to be purchased by Mr. Illes under the 2006-B Common Stock Agreement as well as the 20,000 shares issued to Mr. Illes as a due diligence fee are covered by this prospectus. Under the 2006-B Common Stock Agreement, the Company has the right at any time to require Mr. Illes to purchase Common Stock from the Company at the lower of: (i) $30.00 per share; or (ii) 90% of the closing bid price per share on the date prior to the date of the delivery by the Company to Mr. Illes of notice of his obligation to purchase. The Company can require Mr. Illes to purchase shares only if the shares have been registered by the Company for resale under the Act. During any calendar month, Mr. Illes cannot be required by the Company to purchase Common Stock for an aggregate purchase price in excess of $800,000. The Company has the right in the future, if necessary, to register additional shares in order to ensure that a sufficient number of shares are available for purchase by Mr. Illes. The 2006-B Common Stock Agreement terminates August 30, 2009. The 2006-B Common Stock Agreement replaced the agreement entered into between Mr. Illes and the Company on February 17, 2006, and provided that no additional shares were to be registered under that agreement. The securities were offered and sold to Mr. Illes under the exemption from registration set forth under Rule 506 promulgated under the Act. Mr. Illes is an existing shareholder and an accredited investor, made appropriate investment representations, was afforded access to all public filings and all other information that the Company could reasonably obtain. There was no general solicitation or advertising. We have agreed to register for resale the shares issuable to Mr. Illes under the 2006-B Common Stock Agreement, and to keep the registration statement current and effective for two years from the date of the prospectus.
Prior to entering into the 2006-B Common Stock Agreement, Mr. Illes has been an investor in our Company. During April 2003, we issued to Mr. Illes 10,000 shares at $10 per share and a warrant to purchase up to 40,000 shares at $10 per share. Mr. Illes exercised the warrant for 35,000 shares for an aggregate of $350,000 and did not exercise the remaining warrants. During August 2004, we entered into a stock purchase agreement with Mr. Illes pursuant to which he purchased from us an aggregate of 349,504 shares for $3,560,620 from August 2004 through February 2005. During March 2005, Mr. Illes purchased $750,000 principal amount of our 2005-C convertible senior notes due December 31, 2010. In June 2005, Mr. Illes converted $50,000 of this note into 5,000 shares of Common Stock at $10 per share. In April 2005, we entered into another stock purchase agreement with Mr. Illes, which replaced the August 2004 agreement. Pursuant to this agreement, from April 2005 through May 2006, Mr. Illes purchased from us an aggregate of 559,999 shares for $4,863,066. In February 2006, we entered into another stock purchase agreement, which replaced the April 2005 agreement. Pursuant to this agreement, from February 2006 through September 26, 2006, Mr. Illes has purchased from us an aggregate of 1,070,247 shares for $6,787,274, and 429,753 shares remain available for purchase thereunder by Mr. Illes. The 2006-B Common Stock Purchase Agreement
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entered into in September 2006 replaced the February 2006 agreement, and provided that no additional shares were to be registered under that agreement.
As of the date of this prospectus, Mr. Illes owns 170,000 shares of Common Stock, a $275,000 principal amount 12% convertible senior note purchased from us in 2001 due December 31, 2007 and convertible into 13,750 shares, a $700,000 principal amount 2005-C convertible senior note due December 31, 2010 and convertible into 70,000 shares, and a $25,000 convertible senior note purchased from us in 2002 due December 31, 2008 and convertible into 1,250 shares of Common Stock.
The proceeds from the sales of our Common Stock under the 2006-B Common Stock Agreement will not be used for the cancellation or offset of the 2005-C Senior Note referred to above or any other current or future debt instrument held by Mr. Illes.
On December 13, 2005, the Company entered into a Stock Purchase Agreement with Wellington Management Company, LLP, a large Boston-based institutional investor, on behalf of certain of its clients ("Wellington"). Pursuant thereto, the Company sold to Wellington 400,000 shares of Common Stock for $10 per share for an aggregate of $4,000,000. The offer and sale of the shares was exempt from registration under Rule 506 promulgated under Section 4(2) of the Act. As investment manager, Wellington has shared dispositive and shared voting power over the shares. All of these clients are accredited investors. We have agreed to register the shares for resale under the Act through February 13, 2007. All of these shares are covered by this prospectus.
On January 9, 2006, the Company entered into a Stock Purchase Agreement with Rationalwave On Shore Equity Fund, L.P. ("Rationalwave"), an accredited investor. Pursuant thereto, the Company sold to Rationalwave 40,000 shares of Common Stock for $10 per share for an aggregate of $400,000. The offer and sale of the shares was exempt from registration under Rule 506 promulgated under Section 4(2) of the Act. We have agreed to register the shares for resale under the Act through January 9, 2007. All of these shares are covered by this prospectus.
During October 2002, the Company issued to an investor, Kazi Management VI, Inc., 35,714 shares of its Common Stock at $7 per share generating net proceeds of $244,925. This investor also received a warrant to purchase up to 71,428 shares of Common Stock of the Company at $7 per share at any time on or before October 26, 2007, and a warrant to purchase up to 71,428 shares of Common Stock at $7 per share and up to 50,000 shares at $10 per share at any time before December 23, 2004. We have agreed to register for resale the shares underlying the warrants through December 19, 2008. As of the date of this prospectus, Kazi has exercised warrants to purchase 71,428 shares at $7 per share and warrants to purchase 50,000 shares at $10 per share. The 71,428 shares underlying the unexercised warrants exercisable at $7 per share through October 26, 2007 are included in this prospectus.
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In September 2006, the Company agreed to settle a legal action brought against the Company by Erica Bender, a former employee. As part of the settlement, the Company issued to her 2,536 shares valued at $7.10 per share. We have agreed to register for resale these shares in this prospectus. The offer and sale of the shares to Ms. Bender were exempt from registration under Section 4(2) of the Act.
In September 2006, the Company settled its pending litigation with Swartz Private Equity, LLC. In full settlement of the litigation, the Company issued to Swartz an aggregate of 40,000 shares of Common Stock. Of these shares, 6,816 shares were attributable to the cashless exercise by Swartz in May and June 2003 of warrants, and the balance of 33,184 shares were newly issued shares. Under the settlement agreement, the Company has agreed to register for resale the 33,184 shares through October 12, 2007. The issuance of the shares to Swartz by the Company was exempt from registration under Rule 506 promulgated under Section 4(2) of the Act.
Pursuant to the Employment Agreement dated May 11, 2006 between Mr. Jensen and the Company, the Company agreed to issue to Mr. Jensen an aggregate of 75,000 shares of Common Stock. These shares vest as follows: 25,000 on June 1, 2006; 25,000 on January 1, 2007; and 25,000 on June 1, 2007. The Company has agreed to include in this prospectus the 25,000 shares of Common Stock that vested on June 1, 2006. Pursuant to his Employment Agreement, Mr. Jensen also elected to have fifty percent of his base salary for the fiscal year ending June 30, 2007 paid through the issuance to him of 22,080 shares of Common Stock in lieu of cash. These shares vest as follows: 5,520 shares on July 1, 2006; 5,520 shares on October 1, 2006; 5,520 shares on January 1, 2007; and 5,520 shares on April 1, 2007. The Company has agreed to include in this prospectus the 5,520 shares that vested on July 1, 2006 and the 5,520 shares that vested on October 1, 2006. The offer and sale of the shares to Mr. Jensen were exempt from registration under Section 4(2) of the Act.
Pursuant to the Employment Agreement dated May 11, 2006 between Mr. Herbert and the Company, the Company agreed to issue to Mr. Herbert an aggregate of 50,000 shares of Common Stock. These shares vest as follows: 16,667 on June 1, 2006; 16,667 on January 1, 2007; and 16,666 on June 1, 2007. The Company has agreed to include in this prospectus the 16,667 shares of Common Stock that vested on June 1, 2006. The offer and sale of the shares to Mr. Herbert were exempt from registration under Section 4(2) of the Act.
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BUSINESS
OVERVIEW
USA Technologies, Inc. (the “Company”, “We” or “Our”) was incorporated in the Commonwealth of Pennsylvania in January 1992. The Company offers a suite of networked devices and associated wireless non-cash payment, control/access management, remote monitoring and data reporting services, as well as energy management products. Our networked devices and associated services enable the owners and operators of everyday, stand-alone, distributed assets, such as vending machines, personal computers, copiers, faxes, kiosks and laundry equipment, the ability to remotely monitor, control and report on the results of these distributed assets, as well as the ability to offer their customers alternative cashless payment options. As a result of the acquisition of the assets of Bayview Technology Group, LLC (“Bayview”) in July 2003, our Company also manufactures and sells energy management products which reduce the electrical power consumption of various existing equipment, such as refrigerated vending machines and glass front coolers, thus reducing the electrical energy costs associated with operating this equipment.
Our customers fall into the following categories: vending machine owners and operators, business center operators which include hotels and audio visual companies, commercial laundry operators servicing colleges and universities, brand marketers wishing to provide their products or services via kiosks or vending machines and equipment manufacturers that would like to incorporate the technological features of our networked devices (i.e. remote monitoring, reporting and control as well as cashless payments) into their products. Customers for our energy management products also include energy utility companies, schools and operators of glass front coolers.
OUR TECHNOLOGY
Our Company offers an end-to-end solution for control/access management, remote monitoring, turnkey cashless payment processing and data reporting for distributed assets such as vending machines, office equipment, laundry machines and kiosks. This solution consists of a device in the distributed asset (the “client device”), a connectivity medium, and our proprietary network.
The Client Devices
As part of the end-to-end solution, the Company offers its customers several different client devices to connect their distributed assets. These client devices range from software, or dynamic link libraries ("DLLs"), to hardware devices consisting of control boards, magnetic strip card readers, RFID readers, and/or receipt printers. The client device can be embedded inside the host equipment, such as software residing in the central processing unit of a Kiosk; it can be integrated as part of the host equipment, such as our e-Port(R) hardware that can be attached to the door of a vending machine; or it can be a peripheral, stand-alone terminal, such as our TransAct(TM) terminal for Business Express(R).
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e-Port(R) is the Company's core client device, which is currently being utilized in vending and commercial laundry applications. Our e-Port(R) product facilitates cashless payments by capturing the payment media and transmitting the information to our network for authorization with the payment authority (e.g. credit card processors). Additional capabilities of our e-Port(R) consist of control/access management by authorized users, collection of audit information (e.g. product or service sold, date and time of sale and sales amount), diagnostic information of the host equipment, and transmission of this data back to our network for web-based reporting.
TransAct(R) is the Company's original cashless, transaction-enabling device developed for self-service business center equipment such as PC's, fax machines and copiers. Similar to e-Port(R), the TransAct(R) capabilities include control/access management, collection of sales data (e.g. date and time of sale, sales amount and product or service purchased), and transmission back to our network for reporting to customers.
The Connectivity Mediums
Connectivity of our client devices (e-Port(R) and TransAct(R)) to the USALive(R) network is another component of the Company's end-to-end solution. The reliable, cost effective transfer of customer's business critical data is paramount to the services we deliver. Due to the importance of connectivity, and realizing that every customer's connectivity needs may be different (e.g. access, or lack thereof, to phone lines, local area networks ("LANs”), wide area networks ("WANs”) and wireless data networks), the Company offers multiple connectivity solutions - phone line, Ethernet and wireless.
Increasing wireless connectivity options, coverage and reliability and decreasing costs, over the past few years have allowed us to service a greater number of customer locations, since many of our customer's host equipment, particularly within the vending industry, do not have access to any other communication medium. Additionally, we make it easy for our customers to deploy wireless solutions by being a single point of contact. By aggregating different wireless networks, we ensure our customers have reliable, cost effective nationwide coverage without the hassles of certification and administration of multiple wireless suppliers.
The Network
USALive(R) is the network component of our end-to-end solution to which the Company's devices transmit their cashless payment information for processing as well as the valuable sales and diagnostic data for storage and reporting to our customers. Also, the network, through server-based software applications, provides remote management information and enables control of the networked device's functionality.
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USALive(R) is the enabler of turnkey cashless payment processing for our customers. The network is certified with several cashless payment authorities, such as credit card processors and property management systems, facilitating the authorization and settlement of credit cards, debit cards, hotel room keys and student ids. The network can also act as its own payment processing authority for other cashless payment media, such as on-line stored value or employee payroll deduction. The network authorizes transactions, occurring at the host equipment, with the appropriate payment authority and sends approval or decline responses back to the networked device to allow or terminate the transaction for the purchase of the product or service. The network consolidates successfully approved transactions from multiple devices, batches, and then transmits these batched transactions to the payment authority for settlement. By bundling and batching transactions from multiple networked devices and connecting to the appropriate payment authorities through one central dedicated processing medium, it reduces the fees charged by the payment authority.
USALive On-line(TM) is the web based reporting system that customers use to gain access to the valuable business information collected from the networked devices. The website's functionality includes: management of the distributed assets deployed in the field, such as new activations and location redeployments; user-defined reporting for miscellaneous payment types (e.g. cash, credit, etc), date and time product sold, and sales amount; and detailed bank account deposit information, by device, for easier bank reconciliation. The Company offers this service through either a Company branded website or Customer specific branded website.
OUR PRODUCTS AND SERVICES
Intelligent Vending(R)
Developed for the vending industry, Intelligent Vending(R) is our end-to-end vending solution. This system bundles e-Port(R), USALive(R), and its web-based remote monitoring, management, reporting and turnkey payment processing. Our latest improvement to Intelligent Vending(R) is the introduction of our e-Port(R) G-6. This device includes a radio frequency identification (“RFID”) or “Tap & Go™” tag reader for added convenience to consumers.
Vending operators purchasing our Intelligent Vending(R) products and services will have the capability to conduct cashless transactions via credit cards, debit cards and other payment mediums such as employee/student ids and hotel room keys; to offer improved and expanded customer services by utilizing 'real-time', web-based reporting to keep machine inventory at a desirable level and consumer access to our 1-800 help-desk center for customer purchasing inquiries, both providing the end-user a more consistent user experience; to reduce operational costs through utilization of our remote monitoring technology, thereby maximizing the scheduling of service visits and limiting 'out-of-stock' machines; and to reduce theft and vandalism by providing 100% accountability of all sales transactions and reducing the cash reserves inside the machine.
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e-Suds(TM)
eSuds(TM) is our end-to-end solution developed for the commercial laundry industry. The eSuds(TM) system bundles e-Port(R) and USALive(R) to offer a cash-free payment option, web-based remote monitoring and management, an e-mail alert system to notify users regarding machine availability, cycle completion, and other events. eSuds(TM) also supports a variety of value-added services such as custom advertising or subscription-based payments.
Laundry operators purchasing our eSuds(TM) system will have the capability to conduct cashless transactions via credit cards, debit cards and other payment mediums such as student ids; to reduce operational costs through utilization of our remote monitoring technology, thereby maximizing the scheduling of service visits and increasing machine up-time. The system can also increase customer satisfaction through improved maintenance, higher machine availability, specialized services (i.e. email alerts to indicate that laundry cycle is finished) and the convenience of non-cash transactions. Installations have been completed at Carnegie Mellon University, Rutgers University, Case Western Reserve University, John Hopkins University and others. We are working with distributors to install eSuds(TM) at other colleges and universities based on the positive results of these installations.
Transact(R) And Business Express(R)
TransAct(R), our original payment technology system developed for self-service business center devices, such as PCs, fax machines, and copiers, is a cashless transaction-enabling terminal that permits customers to use office equipment quickly and simply with the swipe of a major credit card. The TransAct(R) device can be sold as a stand-alone unit for customers wishing to integrate it with their own office equipment.
Business Express(R) is a bundled solution comprised of the TransAct(R) payment terminal and a suite of office equipment (i.e. PC, fax and copier). Business Express(R) enables hoteliers and others to offer unmanned business services 24/7/365. In addition, the Company offers the Public PC(TM), the Public Fax(TM) and the Public Copier(TM) to customers wishing to purchase a specific self-service product versus a complete bundled Business Center(R). The Company also provides additional value-added service and revenue generating opportunities with BEXPrint(TM), our proprietary technology that allows users, without access to a printer, to send a document to a secure web-site for storage, and then password retrieval of the document for printing at our Business Center locations, and our Kinko's relationship, which gives our Business Center users access to the nearest, convenient Kinko's center for their more advanced business center needs.
Although larger hotels are expected to provide business centers to its guests, operation of the center can be costly. In addition to the cost of operating a supervised business center, operating hours usually are limited due to staff availability. Business Express(R) provides a cost-effective solution.
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Kiosk
We provide an end-to-end solution that utilizes e-Port(R) and USALive(R) to offer a cash-free payment option and web-based remote monitoring and management for all kiosk types. Kiosks permit a host of new services to become available at the point-of-demand, such as Sony's self-service, PictureStation kiosks, where consumers can produce prints from their own digital media. Our solution also enables Kiosks to sell a variety of more expensive items.
Sony's PictureStation kiosks, which use our e-Port(R) software solution, have been installed in approximately 60 locations across the United States.
Energy Management Products
With the acquisition of Bayview in July 2003, our Company offers energy conservation products ("Misers”) that reduce the electrical power consumption of various types of existing equipment, such as vending machines, glass front coolers and other "always-on" appliances by allowing the equipment to selectively operate in a power saving mode when the full power mode is not necessary. Each of the Company's Miser products utilizes occupancy sensing technology to determine when the surrounding area is vacant or occupied. The Miser then utilizes occupancy data, room and product temperatures, and an energy saving algorithm to selectively control certain high-energy components (e.g. compressor and fan) to realize electrical power savings over the long-term use of the equipment. Customers of our VendingMiser(R) product benefit from reduced energy consumption and costs of up to 46% per machine, depending on regional energy costs, machine type, and utilization of the machine. Our Misers also reduce the overall stress loads on the equipment, helping to reduce associated maintenance costs.
The Miser family of energy-control devices, include:
VendingMiser(R) - installs in a cold drink vending machine and can reduce the electrical power consumption of the vending machine by an average of up to 46%.
CoolerMiser™ - reduces the electrical energy used by sliding glass or pull open glass-front coolers that contain non-perishable goods.
VM2IQ™ and CM2IQ™ - The second generation of the VendingMiser™ and CoolerMiser™ devices that is installed directly inside the machine and has the capability to control the cooling system and the advertising lights separately.
SnackMiser™ - reduces the amount of electricity used by non-refrigerated snack vending machines.
PlugMiser™ - reduces the amount of electricity used by all types of plug loads including those found in personal or modular offices (printers, personal heaters, and radios), video arcade games, and more.
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THE OPPORTUNITY
Everyday devices from vending machines and logistics equipment to refrigerators, security systems, and countless other devices can be better managed by embedding thin-client computing technology with network connectivity into each unit. Using wired and/or wireless networks and centralized, server-based software applications, managers can remotely monitor, control, and optimize a network of devices regardless of where they are located, resulting in a host of benefits including lower maintenance costs, improved inventory and transaction management, and increased operating efficiency.
This market opportunity is known by several different names, including Machine-to-Machine ("M2M") networking, Device Relationship Management ("DRM"), the Pervasive Internet and Device Networking. This industry is the convergence of computer-enabled devices and embedded systems, the Internet or other networking mediums, and centralized enterprise data-management tools. By connecting stand-alone devices into large-scale networks, new opportunities emerge between brand marketers, service providers, and their customers. Networked devices enable remote monitoring, cashless transactions, sales analysis, and optimized machine maintenance - all yielding higher return on investment for operators while increasing consumer satisfaction with improved and expanded services.
Brand marketers will be able to provide their products and services to customers wherever and whenever the need arises. They will no longer be limited to existing distribution channels and outlets. Just as beverage vending machines bring bottlers' products beyond the supermarket to the location where and when the customer wants them, a vast range of products and branding opportunities can be made available to customers at the point-of-need. In laundry, makers of detergent and fabric softener can have their products injected directly into a consumer's laundry, again putting their products at the point-of-need.
The market for networked device solutions is projected to be large and growing rapidly and includes a wide variety of segments such as the security and alarm, automated meter reading, fleet and asset management, and consumer telemetry markets. Networked devices will include personal devices (e.g. cell phones, PDAs), vehicles, containers, supply chain assets, medical devices, HVAC units, industrial machinery, home appliances, energy, accelerometers, pressure gauges, flow control indicators, biosensors, and countless other applications. According to an article, "Pervasive Internet", in M2M Magazine (Fall 2003), a minimum of 1.5 billion devices will be connected to the Internet worldwide by 2010. This represents a $700 billion total opportunity including device enabling, monitoring, and providing value-added services made available by the M2M network, according to M2M Magazine.
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We believe that an opportunity exists to combine our technology with world-class partners in order to deliver a best-in-class solution and emerge as a leader in the Device Networking industry. Our Company has begun addressing this opportunity by working in several initial verticals, which include vending, commercial laundry, self-service business centers and self-service kiosks. These services share several key attributes, specifically, they are all self-service, cash-based businesses that are distributed across broad geographic areas. We address the extremely broad range of Device Networking opportunities by licensing our technologies to equipment makers throughout a variety of market segments. Equipment makers will be able to merge our technology with their in-depth market expertise.
THE INDUSTRY
Our current customers are primarily in the vending, commercial laundry, business center and kiosk industry sectors. While these industry sectors represent only a small fraction of the total Device Networking market, these are the areas where we have gained the most traction. In addition to being our primary markets, these sectors serve as a proof-of-concept for other Device Networking industry applications.
Vending
Annual worldwide sales in the vending industry sector are estimated to be approximately $143.5 billion, according to Vending Times Census of the Industry 2002. According to this Census, there are an estimated 8 million vending locations in the United States, and 30 million locations worldwide. The market segment that can be addressed by our end-to-end solution consists primarily of vended products retailing for $1 or greater, which represents a Company estimated vended volume of approximately $28 billion. Per census statistics, the overall market growth is 5% to 6% annually, while the addressable market segment for our end-to-end solution is growing more rapidly at 9% annually. Our VendingMiser(R) energy conservation product can serve the entire vending market.
Commercial Laundry
The domestic commercial laundry industry is estimated to be $5 billion in annual sales and 3.5 million commercial laundry machines in operation, according to Coin Laundry Association, October 2000 edition. The average annual growth rate for the commercial laundry sector is estimated to be between 10% and 12%. The Company believes the inline sale of additives (i.e. push-button selections for detergent and softener) may lead to a significant increase in this figure due to larger net margins over traditional industry standards. The addressable market is primarily the seven largest laundry operators, as well as several other small operators. These operators own and manage the equipment that is installed in multi-housing and college and university locations. The addressable market excludes those who own single laundromats.
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Business Centers
There are currently 52,000 hotels in the United States and 300,000 worldwide, per American Hotel & Lodging Association's website, www.ahma.com. There is demand for business center availability in hotels, with ever-greater percentages of travelers needing and expecting use of computers, printers, fax machines, copiers, and other business services. We believe that there are 5,900 hotels in the primary addressable market - business oriented hotels with over 150 rooms - and 13,900 in the secondary market, hotels with 75 to 150 rooms. The growth rate for the overall market is 5% annually, with the addressable market gaining 8% annually.
Kiosk
According to a report by Frost and Sullivan Consulting, Kiosks represent a $500 million market. Kiosks are becoming increasingly popular as self-service "specialty" shops within larger retail environments. Value-added services, such as photo enlargement and custom imaging are a prominent example, located within many major retailers. Since pricing on these products is generally higher than $1 or $2, cashless payment options are essential.
SALES AND MARKETING
The Company's sales strategy includes both direct sales and channel development, depending on the particular dynamics of each of our markets. Our marketing strategy is diversified and includes media relations, direct mail, conferences and client referrals. As of June 30, 2006, the Company was marketing and selling its products through its full time staff consisting of thirteen people.
Direct Sales
We sell directly to the major operators in each of our target markets. Each of our target markets is dominated by a handful of large companies, and these companies comprise our primary customer base. In the vending sector, approximately ten large operators dominate the sector; in the commercial laundry sector, seven operators currently control the majority of the market. We also work directly with hoteliers for our TransAct(TM) and Business Express(R) products.
Within the vending industry, our customers include soft drink bottlers and independent vending operators throughout the United States. On the soft drink bottler side, heavy effort is being put into securing initial distribution agreements. Three of the premier national independent vending operators, the Compass Group (Canteen, Flik, Eurest, Restaurant Associates and other affiliates), ARAMARK and Sodexho, have installed approximately 130 e-Port(R) devices.
Channel Sales
We currently engage in channel sales for our TransAct(TM) and Business Express(R) products. We also work with audio-visual companies that service major hotels.
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Marketing
Our marketing strategy consists of building our brand by creating a company and product presence at industry conferences and events, in order to raise visibility within our industry, create opportunity to conduct product demonstrations and consult with potential customers one-on-one; sponsoring of education workshops with trade associations such as National Automated Merchandiser Association ("NAMA"), to educate the industry on the importance and benefits of our solution and establish our position as the industry leader; develop several one-sheet case studies to illustrate the value of our products; the use of direct mail campaigns; advertising in vertically-oriented trade publications such as Vending Times, Automatic Merchandiser and Energy User News; and cultivate a network of State governments and utility companies to provide incentives or underwriting for our energy management products.
STRATEGIC RELATIONSHIPS
Mastercard International
In June 2006, Mastercard International and the Company signed an agreement to deploy 1,000 e-Port devices that accept Matercard “PayPass™” in Coca-Cola vending machines owned and operated by the Philadelphia Coca-Cola Bottling Company. From July through September 2006, the Company has earned approximately $400,000 from this agreement.
Mars Electronics Inc. (MEI)
In September 2004, MEI and the Company signed a technology licensing and sales agreement to bring a turnkey cash and credit card payment system to the vending market. Under the agreement, MEI licensed our intellectual property so operators can connect to USALive(R), our network for services and credit card transaction capability. As of September 2006, the Company has not earned material revenues from these agreements.
Cingular Wireless (formerly AT&T Wireless)
In July 2004, we signed an agreement to use AT&T Wireless' digital wireless wide area network for transport of data, including credit card transactions and inventory management data. AT&T Wireless (now Cingular Wireless) is a provider of advanced wireless voice and data services for consumers and businesses, operating one of the largest digital wireless networks in North America and the fastest nationwide wireless data network in the United States.
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MANUFACTURING
The Company utilizes independent third party companies for the manufacturing of its products. The Company purchases other components of its business center (computers, printers, fax and copy machines) through various manufacturers and resellers. Our manufacturing process mainly consists of quality assurance of materials and testing of finished goods received from our contract manufacturers. We have not entered into a long-term contract with our contract manufacturers, nor have we agreed to commit to purchase certain quantities of materials or finished goods beyond those submitted under routine purchase orders, typically covering short-term forecasts.
COMPETITION
The cashless vending, remote business service and energy conservation industries are each highly competitive markets. While the Company offers unique products and services within smaller niche markets of these industries, a number of competitors in the broader market may offer products and services within our niche market in the future. In the cashless vending market, we are aware of one direct competitor, Transaction Network Services, Inc. In the cashless laundry market, we are aware of one direct competitor, Mac-Gray Corporation. In the automated business center market, we are aware of three direct competitors. In the energy management market, we are not aware of any direct competitors for our Miser products.
The businesses which have developed unattended, credit card activated control systems currently in use in non-vending machine applications (e.g., gasoline dispensing, public telephones, prepaid telephone cards and ticket dispensing machines), might be capable of developing products or utilizing their existing products in direct competition with our e-port control systems targeted to the vending industry. The Company is also aware of several businesses that make available use of the Internet and use of personal computers to hotel guests in their hotel rooms. Such services might compete with the Company's Business Express, and the locations may not order the Business Express, or if ordered, the hotel guest may not use it. Finally, the production of highly efficient vending machines and glass front coolers or alternative energy conservation products may reduce or replace the need for our energy management products.
The Company’s key competitive factors include our unique products, our integrated services, product performance and price. Our competitors are well established, have substantially greater resources than the Company and have established reputations for success in the development, sale and service of high quality products. Any increase in competition in the future may result in reduced sales and/or lower percentages of gross revenues being retained by the Company in connection with its licensing arrangements, or otherwise may reduce potential profits or result in a loss of some or all of its customer base.
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CUSTOMER CONCENTRATIONS
Approximately 39% and 36% of the Company's accounts and finance receivables at June 30, 2006 and 2005, respectively, were concentrated with two and two customers, respectively. Approximately 29%, 11% and 13% of the Company's revenues for the year ended June 30, 2006, 2005 and 2004, respectively, were concentrated with two, one and one customer(s), respectively. The Company's customers are principally located in the United States.
TRADEMARKS, PROPRIETARY INFORMATION AND PATENTS
The Company received federal registration approval of the following trademarks: Business Express, Express Solutions, C3X, TransAct, Public PC, PC Express, Copy Express, Credit Card Copy Express, Credit Card Computer Express, Credit Card Printer Express, Credit Card Microfiche Express, Credit Card Debit Express, The Office That Never Sleeps, Intelligent Vending, e-Port, Dial-A-Vend, Dial-A-Snack, Dial-A-Vend.com, USALive and e-Port The Next Generation in Vending. The Company has two trademarks pending registration, VM2IQ and CM2IQ. Through its wholly owned subsidiary, Stitch Networks, the Company has secured three registered trademarks, including eVend.net, eSuds.net, and Stitch Networks, and one trademark, E-ppliance, which is pending registration. In addition, due to the July 2003 acquisition of Bayview, the Company has secured the VendingMiser trademark and the trademark SnackMiser is pending federal registration.
Much of the technology developed or to be developed by the Company is subject to trade secret protection. To reduce the risk of loss of trade secret protection through disclosure, the Company has entered into confidentiality agreements with its key employees. There can be no assurance that the Company will be successful in maintaining such trade secret protection, that they will be recognized as trade secrets by a court of law, or that others will not capitalize on certain aspects of the Company's technology.
Through August 31, 2006, 59 United States patents and 5 Foreign patents have been issued to the Company, 21 United States patents and 8 Foreign patents are pending and 2 patents have received notices of allowance.
The list of issued patents is as follows:
o U.S. Patent No. 5,619,024 entitled "Credit Card and Bank Issued Debit Card Operating System and Method for Controlling and Monitoring Access of Computer and Copy Equipment";
o U.S. Patent No. 5,637,845 entitled "Credit and Bank Issued Debit Card Operating System and Method for Controlling a Prepaid Card Encoding/Dispensing Machine";
o U.S. Patent No. D423,474 entitled "Dataport"; o U.S. Patent No. D415,742 entitled "Laptop Dataport Enclosure"; o U.S. Patent No. D418,878 entitled "Sign Holder";
o U.S. Patent No. 6,056,194 entitled "System and Method for Networking and Controlling Vending Machines";
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o U.S. Patent No. D428,047 entitled "Electronic Commerce Terminal Enclosure";
o U.S. Patent No. D428,444 entitled "Electronic Commerce Terminal Enclosure for a Vending Machine";
o U.S. Patent No. 6,119,934 entitled "Credit Card, Smart Card and Bank Issued Debit Card Operated System and Method for Processing Electronic Transactions";
o U.S. Patent No. 6,152,365 entitled "Credit and Bank Issued Debit Card Operated System and Method for Controlling a Vending Machine";
o U.S. Patent No. D437,890 entitled "Electronic Commerce Terminal Enclosure with a Hooked Fastening Edge for a Vending Machine";
o U.S. Patent No. D441,401 entitled "Electronic Commerce Terminal Enclosure with Brackets";
o U.S. Patent No. 6,321,985 entitled "System and Method for Networking and Controlling Vending Machines";
o U.S. Patent No. 6,505,095 entitled "System for Providing Remote Audit, Cashless Payment, and Interactive Transaction Capabilities in a Vending Machine" (Stitch);
o U.S. Patent No. 6,389,337 entitled "Transacting e-commerce and Conducting e-business Related to Identifying and Procuring Automotive Service and Vehicle Replacement Parts" (Stitch);
o U.S. Patent No. 6,021,626 entitled "Forming, Packaging, Storing, Displaying and Selling Clothing Articles"; and
o U.S Patent No. 6,622,124 entitled "Method of transacting an electronic mail, an electronic commerce, and an electronic business transaction by an electronic commerce terminal operated on a transportation vehicle";
o U.S. Patent No. 6,615,186 entitled "Communicating interactive digital content between vehicles and internet based data processing resources for the purpose of transacting e-commerce or conducting e-business";
o U.S. Patent No. 6,615,183 entitled "Method of warehousing user data entered at an electronic commerce terminal";
o U.S. Patent No. 6,611,810 entitled "Store display window connected to an electronic commerce terminal";
o U.S. Patent No. 6,609,103 entitled "Electronic commerce terminal for facilitating incentive-based purchasing on transportation vehicles";
o U.S. Patent No. 6,609,102 entitled "Universal interactive advertising and payment system for public access electronic commerce and business related products and services";
o U.S. Patent No. D478,577 entitled "Transceiver base unit";
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o U.S. Patent No. 6,606,605 entitled "Method to obtain customer specific data for public access electronic commerce services";
o U.S. Patent No. 6,606,602 entitled "Vending machine control system having access to the internet for the purposes of transacting e-mail, e-commerce, and e-business, and for conducting vending transactions";
o U.S. Patent No. 6,604,087 entitled "Vending access to the internet, business application software, e-commerce, and e-business in a hotel room";
o U.S. Patent No. 6,604,086 entitled "Electronic commerce terminal connected to a vending machine operable as a telephone";
o U.S. Patent No. 6,604,085 entitled "Universal interactive advertising and payment system network for public access electronic commerce and business related products and services";
o U.S. Patent No. 6,601,040 entitled "Electronic commerce terminal for wirelessly communicating to a plurality of communication devices";
o U.S. Patent No. 6,601,039 entitled "Gas pump control system having access to the Internet for the purposes of transacting e-mail, e-commerce, and e-business, and for conducting vending transactions";
o U.S. Patent No. 6,601,038 entitled "Delivery of goods and services resultant from an electronic commerce transaction by way of a pack and ship type company";
o U.S. Patent No. 6,601,037 entitled "System and method of processing credit card, e-commerce, and e-business transactions without the merchant incurring transaction processing fees or charges worldwide";
o U.S. Patent No. D477,030 entitled "Vending machine cashless payment terminal";
o U.S. Patent No. D476,037 entitled "User interface bracket for a point of sale terminal";
o U.S. Patent No. D476,036 entitled "Printer bracket for point of sale terminal";
o U.S. Patent No. D475,751 entitled "User interface bracket for a point of sale terminal";
o U.S. Patent No. D475,750 entitled "Paper guide for a point of sale terminal";
o U.S. Patent No. D475,414 entitled "Printer bracket for point of sale terminal";
o U.S. Patent No. 5,844,808 entitled "Apparatus and methods for monitoring and communicating with a plurality of networked vending machines";
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o U.S. Patent No. 6,581,396 entitled "Refrigerated vending machine exploiting expanded temperature variance during power-conservation mode";
o U.S. Patent No. 6,389,822 entitled "Refrigerated vending machine exploiting expanded temperature variance during power-conservation mode";
o U.S. Patent No. 6,243,626 entitled "External power management device with current monitoring precluding shutdown during high current"; and
o U.S. Patent No. 5,477,476 entitled "Power conservation system for computer peripherals";
o U.S. Patent No. 6,629,080 entitled "Transaction processing method of fulfilling an electronic commerce transaction by an electronic commerce terminal system";
o U.S. Patent No. D480,948 entitled "Mounting bracket for mounting a cashless payment terminal to a vending machine";
o U.S. Patent No. 6,643,623 entitled "A method of transacting an electronic mail, an electronic commerce, and an electronic business transaction by an electronic commerce terminal using a gas pump";
o U.S. Patent No. 6,684,197 entitled "Method of revaluing a private label card using an electronic commerce terminal (as amended)";
o U.S. Patent No. 6,754,641 entitled "Dynamic identification interchange method for exchanging one form of identification for another";
o U.S. Patent No. 6,763,336 entitled "Method of transacting an e-mail, an e-commerce, and an e-business transaction by an electronic commerce terminal using a wirelessly networked plurality of portable devices";
o U.S. Patent No. 6,801,836 entitled "Power-conservation based on indoor/outdoor and ambient-light determinations";
o U.S. Patent No. 6,807,532 entitled "Method of soliciting a user to input survey data at an electronic commerce terminal";
o U.S. Patent No. 6,853,894 entitled "Global network based vehicle safety and security telematics";
o U.S. Patent No. 6,856,820 entitled "An in-vehicle device for wirelessly connecting a vehicle to the internet and for transacting e-commerce and e-business";
o U.S. Patent No. 6,895,310 entitled "Vehicle related wireless scientific instrumentation telematics";
o U.S. Patent No. 6,898,942 entitled "Method and apparatus for conserving power consumed by a refrigerated appliance";
o U.S. Patent No. 6,931,869 entitled "Refrigerated vending machine exploiting expanded temperature variance during power-conservation mode";
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o U.S. Patent No. 6,975,926 entitled "Method and apparatus for power management control of a compressor-based appliance that reduces electrical power consumption on an appliance";
o U.S. Patent No. 7,003,289 entitled "Communication interface device for managing wireless data transmission between a vehicle and the internet";
o U.S. Patent No. 7,076,329 entitled "Cashless vending transaction management by a Vend Assist mode of operation";
o Canadian Patent No. D199-1014 entitled "Sign holder";
o Canadian Patent No. D199-1038 entitled "Laptop data port enclosure";
o Canadian Patent No. 2,291,015 entitled "Universal interactive advertising and payment system for public access electronic commerce and business related products and services";
o Australian Patent No. 2001263356 entitled "Refrigerated vending machine exploiting expanded temperature variance during power-conservation mode"; and
o Mexican Patent No. 234363 entitled "Refrigerated vending machine exploiting expanded temperature variance during power-conservation mode".
The Company believes that the U.S. patent No. 6,505,095 entitled "System for providing remote audit, cashless payment, and interactive transaction capabilities in a vending machine" is important in protecting its intellectual property used in its e-Port(R) control system targeted to the vending industry. The patent expires in July 2021.
RESEARCH AND DEVELOPMENT
Research and development expenses, which are included in general and administrative and compensation expense in the Consolidated Statements of Operations, were approximately $974,000, $1,364,000, and $688,000 for the years ended June 30, 2006, 2005 and 2004, respectively.
EMPLOYEES
On August 31, 2006, the Company had 57 full-time employees and 2 part-time employees.
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PROPERTY
The Company conducts its operations from various facilities under operating leases. In March 2003, the Company entered into a lease for 12,864 square feet of space located in Malvern, Pennsylvania for its principal executive office and used for general administrative functions, sales activities, and product development. The lease term extends through December 31, 2008 and provides for escalating rent payments and a period of free rent prior to the commencement of the monthly lease payment in January 2004 of approximately $25,000 per month. During April 2005, the Company entered into an amendment to the lease covering 4,385 additional square feet that is contiguous to its existing space. The lease term was extended to December 31, 2010, and the amendment provides for a period of free rent for the additional space with rent of approximately $31,000 per month commencing in September 2005 with escalating rental payments thereafter.
The Company also leases 9,084 square feet of space, located in Malvern, Pennsylvania, on a month-to-month basis for a monthly payment of approximately $8,000. During prior years, the facility was solely used to warehouse product. All product warehousing, shipping and customer support was transferred to this location from the executive office location during the first quarter of fiscal year 2005.
In December 2004, the Company entered into a lease for 2,837 square feet of space located in Denver, Colorado, to be used for administrative functions, sales activities and product warehousing associated with our energy management products. The lease term extends through May 31, 2009 and provides for five months of free rent followed by rent payments of $1,200 per month and escalating payments beginning on June 1, 2006. The lease provides for additional rent for a prorated share of operating costs for the entire facility.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our Directors and executive officers, on August 31, 2006, together with their ages and business backgrounds were as follows:
Name | Age | Position(s) Held | ||
George R. Jensen, Jr. | 57 | Chief Executive Officer, Chairman | ||
of the Board of Directors | ||||
Stephen P. Herbert | 43 | Chief Operating Officer and | ||
President, Director | ||||
David M. DeMedio | 35 | Chief Financial Officer | ||
William L. Van Alen, Jr. (1)(2) | 73 | Director | ||
Steven Katz (1)(2) | 58 | Director | ||
Douglas M. Lurio | 49 | Director | ||
Albert Passner | 67 | Director | ||
Stephen W. McHugh (2) | 50 | Director | ||
_____________________ |
(1) | Member of Compensation Committee |
(2) | Member of Audit Committee |
Each Director holds office until the next Annual Meeting of shareholders and until his successor has been elected and qualified.
George R. Jensen, Jr., has been our Chief Executive Officer and a Director since our inception in January 1992. Mr. Jensen was Chairman, Director, and Chief Executive Officer of American Film Technologies, Inc. ("AFT") from 1985 until 1992. AFT was in the business of creating color imaged versions of black-and-white films. From 1979 to 1985, Mr. Jensen was Chief Executive Officer and President of International Film Productions, Inc. Mr. Jensen was the Executive Producer of the twelve hour miniseries, "A.D.", a $35 million dollar production filmed in Tunisia. Procter and Gamble, Inc., the primary source of funds, co-produced and sponsored the epic, which aired in March 1985 for five consecutive nights on the NBC network. Mr. Jensen was also the Executive Producer for the 1983 special for public television, "A Tribute to Princess Grace". From 1971 to 1978, Mr. Jensen was a securities broker, primarily for the firm of Smith Barney, Harris Upham. Mr. Jensen was chosen 19 89 Entrepreneur of the Year in the high technology category for the Philadelphia, Pennsylvania area by Ernst & Young LLP and Inc. Magazine. Mr. Jensen received his Bachelor of Science Degree from the University of Tennessee and is a graduate of the Advanced Management Program at the Wharton School of the University of Pennsylvania. Mr. Jensen is also a Director of The Noah Fund, a publicly traded mutual fund.
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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.
David M. DeMedio joined USA Technologies on a full-time basis in March 1999 as Controller. In the Summer of 2001, Mr. DeMedio was promoted to Director of Financial Services where he was responsible for the sales and financial data reporting to customers, the Company's turnkey banking services and maintaining and developing relationships with credit card processors and card associations. In July 2003, Mr. DeMedio served as interim Chief Financial Officer through April, 2004. From April, 2004 until April 12, 2005, Mr. DeMedio served as Vice President - Financial & Data Services. On April 12, 2005, he was appointed as the Company's Chief Financial Officer. From 1996 to March 1999, prior to joining the Company, Mr. DeMedio had been employed by Elko, Fischer, Cunnane and Associates, LLC as a supervisor in its' accounting and auditing and consulting practice. Prior thereto, Mr. DeMedio held various accounting positions with Intelligent Electronics, Inc., a multi-billion reseller of computer hardware and configuration services. Mr. DeMedio graduated with a Bachelor of Science in Business Administration from Shippensburg University and is a Certified Public Accountant.
William L. Van Alen, Jr., joined the Board of Directors of USA in May 1993. Mr. Van Alen is President of Cornerstone Entertainment, Inc., an organization engaged in the production of feature films of which he was a founder in 1985. Since 1996, Mr. Van Alen has been President and a Director of The Noah Fund, a publicly traded mutual fund. Prior to 1985, Mr. Van Alen practiced law in Pennsylvania for twenty-two years. Mr. Van Alen received his undergraduate degree in Economics from the University of Pennsylvania and his law degree from Villanova Law School.
Steven Katz joined the Board of Directors in May 1999. He is President of Steven Katz & Associates, Inc., a management consulting firm specializing in strategic planning and corporate development for technology and service-based companies in the health care, environmental, telecommunications and Internet markets. Mr. Katz’s prior experience includes five years with PriceWaterhouse & Co. in audit, tax and management advisory services; two years of corporate planning with Revlon, Inc.; five years with National Patent Development Corporation (NPDC) in strategic planning, merger and acquisition, technology in-licensing and out-licensing, and corporate turnaround experience as President of three NPDC subsidiaries; and two years as a Vice President and General Manager of a non-banking division of Citicorp, N.A. Mr. Katz is also a Director of Health Systems Solutions Inc., Vivid Learning Systems Inc., Nanoscience Technologies Inc. and Biophan Technologies Inc., all publicly traded companies.
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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.
Albert Passner joined the Board of Directors of USA in April 2006. Mr. Passner is a consultant in the fields of physics and engineering. He was a former member of the technical staff at Lucent/AT&T Bell Labs where he participated in many projects including designing systems in electronics, optics, lasers, pulsed magnets, electron-optics, cryogenics and thin films. He has authored and co-authored more than fifty scientific publications.
Stephen W. McHugh joined the Board of Directors of USA in June 2006. Mr. McHugh was appointed by the Board to fill the vacancy on the Board caused by the death of William W. Sellers. Mr. McHugh is the President and co-founder of Santa Barbara Infrared, Inc., a designer and manufacturer of military and commercial Electro-Optical test equipment that was recently acquired by HEICO Corporation. Mr. McHugh formerly was a mechanical engineer and technical sales expert at Electro Optical Industries where he designed optical and mechanical instruments for the test of infrared camera systems.
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The following table sets forth certain information with respect to compensation paid or accrued by the Company during the fiscal years ended June 30, 2004, June 30, 2005 and June 30, 2006 to each of the executive officers and employee of the Company named below:
SUMMARY COMPENSATION TABLE | ||||||||||||
Name and Principal | Fiscal | |||||||||||
Position | Year | Annual Compensation | Long Term Compensation | |||||||||
Securities | ||||||||||||
Other Annual | Restricted | Underlying | ||||||||||
Compensation | Stock Awards | Options | ||||||||||
Salary | Bonus(1) | (2) | ($) | (#) | ||||||||
George R. Jensen, Jr. | 2006 | $270,288 | $200,000 | $18,563 | $400,000 | (6) | 75,000 | |||||
Chief Executive Officer | 2005 | $250,000 | — | $17,875 | — | — | ||||||
& Chairman of the Board | 2004 | $217,500 | $4,870,000 | (3) | $17,875 | — | — | |||||
Stephen P. Herbert | 2006 | $246,673 | $133,336 | $18,563 | $266,664 | (6) | 18,000 | |||||
Chief Operating Officer | 2005 | $231,923 | — | $17,875 | — | — | ||||||
& President | 2004 | $192,692 | $225,000 | $17,875 | — | — | ||||||
H. Brock Kolls (5) | 2006 | $171,346 | $30,000 | $12,375 | — | — | ||||||
Senior Vice-President, | 2005 | $165,000 | $110,000 | $11,917 | — | — | ||||||
Research & Development | 2004 | $156,923 | $60,000 | $63,205 | — | — | ||||||
David M. DeMedio (4) | 2006 | $162,385 | — | $20,112 | — | 7,000 | ||||||
Chief Financial Officer | 2005 | $131,689 | $11,000 | $7,800 | — | 3,000 | ||||||
Wendy Jenkins | 2006 | $130,850 | $20,000 | $16,200 | — | — | ||||||
Vice-President of | 2005 | $103,653 | $26,000 | $14,850 | — | — | ||||||
Marketing | 2004 | $65,384 | — | $10,500 | — | — |
(1) Fiscal year 2006 includes 25,000 shares that vested on June 1, 2006 valued at $8.00 per share for Mr. Jensen; 16,667 shares that vested on June 1, 2006 valued at $8.00 per share for Mr. Herbert, a $30,000 cash bonus for Mr. Kolls, and a $20,000 cash bonus for Ms. Jenkins. Fiscal year 2005 includes a $110,000 cash bonus for Mr. Kolls, cash bonuses totaling $11,000 for Mr. DeMedio, and a $20,000 cash bonus and $6,000 stock bonus for Ms. Jenkins. Fiscal year 2004 includes 105,000 shares valued at $44 per share, in connection with the amendment of his employment agreement, and a $250,000 cash bonus for Mr. Jensen; a $225,000 cash bonus for Mr. Herbert; and a $60,000 cash bonus for Mr. Kolls.
(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.
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(3) Prior to July 2003, Mr. Jensen's employment agreement provided that upon the occurrence of a USA Transaction he would receive that number of shares equal to seven percent of all of the then issued and outstanding shares on a fully converted basis. During July 2003, the Company and Mr. Jensen agreed to amend Mr. Jensen's employment agreement so that upon the occurrence of a USA Transaction he would receive only 140,000 shares. Under the new amended agreement, the 140,000 shares became subject to dilution (i.e., did not increase in order to reflect subsequent issuances by the Company of its shares). Under the prior agreement, the number of shares to be issued to Mr. Jensen was not subject to dilution (i.e., would be increased in order to reflect subsequent issuances by the Company of its shares) and was based upon the actual total number of shares outstanding at the time of a USA Transaction.
For example, if a USA Transaction occurred while there were 4,750,000 shares then outstanding on a fully converted basis, Mr. Jensen would have received 332,500 shares under his prior agreement rather than the fixed number of 140,000 shares under his new amended agreement.
During July 2003, the Company issued to Mr. Jensen an aggregate of 105,000 shares of restricted Common Stock, 25,000 shares of which were issued as compensation to Mr. Jensen, and 80,000 shares of which were issued to Mr. Jensen in connection with the employment agreement amendment described above. In accordance with generally accepted accounting principles, the Company was required to value all of these shares at $44 per share or an aggregate of $4,620,000.
(4) Employment as Chief Financial Officer commenced on April 12, 2005.
(5) During May 2006, Mr. Kolls notified the Company that he was resigning as an employee effective as of June 30, 2006, and requested that his employment agreement not be renewed.
(6) Under the terms of Mr. Jensen’s existing employment agreement with us, he received an award of 75,000 shares of restricted stock upon his signing of the agreement in May 2006. These shares vest as follows: 25,000 on June 1, 2006; 25,000 on January 1, 2007; and 25,000 on June 1, 2007. As of June 30, 2006, based upon a price per share of $7.80, the closing bid price for our common stock as of such date, the value of the restricted stock held by Mr. Jesnen was $390,000. This stock will be treated like all other shares of our stock, including the right to receive any dividends declared on our common stock. The 25,000 shares that vested on June 1, 2006 are reflected in the Bonus column of the above table.
Under the terms of Mr. Herbert’s existing employment agreement with us, he received an award of 50,000 shares of restricted stock upon his signing of the agreement in May 2006. These shares vest as follows: 16,667 on June 1, 2006; 16,667 on January 1, 2007; and 16,666 on June 1, 2007. As of June 30, 2006, based upon a price per share of $7.80, the closing bid price for our common stock as of such date, the value of the restricted stock held by Mr. Herbert was $259,997. This stock will be treated like all other shares of our stock, including the right to receive any dividends declared on our common stock. The 16,667 shares that vested on June 1, 2006 are reflected in the Bonus column of the above table.
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OPTION GRANTS IN LAST FISCAL YEAR | ||||||||
(Individual Grants) | ||||||||
Number of | Percent of | |||||||
securities | total options | Exercise | ||||||
underlying | granted to | base | ||||||
options | employees in | price | Expiration | |||||
Name | granted(1) | fiscal year | ($/share) | date | ||||
George R. Jensen, Jr. | 75,000 | 75 % | $7.50 | (2) | ||||
Stephen P. Herbert | 18,000 | 18 % | $7.50 | (2) | ||||
David M. DeMedio | 7,000 | 7 % | $7.50 | (2) | ||||
________________ |
(2) The options expire five years from the date of vesting.
TOTAL OPTIONS EXERCISED IN FISCAL YEAR ENDED JUNE 30, 2006 AND YEAR END VALUES
The following table gives information for options exercised by an executive officer and an employee in fiscal year 2006, and the number of options held by the executive officer and the employee at fiscal year end:
Number of | ||||||||
Securities | ||||||||
Shares | Underlying | Value of Unexercised | ||||||
Acquired | Unexercised | In-the-Money Options | ||||||
On | Value | Options at FY-End | at FY-End | |||||
Exercise | Realized | (#)Exercisable/ | ($)Exercisable/ | |||||
Name | (#) | ($) | Unexercisable | Unexercisable | ||||
George R. Jensen, Jr. | - | - | 25,000/50,000 | 7,500/15,000 | ||||
Stephen P. Herbert | - | - | 6,000/12,000 | 1,800/3,600 | ||||
David M. DeMedio | - | - | 3,834/6,166 | 700/1,400 |
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EXECUTIVE EMPLOYMENT AGREEMENTS
On May 11, 2006, the Company and Mr. Jensen entered into an Amended and Restated Employment Agreement pursuant to which the term of Mr. Jensen’s employment with the Company was extended to June 30, 2009. Effective May 11, 2006, Mr. Jensen’s base salary was increased to $325,000 per annum. 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. Mr. Jensen was granted the right (exercisable at any time prior to the 60th day following the commencement of each fiscal year) to elect to have one-half of his base salary for each of the fiscal years ending June 30, 2007, June 30, 2008, and June 30, 2009 paid in shares of Common Stock rather than cash. Mr. Jensen has elected to receive shares in lieu of cash for one-half of his base salary for the fiscal year ending June 30, 2007. As a result of such election, 22,080 shares will be issued to him which will vest as follows: 5,520 on July 1, 2006; 5,520 on October 1, 2006; 5,520 on January 1, 2007; and 5,520 on April 1, 2007. Mr. Jensen was also granted 75,000 shares of Common Stock and an additional amount of options to purchase up to 75,000 shares of Common Stock at $7.50 per share. The 75,000 shares of Common Stock vest as follows: 25,000 on June 1, 2006; 25,000 on January 1, 2007; and 25,000 on June 1, 2007. The options vest as follows: 25,000 on May 11, 2006; 25,000 on June 30, 2007; and 25,000 on June 30, 2008. The options may be exercised at any time within 5 years of vesting. All of the shares granted to or to be issued to Mr. Jensen under his employment agreement, and the shares underlying the options granted to Mr. Jensen, are not and will not be registered under the Securities Act of 1933, as amended, and constitute restricted securities as such term is defined in Rule 144 promulgated under the 1933 Act. In October 2006, the Company granted to Mr. Jensen piggyback registration rights under the Act for the shares described above for a period of five years following the vesting of any of such shares and for the shares underlying any of the options described above for a period of five years following the vesting of any such options.
As previously provided in his employment agreement, upon the occurrence of a "USA Transaction" (as defined below), the Company will issue to Mr. Jensen 140,000 shares of Common Stock subject to adjustment for stock splits or combinations ("Jensen Shares"). The Jensen Shares are not reflected or included in the number of issued and outstanding shares of the Company on a fully diluted basis in this prospectus. Mr. Jensen is not required to pay any additional consideration for the Jensen Shares. At the time of any USA Transaction, all of the Jensen Shares are automatically deemed to be issued and outstanding immediately prior to any USA Transaction, and are entitled to be treated as any other issued and outstanding shares of Common Stock in connection with such USA Transaction.
The term USA Transaction is defined as (i) the acquisition of fifty-one percent or more of the then outstanding voting securities entitled to vote generally in the election of Directors of the Company by any person, entity or group, or (ii) the approval by the shareholders of the Company of a reorganization, merger, consolidation, liquidation, or dissolution of the Company, or the sale, transfer, lease or other disposition of all or substantially all of the assets of the Company. The Jensen Shares are irrevocable and fully vested, have no expiration date, and will not be
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affected by the termination of Mr. Jensen’s employment with the Company for any reason whatsoever.
On May 11, 2006, the Company and Mr. Herbert entered into an Amended and Restated Employment Agreement pursuant to which the term of Mr. Herbert’s employment with the Company was extended to June 30, 2009. Effective May 11, 2006, Mr. Herbert’s base salary was increased to $285,000 per annum. 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. Herbert was granted the right to elect to have one-half of his base salary for each of the fiscal years ending June 30, 2007, June 30, 2008, and June 30, 2009 paid in shares of Common Stock rather than cash. Mr. Herbert was also granted 50,000 shares of Common Stock and an additional amount of options to purchase up to 18,000 shares of Common Stock at $7.50 per share. The 50,000 shares of Common Stock vest as follows: 16,667 on June 1, 2006; 16,667 on January 1, 2007; and 16,666 on June 1, 2007. The options vest as follows: 6,000 on May 11, 2006; 6,000 on June 30, 2007; and 6,000 on June 30, 2008. The options may be exercised at any time within 5 years of vesting. All of the shares granted to or to be issued to Mr. Herbert under his employment agreement, and the shares underlying the options granted to Mr. Herbert, are not and will not be registered under the Securities Act of 1933, as amended, and constitute restricted securities as such term is defined in Rule 144 promulgated under the 1933 Act. In October 2006, the Company granted to Mr. Herbert piggyback registration rights under the Act for the shares described above for a period of five years following the vesting of any of such shares and for the shares underlying any of the options described above for a period of five years following the vesting of any such options.
On May 11, 2006, the Company and Mr. DeMedio entered into an amendment to his Employment Agreement pursuant to which the term of Mr. DeMedio’s employment with the Company was extended to June 30, 2008. Effective May 11, 2006, Mr. DeMedio’s base salary was increased to $165,000 per annum. Mr. DeMedio was granted the right to elect to have one-half of his base salary for each of the fiscal years ending June 30, 2007, and June 30, 2008 paid in shares of Common Stock rather than cash. Mr. DeMedio was also granted options to purchase up to 7,000 shares of Common Stock at $7.50 per share. The options vest as follows: 2,334 on May 11, 2006; 2,333 on June 30, 2007; and 2,333 on June 30, 2008. The options may be exercised at any time within 5 years of vesting. All of the shares underlying the options granted to Mr. DeMedio under his employment agreement are not and will not be registered under the Securities Act of 1933, as amended, and constitute restricted securities as such term is defined in Rule 144 promulgated under the 1933 Act. In October 2006, the Company granted to Mr. DeMedio piggyback registration rights under the Act for the shares underlying any of the options described above for a period of five years following the vesting of any such options.
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Mr. Kolls entered into an employment agreement with the Company that required Mr. Kolls or the Company to deliver written notice of termination at least sixty days prior to June 30, 2006, or the agreement would be automatically renewed until June 30, 2007. During May 2006, Mr. Kolls notified the Company that he was resigning as an employee effective as of June 30, 2006, and requested that his employment agreement not be renewed for another year. The Company does not believe that Mr. Kolls’ resignation was timely. The agreement provided for an annual base salary of $165,000 per year. Mr. Kolls was entitled to a payment of $5,000 upon each of the following: (i) filing of a new patent application by USA for which he is listed as the inventor; (ii) granting of any such patent application; and (iii) issuance of a patent for any patent application that had been filed prior to April 20, 2004. Mr. Kolls is also entitled to receive such bonus or bonuses, as may be awarded to him by the Board of Directors. The Agreement required Mr. Kolls to devote his full time and attention to the business and affairs of the Company, and obligated him not to engage in any investments or activities which would compete with the Company during the term of his agreement and for a period of one year thereafter. In the event that a USA Transaction (as defined in Mr. Jensen's employment agreement) occured, then Mr. Kolls had the right to terminate his agreement upon 30 days notice to USA.
COMPENSATION OF DIRECTORS
Members of the Board of Directors receive cash and equity compensation for serving on the Board of Directors, as determined from time to time by the Compensation Committee with subsequent approval thereof by the Board of Directors.
During fiscal year 2006, we paid each of Messrs. Sellers, Van Alen, Katz and Lurio $20,000 each for serving as a Director during the fiscal year and $10,000 each for serving on Board Committees.
On April 21, 2006, we granted options to purchase up to 12,000 shares to each of Messrs. Sellers, Van Alen, Katz, and Lurio, and options to purchase up to 6,000 shares to Mr. Passner, a new director as of April 12, 2006. These options have an exercise price of $7.50 per share and are exercisable at any time within five years following the date of vesting. The options granted to Mr. Sellers and Mr. Van Allen are fully vested. Of the options granted to Mr. Katz and Mr. Lurio, 6,000 vest immediately, 3,000 vest on April 1, 2007, and 3,000 vest on April 1, 2008. Of the options granted to Mr. Passner, 3,000 vest on April 1, 2007, and 3,000 vest on April 1, 2008.
In conjunction with the appointment of Stephen McHugh to the Board of Directors on June 20, 2006, the Company granted Mr. McHugh options to purchase up to 6,000 shares with an exercise price of $8.00 per share. The options vest as follows: 3,000 on June 20, 2007 and 3,000 on June 20, 2008. The options are exercisable at any time within five years of vesting.
In October 2006, the Company granted to each of the holders of the above options piggyback registration rights under the Act for the shares underlying each of the options described above for a period of five years following the vesting of any such options.
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PRINCIPAL SHAREHOLDERS
COMMON STOCK
The following table sets forth, as of June 30, 2006, the beneficial ownership of the Common Stock of each of the Company's directors and executive officers, the other employees named in the summary compensation table set forth above, as well as by the Company's directors and executive officers as a group. Except as set forth below, the Company is not aware of any beneficial owner of more than five percent of the Common Stock. Except as otherwise indicated, the Company believes that the beneficial owners of the Common Stock listed below, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable:
Number of Shares | ||||
of Common Stock | ||||
Beneficially | Percent of | |||
Name and Address of Beneficial Owner | Owned(1) | Class(2) | ||
George R. Jensen, Jr. | 132,210(3) | 1.81 % | ||
100 Deerfield Lane, Suite 140 | ||||
Malvern, Pennsylvania 19355 | ||||
Stephen P. Herbert | 46,527(4) | * | ||
100 Deerfield Lane, Suite 140 | ||||
Malvern, Pennsylvania 19355 | ||||
Haven Brock Kolls, Jr. | 5,537(5) | * | ||
100 Deerfield Lane, Suite 140 | ||||
Malvern, Pennsylvania 19355 | ||||
David M. DeMedio | 7,535(8) | * | ||
100 Deerfield Lane, Suite 140 | ||||
Malvern, Pennsylvania 19355 | ||||
Douglas M. Lurio | 15,280(7) | * | ||
2005 Market Street, Suite 2340 | ||||
Philadelphia, Pennsylvania 19103 | ||||
Steven Katz | 12,350(6) | * | ||
440 South Main Street | ||||
Milltown, New Jersey 08850 | ||||
William L. Van Alen, Jr. | 63,023(9) | * | ||
P.O. Box 727 | ||||
Edgemont, Pennsylvania 19028 | ||||
Albert Passner | - | * | ||
3 Disbrow Ct | ||||
East Brunswick, New Jersey 08816 |
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Stephen W. McHugh | - | * | ||
100 Deerfield Lane, Suite 140 | ||||
Malvern, Pennsylvania 19355 | ||||
Wendy Jenkins | 2,819(10) | * | ||
100 Deerfield Lane, Suite 140 | ||||
Malvern, Pennsylvania 19355 | ||||
Wellington Management Company, LLP | 710,000(11) | 9.71 % | ||
75 State Street | ||||
Boston, Massachusetts 02109 | ||||
All Directors and Executive | 285,281 | 3.90 % | ||
Officers As a Group (9 persons) | ||||
__________________________ | ||||
*Less than one percent (1%) |
(1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and derives from either voting or investment power with respect to securities. Shares of Common Stock issuable upon conversion of the Preferred Stock, shares issuable upon the conversion of Convertible Senior Notes, or shares of Common Stock issuable upon exercise of warrants and options currently exercisable, or exercisable within 60 days of June 30, 2006, are deemed to be beneficially owned for purposes hereof.
(2) On June 30, 2006 there were 6,327,175 shares of Common Stock and 521,542 shares of Preferred Stock issued and outstanding. For purposes of computing the percentages under this table, it is assumed that all shares of issued and outstanding Preferred Stock have been converted into 5,215 shares of Common Stock, and that all of the options to acquire Common Stock which have been issued and are fully vested as of June 30, 2006 (or within 60-days of June 30, 2006) have been converted into 87,142 shares of Common Stock. For purposes of computing such percentages it has also been assumed that all of the remaining Common Stock Warrants have been exercised for 219,481 shares of Common Stock; that all of the Senior Notes have been converted into 669,635 shares of Common Stock; and that all of the accrued and unpaid dividends on the Preferred Stock as of June 30, 2006 have been converted into 8,226 shares of Common Stock. Therefore, 7,316,874 shares of Common Stock were trea ted as issued and outstanding for purposes of computing the percentages under this table. Does not reflect or include the shares issuable to Mr. Jensen upon a “USA Transaction”.
(3) Includes 2,000 shares of Common Stock beneficially owned by his spouse. Does not include the right granted to Mr. Jensen under his Employment Agreement to receive Common Stock upon the occurrence of a USA Transaction (as defined therein). See "Executive Employment Agreements". Includes 60,000 shares owned by George R. Jensen, Jr. Grantor Retained Unitrust dated July 14, 2003 over which Mr. Jensen retains beneficial ownership. Includes 25,000 shares underlying vested stock options.
(4) Includes 10 shares of Common Stock beneficially owned by his child and 4,000 shares of Common Stock beneficially owned by his spouse. Includes 6,000 shares underlying vested stock options.
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(5) Includes 120 shares of Common Stock owned by Mr. Kolls' spouse and 1,500 shares issuable to his spouse upon conversion of her Senior Note.
(6) Includes 6,000 shares underlying vested stock options.
(7) Includes 2,250 shares issuable upon conversion of Senior Notes. Includes 6,000 shares underlying vested stock options.
(8) Includes 565 shares of Common Stock issuable to Mr. DeMedio upon conversion of his Senior Notes, 3,834 shares underlying vested stock options and 375 shares underlying stock options that vest within 60 days of June 30, 3006.
(9) Includes 17,339 shares of Common Stock issuable to Mr. Van Alen upon conversion of his Senior Notes, 5,333 shares issuable upon the exercise of warrants and 100 shares of Common Stock beneficially owned by his spouse. Includes 12,000 shares underlying vested stock options.
(10) Includes 790 shares underlying vested stock options.
(11) Wellington Management Company, LLP ("Wellington Management"), in its capacity as an investment adviser, may be deemed to have beneficial ownership of 710,000 shares of common stock that are owned by numerous investment advisory clients, none of which is known to have such interest with respect to more than five percent of the class of shares. Wellington Management has shared voting authority over 456,000 shares and shared dispositive power over 710,000 shares. Wellington Management is a registered investment adviser under the Investment Advisers Act of 1940, as amended.
PREFERRED STOCK
There were no shares of Preferred Stock that were beneficially owned by the Company's directors, executive officers, or the other employee named in the Summary Compensation Table set forth above.
CERTAIN TRANSACTIONS
During the fiscal year ended June 30, 2006, the Company incurred charges to Lurio & Associates, P.C., of which Mr. Lurio is President and a shareholder, for professional fees of approximately $258,000 for legal services rendered to the Company by such law firm. Mr. Lurio is a Director of the Company. As of June 30, 2006, the Company had accrued approximately $28,000 for these services.
During fiscal year 2006, William Van Alen, Jr., a Director, invested $33,333 in the 2008-C Senior Note offering and received warrants to purchase 3,333 shares of Common Stock at $10 per share, pursuant to his investment in this offering. Mr. Van Alen also invested $20,000 in the 2010-B Senior Note offering and received warrants to purchase 2,000 shares of Common Stock at $10 per share, pursuant to his investment in this offering.
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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 each of the selling shareholders was or will be a transaction exempt from the registration requirements of the Act and various state securities laws.
We have agreed, at our expense, to register all of the common stock for resale by the selling shareholders under the Act. We expect to incur expenses of approximately $35,000 in connection with the registration statement of which this prospectus is a part.
The number of shares that may be actually sold by a selling shareholder will be determined by the selling shareholders. The selling shareholders are under no obligation to sell all or any portion of the shares offered, nor are the selling shareholders obligated to sell such shares immediately under this prospectus. Particular selling shareholders may not have a preset intention of selling their shares and may offer less than the number of shares indicated. Because the selling shareholder may sell all, some or none of the shares of common stock that the selling shareholder holds, no estimate can be given as to the number of shares of our common stock that will be held by the selling shareholder upon termination of the offering. Shares of common stock may be sold from time to time by the selling shareholders or by pledgees, donees, transferees or other successors in interest.
The following table sets forth information with respect to each selling shareholder and the 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.
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SELLING SHAREHOLDERS’ TABLE | ||||||||
Beneficial Ownership | ||||||||
Before | After | |||||||
Common Stock | Offering | Offering | ||||||
Selling Shareholder | Offered Hereby | Number | Number | Percent | ||||
British Columbia Investment Management | ||||||||
Corporation(1) | 14,000 | 14,000 | 0 | * | ||||
Government of Singapore Investment | ||||||||
Management Corporation Pte Ltd.(1) | 20,000 | 20,000 | 0 | * | ||||
The Retirement Program Plan for Employees | ||||||||
of Union Carbide Corporation(1) | 20,000 | 20,000 | 0 | * | ||||
The Dow Chemical Employees’ Retirement | ||||||||
Plan(1) | 22,000 | 22,000 | 0 | * | ||||
The Robert Wood Johnson Foundation(1) | 25,000 | 25,000 | 0 | * | ||||
Howard Hughes Medical Institute(1) | 30,000 | 30,000 | 0 | * | ||||
WTC-CIF Emerging Companies Portfolio(1) | 45,000 | 45,000 | 0 | * | ||||
WTC-CTF Emerging Companies Portfolio(1) | 50,000 | 50,000 | 0 | * | ||||
Public Sector Pension Investment Board(1) | 74,000 | 74,000 | 0 | * | ||||
Oregon Investment Council(1) | 100,000 | 100,000 | 0 | * | ||||
Kazi Management VI, Inc. (2) | 71,428 | 71,428 | 0 | * | ||||
Rationalwave On Shore Equity Fund, L.P.(3) | 40,000 | 40,000 | 0 | * | ||||
Steve Illes(4) | 1,020,000 | 1,255,000 | 235,000 | 3.22% | ||||
Swartz Private Equity, LLC(5) | 33,184 | 40,000 | 6,816 | * | ||||
Erica Bender(6) | 2,536 | 2,704 | 168 | * | ||||
George R. Jensen, Jr.(7) | 36,040 | 168,250 | 132,210 | 1.81% | ||||
Stephen P. Herbert(8) | 16,667 | 63,194 | 46,527 | * | ||||
TOTAL | 1,619,855 | |||||||
___________ | ||||||||
* Less than 1%. |
(1) Client of Wellington Management Company, LLP.
(2) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of record is Zubair Kazi.
(3) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of record is Marc Rosenblatt.
(4) Mr. Illes is and has been an investor in our Company. See “Other Events.”
(5) The natural person who exercises sole and/or shared voting or dispositive powers with respect to the shares held of record is Eric S. Swartz.
(6) Former employee of the Company.
(7) Mr. Jensen is our Chairman and Chief Executive Officer.
(8) Mr. Herbert is our President and Chief Operating Officer.
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MARKET FOR COMMON STOCK
The Common Stock of the Company is currently traded on the OTC Electronic Bulletin Board under the symbol USAT.
The high and low bid prices on the OTC Electronic Bulletin Board for the Common Stock were as follows. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
Year ended June 30, 2006 | High | Low | ||||||||
First Quarter (through September 30, 2005) | $ 16.80 | $ 12.00 | ||||||||
Second Quarter (through December 31, 2005) | $ 13.10 | $ 8.50 | ||||||||
Third Quarter (through March 31, 2006) | $ 14.00 | $ 10.10 | ||||||||
Fourth Quarter (through June 30, 2006) | $ 8.95 | $ 6.50 | ||||||||
Year ended June 30, 2005 | ||||||||||
First Quarter (through September 30, 2004) | $ 18.10 | $ 11.70 | ||||||||
Second Quarter (through December 31, 2004) | $ 16.40 | $ 9.50 | ||||||||
Third Quarter (through March 31, 2005) | $ 28.00 | $ 10.80 | ||||||||
Fourth Quarter (through June 30, 2005) | $ 20.00 | $ 13.30 |
On August 31, 2006 there were 1,293 record holders of the Common Stock and 506 record holders of the Preferred Stock.
The holders of the Common Stock are entitled to receive such dividends as the Board of Directors of the Company may from time to time declare out of funds legally available for payment of dividends. Through the date hereof, no cash dividends have been declared on the Company's Common Stock or Preferred Stock. No dividend may be paid on the Common Stock until all accumulated and unpaid dividends on the Preferred Stock have been paid. As of June 30, 2006, such accumulated unpaid dividends amounted to $8,226,261.
As of June 30, 2006, equity securities authorized for issuance by the Company with respect to compensation plans were as follows:
Number of | ||||||
securities to be | Number of | |||||
issued upon | Weighted average | securities | ||||
exercises of | exercise price | remaining | ||||
outstanding | of outstanding | available for | ||||
options and | options and | future | ||||
Plan category | warrants | warrants | issuance | |||
Equity compensation | None | Not applicable | None | |||
plans approved by | ||||||
security holders | ||||||
Equity compensation | 178,933(a) | $8.68 | 156,587(b) | |||
plans not approved by | ||||||
security holders |
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a) Represents stock options outstanding as of June 30, 2006 for the purchase of shares of Common Stock of the Company expiring at various times from July 2006 through June 2013. Of such options, 164,275 were granted to employees and directors of the Company and 14,658 to former option holders of Stitch Networks Corporation. Exercise prices for all the options outstanding were at prices that were either equal to or greater than the market price of the Company's Common Stock on the dates the options were granted.
b) Represents 140,000 shares of Common Stock issuable to the Company's Chief Executive Officer under the terms of his employment agreement plus 16,587 shares of Common Stock issuable under the Company's 2006-A Stock Compensation Plan.
In July 2003 the Company and the Company's Chief Executive Officer (CEO) amended the terms of his employment agreement. Under the terms of the previous Executive Employment Agreement, the CEO would have been granted seven percent (non-dilutive) of all the then issued and outstanding shares of the Company's Common Stock in the event a "USA Transaction" (as defined) occurs, which among other events includes a change in control of the Company. The amended terms of the Executive Employment Agreement, eliminated the seven percent (non-dilutive) right to receive Common Stock upon a "USA Transaction", and granted the CEO an aggregate of 140,000 shares of Common Stock in the event a "USA Transaction" occurs. In exchange for the amendment of these terms, the Company issued an aggregate of 105,000 shares of its Common Stock to the CEO. In connection with this amendment, the CEO also entered into a lock-up agreement pursuant to which he shall not sell 25,000 of these shares for a one-year period and 80,000 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 140,000 shares to be issued to the CEO in connection with this amendment are automatically deemed to be issued and outstanding, and will be entitled to be treated as any other issued and outstanding shares of Common Stock. The right to receive the shares is irrevocable and fully vested, and the rights have no expiration date and will not be affected by the termination of the CEO’s employment with the Company for any reason whatsoever. The shares issuable to Mr. Jensen are not reflected or included in the number of issued and outstanding shares of the Company on a fully diluted basis in this prospectus.
The Company's Board of Directors established and authorized the 2006-A Stock Compensation Plan in June 2006 for use in compensating employees, directors and consultants through the issuance of shares of Common Stock of the Company. There were 25,000 shares authorized under the Plan. The underlying shares for the Plan have been registered with the Securities and Exchange Commission as an employee benefit plan under Form S-8. As of June 30, 2006 there were 16,587 shares available for future issuance under the Plan.
As of June 30, 2006, shares of Common Stock reserved for future issuance were as follows:
o | 178,933 shares issuable upon the exercise of stock options at exercise prices ranging from $7.50 to $100 per share |
o | 214,436 shares issuable upon the exercise of common stock warrants at exercise prices ranging from $7 to $125 per share |
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o | 5,215 shares issuable upon the conversion of outstanding Preferred Stock |
o | 669,635 shares issuable upon the conversion of Senior Notes having an aggregate face value of $9,895,262 |
o | 715,571 shares issuable to an accredited investor under the 2006 Common Stock Agreement |
o | 16,587 shares issuable the 2006-A Stock Compensation Plan; and |
o | 140,000 shares issuable to Mr. Jensen under his employment agreement upon the occurrence of a USA Transaction |
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, who may act as agents or principals. Such broker-dealers may receive compensation in the form of discounts, concessions, or commissions from the selling shareholders. They may also receive compensation from the purchasers of common shares for whom such broker-dealers may act as agents or to whom they sell as principal, or both (which compensation as to a particular broker-dealer might be in excess of customary commissions).
Steve Illes is an "underwriter" within the meaning of the Act in connection with the sale of shares purchased from us under his agreement with us. The ten-percent discount received by him in connection with his purchase of shares from us will be an underwriting discount. The other selling shareholders and any broker-dealers or agents that are involved in selling the shares may also be deemed to be “underwriters” within the meaning of the Act in connection with such sales. In such event, any commissions received by such broker-dealers and profit on the resale of the shares purchased by them may be deemed to be underwriting discounts under the Act.
The selling shareholders also may resell all or a portion of the common shares in open market transactions in reliance upon Rule 144 under the Act, provided they meet the criteria and conform to the requirements of such Rule. We have agreed to bear all the expenses (other than selling commissions) in connection with the registration and sale of the common stock covered by this prospectus. In some circumstances, we have agreed to indemnify the selling shareholders against certain losses and liabilities, including liabilities under the Act.
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We have advised the selling shareholders that while they are engaged in a distribution of the shares included in this prospectus they are required to comply with Regulation M promulgated under the Securities Exchange Act of 1934, as amended. With certain exceptions, Regulation M precludes the selling shareholders, any affiliated purchasers, and any broker-dealer or other person who participates in such distribution from bidding for or purchasing, or attempting to induce any person to bid for or purchase any security which is the subject of the distribution until the entire distribution is complete.
DESCRIPTION OF SECURITIES
GENERAL
We are authorized to issue up to 640,000,000 shares of common stock, no par value, and 1,800,000 shares of undesignated preferred stock. As of the date hereof, 900,000 preferred shares have been designated as series A convertible preferred stock, no par value. As of June 30, 2006, there were 6,327,175 shares of common stock issued and outstanding and 521,542 shares of series A preferred stock issued and outstanding which are convertible into 5,215 shares of common stock. Through June 30, 2006, a total of 589,608 shares of preferred stock have been converted into 6,660 shares of Common Stock and $2,703,764 of accrued and unpaid dividends thereon have been converted into 2,904 shares of Common Stock.
COMMON STOCK
The holder of each share of common stock:
o is entitled to one vote on all matters submitted to a vote of the shareholders of USA, including the election of directors. There is no cumulative voting for directors;
o does not have any preemptive rights to subscribe for or purchase shares, obligations, warrants, or other securities of USA; and
o is entitled to receive such dividends as the Board of Directors may from time to time declare out of funds legally available for payment of dividends.
No dividend may be paid on the common stock until all accumulated and unpaid dividends on the series A preferred stock have been paid. Upon any liquidation, dissolution or winding up of USA, holders of shares of common stock are entitled to receive pro rata all of the assets of USA available for distribution, subject to the liquidation preference of the series A preferred stock of $10 per share and any unpaid and accumulated dividends on the series A preferred stock.
SERIES A CONVERTIBLE PREFERRED STOCK
The holders of shares of Series A preferred stock:
o have the number of votes per share equal to the number of shares of common stock into which each such share is convertible (i. e. , 100 shares of series A preferred stock equals 1 vote);
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o are entitled to vote on all matters submitted to the vote of the shareholders of USA, including the election of directors; and
o are entitled to an annual cumulative cash dividend of $1.50 per annum, payable when, as and if declared by the Board of Directors.
The record dates for payment of dividends on the Series A Preferred Stock are February 1 ($0.75) and August 1 ($0.75) of each year. Any and all accumulated and unpaid cash dividends on the Series A Preferred Stock must be declared and paid prior to the declaration and payment of any dividends on the Common Stock. Any unpaid and accumulated dividends will not bear interest. As of June 30, 2006, such accumulated unpaid dividends amounted to $8,226,261.
Each share of Series A Preferred Stock is convertible at any time into 1/100thof a 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 $1,000 per share of Common Stock at the time of conversion and whether or not such dividends have then been declared by USA. As of June 30, 2006 a total of 589,608 shares of series A Preferred Stock have been converted into common stock and accrued and unpaid dividends thereon have been converted into 2,904 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 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 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 per share figure was the redemption price approved by the Directors and shareholders of USA at the time the series A preferred stock was created and first issued. We currently have no plans to redeem the preferred stock.
SENIOR NOTES
As of June 30, 2006, we had $983,826 of unsecured senior notes due on June 30, 2007, $2,962,516 of unsecured senior notes due on December 31, 2007, $2,096,919 of unsecured senior notes due on December 31, 2008, $1,520,000 of unsecured senior notes due one December 31, 2009, and $2,012,000 of unsecured senior notes due on December 31, 2010. The principal amount of each senior note which is not voluntarily converted shall be payable on the maturity date thereof, at which time any unpaid and accrued interest shall also become due. Interest shall accrue at the rate of 12% per annum from and after the date of issuance and shall be payable quarterly in arrears on December 31, March 31, June 30, and September 30 of each year until maturity, with the exception of the Senior Notes due June 30, 2007 and December 31, 2010 and $544,945 of the December 31, 2008 notes, which accrue interest at the rate of 10% per annum. The senior notes are senior to all existing equity securities of USA, including the series A preferred stock.
66
The principal amount of each Senior Note due June 30, 2007 is convertible at any time at into shares of Common Stock at the rate of $10 per share. The principal amount of each Senior Note due December 31, 2007 is convertible at any time into shares of Common Stock at the rate of $20 per share. $544,945 of the Senior Notes due December 31, 2008 are convertible at anytime into shares of Common Stock at a rate of $10 per share and the remaining $1,920,651 principal amount of each Senior Note due December 31, 2008 is convertible at anytime into shares of Common Stock at the rate of $20 per share. The principal amount of each Senior Note due December 31, 2009 is convertible at anytime into shares of Common Stock at the rate of $20 per share. The principal amount of each Senior Note due December 31, 2010 is convertible at anytime into shares of Common Stock at the rate of $10 per share.
The indebtedness evidenced in the Senior Note is subordinated to the prior payment when due of the principal of, premium, if any, and interest on all "Senior Indebtedness", as defined herein, of USA as follows: Upon any distribution of its assets in a liquidation or dissolution of USA, or in bankruptcy, reorganization, insolvency, receivership or similar proceedings relating to USA, the Lender shall not be entitled to receive payment until the holders of Senior Indebtedness are paid in full. Until a payment default occurs with respect to any Senior Indebtedness, all payments of principal and interest due to Lender under the senior note shall be made in accordance with this senior note. Upon the occurrence of any payment default with respect to any Senior Indebtedness then, upon written notice thereof to USA and Lender by any holder of such Senior Indebtedness or its representative, no payments of principal or interest on the senior note shall be made by USA until such payment default has been cured to the satisfaction of the holder of such Senior Indebtedness or waived by such holder, provided, however, that if during the 180 day period following such default, the holder of Senior Indebtedness has not accelerated its loan, commenced foreclosure proceedings or otherwise undertaken to act on such default, then USA shall be required to continue making payments under the senior note, including any which had not been paid during such 180 day period. In the event that any institutional lender to USA at any time so requires, the Lender shall execute, upon request of USA, any intercreditor or subordination agreement(s) with any such institutional lender on terms not materially more adverse to the Lender then the subordination terms contained in this senior note.
The term "Senior Indebtedness" shall mean (a) all direct or indirect, contingent or certain indebtedness of any type, kind or nature (present or future) created, incurred or assumed by USA with respect to any future bank or other financial institutional indebtedness of USA or (b) any indebtedness created, incurred, or assumed, by USA secured by a lien on any of our assets.
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;
67
o any obligation of Borrower issued or contracted for as payment in consideration of the purchase by USA of the capital stock or substantially all of the assets of another person or in consideration for the merger or consolidation with respect to which USA was a party;
o any operating lease obligations of USA;
o any other indebtedness which by its terms is subordinated to the senior note; or
o any "other indebtedness" which is subordinated to all indebtedness to which the senior note is subordinated in substantially like terms as the senior note; which such "other indebtedness" shall be treated as equal with the indebtedness evidenced by the senior note.
COMMON STOCK PURCHASE WARRANTS
As of June 30, 2006, there were outstanding warrants to purchase 71,429 shares at $7 per share, warrants to purchase 12,000 shares at $91 per share, warrants to purchase 3,779 shares at $100 per share, warrants to purchase 29 shares at $103 per share, warrants to purchase 750 shares at $12.50 per share, and warrants to purchase up to 131,494 shares at $20 per share.
The exercise price of the warrants and the number of shares of Common Stock issuable upon exercise of the warrants are subject to adjustment in certain circumstances, including a stock split of, stock dividend on, or a subdivision, combination or recapitalization of the common stock. Upon the merger, consolidation, sale of substantially all the assets of USA, or other similar transaction, the warrant holders shall, at the option of USA, be required to exercise the warrants immediately prior to the closing of the transaction, or such warrants shall automatically expire. Upon such exercise, the warrant holders shall participate on the same basis as the holders of common stock in connection with the transaction.
The warrants do not confer upon the holder any voting or any other rights of a shareholder of USA. Upon notice to the warrant holders, USA has the right, at any time and from time to time, to reduce the exercise price or to extend the warrant termination date.
SHARES ELIGIBLE FOR FUTURE SALE
Of the 6,327,175 shares of common stock issued and outstanding on June 30, 2006, all are freely transferable without further registration under the Act (other than shares held by “affiliates” of the Company). As of June 30, 2006, there were 521,542 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 June 30, 2006 are convertible into 5,215 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).
68
Shares of our common stock which are not freely tradeable under the Act are known as "restricted securities" and cannot be resold without registration under the Act or pursuant to Rule 144 promulgated thereunder.
In general, under Rule 144 as currently in effect, a person (or persons whose shares are required to be aggregated), including any affiliate of USA, who beneficially owns "restricted securities" for a period of at least one year is entitled to sell within any three-month period, shares equal in number to the greater of (i) 1% of the then outstanding shares of the same class of shares, or (ii) the average weekly trading volume of the same class of shares during the four calendar weeks preceding the filing of the required notice of sale with the SEC. The seller must also comply with the notice and manner of sale requirements of Rule 144, and there must be current public information available about USA. In addition, any person (or persons whose shares must be aggregated) who is not, at the time of sale, nor during the preceding three months, an affiliate of the USA, and who has beneficially owned restricted shares for at least two years, can sell such shares under Rule 144 without regard to the notice, manner of sale, public information or the volume limitations described above.
LIMITATION OF LIABILITY; INDEMNIFICATION
As permitted by the Pennsylvania Business Corporation Law of 1988 ("BCL"), our By-laws provide that Directors will not be personally liable, as such, for monetary damages for any action taken unless the Director has breached or failed to perform the duties of a Director under the BCL and the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. This limitation of personal liability does not apply to any responsibility or liability pursuant to any criminal statute, or any liability for the payment of taxes pursuant to Federal, State or local law. The By-laws also include provisions for indemnification of our Directors and officers to the fullest extent permitted by the BCL. Insofar as indemnification for liabilities arising under the Act may be permitted to Directors, officers and controlling persons of USA pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our stock is American Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005.
LEGAL MATTERS
The validity of the common stock has been passed upon for us by Lurio & Associates, P.C., Philadelphia, Pennsylvania 19103.
69
EXPERTS
The consolidated financial statements and schedule of USA Technologies, Inc. at June 30, 2006 and 2005, and for each of the two years ended June 30, 2006 and 2005 appearing in this Prospectus and Registration Statement have been audited by Goldstein Golub Kessler LLP, independent registered public accounting firm, as set forth in their report thereon (which contains an explanatory paragraph describing conditions that raise substantial doubt about the Company's ability to continue as a going concern as described in Note 2 to the consolidated financial statements) appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
The consolidated statement of operations, shareholders’ equity, and cash flows and schedule of USA Technologies, Inc. for the year ended June 30, 2004 appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon (which contains an explanatory paragraph describing conditions that raise substantial doubt about the Company's ability to continue as a going concern as described in Note 2 to the consolidated financial statements) appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We file annual, quarterly and other reports, proxy statements and other information with the Securities and Exchange Commission. Anyone may inspect a copy of the registration statement or any other reports we file, without charge at the public reference facility maintained by the Securities and Exchange Commission in Room 1024, 450 Fifth Street, NW, Washington, DC 20549. Copies of all or any part of the registration statement may be obtained from that facility upon payment of the prescribed fees. The public may obtain information on the operation of the public reference room by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains a website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that file electronically with the Securities and Exchange Commission.
We will furnish record holders of our securities with annual reports containing financial statements audited and reported upon by our independent auditors, quarterly reports containing unaudited interim financial information, and such other periodic reports as we may determine to be appropriate or as may be required by law.
You can find additional information concerning us on our website http://www.usatech.com. Information on our website is not and should not be considered a part of this prospectus.
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FINANCIAL STATEMENTS
USA TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements: | ||
Reports of Independent Registered Public Accounting Firms | F-1 | |
Consolidated Balance Sheets | F-3 | |
Consolidated Statements of Operations | F-4 | |
Consolidated Statements of Shareholders' Equity | F-5 | |
Consolidated Statements of Cash Flows | F-8 | |
Notes to Consolidated Financial Statements | F-10 |
71
/s/ Goldstein Golub Kessler LLP | ||
/s/ Ernst & Young LLP | ||
Philadelphia, Pennsylvania September 10, 2004 |
June 30 | |||||||
2006 | 2005 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 2,866,801 | $ | 2,097,881 | |||
Accounts receivable, less allowance for uncollectible accounts of $229,000 and $196,000 as of 2006 and 2005, respectively | 1,022,114 | 744,041 | |||||
Finance receivables | 418,184 | 255,595 | |||||
Inventory | 1,410,812 | 1,697,236 | |||||
Prepaid expenses and other current assets | 209,108 | 240,324 | |||||
Subscriptions receivable | — | 35,723 | |||||
Investment | — | 39,467 | |||||
Total current assets | 5,927,019 | 5,110,267 | |||||
Finance receivables, less current portion | 289,389 | 269,722 | |||||
Property and equipment, net | 1,119,304 | 684,927 | |||||
Intangibles, net | 8,358,632 | 9,595,232 | |||||
Goodwill | 7,663,208 | 7,663,208 | |||||
Other assets | 61,914 | 68,409 | |||||
Total assets | $ | 23,419,466 | $ | 23,391,765 | |||
Liabilities and shareholders' equity | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 2,448,611 | $ | 3,265,928 | |||
Accrued expenses | 2,012,938 | 1,479,352 | |||||
Current obligations under long-term debt | 89,917 | 100,646 | |||||
Convertible Senior Notes | 851,486 | 1,252,161 | |||||
Total current liabilities | 5,402,952 | 6,098,087 | |||||
Convertible Senior Notes, less current portion | 6,805,403 | 7,897,314 | |||||
Long-term debt, less current portion | 34,047 | 87,179 | |||||
Total liabilities | 12,242,402 | 14,082,580 | |||||
Commitments and contingencies (Note 16) | |||||||
Shareholders' equity: | |||||||
Preferred Stock, no par value: | |||||||
Authorized shares- 1,800,000 | |||||||
Series A Convertible Preferred- | |||||||
Authorized shares- 900,000 | |||||||
Issued and outstanding shares- 521,542 and | |||||||
522,742 as of 2006 and 2005, respectively | |||||||
(liquidation preference of $13,441,681 and | |||||||
$12,688,713 as of 2006 and 2005, respectively) | 3,694,360 | 3,702,856 | |||||
Common Stock, no par value: | |||||||
Authorized shares- 640,000,000 as of | |||||||
June 30, 2006 and 560,000,000 as of | |||||||
June 30, 2005, respectively | |||||||
Issued and outstanding shares- 6,327,175 and | |||||||
4,335,679 as of 2006 and 2005,respectively | 138,110,126 | 121,598,475 | |||||
Subscriptions receivable | — | (233,850 | ) | ||||
Accumulated other comprehensive income | — | 3,080 | |||||
Accumulated deficit | (130,627,422 | ) | (115,761,376 | ) | |||
Total shareholders' equity | 11,177,064 | 9,309,185 | |||||
Total liabilities and shareholders' equity | $ | 23,419,466 | $ | 23,391,765 |
Year ended June 30 | ||||||||||
2006 | 2005 | 2004 | ||||||||
Revenues: | ||||||||||
Equipment sales | $ | 5,198,360 | $ | 3,535,064 | $ | 4,349,566 | ||||
License and transaction fees | 1,216,443 | 1,142,925 | 977,651 | |||||||
Product sales and other | — | — | 305,598 | |||||||
Total revenues | 6,414,803 | 4,677,989 | 5,632,815 | |||||||
Cost of sales (including | ||||||||||
amortization of software | ||||||||||
development costs- Note 2) | 4,404,457 | 3,478,673 | 4,329,692 | |||||||
Gross profit | 2,010,346 | 1,199,316 | 1,303,123 | |||||||
Operating expenses: | ||||||||||
General and administrative | 5,200,116 | 6,429,458 | 6,747,824 | |||||||
Compensation | 6,892,436 | 5,559,945 | 10,071,354 | |||||||
Depreciation and amortization | 1,699,593 | 1,600,120 | 1,632,330 | |||||||
Loss on debt modification | — | — | 318,915 | |||||||
Total operating expenses | 13,792,145 | 13,589,523 | 18,770,423 | |||||||
Operating loss | (11,781,799 | ) | (12,390,207 | ) | (17,467,300 | ) | ||||
Other income (expense): | ||||||||||
Interest income | 99,776 | 61,068 | 40,789 | |||||||
Gain (loss) on investment | (16,087 | ) | — | 603,480 | ||||||
Gain (loss) on contract | ||||||||||
settlement | — | (42,300 | ) | 429,204 | ||||||
Legal loss contingency | (270,000 | ) | — | — | ||||||
Interest expense: | ||||||||||
Coupon or stated rate | (1,365,860 | ) | (1,256,999 | ) | (1,179,322 | ) | ||||
Non-cash interest and | ||||||||||
amortization of debt | ||||||||||
Discount | (1,513,106 | ) | (1,870,752 | ) | (3,853,029 | ) | ||||
Total interest expense | (2,878,966 | ) | (3,127,751 | ) | (5,032,351 | ) | ||||
Total other income (expense) | (3,065,277 | ) | (3,108,983 | ) | (3,958,878 | ) | ||||
Net loss | (14,847,076 | ) | (15,499,190 | ) | (21,426,178 | ) | ||||
Cumulative preferred | ||||||||||
dividends | (783,289 | ) | (784,113 | ) | (786,513 | ) | ||||
Loss applicable to common | ||||||||||
shares | $ | (15,630,365 | ) | $ | (16,283,303 | ) | $ | (22,212,691 | ) | |
Loss per common share (basic | ||||||||||
and diluted) | $ | (3.15 | ) | $ | (4.18 | ) | $ | (7.70 | ) | |
Weighted average number of | ||||||||||
common shares outstanding | ||||||||||
(basic and diluted) | 4,965,501 | 3,894,204 | 2,884,761 |
SERIES A CONVERTIBLE PREFERRED STOCK | COMMON STOCK | ACCUMULATED OTHER COMPREHENSIVE INCOME | ACCUMULATED DEFICIT | TOTAL | ||||||||||||
Balance, June 30, 2003 | $ | 3,715,246 | $ | 78,790,405 | $ | — | $ | (78,813,568 | ) | $ | 3,692,083 | |||||
Issuance of 17 shares of Common Stock | ||||||||||||||||
from the conversion of 1,750 shares | ||||||||||||||||
of Preferred Stock | $ | (12,390 | ) | $ | 12,390 | $ | — | $ | — | $ | — | |||||
Conversion of cumulative preferred | ||||||||||||||||
dividends into 22 shares of Common | ||||||||||||||||
Stock at $1000 per share | — | 22,440 | — | (22,440 | ) | — | ||||||||||
Exercise of 321,793 Common Stock | ||||||||||||||||
Warrants and Options | — | 2,800,472 | — | — | 2,800,472 | |||||||||||
Issuance of 142,048 shares of Common | ||||||||||||||||
Stock from the conversion of 12% | ||||||||||||||||
Senior Notes | — | 2,840,978 | — | — | 2,840,978 | |||||||||||
Issuance of 16,157 shares of Common | ||||||||||||||||
Stock in exchange for salaries and | ||||||||||||||||
professional services | — | 422,092 | — | — | 422,092 | |||||||||||
Issuance of 105,000 shares of Common | ||||||||||||||||
Stock to executive in connection with | ||||||||||||||||
employment agreement | — | 4,620,000 | — | — | 4,620,000 | |||||||||||
Issuance of 531,778 shares of Common | ||||||||||||||||
Stock from various private placement | ||||||||||||||||
offerings at varying prices per | ||||||||||||||||
share, less issuance costs of $253,071 | — | 9,389,263 | — | — | 9,389,263 | |||||||||||
Issuance of 10,612 shares of Common | ||||||||||||||||
Stock and related common Stock | ||||||||||||||||
Warrants in lieu of cash payment for | ||||||||||||||||
interest on the 12% senior Notes | — | 478,496 | — | — | 478,496 | |||||||||||
Debt discount relating to beneficial | ||||||||||||||||
conversion feature on 12% Senior Notes | — | 1,981,007 | — | — | 1,981,007 | |||||||||||
Issuance of 201,700 shares of Common | ||||||||||||||||
Stock in connection with the Bayview | ||||||||||||||||
acquisition | — | 9,278,200 | — | — | 9,278,200 | |||||||||||
Comprehensive Loss: | ||||||||||||||||
Net loss | — | — | — | (21,426,178 | ) | (21,426,178 | ) | |||||||||
Unrealized gain on investment | — | — | 32,249 | — | 32,249 | |||||||||||
Total comprehensive loss | (21,393,929 | ) | ||||||||||||||
Balance, June 30, 2004 | $ | 3,702,856 | $ | 110,635,743 | $ | 32,249 | $ | (100,262,186 | ) | $ | 14,108,662 |
SERIES A CONVERTIBLE PREFERRED STOCK | COMMON STOCK | SUBSCRIPTIONS RECEIVABLE | ACCUMULATED OTHER COMPREHENSIVE INCOME | ACCUMULATED DEFICIT | TOTAL | ||||||||||||||
Exercise of 109,942 Common Stock Warrants at $10 per share, net | $ | — | $ | 1,094,658 | $ | — | $ | — | $ | — | $ | 1,094,658 | |||||||
Issuance of 90,351 shares of Common Stock from the conversion of 12% Senior Notes | — | 931,208 | — | — | — | 931,208 | |||||||||||||
Issuance of 8,005 shares of Common Stock for employee compensation | — | 107,670 | — | — | — | 107,670 | |||||||||||||
Issuance of 384,504 shares of Common Stock to an accredited investor at varying prices per share, less issuance costs of $291,166 | — | 3,779,454 | — | — | — | 3,779,454 | |||||||||||||
Issuance of 233,333 shares of Common Stock from a private placement at varying prices per share, less issuance costs of $73,103 | — | 3,426,897 | (233,850 | ) | — | — | 3,193,047 | ||||||||||||
Cancellation of 7,000 shares of Common Stock in connection with the Bayview acquisition | — | (322,000 | ) | — | — | — | (322,000 | ) | |||||||||||
Debt discount related to the beneficial conversion feature on various Senior Notes issued | — | 1,944,845 | — | — | — | 1,944,845 | |||||||||||||
Comprehensive loss: | |||||||||||||||||||
Net loss | — | — | — | — | (15,499,190 | ) | (15,499,190 | ) | |||||||||||
Unrealized loss on investment | — | — | — | (29,169 | ) | — | (29,169 | ) | |||||||||||
Total comprehensive loss | (15,528,359 | ) | |||||||||||||||||
Balance, June 30, 2005 | $ | 3,702,856 | $ | 121,598,475 | $ | (233,850 | ) | $ | 3,080 | $ | (115,761,376 | ) | $ | 9,309,185 |
SERIES A CONVERTIBLE PREFERRED STOCK | COMMON STOCK | SUBSCRIPTIONS RECEIVABLE | ACCUMULATED OTHER COMPREHENSIVE INCOME | ACCUMULATED DEFICIT | TOTAL | ||||||||||||||
Issuance of 1,754,428 shares of Common Stock to an accredited investors at varying prices per share | $ | — | $ | 13,747,261 | $ | — | $ | — | $ | — | $ | 13,747,261 | |||||||
Exercise of 36,800 2005-D Common Stock Warrants at $10 per share | — | 368,000 | — | — | — | 368,000 | |||||||||||||
Cancellation of 15,590 shares of Common Stock issued as part of the 2005-D private placement | — | (233,850 | ) | 233,850 | — | — | — | ||||||||||||
Conversion of 1,200 shares of Preferred Stock to 12 shares of Common Stock | (8,496 | ) | 8,496 | — | — | — | — | ||||||||||||
Conversion of $18,320 of cumulative preferred dividends into 18 shares of Common Stock at $1000 per share | — | 18,320 | — | — | (18,970 | ) | (650 | ) | |||||||||||
Issuance of 59,247 shares of Common Stock from the conversion of Senior Notes | — | 667,469 | — | — | — | 667,469 | |||||||||||||
Debt discount related to the beneficial conversion feature on Senior Notes | — | 552,263 | — | — | — | 552,263 | |||||||||||||
Issuance of special purchase rights in conjunction with the 2008-C and 2010-A Senior Notes | — | 428,941 | — | — | — | 428,941 | |||||||||||||
Issuance of 9,500 shares of Common Stock for employee compensation | — | 79,195 | — | — | — | 79,195 | |||||||||||||
Stock option compensation charges | — | 875,556 | — | — | — | 875,556 | |||||||||||||
Repayment of fractional shares from reverse stock split | — | — | — | — | — | — | |||||||||||||
Comprehensive loss: | |||||||||||||||||||
Net loss | — | — | — | — | (14,847,076 | ) | (14,847,076 | ) | |||||||||||
Unrealized loss on investment | — | — | — | (3,080 | ) | — | (3,080 | ) | |||||||||||
Total comprehensive loss | (14,850,156 | ) | |||||||||||||||||
Balance, June 30, 2006 | $ | 3,694,360 | $ | 138,110,126 | $ | — | $ | — | $ | (130,627,422 | ) | $ | 11,177,064 |
Year ended June 30 | ||||||||||
2006 | 2005 | 2004 | ||||||||
OPERATING ACTIVITIES: | ||||||||||
Net loss | $ | (14,847,076 | ) | $ | (15,499,190 | ) | $ | (21,426,178 | ) | |
Adjustment to reconcile net loss | ||||||||||
to net cash used in operating | ||||||||||
activities: | ||||||||||
Charges incurred in connection | ||||||||||
with the issuance of Common | ||||||||||
Stock for employee compensation | 79,195 | 107,670 | 5,042,092 | |||||||
Charges incurred in connection | ||||||||||
with stock option compensation | 875,556 | — | — | |||||||
Interest expense on the | ||||||||||
Senior Notes paid through | ||||||||||
the issuance of Common Stock | — | — | 478,496 | |||||||
Non-cash interest and amortization | ||||||||||
of debt discount | 1,513,106 | 1,870,752 | 3,374,533 | |||||||
Depreciation | 462,993 | 363,520 | 469,418 | |||||||
Amortization | 1,236,600 | 1,236,600 | 2,207,329 | |||||||
Loss (gain) on sale of | ||||||||||
investment | 17,144 | — | (603,478 | ) | ||||||
Loss (gain) on contract settlement | — | 42,300 | (429,204 | ) | ||||||
Loss on debt modification | — | — | 318,915 | |||||||
Changes in operating assets | ||||||||||
and liabilities: | ||||||||||
Accounts receivable | (278,073 | ) | 27,680 | (711,848 | ) | |||||
Finance receivables | (182,256 | ) | (221,181 | ) | (73,353 | ) | ||||
Inventory | 286,424 | 10,448 | (1,249,784 | ) | ||||||
Prepaid expenses and | ||||||||||
other assets | 37,711 | (85,541 | ) | (1,732 | ) | |||||
Accounts payable | (817,317 | ) | 336,437 | 843,680 | ||||||
Accrued expenses | 533,586 | (90,016 | ) | (796,342 | ) | |||||
Net cash used in operating | ||||||||||
activities | (11,082,407 | ) | (11,900,521 | ) | (12,557,456 | ) | ||||
INVESTING ACTIVITIES: | ||||||||||
Purchase of property and | ||||||||||
equipment, net | (842,470 | ) | (248,043 | ) | (358,033 | ) | ||||
Cash paid in connection with | ||||||||||
Bayview acquisition | — | — | (727,970 | ) | ||||||
Cash received from the sale of | ||||||||||
Investment | 19,243 | — | 1,471,140 | |||||||
Cash received from contract | ||||||||||
settlement | — | — | 674,649 | |||||||
Cash received from the sale of | ||||||||||
assets held for sale | — | 23,700 | 41,400 | |||||||
Net cash provided by (used in) | ||||||||||
investing activities | (823,227 | ) | (224,343 | ) | 1,101,186 |
Year ended June 30 | ||||||||||
2006 | 2005 | 2004 | ||||||||
FINANCING ACTIVITIES: | ||||||||||
Net proceeds from the issuance | ||||||||||
of Common Stock and the | ||||||||||
exercise of Common Stock | ||||||||||
Warrants | $ | 14,114,612 | $ | 8,004,436 | $ | 11,889,735 | ||||
Collection of subscriptions | ||||||||||
receivable | 35,723 | 300,000 | 1,013,400 | |||||||
Net proceeds from the issuance | ||||||||||
of Senior Notes | 1,314,944 | 3,305,790 | — | |||||||
Repayment of long-term debt and | ||||||||||
Senior Notes | (2,790,725 | ) | (406,695 | ) | (812,106 | ) | ||||
Net cash provided by financing | ||||||||||
activities | 12,674,554 | 11,203,531 | 12,091,029 | |||||||
Net increase (decrease) in cash | ||||||||||
and cash equivalents | 768,920 | (921,333 | ) | 634,759 | ||||||
Cash and cash equivalents at | ||||||||||
beginning of year | 2,097,881 | 3,019,214 | 2,384,455 | |||||||
Cash and cash equivalents at end | ||||||||||
of year | $ | 2,866,801 | $ | 2,097,881 | $ | 3,019,214 | ||||
Supplemental disclosures of | ||||||||||
cash flow information: | ||||||||||
Cash paid for interest | $ | 1,430,115 | $ | 1,187,833 | $ | 1,098,727 | ||||
Purchases of equipment with | ||||||||||
long-term debt | $ | 54,900 | $ | 197,450 | $ | — | ||||
Conversion of Convertible | ||||||||||
Preferred Stock to Common Stock | $ | 8,496 | $ | — | $ | 12,390 | ||||
Conversion of Cumulative | ||||||||||
Preferred Dividends to Common | ||||||||||
Stock | $ | 18,320 | $ | — | $ | 22,440 | ||||
Subscriptions receivable | $ | — | $ | 35,723 | $ | 300,000 | ||||
Conversion of Senior Notes | ||||||||||
to Common Stock | $ | 667,469 | $ | 931,208 | $ | 2,840,978 | ||||
Issuance (cancellation) of | ||||||||||
Common Stock in connection | ||||||||||
with Bayview acquisition | $ | — | $ | (322,000 | ) | $ | 9,278,200 | |||
Beneficial conversion feature | ||||||||||
related to Senior Notes | $ | 552,263 | $ | 1,944,845 | $ | 1,981,007 | ||||
Debt discount related to | ||||||||||
issuance of purchase rights | $ | 428,941 | $ | — | $ | — |
Current assets | $ | 7,628 | ||
Property and equipment | 244,704 | |||
Intangible assets | 9,449,000 | |||
Goodwill | 329,562 | |||
Total assets acquired | $ | 10,030,894 |
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 |
JUNE 30, 2006 | ||||||||||
GROSS CARRYING AMOUNT | ACCUMULATED AMORTIZATION | NET CARRYING VALUE | ||||||||
Intangible assets: | ||||||||||
Trademarks | $ | 2,064,000 | $ | (433,125 | ) | $ | 1,630,875 | |||
Patents | 9,294,000 | (2,976,622 | ) | 6,317,378 | ||||||
Non-Compete agreement | 1,011,000 | (600,621 | ) | 410,379 | ||||||
Total | $ | 12,369,000 | $ | (4,010,368 | ) | $ | 8,358,632 |
JUNE 30, 2005 | ||||||||||
GROSS CARRYING AMOUNT | ACCUMULATED AMORTIZATION | NET CARRYING VALUE | ||||||||
Intangible assets: | ||||||||||
Trademarks | $ | 2,064,000 | $ | (328,125 | ) | $ | 1,735,875 | |||
Patents | 9,294,000 | (2,047,222 | ) | 7,246,778 | ||||||
Non-Compete agreement | 1,011,000 | (398,421 | ) | 612,579 | ||||||
Total | $ | 12,369,000 | $ | (2,773,768 | ) | $ | 9,595,232 |
USEFUL | JUNE 30 | |||||||||
LIVES | 2006 | 2005 | ||||||||
Computer equipment and purchased software | 3 years | $ | 3,063,618 | $ | 2,536,990 | |||||
Vending machines and | ||||||||||
related components | 7 years | 4,427 | 4,427 | |||||||
Control systems | 3 years | 79,567 | 479,530 | |||||||
Furniture and equipment | 5-7 years | 738,746 | 816,537 | |||||||
Leasehold improvements | Lease term | 126,007 | 74,576 | |||||||
Vehicles | 5 years | 29,066 | 29,066 | |||||||
Less accumulated depreciation | 4,041,431 | 3,941,126 | ||||||||
(2,922,127 | ) | (3,256,199 | ) | |||||||
$ | 1,119,304 | $ | 684,927 |
JUNE 30 | |||||||
2006 | 2005 | ||||||
Accrued compensation and related | |||||||
sales commissions | $ | 384,256 | $ | 404,485 | |||
Accrued interest | 381,240 | 445,495 | |||||
Accrued professional fees | 162,051 | 151,220 | |||||
Accrued taxes and filing fees | 100,573 | 97,860 | |||||
Accrued consulting fees | — | 122,500 | |||||
Accrued rent | — | — | |||||
Advanced customer billings | 109,007 | 65,385 | |||||
Accrued loss contingency | 270,000 | — | |||||
Accrued other | 605,811 | 192,407 | |||||
$ | 2,012,938 | $ | 1,479,352 |
JUNE 30 | |||||||
2006 | 2005 | ||||||
Software licensing and other | $ | 123,964 | $ | 186,768 | |||
Capital lease obligations | — | 1,057 | |||||
123,964 | 187,825 | ||||||
Less current portion | 89,917 | 100,646 | |||||
$ | 34,047 | $ | 87,179 |
JUNE 30 | |||||||
2006 | 2005 | ||||||
Deferred tax assets: | |||||||
Net operating loss and capital loss carryforwards | $ | 41,833,000 | $ | 37,508,000 | |||
Deferred research and development costs | 234,000 | 373,000 | |||||
Software development costs | 1,081,000 | 1,297,000 | |||||
Other | 1,430,000 | 780,000 | |||||
44,578,000 | 39,958,000 | ||||||
Deferred tax liabilities: | |||||||
Intangibles | (696,000 | ) | (815,000 | ) | |||
43,882,000 | 39,143,000 | ||||||
Valuation allowance | (43,882,000 | ) | (39,143,000 | ) | |||
Deferred tax assets, net | $ | — | $ | — |
Senior Notes Maturing December 31, | |||||||||||||||||||||||||
2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||||
(2003 Senior | (2004 Senior | (2005 Senior | (2006 Senior | (2007 Senior | (2008 & 2008-C | (2009 Senior | (2010 & 2010-B | ||||||||||||||||||
Notes) | Notes) | Notes) | Notes) | Notes) | Senior Notes) | Notes) | Senior Notes) | ||||||||||||||||||
Face amount of Senior Notes | |||||||||||||||||||||||||
Balance, June 30, 2004 | $ | — | $ | 451,152 | $ | 3,011,791 | $ | 3,213,500 | $ | 3,019,397 | $ | — | $ | — | $ | — | |||||||||
Issued for cash | — | — | — | — | — | — | — | — | |||||||||||||||||
Repayment | — | (131,152 | ) | (12,735 | ) | — | — | — | — | — | |||||||||||||||
2004 Senior Notes exchanged | |||||||||||||||||||||||||
for June 30, 2006 Senior | |||||||||||||||||||||||||
Notes | — | (320,000 | ) | — | — | — | — | — | — | ||||||||||||||||
2005 and 2006 Senior Notes | |||||||||||||||||||||||||
exchanged for 2008 and 2009 | |||||||||||||||||||||||||
Senior Notes | — | — | (1,920,651 | ) | (1,520,000 | ) | — | 1,920,651 | 1,520,000 | — | |||||||||||||||
2005-B Senior Notes issued | |||||||||||||||||||||||||
for cash and subsequently | |||||||||||||||||||||||||
exchanged for 2010 Senior | |||||||||||||||||||||||||
Notes | — | — | — | — | — | — | — | 1,755,000 | |||||||||||||||||
Conversions to Common Stock | — | — | (21,000 | ) | — | (34,381 | ) | — | — | (415,000 | ) | ||||||||||||||
Balance, June 30, 2005 | $ | — | $ | — | $ | 1,057,405 | $ | 1,693,500 | $ | 2,985,016 | $ | 1,920,651 | $ | 1,520,000 | $ | 1,340,000 | |||||||||
2008-C Issued for cash | — | — | — | — | — | 544,944 | — | — | |||||||||||||||||
Bridge Notes converted into | |||||||||||||||||||||||||
2010-B Senior Notes | — | — | — | — | — | — | — | 770,000 | |||||||||||||||||
Repayment | — | — | (927,405 | ) | (1,683,500 | ) | (12,500 | ) | (5,343 | ) | — | — | |||||||||||||
Conversions to Common Stock | — | — | (130,000 | ) | (10,000 | ) | (10,000 | ) | (363,333 | ) | — | (98,000 | ) | ||||||||||||
Balance, June 30, 2006 | $ | — | $ | — | $ | — | $ | — | $ | 2,962,516 | $ | 2,096,919 | $ | 1,520,000 | $ | 2,012,000 |
Senior Notes Maturing | |||||||
June 30, | |||||||
2009 | 2007 | ||||||
(2007-B Senior | |||||||
Notes) | |||||||
Face amount of Senior Notes | |||||||
Balance, June 30, 2004 | $ | — | $ | — | |||
Issued for cash | — | 1,550,790 | |||||
2004 Senior Notes exchanged | |||||||
for June 30, 2006 Senior | |||||||
Notes | 320,000 | — | |||||
Conversions to Common Stock | — | (460,827 | ) | ||||
Balance, June 30, 2005 | $ | 320,000 | $ | 1,089,962 | |||
Repayment | — | (50,000 | ) | ||||
Conversions to Common Stock | — | (56,136 | ) | ||||
Balance, June 30, 2006 | $ | 320,000 | $ | 983,826 |
Senior Notes Maturing December 31, | |||||||||||||||||||||||||
2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||||
(2003 Senior | (2004 Senior | (2005 Senior | (2006 Senior | (2007 Senior | (2008 & 2008-C | (2009 Senior | (2010 & 2010-B | ||||||||||||||||||
Notes) | Notes) | Notes) | Notes) | Notes) | Senior Notes) | Notes) | Senior Notes) | ||||||||||||||||||
Debt discount and other | |||||||||||||||||||||||||
issuance costs | |||||||||||||||||||||||||
Unamortized costs at | |||||||||||||||||||||||||
June 30, 2003 | $ | (80,233 | ) | $ | (453,930 | ) | $ | (2,153,223 | ) | $ | (1,104,169 | ) | $ | (596,852 | ) | $ | — | $ | — | $ | — | ||||
Debt discount from issuances | — | — | — | (1,155,475 | ) | (825,532 | ) | — | — | — | |||||||||||||||
Amortization and write-off of | |||||||||||||||||||||||||
unamortized costs upon | |||||||||||||||||||||||||
conversions to Common Stock | 32,803 | 133,180 | 1,052,231 | 1,329,255 | 827,064 | — | — | — | |||||||||||||||||
Loss on modification for | |||||||||||||||||||||||||
exchanges of 2003 and 2004 | |||||||||||||||||||||||||
Senior Notes for 2006 and | |||||||||||||||||||||||||
2007 Senior Notes | 47,430 | 271,485 | — | — | — | — | — | — | |||||||||||||||||
Unamortized costs at | |||||||||||||||||||||||||
June 30, 2004 | — | (49,265 | ) | (1,100,992 | ) | (930,389 | ) | (595,320 | ) | — | — | — | |||||||||||||
Debt discount from issuance | — | — | 358,659 | 308,052 | — | (358,659 | ) | (308,052 | ) | (1,394,200 | ) | ||||||||||||||
Amortization and write off | |||||||||||||||||||||||||
of unamortized costs upon | |||||||||||||||||||||||||
conversions to Common | |||||||||||||||||||||||||
Stock | — | 49,265 | 617,089 | 328,148 | 174,933 | 23,911 | 16,213 | 376,778 | |||||||||||||||||
Unamortized costs at | |||||||||||||||||||||||||
June 30, 2005 | $ | — | $ | — | $ | (125,244 | ) | $ | (294,189 | ) | $ | (420,387 | ) | $ | (334,748 | ) | $ | (291,839 | ) | $ | (1,017,422 | ) | |||
Debt discount from issuance | — | — | — | — | — | (415,406 | ) | — | (565,798 | ) | |||||||||||||||
Amortization and write off | |||||||||||||||||||||||||
of unamortized costs upon | |||||||||||||||||||||||||
conversions to Common | |||||||||||||||||||||||||
Stock | — | — | 125,244 | 294,189 | 170,061 | 402,128 | 64,853 | 302,526 | |||||||||||||||||
Unamortized costs at | |||||||||||||||||||||||||
June 30, 2006 | $ | — | $ | — | $ | — | $ | — | $ | (250,326 | ) | $ | (348,026 | ) | $ | (226,986 | ) | $ | (1,280,694 | ) | |||||
Senior Notes reflected in the | |||||||||||||||||||||||||
Consolidated Balance Sheet: | |||||||||||||||||||||||||
June 30, 2005 | |||||||||||||||||||||||||
Face amount | $ | — | $ | — | $ | 1,057,405 | $ | 1,693,500 | $ | 2,985,016 | $ | 1,920,651 | $ | 1,520,000 | $ | 1,340,000 | |||||||||
Unamortized costs | — | — | (125,244 | ) | (294,189 | ) | (420,387 | ) | (334,748 | ) | (291,839 | ) | (1,017,422 | ) | |||||||||||
$ | — | $ | — | $ | 932,161 | $ | 1,399,311 | $ | 2,564,629 | $ | 1,585,903 | $ | 1,228,161 | $ | 322,578 | ||||||||||
June 30, 2006 | |||||||||||||||||||||||||
Face amount | $ | — | $ | — | $ | — | $ | — | $ | 2,962,516 | $ | 2,096,919 | $ | 1,520,000 | $ | 2,012,000 | |||||||||
Unamortized costs | — | — | — | — | (250,326 | ) | (348,026 | ) | (226,986 | ) | (1,280,694 | ) | |||||||||||||
$ | — | $ | — | $ | — | $ | — | $ | 2,712,190 | $ | 1,748,893 | $ | 1,293,014 | $ | 731,306 |
Senior Notes Maturing | |||||||
June 30, | |||||||
2009 | 2007 | ||||||
(2007-B Senior | |||||||
Notes) | |||||||
Debt discount and other | |||||||
issuance costs | |||||||
Unamortized costs at | |||||||
June 30, 2004 | $ | — | $ | — | |||
Debt discount from issuance | — | (518,645 | ) | ||||
Amortization and write off | |||||||
of unamortized costs upon | |||||||
conversions to Common | |||||||
Stock | — | 225,415 | |||||
Unamortized costs at | |||||||
June 30, 2005 | $ | — | $ | (293,230 | ) | ||
Debt discount from issuance | — | — | |||||
Amortization and write off | |||||||
of unamortized costs upon | |||||||
conversions to Common | |||||||
Stock | — | 160,890 | |||||
Unamortized costs at | |||||||
June 30, 2006 | $ | — | $ | (132,340 | ) | ||
Senior Notes reflected in the | |||||||
Consolidated Balance Sheet: | |||||||
June 30, 2005 | |||||||
Face amount | $ | 320,000 | $ | 1,089,962 | |||
Unamortized costs | — | $ | (293,230 | ) | |||
$ | 320,000 | $ | 796,732 | ||||
June 30, 2006 | |||||||
Face amount | $ | 320,000 | $ | 983,826 | |||
Unamortized costs | — | $ | (132,340 | ) | |||
$ | 320,000 | $ | 851,486 |
2007 | $ | 3,946,342 | ||
2008 | 2,096,919 | |||
2009 | 1,840,000 | |||
2010 | 2,012,000 | |||
$ | 9,895,261 | |||
Less discount | 2,238,372 | |||
$ | 7,656,889 |
Exercise of Common Stock Options | 178,933 | |||
Exercise of Common Stock Warrants | 219,481 | |||
Conversions of Preferred Stock and cumulative | ||||
Preferred Stock dividends | 13,441 | |||
Conversions of Senior Notes | 669,635 | |||
Issuance under 2006 Common Stock Agreement | 715,571 | |||
Issuance under 2006-A Stock Compensation Plan | 16,587 | |||
Issuance under Chief Executive Officer’s employment | ||||
agreement upon the occurrence of a USA Transaction | 140,000 | |||
Total shares reserved for future issuance | 1,953,648 |
Nonvested Shares | Shares | Weighted-Average Grant-Date Fair Value | |||||
Nonvested at July 1, 2006 | — | $ | — | ||||
Granted | 125,000 | 8.00 | |||||
Vested | 41,667 | 8.00 | |||||
Forfeited | — | — | |||||
Nonvested at June 30, 2006 | 83,333 | $ | 8.00 |
WARRANTS | ||||
Outstanding at June 30, 2003 | 621,277 | |||
Issued | 188,739 | |||
Exercised | (320,604 | ) | ||
Cancelled | (154,840 | ) | ||
Outstanding at June 30, 2004 | 334,571 | |||
Issued | 233,333 | |||
Exercised | (109,942 | ) | ||
Cancelled | (136,642 | ) | ||
Outstanding at June 30, 2005 | 321,320 | |||
Issued | 131,494 | |||
Exercised | (36,800 | ) | ||
Cancelled | (196,533 | ) | ||
Outstanding at June 30, 2006 | 219,481 |
WARRANTS OUTSTANDING | EXERCISE PRICE PER SHARE | EXPIRATION DATE | |||||
750 | $ | 12.50 | June 30, 2006 | ||||
71,429 | $ | 7 | October 26, 2007 | ||||
131,494 | $ | 20 | December 31, 2008 | ||||
12,000 | $ | 91 | August 29, 2010 | ||||
3,779 | $ | 100 | April 24, 2011 | ||||
29 | $ | 103 | April 30, 2011 | ||||
219,481 |
WARRANTS OUTSTANDING | EXERCISE PRICE PER SHARE | EXPIRATION DATE | |||||
233,333 | $ | 15 | December 31, 2005 | ||||
750 | $ | 12.50 | June 30, 2006 | ||||
71,429 | $ | 7 | October 26, 2007 | ||||
12,000 | $ | 91 | August 29, 2010 | ||||
3,779 | $ | 100 | April 24, 2011 | ||||
29 | $ | 103 | April 30, 2011 | ||||
321,320 |
OPTIONS OUTSTANDING | EXERCISE PRICE PER SHARE | WEIGHTED-AVERAGE EXCERCISE PRICE | ||||||||
Outstanding at June 30, 2003 | 29,075 | $ | 16.50-$250 | $ | 35.32 | |||||
Granted | 3,000 | $ | 30 | $ | 30.00 | |||||
Exercised | (2,239 | ) | $ | 16.50 | $ | 16.50 | ||||
Expired | (10,861 | ) | $ | 16.50-$250 | $ | 56.15 | ||||
Outstanding at June 30, 2004 | 18,975 | $ | 16.50-$200 | $ | 23.80 | |||||
Granted | 3,000 | $ | 20 | $ | 20.00 | |||||
Cancelled | (1,876 | ) | $ | 30 | $ | 30.00 | ||||
Outstanding at June 30, 2005 | 20,099 | $ | 16.50-$200 | $ | 23.58 | |||||
Granted | 160,000 | $ | 7.50-$8 | $ | 7.52 | |||||
Expired | (1,166 | ) | $ | 100-$200 | $ | 105.66 | ||||
Outstanding at June 30, 2006 | 178,933 | $ | 7.50-$100 | $ | 8.68 | |||||
Exercisable at June 30, 2006 | 86,767 | $ | 7.50-$100 | $ | 9.69 |
WEIGHTED AVERAGE | |||||||||||||||||||
EXERCISE | REMAINING CONTRACTUAL | ||||||||||||||||||
OPTIONS | OPTIONS | PRICE | LIFE (YEARS)- | INTRINSIC VALUE- | |||||||||||||||
OUTSTANDING | EXERCISABLE | PER SHARE | OUTSTANDING | EXERCISEABLE | OUTSTANDING | EXERCISABLE | |||||||||||||
154,000 | 69,334 | $ | 7.50 | 5.72 | 4.83 | $ | 30,800 | $ | 13,867 | ||||||||||
6,000 | — | $ | 8 | 6.47 | 0.00 | $ | — | $ | — | ||||||||||
14,658 | 14,658 | $ | 16.50 | 0.87 | 0.87 | $ | — | $ | — | ||||||||||
3,000 | 1,500 | $ | 20 | 1.95 | 0.40 | $ | — | $ | — | ||||||||||
1,125 | 1,125 | $ | 30 | 0.31 | 0.31 | $ | — | $ | — | ||||||||||
150 | 150 | $ | 100 | 0.96 | 0.96 | $ | — | $ | — | ||||||||||
178,933 | 86,767 | 5.25 | 4.02 | $ | 30,800 | $ | 13,867 | ||||||||||||
Dividend yield | 0 | % | ||
Expected stock price volatility | 0.823 | |||
Risk-free interest rate | 4.0 | % | ||
Expected life, in years | 5 |
Dividend yield | 0 | % | ||
Expected stock price volatility | 0.796 | |||
Risk-free interest rate | 4.0 | % | ||
Expected life, in years | 5 |
Dividend yield | 0 | % | ||
Expected stock price volatility | 0.922 | |||
Risk-free interest rate | 4.0 | % | ||
Expected life, in years | 2 |
Dividend yield | 0 | % | ||
Expected stock price volatility | 0.971 | |||
Risk-free interest rate | 4.0 | % | ||
Expected life, in years | 3 |
OPERATING | ||||
LEASES | ||||
2007 | $ | 438,000 | ||
2008 | 447,000 | |||
2009 | 452,000 | |||
2010 | 220,000 | |||
Total minimum lease payments | $ | 1,989,000 |
PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is an itemized statement of the estimated amounts of all expenses payable by the Registrant in connection with the registration of the common stock, other than underwriting discounts and commissions.
Securities and Exchange Commission - Registration Fee | $ 356.45 | |
Printing and Engraving Expenses | $ 4,643.55 | |
Accounting Fees and Expenses | $15,000.00 | |
Legal Fees and Expenses | $15,000.00 | |
Total | $35,000.00 | |
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS. |
Section 1746 of the Pennsylvania Business Corporation Law of 1988, as amended ("BCL"), authorizes a Pennsylvania corporation to indemnify its officers, directors, employees and agents under certain circumstances against expenses and liabilities incurred in legal proceedings involving such persons because of their holding or having held such positions with the corporation and to purchase and maintain insurance of such indemnification. Our By-laws substantively provide that we will indemnify our officers, directors, employees and agents to the fullest extent provided by Section 1746 of the BCL.
Section 1713 of the BCL permits a Pennsylvania corporation, by so providing in its By-laws, to eliminate the personal liability of a director for monetary damages for any action taken unless the director has breached or failed to perform the duties of his office and the breach or failure constitutes self-dealing, willful misconduct or recklessness. In addition, no such limitation of liability is available with respect to the responsibility or liability of a director pursuant to any criminal statute or for the payment of taxes pursuant to Federal, state or local law. Our By-laws eliminate the personal liability of the directors to the fullest extent permitted by Section 1713 of the BCL.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
During the three years immediately preceding the date of the filing of this registration statement, the following securities were issued by USA without registration under the Securities Act of 1933, as amended ("Act"):
PRIVATE PLACEMENTS
In October 2003, we issued 5,774 shares and 5,774 warrants to purchase up to 5,774 shares to the holders of our senior notes who elected to receive these securities in lieu of the cash interest payment due for the quarter ended September 30, 2003. The shares were purchased at the rate of $20 per share and the warrants are exercisable at $20 per share at any time through June 30, 2004. We have agreed to register the shares and the shares underlying the warrants under the Act for resale for a period of 2 years. The securities were offered and sold under the exemption from registration set forth in Rule 506 promulgated under the Act. All of the noteholders are accredited investors and existing security holders, and there was no general
72
solicitation or advertising.
In October 2003, we issued to Alpha Capital Atkiengesellschaft, a current shareholder, an aggregate of 5,000 shares due to Alpha as a result of the occurrence of a Non-Registration Event as defined under our agreement with Alpha because we failed to register within 120 days of issuance the securities issued to Alpha in November 2002. The securities were sold to an accredited investor and the offer and sale thereof did not involve any general advertising or solicitation and the offer and sale was therefore exempt from registration under Section 4(2) under the Act.
From February through June 2004, the Company sold 282,908 shares of Common Stock to 34 accredited investors at $15 per share for an aggregate of $4,243,625. During June 2004, the Company granted to each investor in the offering a warrant to purchase one-half of a share for each share subscribed for by such investor in the offering. The Company issued warrants to purchase a total of 141,454 shares. The warrants were originally exercisable at $20 per share at any time through December 31, 2004. The exercise price was subsequently reduced to $10 per share. We have agreed to register the shares and the shares underlying the warrants under the Act for resale for a period of two years. The offer and sales of the shares was exempt from registration under Rule 506 promulgated under Section 4(2) of the Act. All of the investors were either pre-existing security holders or business associates. The offer and sale thereof did not involve any general advertising or solicitation and the securities contained appropriate restrictive legends under the Act.
In January 2004, we issued 5,425 shares and 5,425 warrants to purchase up to 5,425 shares to the holders of our senior notes who elected to receive these securities in lieu of the cash interest payment due for the quarter ended December 31, 2003. The shares were purchased at the rate of $20 per share and the warrants are exercisable at $20 per share at any time through June 30, 2004. We have agreed to register the shares and the shares underlying the warrants under the Act for resale for a period of 2 years. The securities were offered and sold under the exemption from registration set forth in Rule 506 promulgated under the Act. All of the noteholders are accredited investors and existing security holders, and there was no general solicitation or advertising.
In June 2004, we issued warrants to purchase up to 37,164 shares of Common Stock to the holders of our senior notes who elected to receive warrants in lieu of the cash interest payment due for the quarters ended June 30, 2002, September 30, 2002, December 31, 2002, March 31, 2003, June 30, 2003, September 30, 2003 and December 31, 2003. The warrants are exercisable at $20 per share at any time through December 31, 2004 and were later reduced in price to $10 per share. We have agreed to register the shares underlying the warrants under the Act for resale for a period of 2 years. The securities were offered and sold under the exemption from registration set forth in Rule 506 promulgated under the Act. All of the noteholders are accredited investors and existing security holders of USA, and there was no general solicitation or advertising.
In January 2004, we issued to CEOCAST, Inc. a total of 1,500 shares for services to be rendered to the Company. The offer and sale of the shares were
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exempt from registration under Section 4(2) of the Act. The Company agreed to use its best efforts to register the shares for resale under the Act.
On June 18, 2004, we entered into a Common Stock Purchase Agreement with Steve Illes. During the one year period following the effectiveness of a registration statement covering the shares, Mr. Illes has agreed to purchase from USA shares of Common Stock, provided that the aggregate purchase price can not exceed $7,500,000. Under the Agreement, Mr. Illes is permitted to purchase Common Stock from USA at any time at the price per share of $30. In addition, USA has the right at any time to require Mr. Illes to purchase Common Stock from USA at the lower of: (i) $30; or (ii) 90% of the closing bid price per share on the date prior to the date of the delivery by USA to Mr. Illes of notice of his obligation to purchase. USA can require Mr. Illes to purchase shares under the Agreement only if the shares have been registered by the Company for resale by Mr. Illes under the Act. During any calendar month, Mr. Illes is not permitted to purchase and can not be required by USA to purchase Common Stock for an aggregate purchase price in excess of $700,000. We have agreed to register for resale the shares purchased by Mr. Illes under the Agreement for a period of one year from the date of the effectiveness of the initial registration statement covering the shares to be purchased by Mr. Illes. We have agreed to pay to Mr. Illes a due diligence fee of $45,000. The securities were offered and sold to Mr. Illes under the exemption from registration set forth under Rule 506 promulgated under the Act. Mr. Illes is an existing shareholder and an accredited investor, and there was no general solicitation or advertising.
In July 2004, the Staff of the Securities and Exchange Commission indicated that because of the discretion given to Mr. Illes under the Agreement to purchase the shares at any time for $30 per share, it was not appropriate to register the shares unless this discretion was eliminated. On August 6, 2004 the Company and Mr. Illes entered into a subsequent agreement which superceded the prior agreement and gave the Company the right to require Mr. Illes to purchase the shares but did not give Mr. Illes any discretion to purchase shares. During the one year period following the date of effectiveness of a registration statement covering the shares, Mr. Illes has agreed to purchase from USA shares of Common Stock, provided that the aggregate purchase price can not exceed $7,500,000. Under the Agreement, USA has the right at any time to require Mr. Illes to purchase Common Stock from USA at the lower of: (i) $30; or (ii) 90% of the closing bid price per share on the date prior to the date of the delivery by USA to Mr. Illes of notice of his obligation to purchase. USA can require Mr. Illes to purchase shares under the Agreement only if the shares have been registered by the Company for resale by Mr. Illes under the Act. During any calendar month, Mr. Illes is not permitted to purchase and can not be required by USA to purchase Common Stock for an aggregate purchase price in excess of $700,000.
From November 3, 2004 through February 14, 2005, the Company sold $1,550,789 of senior notes convertible into Common Shares at $10 per share and maturing on June 30, 2007. Interest is payable quarterly at a rate of 10% per annum. The securities were offered and sold under the exemption from registration set forth in Rule 506 promulgated under Section 4(2) of the Act. All of the purchasers of the notes were accredited investors, were either pre-existing security holders or business associates and there was no general solicitation or advertising. We have agreed to use our best efforts to have the shares
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underlying the senior notes registered for resale under the Act through June 30, 2007.
In March 2005, the Company exchanged $1,755,000 of principal amount 2005-B 10% Senior Notes for a like principal amount of 2005-C 10% Convertible Senior Notes (“2010 Senior Notes”). The 2010 Senior Notes are convertible into Common Shares at $10 per share and due December 31, 2010. There are an aggregate of 175,500 shares underlying these senior notes. Interest is payable quarterly at a rate of 10% per annum. We have agreed to register the shares underlying the 2010 Senior Notes under the Act for resale through April 30, 2006. The exchange of the shares was exempt from registration under Section 3(a)(9) of the Act. All of the investors receiving 2010 Senior Notes are existing security holders. No commission or remuneration was paid or given directly or indirectly for soliciting the exchange.
During March and April 2005, the Company sold 233,333 shares of Common Stock at $15 per share for an aggregate of $3,500,000 (“2005-D Private Placement Offering”). For each share purchased, the Company granted a warrant to purchase one share of Common Stock exercisable at $15 per share at anytime prior to December 31, 2005. The Company issued warrants to purchase a total of 233,333 shares. To date, none of the warrants have been exercised. We have agreed to register the shares and the shares underlying the warrants under the Act for resale through December 31, 2006. The offer and sales of the shares was exempt from registration under Rule 506 promulgated under Section 4(2) of the Act. All of the investors were accredited investors and either pre-existing security holders or business associates. The offer and sale thereof did not involve any general advertising or solicitation and the securities contained appropriate restrictive legends under the Act.
On April 4, 2005, the Company and Steve Illes entered into a new Common Stock Purchase Agreement (“2005 Commmon Stock Ageement”). Pursuant to the 2005 Common Stock Agreement, Mr. Illes agreed to purchase shares of the Company’s Common Stock, provided that the aggregate purchase price does not exceed $10,000,000. Under the 2005 Common Stock Agreement, the Company has the right at any time to require Mr. Illes to purchase Common Stock from the Company at the lower of: (i) $30 per share; or (ii) 90% of the closing bid price per share on the date prior to the date of the delivery by the Company to Mr. Illes of notice of his obligation to purchase. The Company can require Mr. Illes to purchase shares under the Common Stock Agreement only if the shares have been registered by the Company for resale under the Act. During any calendar month, Mr. Illes cannot be required by the Company to purchase Common Stock for an aggregate purchase price in excess of $800,000. The Company issued 5,000 shares of Common Stock to Mr. Illes as a due diligence/commitment fee in connection with the 2005 Common Stock Agreement. The 2005 Common Stock Agreement terminates August 11, 2007. We have agreed to register for resale the shares purchased by Mr. Illes under the agreement until May 13, 2007. The securities offered and to be sold to Mr. Illes are exempt from registration as set forth under Rule 506 promulgated under the Act. Mr. Illes is an existing shareholder and an accredited investor, and there was no general solicitation or advertising.
During October and November 2005, the Company sold $544,945 principal amount of 2005-G Convertible Senior Notes due December 31, 2008 to six investors. These notes earn interest at 10% per annum, payable quarterly, and are convertible into Common Shares at $10 per share at any time prior to
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maturity. The offering was made to the holders of the 2005-D Common Stock Warrants. The 2005-D Warrants were exercisable at $10 per share through November 30, 2005, and at $15 through December 31, 2005. Each holder of the 2005–D Common Stock Warrants was entitled to purchase the principal amount of the 2005–G Senior Notes equal to the number of 2005-D Warrants held multiplied by $10. Upon any investment in the offering, the corresponding number of 2005-D Warrants were cancelled. There are 54,494 shares underlying these 2005-G senior notes. For each $10,000 of senior notes purchased, the investor also received a purchase right to purchase up to 1,000 shares at $20 per share at anytime prior to December 31, 2008. The purchase rights could only be exercised if the shares issuable upon the exercise of the purchase rights are made available through the prepayment by the Company of outstanding convertible senior notes that are convertible at $20 per share. The Company issued purchase rights to acquire 54,494 shares. During January 2006, the holder of each purchase right agreed to exchange the purchase rights for warrants to purchase shares at $20 at anytime prior to December 31, 2008. Pursuant thereto, warrants were issued for an aggregate of 54,494 shares. We have agreed to register the shares underlying the 2005-G Senior Notes and the shares underlying the warrants under the Act for resale, and to keep the registration statement current and effective through November 30, 2006. The offer and sale of the 2005-G Senior Notes and purchase rights was exempt from registration under Rule 506 promulgated under Section 4(2) of the Act. All of the investors were accredited investors. The offer and sale thereof did not involve any general advertising or solicitation and the securities contained appropriate restrictive legends under the Act. The issuance by us of the warrants was exempt from registration under Section 3(a)(9) of the Act. All of the investors were existing holders of the purchase rights. No commission or remuneration was paid or given directly or indirectly for soliciting the exchange.
On December 13, 2005, the Company entered into a Stock Purchase Agreement with Wellington Management Company, LLP, a large Boston-based institutional investor, on behalf of certain of its clients (“Wellington”). Pursuant thereto, the Company sold to Wellington 400,000 shares of Common Stock for $10 per share for an aggregate of $4,000,000. The offer and sale of the shares was exempt from registration under Rule 506 promulgated under Section 4(2) of the Act. As investment manager, Wellington has shared dispositive and shared voting power over the shares. All of these clients are accredited investors. We have agreed to register the shares for resale under the Act for a period of one year. The Stock Purchase Agreement provides that if the registration statement is not declared effective by the SEC within 60 days from the date of the Stock Purchase Agreement, then the Company will pay to Wellington as liquidated damages two percent of the purchase price for the shares for each month beyond 60 days that the registration statement is not effective. As a condition of its investment, Wellington required the Company to approve and call a special meeting of its shareholders to consider approval of a 1-to-100 reverse stock split of its Common Stock.
In October and November, 2005, the Company offered for sale up to $1,000,000 of principal amount of 10% Bridge Notes due January 6, 2006. Interest accrued on the Bridge Notes at the rate of 10% per annum from and after the date of issuance with all accrued and unpaid interest paid on January 6, 2006. The Company sold $770,000 Bridge Notes to 8 investors. On January 6, 2006, the Bridge Notes were automatically exchanged for a like principal amount of new 2006-A Convertible Senior Notes due December 31, 2010. The 2006-A Notes bear
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interest at 10% and are convertible at any time prior to maturity at $10 per share. For each $10,000 of 2006-A Convertible Senior Notes received in exchange for the Bridge Notes, the Company also issued purchase rights enabling the holder to purchase up to 1,000 shares of Common Stock at $20 per share at anytime prior to December 31, 2008. The purchase rights could only be exercised if the shares issuable upon the exercise of the purchase rights are made available through the prepayment by the Company of outstanding convertible senior notes that are convertible at $20 per share. The Company issued purchase rights to acquire 77,000 shares. During January 2006, the holder of each purchase right agreed to exchange the purchase right for a warrant to purchase one share at $20 at anytime prior to December 31, 2008. Pursuant thereto, warrants were issued for an aggregate of 77,700 shares. The offer and sale of the Bridge Notes was exempt from registration under Rule 506 promulgated under Section 4(2) of the Act. All of the investors were accredited investors. The offer and sale thereof did not involve any general advertising or solicitation and the securities contained appropriate restrictive legends under the Act. The issuance by us of the 2006-A Senor Notes and purchase rights in exchange for the Bridge Notes, and the warrants in exchange for the purchase rights was exempt from registration under Section 3(a)(9) of the Act. All investors were existing security holders of the Company. No commission or remuneration was paid or given directly or indirectly for soliciting the exchange. We have agreed to register the shares underlying the 2006-A Senior Notes and the shares underlying the warrants under the Act for resale, and to keep the registration statement current and effective through November 30, 2006.
On January 9, 2006, the Company entered into a Stock Purchase Agreement with Rationalwave On Shore Equity Fund, L.P. (“Rationalwave”), an accredited investor. Pursuant thereto, the Company sold to Rationalwave 40,000 shares of Common Stock for $10 per share for an aggregate of $400,000. The offer and sale of the shares was exempt from registration under Rule 506 promulgated under Section 4(2) of the Act. We have agreed to register the shares for resale under the Act through January 9, 2007.
On February 17, 2006, the Company and Steve Illes entered into a Common Stock Purchase Agreement ("2006 Commmon Stock Ageement"). Pursuant to the 2006 Common Stock Agreement, Mr. Illes agreed to purchase shares of the Company's Common Stock, provided that the aggregate purchase price does not exceed $20,000,000. Under the 2006 Common Stock Agreement, the Company has the right at any time to require Mr. Illes to purchase Common Stock from the Company at the lower of: (i) $30.00 per share; or (ii) 90% of the closing bid price per share on the date prior to the date of the delivery by the Company to Mr. Illes of notice of his obligation to purchase. The Company can require Mr. Illes to purchase shares under the Common Stock Agreement only if the shares have been registered by the Company for resale under the Act. During any calendar month, Mr. Illes cannot be required by the Company to purchase Common Stock for an aggregate purchase price in excess of $800,000. The 2006 Common Stock Agreement terminates June 30, 2009. We have agreed to register for resale the shares purchased by Mr. Illes under the agreement for a two year period. The securities offered and to be sold to Mr. Illes are exempt from registration as set forth under Rule 506 promulgated under the Act. Mr. Illes is an existing shareholder and an accredited investor, and there was no general solicitation or advertising. The 2006 Common Stock Agreement replaces the April 2005 stock purchase agreement between Mr. Illes and the Company, and provides that no further shares may be registered under that agreement.
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Pursuant to the Employment Agreement dated May 11, 2006 between Mr. Jensen and the Company, the Company agreed to issue to Mr. Jensen an aggregate of 75,000 shares of Common Stock. These shares vest as follows: 25,000 on June 1, 2006; 25,000 on January 1, 2007; and 25,000 on June 1, 2007. Pursuant to his Employment Agreement, Mr. Jensen also elected to have fifty percent of his base salary for the fiscal year ending June 30, 2007 paid through the issuance to him of 22,080 shares of Common Stock in lieu of cash. These shares vest as follows: 5,520 shares on July 1, 2006; 5,520 shares on October 1, 2006; 5,520 shares on January 1, 2007; and 5,520 shares on April 1, 2007. The offer and sale of the shares to Mr. Jensen were exempt from registration under Section 4(2) of the Act.
Pursuant to the Employment Agreement dated May 11, 2006 between Mr. Herbert and the Company, the Company agreed to issue to Mr. Herbert an aggregate of 50,000 shares of Common Stock. These shares vest as follows: 16,667 on June 1, 2006; 16,667 on January 1, 2007; and 16,666 on June 1, 2007. The offer and sale of the shares to Mr. Herbert were exempt from registration under Section 4(2) of the Act.
On September 25, 2006, the Company and Steve Illes entered into the 2006-B Common Stock Purchase Agreement ("2006-B Commmon Stock Ageement"). Pursuant to the 2006-B Common Stock Agreement, Mr. Illes agreed to purchase shares of the Company's Common Stock, provided that the aggregate purchase price does not exceed $15,000,000. Under the 2006-B Common Stock Agreement, the Company has the right at any time to require Mr. Illes to purchase Common Stock from the Company at the lower of: (i) $30.00 per share; or (ii) 90% of the closing bid price per share on the date prior to the date of the delivery by the Company to Mr. Illes of notice of his obligation to purchase. The Company can require Mr. Illes to purchase shares under the 2006-B Common Stock Agreement only if the shares have been registered by the Company for resale under the Act. During any calendar month, Mr. Illes cannot be required by the Company to purchase Common Stock for an aggregate purchase price in excess of $800,000. The 2006-B Common Stock Agreement terminates August 30, 2009. We have agreed to register for resale the shares purchased by Mr. Illes under the agreement for a two year period. The securities offered and to be sold to Mr. Illes are exempt from registration as set forth under Rule 506 promulgated under the Act. Mr. Illes is an existing shareholder and an accredited investor, and there was no general solicitation or advertising. The 2006-B Common Stock Purchase Agreement replaces the February 2006 stock purchase agreement between Mr. Illes and the Company, and provides that no further shares may be registered under that agreement.
In September 2006, the Company agreed to settle a legal action brought against the Company by Erica Bender, a former employee. As part of the settlement, the Company issued to her 2,536 shares valued at $7.10 per share. The offer and sale of the shares to Bender were exempt from registration under Section 4(2) of the Act.
In September 2006, the Company settled its pending litigation with Swartz Private Equity, LLC. In full settlement of the litigation, the Company issued to Swartz an aggregate of 40,000 shares of Common Stock. Of these shares, 6,816 shares were attributable to the cashless exercise by Swartz in May and June 2003 of warrants, and the balance of 33,184 shares are newly issued shares. Under the settlement agreement, the Company has agreed to register
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for resale the 33,184 shares through October 12, 2007. The issuance of the shares to Swartz by the Company was exempt from registration under Rule 506 promulgated under Section 4(2) of the Act.
STOCK OPTIONS
On April 28, 2004 the Company issued to Mary West Young options to purchase 300,000 shares of Common Stock for $.30 per share which vest ratably over a two year period.
On April 12, 2005 the Company issued to David DeMedio options to purchase 300,000 shares of Common Stock for $.20 per share which vest ratably over a two year period.
On April 21, 2006, the Board of Directors approved the grant of 12,000 Common Stock Options to each of the outside directors serving as of February 27, 2006 and 6,000 Common Stock Options to Mr. Passner, a new director as of April 12, 2006, all with an exercise price of $7.50 per share and all exercisable at any time within five years following the date of vesting. The options granted to Mr. Sellers and Mr. Van Allen are fully vested. Of the options granted to Mr. Katz and Mr. Lurio, 6,000 vest immediately, 3,000 vest on April 1, 2007, and 3,000 vest on April 1, 2008. Of the options granted to Mr. Passner, 3,000 vest on April 1, 2007, and 3,000 vest on April 1, 2008.
In conjunction with the signing of employment agreements on May 11, 2006, the Company granted Mr. Jensen, Mr. Herbert, and Mr. DeMedio, 75,000, 18,000 and 7,000 Common Stock Options, all with an exercise price of $7.50 per share and all exercisable at any time within five years following the date of vesting. The options vest as follows: one-third on May 11, 2006; one-third on June 30, 2007; and one-third on June 30, 2008.
In conjunction with the appointment of Stephen McHugh to the Board of Directors on June 20, 2006, the Company granted Mr. McHugh 6,000 Common Stock Options with an exercise price of $8.00 per share. The options vest as follows: 3,000 on June 20, 2007 and 3,000 on June 20, 2008. The options are exercisable at any time within five years of vesting.
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.
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ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
EXHIBITS
Exhibit
Number Description
- --------------------------------------------------------------------------------
2.1 | Asset Purchase Agreement dated July 11, 2003 by and between USA and Bayview Technology Group LLC (Incorporated by reference to Exhibit 2.1 to Form 8-K filed July 14, 2003) | |
3.1 | Amended and Restated Articles of Incorporation of USA filed January 26, 2004 (Incorporated by reference to Exhibit 3.1.19 to Form 10-QSB filed on February 12, 2004). | |
3.1.1 | First Amendment to Amended and Restated Articles of Incorporation of USA filed on March 17, 2005 (Incorporated by reference to Exhibit 3.1.1to Form S-1 Registration Statement No. 333-124078). | |
3.1.2 | Second Amendment to Amended and Restated Articles of Incorporation of USA filed on December 13, 2005 (Incorporated by reference to Exhibit 3.1.2 to Form S-1 Registration Statement No. 333-130992). | |
3.2 | By-Laws of USA (Incorporated by reference to Exhibit 3.2 to Form SB-2 Registration Statement No. 33-70992). | |
4.1 | Form of 2004 Senior Note (Incorporated by reference to Exhibit 4.24to Form SB-2 Registration Statement No. 333-101032). | |
4.2 | Form of 2005 Senior Note (Incorporated by reference to Exhibit 4.25to Form SB-2 Registration Statement No. 333-101032). | |
4.3 | Addendum to 2006 Senior Note. (Incorporated by reference to Exhibit 4.30 to Form 10-KSB filed on September 28, 2004). | |
4.4 | Addendum to 2007 Senior Note. (Incorporated by reference to Exhibit 4.30 to Form 10-KSB filed on September 28, 2003). | |
4.5 | Common Stock Purchase Agreement between the Company and Steve Illes dated April 4, 2005 (Incorporated by reference to Exhibit 4.13.1 to Form S-1 Registration Statement No. 333-124078). | |
4.6 | Form of 2004-B Note (Incorporated by reference to Exhibit 4.28 to Form S-1 Registration Statement No. 333-119951). | |
4.7 | Form of 2005-C Note (Incorporated by reference to Exhibit 4.15 to Form S-1 Registration Statement No. 333-124078). | |
4.8 | Stock Purchase Agreement dated December 13, 2005 by and between the Company and certain clients of Wellington Management Company, LLC (Incorporated by reference to Exhibit 4.1 to Form 8-K filed December 19, 2005). | |
4.9 | Stock Purchase Agreement dated January 9, 2006, by and between the Company and Rationalwave On Shore Equity Fund, L.P. (Incorporated by reference to Exhibit 4.19 to Form S-1 Registration Statement No. 333-130992). | |
4.10 | Form of 2006-A 10% Convertible Senior Note due December 31, 2010 (Incorporated by reference to Exhibit 4.20 to Form S-1 Registration Statement No. 333-130992). | |
4.11 | Form of 2006-A Warrant(Incorporated by reference to Exhibit 4.21 to Form S-1 Registration Statement No. 333-130992). | |
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4.12 | Form of 2005-G Warrant (Incorporated by reference to Exhibit 4.22 to Form S-1 Registration Statement No. 333-130992). | |
4.13 | Common Stock Purchase Agreement between the Company and Steve Illes dated February 17, 2006 (Incorporated by reference to Exhibit 4.23 to Form S-1 Statement No. 333-132019). | |
4.14 | 2006-B Common Stock Purchase Agreement between the Company and Steve Illes dated September 25, 2006 (Incorporated by reference to Exhibit 4.14 to Form 10-K filed September 28, 2006). | |
**4.15 | Settlement Agreement And Mutual Release between Erika Bender and USA Technologies, Inc. dated September 22, 2006. | |
**4.16 | Settlement Agreement dated October 12, 2006 between Swartz Private Equity, LLC and USA Technologies, Inc. | |
**5.1 | Opinion of Lurio & Associates, P.C. | |
10.1 | Amended And Restated Employment and Non-Competition Agreement between USA and Stephen P. Herbert dated May 11, 2006 (Incorporated by reference to Exhibit 10.2 to Form 10-Q filed on May 15, 2006). | |
10.2 | Amended And Restated Employment and Non-competition Agreement between USA and George R. Jensen, Jr. dated May 11, 2006 (Incorporated by reference to Exhibit 10.1 to Form 10-Q filed on May 15, 2006). | |
10.3 | Investment Agreement between USA and Swartz Private Equity, LLC dated September 15, 2000 (incorporated by reference to Exhibit 10.1to Form 8-K dated September 21, 2000). | |
10.4 | 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). | |
10.5 | 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). | |
10.6 | Registration Rights Agreement between USA and Swartz Private Equity dated September 15, 2000 (incorporated by reference to Exhibit 10.4 to Form 8-K dated September 21, 2000). | |
10.7 | Agreement and Plan of Merger dated April 10, 2002, by and among the Company, USA Acquisition, Inc., Stitch Networks Corporation, David H. Goodman, Pennsylvania Early Stage Partners, L.P., and Maytag Holdings, Inc. (Incorporated by reference to Exhibit 2.1 to Form 10-QSB for the quarter ended March 31, 2002). | |
10.8 | 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). | |
10.9 | Vending Placement, Supply and Distribution Agreement between Stitch Networks Corporation, Eastman Kodak Company, Maytag Corporation and Dixie-Narco, Inc. dated D-ecember 2000 (Incorporated by reference to Exhibit 10.40 to Form SB-2 Registration Statement No. 333-101032). | |
10.10 | 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). | |
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10.11 | Termination Agreement dated December 31, 2003 by and between Eastman Kodak Company, Maytag Corporation, Dixie-Narco, Inc. and Stitch Networks Corporation. (Incorporated by reference to Exhibit 10.6 to Form 10-QSB filed on February 12, 2004). |
10.12 | Option Certificate (No. 198) dated April 28, 2004 in favor of Mary West Young. (Incorporated by reference to Exhibit 10.45 to Form SB-2 Registration Statement No. 333-116977) |
10.13 | Agreement of Lease between Pennswood Spring Mill Associates, as landlord, and the Company, as tenant, dated September 2002, and the Rider thereto (Incorporated by reference to Exhibit 10.21 to Form 10-KSB filed on September 28, 2004). |
10.14 | Agreement of Lease between Deerfield Corporate Center 1 Associates LP, as landlord, and the Company, as tenant, dated March 2003 (Incorporated by reference to Exhibit 10.22 to Form 10-KSB filed on September 28, 2004). |
10.15 | Amendment to Office Space Lease dated as of April 1, 2005 by and between the Company and Deerfield Corporate Center Associates, LP. (Incorporated by reference to Exhibit 10.19.1 to Form S-1 Registration Statement No. 333-124078) |
10.16 | Co-Marketing Agreement between Honeywell D.M.C. Services, LLC and the Company dated July 13, 2004 (Incorporated by reference to Exhibit 99.1 to Form 8-K filed on September 29, 2004). |
10.17 | Employment and Non-Competition Agreement between USA and David M. DeMedio dated April 12, 2005 (Incorporated by reference to Exhibit 10.22 to Form S-1 Registration Statement No. 333-124078). |
10.18 | First Amendment to Employment and Non-Competition Agreement between USA and David M. DeMedio dated May 11,2006 (Incorporated by reference to Exhibit 10.3 to Form 10-Q filed on May 15, 2006). |
10.19 | Option Certificate (No. 200) dated April 12, 2005 in favor of David M. DeMedio (Incorporated by reference to Exhibit 10.23 to Form S-1 Registration Statement No. 333-124078). |
10.20 | Agreement dated December 28, 2004 between USA Technologies and PepsiCo, Inc. (Incorporated by reference to Exhibit 10.01 of Form 8-K filed July 27, 2005) |
10.21 | Option Certificate (No. 201) dated May 11, 2006 in favor of George R. Jensen, Jr. (Incorporated by reference to Exhibit 10.21 to Form 10-K filed on September 28, 2006) |
10.22 | Option Certificate (No. 202) dated May 11, 2006 in favor of Stephen P. Herbert (Incorporated by reference to Exhibit 10.22 to Form 10-K filed on September 28, 2006) |
10.23 | Option Certificate (No. 203) dated May 11, 2006 in favor of David m. Demedio (Incorporated by reference to Exhibit 10.23 to Form 10-K filed on September 28, 2006) |
10.24 | Option Certificate (No. 204) dated April 21, 2006 in favor of William W. Sellers (Incorporated by reference to Exhibit 10.24 to Form 10-K filed on September 28, 2006) |
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10.25 | Option Certificate (No. 205) dated April 21, 2006 in favor of William L. Van Alen, Jr. (Incorporated by reference to Exhibit 10.25 to Form 10-K filed on September 28, 2006). |
10.26 | Option Certificate (No. 206) dated April 21, 2006 in favor of Steven Katz (Incorporated by reference to Exhibit 10.26 to Form 10-K filed on September 28, 2006). |
10.27 | Option Certificate (No. 207) dated April 21, 2006 in favor of Douglas m. Lurio (Incorporated by reference to Exhibit 10.27 to Form 10-K filed on September 28, 2006) |
10.28 | Option Certificate (No. 208) dated April 21, 2006 in favor of Albert Passner (Incorporated by reference to Exhibit 10.28 to Form 10-K filed on September 28, 2006) |
10.29 | Option Certificate (No. 209) dated July 20, 2006 in favor of Stephen W. McHugh (Incorporated by reference to Exhibit 10.29 to Form 10-K filed on September 28, 2006) |
10.30 | USA Technologies, Inc. 2006-A Stock Compensation Plan (Incorporated by reference to Exhibit 10.1 to Form S-8 filed June 19, 2006). |
**10.31 | Restricted Stock Issuance Agreement In Lieu of Cash Base Salary between George R. Jensen, Jr. and USA Technologies, Inc. dated June 28, 2006. |
**10.32 | Restricted Bonus Stock Issuance Agreement between George R. Jensen, Jr., and USA Technologies, Inc. dated June 28, 2006. |
**10.33 | Restricted Bonus Stock Issuance Agreement between Stephen P. Herbert and USA Technologies, Inc. dated June 28, 2006. |
14.1 | Code of Business Conduct and Ethics (Incorporated by reference to Exhibit 14.1 to Form 8-K filed on April 17, 2006). |
**23.1 | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm. |
**23.2 | Consent of Goldstein Golub Kessler LLP, Independent Registered Public Accounting Firm. |
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** Filed herewith
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ITEM 16(b) FINANCIAL STATEMENT SCHEDULES
SCHEDULE II
USA TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2006, 2005 AND 2004
ACCOUNTS RECEIVABLE | Deductions | |||||||||||
Additions | uncollectible | |||||||||||
Balance at | (reductions) | receivables | Balance | |||||||||
beginning of | charged to | written off, net | at end | |||||||||
period | earnings | of recoveries | of period | |||||||||
June 30, 2006 | $ 196,000 | 131,000 | 98,000 | $ 229,000 | ||||||||
June 30, 2005 | $ 240,000 | (23,000) | 20,000 | $ 196,000 | ||||||||
June 30, 2004 | $ 65,000 | 194,000 | 19,000 | $ 240,000 | ||||||||
INVENTORY | Balance at | Additions | Deductions | Balance | ||||||||
beginning of | charged to | shrinkage and | at end | |||||||||
period | earnings | obsolescence | of period | |||||||||
June 30, 2006 | $ 321,000 | 484,000 | 546,000 | $ 259,000 | ||||||||
June 30, 2005 | $ 229,000 | 286,000 | 194,000 | $ 321,000 | ||||||||
June 30, 2004 | $ 63,000 | 190,000 | 24,000 | $ 229,000 |
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ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
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(4) That, for purposes of determining liability under the Securities Act of 1933 to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such docum ent immediately prior to such date of first use.
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 p ublic 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.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing this Form S-1 and has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in Malvern, Pennsylvania, on October 20, 2006.
USA TECHNOLOGIES, INC. | ||
By: | /s/ George R. Jensen, Jr. | |
George R. Jensen, Jr., Chairman | ||
and Chief Executive Officer |
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KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints George R. Jensen, Jr. and Stephen P. Herbert, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the SEC, granting unto such attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them or their or his substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been duly signed below by the following persons in the capacities and dates indicated.
SIGNATURES | TITLE | DATE | |||
/s/ | George R. Jensen, Jr. | Chairman of the Board of Directors | October 20, 2006 | ||
George R. Jensen, Jr. | and Chief Executive Officer | ||||
(Principal Executive Officer) | |||||
/s/ | David M. DeMedio | Chief Financial Officer (Principal | October 20, 2006 | ||
David M. DeMedio | Accounting Officer) | ||||
/s/ | Stephen P. Herbert | Chief Operating Officer, President | October 20, 2006 | ||
Stephen P. Herbert | and Director | ||||
/s/ | William L. Van Alen, Jr. | Director | October 20, 2006 | ||
William L. Van Alen, Jr. | |||||
/s/ | Douglas M. Lurio | Director | October 20, 2006 | ||
Douglas M. Lurio | |||||
/s/ | Steven Katz | Director | October 20, 2006 | ||
Steven Katz | |||||
/s/ | Albert Passner | Director | October 20, 2006 | ||
Albert Passner | |||||
/s/ | Stephen W. McHugh | Director | October 20, 2006 | ||
Stephen W. McHugh |
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Exhibit Index
Exhibit
Number Description
4.15 | Settlement Agreement And Mutual Release between Erika Bender and USA Technologies, Inc. |
4.16 | Settlement Agreement dated October 12, 2006 between Swartz Private Equity, LLC and USA Technologies, Inc. |
5.1 | Opinion of Lurio & Associates, P.C. |
10.31 | Restricted Stock Issuance Agreement In Lieu of Cash Base Salary between George R. Jensen, Jr. and USA Technologies, Inc. dated June 28, 2006. |
10.32 | Restricted Bonus Stock Issuance Agreement between George R. Jensen, Jr., and USA Technologies, Inc. dated June 28, 2006. |
10.33 | Restricted Bonus Stock Issuance Agreement between Stephen P. Herbert and USA Technologies, Inc. dated June 28, 2006. |
23.1 | Consent of Ernst & Young LLP |
23.2 | Consent of Goldstein Golub Kessler LLP |
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