SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended June 30, 2001 Commission file number: 33-70882
OR
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 [No Fee Required]
For the transition period from ______ to ______
USA TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2679963
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Plant Avenue, Wayne, PA. 19087
(Address of principal executive offices) (Zip Code)
(610)-989-0340
(Registrant's telephone number, including area code)
NONE
(Securities registered under Section 12(b) of the Exchange Act)
NONE
(Securities registered pursuant to Section 12(g) of the Exchange Act)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to for such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405,
of regulations S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendments to
this Form 10-KSB. [X]
Transitional Small Business Disclosure Format Yes ___ No _X_
Registrant's total revenues for its most recent fiscal year..........$1,451,002.
As of September 28, 2001, there were outstanding 28,206,539 shares of Common
Stock, no par value.
The company's voting securities are traded on the Over the Counter (OTC)
Electronic Bulletin Board. The aggregate market value of the company's voting
securities held by non-affiliates of the Registrant was $17,300,545 on September
28, 2001 based upon the closing price of the Registrant's Common Stock on that
date.
TABLE OF CONTENTS
Part I Page
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Item 1. Business 3
2. Properties 11
3. Legal Proceedings 11
4. Submission of Matters to a Vote of Security Holders 12
Part II
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Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 13
6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
7. Financial Statements 20
8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 21
Part III
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Item 9. Directors and Executive Officers of the Registrant 21
10. Executive Compensation 23
11. Security Ownership of Certain Beneficial Owners
and Management 28
12. Certain Relationships and Related Transactions 31
Part IV
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Item 13. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 34
USA TECHNOLOGIES, INC.
PART I
Item 1. Business
USA Technologies, Inc., a Pennsylvania corporation (the
"Company"), was founded in January 1992. Our vision is to be a major player in
the 'Digital, Networked Economy' by providing the marketplace with embedded
technology and associated network and on-line financial services that will help
transform their businesses. The ultimate goal is to position the Company as the
preferred method and industry standard for cashless micropayments and automated
retailing, and to become a leading point-of-sale, interactive media and network
services company.
The Company intends to accomplish this by building on its
market position in networked, unattended consumer payment systems through a new
e-Business solution called e-Port(TM). To this end, the Company has focused on
developing e-Port(TM) - its new credit card payment system. The non-media
version of the e-Port is a device that is integrated with copiers, vending
machines or other host equipment that gathers information about sales and
operations of the host equipment and also allows a consumer to use a credit card
to make a purchase. The media version of the e-Port is currently being
engineered and would enable consumers to view interactive advertising/media, and
to conduct simple, secure and direct e-commerce while making routine purchases
anywhere. The non-media version of the e-Port contains all the functionality of
USA Technologies' current TransAct(TM) system for credit card processing,
micropayments, control and data management and would offer data management and
auditing capability for vending operators, kiosk operators and others wishing to
place equipment or products on a network via embedded computing capability.
The media capable version of the e-Port(TM) would be a non-PC
device offering consumers the opportunity to view interactive advertising and to
conduct e-commerce transactions while making routine purchases with a credit
card, smart card or any other payment device such as a cellular phone, at
vending machines, convenience stores, gas pumps and other high-traffic retail
points-of-sale. The media capable e-Port(TM) also would allow advertisers the
opportunity to operate non-PC electronic storefronts that could provide
consumers with promotional offers at actual retail locations.
The Company is a leading provider and licensor of unattended,
credit card activated control systems for the copying, debit card and personal
computer industries. USA Technologies' devices make available unattended credit
card payment technology in connection with the sale of a variety of products and
services. USA Technologies has historically generated its revenues from the
direct sale of its control systems and the resale of configured office products,
plus network service fees, plus by retaining a portion of the monies generated
from all credit card transactions conducted through its control systems.
We have been granted fourteen patents related to our
technology. One of these is in the area of networked vending machines and credit
card technology - including the use of smart cards. Another is a patented method
of batch processing which enables consumers to engage in cashless micropayments.
Fifty-three other foreign and domestic patents are pending.
The Company has entered into a corporate agreement with Promus
Hotel Corporation (Embassy Suites, Hampton, and Doubletree brands) which
establishes itself as a preferred supplier of business center products for those
brands. The Company's Business Express(R) has been approved and recommended as a
solution for business center needs by Marriott for its hotels. The Company is
the exclusive provider of business center solutions to over 100 properties owned
by MeriStar, and the preferred provider of business center products to over 100
additional properties managed by MeriStar. MeriStar is the largest independent
hotel management company in the United States, operating over 200 hotels and
resorts under such known brand names as Hilton, Holiday Inn and Wyndham. As of
June 30, 2001, business centers have been installed at 14 MeriStar locations.
The Company has a national reseller agreement in place with Xerox.
USA Technologies is a market leader in making self-serve, credit
card activated products and services available to consumers everywhere. The
Company has achieved this with the sale and installation of its product,
Business Express(R) or MBE Business Express(R), at nearly 400 hotel, library and
retail locations nationwide. Business Express(R) and MBE Business Express(R)
offer thousands of business travelers and consumers the opportunity to conduct
e-business/e-commerce 24 hours a day with the swipe of a credit card. The
Business Express(R) gives consumers self-serve, public access to the Internet,
copy and fax services, and other 'e-Business services'. At the heart of this
product line is USA Technologies' networked payment solution TransAct(TM), an
automated, credit card consumer payment system which has been utilized with
photocopying machines, facsimile machines, computer printers, vending machines
and debit and smart card purchase/revalue stations. The Company retains all
rights to software and proprietary technology that it licenses to location
operators for their exclusive use. As of June 30, 2001, 367 Business Express(R)
or MBE Business Express(R) units are installed. The Company also markets a
product line extension to the Business Express(R), called the Business
Express(R) Limited Service Series (LSS). The LSS has copier and fax capabilities
plus laptop printing, dataport capabilities and credit card activated phone. The
LSS is targeted to the hospitality mid-market, limited service and economy
properties. As of June 30, 2001, 100 LSS units are included in the total of 367
Business Express(R) or MBE Business Express(R) units installed. The Company also
sells its TransAct(R) credit card device and payment system as a standalone
offering to the world's leading office equipment manufacturers and distributors.
The Company established a TransAct(R) Authorized Reseller Program to sign up
various independent and national dealers and distributors. As of June 30, 2001,
22 dealers are participating in the program.
Currently, the Company has as its core business three components:
unattended credit card control systems; a financial services and auditing
network; and a proposed interactive media and ad serving network.
The first component is our credit card activated control systems. The
current version of the Company's technology is TransAct(TM). This product, as
outlined above, is currently installed in locations throughout North America.
The latest generation of technology that the Company introduced is called the
e-Port(TM). It was unveiled in October 2000 at the National Automatic
Merchandising Association convention in New Orleans, the world's largest vending
trade event.
The e-Port(TM) is designed to be a flexible and versatile embedded
system device. While initially targeted to the vending industry, the technology
that has been developed may be applied in many other industries such as copiers,
retail point of sale, mass transit, etc; wherever pervasive computing, embedded
systems and credit card and other cashless payment systems are used.
The e-Port(TM) hardware consists of a circuit board, RAM,
Flash Memory, modem, ports, credit card reader, and propriety software. The
Company is in the process of engineering a media capable e-Port featuring an LCD
color touch screen. The version of e-Port(TM) with the LCD color touch screen is
built to USA's specifications by RadiSys, a leader in developing and
mass-producing embedded systems. The Company entered into a Development and
Manufacturing Agreement ("DMA") with RadiSys Corporation in June, 2000. RadiSys
has significant manufacturing expertise in the embedded chip market and is
partially owned by Intel. The Company also contracts with Masterwork Electronics
Corporation, a leader in the manufacture of electronics for the vending
industry, for the non-media version of e-Port(TM) without the LCD color touch
screen.
Additionally, e-Port(TM) uses the connectivity features developed by
the Company. These include the ability to send and receive data via land lines,
radio waves (like a home cordless phone), wireless modems, always-on phone
connections, etc. The Telecom and Internet connections offered by Sprint support
the hardware developed by the Company. USA Technologies and Sprint have agreed
to a partnership allowing its customers access to many connectivity options at
superior service levels and pricing.
e-Port(TM) technology is anticipated to be available in three
primary configurations. By offering these options, the Company believes that it
would provide a complete set of solutions and applications to solve the needs of
customers and industries from the smallest to the largest, and most demanding.
o e-Port(TM) - Audit. The audit only e-Port(TM) is an embedded
device that is integrated with existing copiers, vending machines
or other 'host' equipment. The auditing feature captures supply
chain data (units sold, what sold, price of units sold, etc.) and
other machine information. It will send the information back to
either a customer's network or to the USA network for reporting.
o e-Port(TM) - Audit/Credit. The Audit/Credit version of the
e-Port(TM) is an embedded device that, in addition to gathering
information about the sales and operation in the host equipment
(the auditing portion) also allows a user to use a credit card or
other cashless method to make a purchase. It will work with cash
and credit as well as credit only. This version will allow a user
to make multiple purchases with one credit card transaction. This
unit relays both the credit and cash sales information back to a
network along with the other audit information.
o e-Port(TM) - Audit/Credit/Interactive. The Audit/Credit/
Interactive version of e-Port(TM) is also known as the media
capable e-Port and is currently being engineered by the Company.
It would allow a user to take advantage of the benefits that
network control and remote monitoring provide, the increased sales
opportunity that the credit cards provides and the potential for
revenue generation that the LCD screen with its interactive ad
could possibly provide.
Our customers' terminals are currently networked together
using USALive(TM) - a network service that enables terminal users to easily
access basic audit information, conduct unattended credit card transactions,
turnkey banking, and micropayments. The Company together with IBM Global
Services is currently developing an enhanced network which should provide
interactive media and advertising at point of sale. The Company anticipates that
an additional $1.6 million will be incurred in this regard in the first half of
fiscal 2002.
The second component involves financial services and auditing. This
capability provides users with auditing capability as well as turnkey credit
card and banking capability.
o USA utilizes a patented method of batch processing in order to conduct
affordable credit card transactions of as little as $1.00.
o USA provides users of the e-Port(TM) and TransAct(TM) with the ability to
instantly accept credit cards in an unattended location.
o USA acts as a 'super merchant' for its customers - thereby helping them to
avoid getting certified with credit card processors to do unattended
transactions.
o USA provides all the refunds, payments, and reporting of the credit card
transactions.
o The auditing capability of the network provides customers with detailed
information on location or host equipment operation, sales, security, etc.
The third component would involve serving targeted, interactive ads to
our proposed media capable e-Ports. In addition to being able to provide highly
targeted ads, it would possibly serve these ads to a more captive audience than
is possible with traditional web based advertising. The targeting of media via
the Company's proposed network may be possible because the data base would be
constantly updated concerning information about each e-Port(TM): state, city,
zip code, make up of users from standpoint of: income, vocation, location of the
machine (school, mall, convention center, movie theater, super market, etc.) A
potential advertiser could possibly select the group they want to target to
advertise to and the USA Ad Serving network could possibly send the ads to the
targeted e-Ports.
The Company has been designated as an authorized equipment reseller by
International Business Machines Corporation and Hewlett-Packard. The Company
believes that it benefits from the association of its control systems with the
well-known brands of business equipment manufactured by these companies.
On September 24, 1997, the Company entered into a Joint Venture
Agreement ("JV") with Mail Boxes Etc. ("MBE"), in order to sell automated,
credit card activated business centers under the name MBE(TM) Business
Express(R). The JV was terminated in May 1999, but the Company continues to
service all MBE(TM) Business Express(R) field installations.
For the years ended June 30, 2001 and 2000, the Company has expensed
approximately $1,260,000 and $554,000, respectively for the development of its
proprietary technology. These amounts include the expense of outside consultants
and contractors as well as compensation paid to certain of the Company's
employees and is reflected in compensation and general and administrative
expense in the accompanying financial statements. In addition, the Company has
capitalized approximately $3.1 million since May, 2000 for the services of IBM,
to program the enhanced version of the Company's proprietary "USAlive" network.
See Note 2 to the Financial Statements.
As of June 30, 2001, the Company had a total installed base of 1,400
control systems, distributed as follows: 1,066 Business Express(R) or MBE
Business Express(R) control systems, 170 Business Express(R) Limited Service
(LSS) control systems, 23 Copy Express(TM) control systems, 10 Debit Express(TM)
control systems, 6 Fax/Printer Express(TM) control systems, 3 Public PC(R)
control systems and 122 standalone TransAct(R) control systems located at
various hotels and libraries throughout the United States and Canada. In
addition, there were 74 non-media e-Port(TM) control systems located at vending
locations in the United States. Through June 30, 2001 total license and
transaction fee revenues received by the Company from these systems, although
growing, has not been sufficient to cover operating expenses.
Industry Trends
USA Technologies believes it has positioned itself to claim a piece of
three important market spaces within the new Internet economy: interactive
advertising, electronic commerce and pervasive computing. USA Technologies
intends to continue to leverage its proprietary technologies, e-Port(TM) and
TransAct(TM) payment systems, which put credit card activated goods and
services, e-business and e-commerce at 'arms reach' of consumers. The Company
will attempt to take advantage of four powerful trends:
1. Growth in credit card/cashless transactions
- Transaction volume nearly quadrupled from 1990 to 2000
- 1.3 billion credit cards in circulation
- $2.24 trillion in purchase volume in 2000
- $3.17 trillion in total volume* in 2000
- Preferred method of payment for US consumers
This important trend is driving impressive growth in purchases of credit card
devices, as well as the network services that support use of those terminals
(e.g., credit card processing). Source: The Nilson Report.
(*Total volume includes purchases of goods and services, cash
advances/withdrawals, and commercial funds transfers from business in China.)
2. Growth in cashless micropayments
Visa estimates that in the United States cash transactions below $10 total
nearly $400 billion annually - an attractive market which is virtually untouched
by credit cards. Furthermore research firm Ovum predicts that wireless
micropayments - transactions of less than $10 - will total $200 billion
worldwide by 2005.
3. Emergence of pervasive computing/'Internet Everywhere' appliances (source,
IDC).
Growth in pervasive computing devices is expected to fuel unprecedented
growth of Internet/e-Commerce. These intelligent or 'smart' devices (e.g.
vending machines, personal digital assistants, credit card readers etc.) are
embedded with microprocessors that allow users to gain direct, simple and secure
access to relevant information and services via the Internet without the need
for a PC.
It is projected that two billion people will be accessing the web with 'non-PC'
Internet appliances which are simple to use and less costly than a conventional
PC (e.g. digital assistants, intelligent cell phones, game devices). Billions of
vending machines, television set top boxes, automobiles, telephones and payment
devices of all types are anticipated to be embedded with computational ability
and connected to the Internet.
4. Growth in interactive advertising
Interactive advertising is expected to grow from an annual $2 billion industry
in 1999 to over $12 Billion by 2003 (source: Forester and IAB Internet Ad
Revenue Report).
5. Growth in electronic commerce.
By the year 2003, it is projected by IDC that 500 million Internet users will be
accessing information and conducting commerce over the net (versus 160 million
users in 1998). This increased use would amount to two new users per second. As
a consequence, consumer e-commerce will hit nearly $200 billion annually by
2004.
Credit Card Processing
Each of the Company's credit card activated control systems
records and transmits all transaction data to the Company, and the Company then
forwards such data to the credit card processor. After receiving transaction
information from the Company, the credit card processor electronically transfers
the funds (less the credit card processor's charge) to the Company. The Company
then forwards to the location its share of the funds.
The Company and each location have agreed on a percentage split of
the gross proceeds from the Company's device. The credit card processor's fees
and cost to forward the location's share of the gross proceeds are all paid for
out of the Company's portion of the gross revenue.
The Company currently retains a portion of the gross revenues from
each control system. If the Company has sold the equipment to the location, the
portion retained is generally 5% of the gross revenues. In cases where the
Company continues to own the equipment, the portion retained can be as high as
90% of gross revenues. In addition the Company charges a fixed monthly
management fee which is generally $20-$25 per control system for existing
hospitality locations.
Product Lines
The Business Express(R)
The hotel/motel hospitality industry has become more competitive
as chains increase efforts to attract the most profitable customer: the business
traveler or conference attendee, who accounts for the majority of hotel
occupancy, stays longer and spends more per visit than the leisure traveler. For
these reasons, hotels have become very responsive to the needs of the business
traveler. The Business Express(R) enables a hotel to address some of these
needs, while offering the possibility of generating incremental revenue.
The Business Express(R) utilizes the Company's existing
applications for computers, copiers, and facsimile equipment, and combines them
into a branded product. The Business Express(R) bundles the Public PC(R) unit,
the Copy Express(TM) unit, and the Fax Express(TM) unit, into a functional kiosk
type workstation. All devices are credit card activated, therefore eliminating
the need for an attendant normally required to provide such services.
The MBE(TM) Business Express(R)
The MBE(TM) Business Express(R) bundles together the same components as
the Business Express(R): Public PC(R), Copy Express(TM), and Fax Express(TM),
but under the MBE brand name. In addition, the MBE(TM) Business Express(R)
includes a dial-through service to a nearby MBE store making available the
products and services of the store. The Company terminated the Joint Venture in
May 1999.
The Copy Express(TM)
The Copy Express(TM) provides a cashless method to pay for the use
of photocopying machines. The device is attached to the photocopying machine,
computer printer, or microfilm/fiche printer in a similar manner as attaching a
standard coin acceptor. The device can be attached to either existing or new
equipment. The control system enables customers to photocopy documents with the
use of a credit card.
The Debit Express(TM)
The Company's Debit Express(TM) enables customers to purchase or revalue
their debit cards with the swipe of a credit card and eliminates the need for
cash or for an attendant to handle cash or provide change. The Debit Express(TM)
eliminates any reliance on cash by allowing customers to use a valid credit card
to purchase or place additional value on a debit card.
The Public PC(R)
The Public PC(R) enables the public to utilize functions of a personal
computer on an "as-needed" basis in the public domain. Our system controls
access to the computer and charges for time in use, printed output, and any
modem activity.
TransAct(R) as a Stand Alone Product
USA Technologies produced and patented TransAct(R), a cashless
transaction terminal that enables secure, low cost credit transactions to take
place. As the nerve center for USA's Business Express(R) product line,
TransAct(R) currently enables all business center locations to provide 24/7
business center accessibility, secure transaction settlements and voice and
display instructions for users. TransAct(R) works effectively to transform a la
carte office components into automated, credit card-operated, revenue centers.
To penetrate effectively the "pay as you go" business service
markets within the retail, university, transportation and apartment communities,
three standardized TransAct(R) packages have been developed, priced and launched
to office component dealers who already service these markets. The Company
anticipates that the development of a dealer channel to sell TransAct(R) units
will increase licensing and usage revenue streams.
The e-Port(TM)
The e-Port(TM) has two basic versions, both of which contain all the
functionality of the current TransAct(R) terminal for credit card processing,
control and data management. The non-media version of the e-Port is a device
that is integrated with copiers, vending machines or other host equipment that
gathers information about sales and operations of the host equipment and also
allows a consumer to use a credit card to make a purchase. The media capable
version which is currently being engineered would offer, in addition, capability
for public access electronic commerce and advertising using the Internet. With
the media capable e-Port(TM), the Company believes it has positioned itself to
claim a piece of two important market spaces within the new "Internet" economy -
electronic commerce and pervasive computing. This version would enable
e-commerce to be transacted away from the computer and would offer Internet
merchants an extension of their business without brick and mortar outlays. It
could be considered a low cost "physical" location for "virtual" merchants. The
media capable e-Port(TM) would possibly give consumers the opportunity to engage
in interactive advertising and e-commerce while making routine purchases at
millions of points of sale - including our Business Express(R) locations,
vending machines, and convenience stores.
Marketing
As of June 30, 2001, the Company was marketing its products through its
full time staff consisting of six salespeople. The company is primarily focused
on the vending, hospitality and office equipment industries, but has expanded
product distribution into new industries, including transportation, laundry and
multi-housing.
In the vending industry, the non-media e-Port product line is now
commercialized and being used by vending operators and soft drink bottlers in
the USA and Canada. In April 2001, the Company formed a business alliance with
Marconi, who holds the global agreement with the Coca-Cola Company for
intelligent vending. The Company continues to work with the top vending machine
manufacturers, including Automatic Products, AMS, U-Select-It, Rowe
International, Vendtronics, Vendo, Royal and Dixie Narco; expand its authorized
resellers, including Betson Enterprises, State Sales & Service and Weymouth
Distributing; and intends to implement the non-media version of the e-Port with
major national vending operators.
As for the hospitality industry, Business Express continues to be one
of the premier solutions for automated business centers. The Company has
relationships with the two most recognized global hotel chains, Marriott and
Hilton Hotels and two of the largest hotel management companies in the USA,
MeriStar Hotels and Prime Hospitality.
In the office equipment industry, the Company continues to work with
Xerox, its largest authorized reseller on new distribution opportunities. In
addition to Xerox, the Company has added a major new reseller in Canada, Global
Technologies, which has increased the distribution of our TransAct products.
Procurement
The Company's media capable e-Port(TM) is currently being
engineered to be internet and media capable and easily mass producible, by an
independent contract manufacturer, RadiSys. The Company believes that work is
nearing completion and test units have been received. Product orders to RadiSys
are governed by the Design and Manufacturing Agreement signed in June, 2000.
In March, 2001, a manufacturing agreement between the Company and
Masterwork Electronics was signed, to provide the Company with manufacturing
capability for the non-media version of e-Port(TM). In April, 2001 the Company
placed an order with Masterwork for 500 non-media units. In August, 2001, 100
were received, with the remainder due in September 2001 and November 2001.
The Company anticipates obtaining the other components of its
business center (computers, printers, fax and copy machines) through CompuCom, a
distributor of IBM products, Hewlett Packard, and copier and fax manufacturers.
Orders are regularly placed for quantities required for expected orders several
months in advance.
Competition
There are currently other businesses offering or announcing unattended,
credit card activated control systems for use in connection with copiers,
printers, personal computers, fax machines, Internet and e-mail access, vending,
retail point of sale, and debit card purchase/revalue stations. In addition, the
businesses which have developed unattended, credit card activated control
systems currently in use in connection with gasoline dispensing, public
telephones, prepaid telephone cards, ticket dispensing machines, vending
machines, or facsimile machines, are capable of developing products or utilizing
their existing products in direct competition with the Company. Many of these
businesses are well established, have substantially greater resources than the
Company and have established reputations for success in the development, sale
and service of high quality products. The Company is aware of businesses that
have developed an unattended, credit card activated control system to be used in
connection with vending machines. Any such increased competition may result in
reduced sales and/or lower percentages of gross revenues being retained by the
Company in connection with its licensing arrangements, or otherwise may reduce
potential profits or result in a loss of some or all of its customer base. The
Company is also aware of several businesses that make available use of the
Internet and use of personal computers to hotel guests in their hotel rooms.
Such services might compete with the Company's Business Express(R), and the
locations may not order the Business Express(R), or if ordered, the hotel guest
may not use it. The Company is aware that credit card activated personal
computer kiosks have been developed and are in the marketplace.
Patents, Trademarks and Proprietary Information
The Company received federal registration approval of its trademarks
Business Express(R), C3X(R), TransAct(R), and Public PC(R), and has applied for
federal registration of its trademarks Copy Express(TM) and e-Port(TM).
Much of the technology developed or to be developed by the Company is
subject to trade secret protection. To reduce the risk of loss of trade secret
protection through disclosure, the Company has entered into confidentiality
agreements with its key employees. There can be no assurance that the Company
will be successful in maintaining such trade secret protection, that they will
be recognized as trade secrets by a court of law, or that others will not
capitalize on certain of the Company's technology.
To date, twelve United States patents have been issued to the Company:
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", 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", U.S. Patent No. D423,474 entitled "Dataport", U.S.
Patent No. D415,742 entitled "Laptop Dataport Enclosure", U.S. Patent No.
D418,878 entitled "Sign Holder", U.S. Patent No. 6,056,194 entitled "System and
Method for Networking and Controlling Vending Machines", U.S. Patent No.
D428,047 entitled "Electronic Commerce Terminal Enclosure"; U.S. Patent No.
D428,444 entitled "Electronic Commerce Terminal Enclosure for a Vending
Machine"; 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." U.S. Patent No. 6,152,365 entitled "Credit and Bank Issued Debit
Card Operated System and Method for Controlling a Vending Machine"; U.S. Patent
No. D437,890 entitled "Electronic Commerce Terminal Enclosure with a Hooked
Fastening Edge for a Vending Machine". Two foreign patents have been granted to
the Company, Canadian Patent No. D87998 entitled "Sign Holder" and Canadian
Patent No. D91645 entitled "Laptop Data Port Enclosure".
As of June 30, 2001, the Company has 37 pending U.S. patent
applications and 16 pending foreign patent applications.
Employees
As of June 30, 2001, the Company had twenty-eight full time
employees.
Item 2. Properties
The Company leases its principal executive offices, consisting of
approximately 10,000 square feet, at 200 Plant Avenue, Wayne, Pennsylvania for a
monthly rental of $12,705 plus utilities and operating expenses. The lease
expires on June 30, 2002.
Item 3. Legal Proceedings
On June 28, 2001 the Company and Mail Boxes Etc. USA, Inc. settled the
litigation between them which had been pending in the United States District
Court of the Southern District of California. The settlement agreement provides
that the entire litigation will be dismissed with prejudice.
MBE and the Company had formed a joint venture which sold unattended
business centers to the hospitality industry. As part of the settlement, MBE has
assigned to the Company all of MBE's rights in the joint venture as well as to
all agreements entered into by the joint venture. MBE has also made a payment in
an amount of not more than $356,000 to those MBE franchisees who had purchased
or leased the business centers.
As of March 31, 2001, the joint venture had an account payable to MBE
in the amount of $207,662. This account payable represented MBE's portion of
monies which had actually been received by the joint venture but which had not
yet been paid to MBE. In full payment of this account payable, and as part of
the settlement, the Company released to MBE the amount of $160,000.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on June 7, 2001.
(b) Election of Directors
Each of the following individuals was elected as a director at the
Annual Meeting. The number of votes cast with respect to the election of the
directors was as follows:
For Withhold
--- --------
George R. Jensen, Jr. 13,242,353 178,575
Stephen P. Herbert 13,242,353 178,575
Steven Katz 13,234,451 186,477
William W. Sellers 13,242,353 178,575
Henry B. duPont Smith 13,241,353 179,575
William L. Van Alen, Jr. 13,242,353 178,575
Douglas M. Lurio 13,242,353 178,575
Edwin R. Boynton 13,242,353 178,575
(c) In addition to the election of directors, the following other
matter was also voted on and approved at the Annual Meeting:
Ratification of the appointment of Ernst & Young
LLP as independent auditors for the Company for
its 2001 fiscal year.
Affirmative Votes 13,317,790
Negative Votes 28,888
Abstaining Votes 74,250
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Common Stock is currently traded on the OTC Electronic Bulletin
Board under the symbol USTT.
The high and low bid prices on the OTC Electronic Bulletin Board for
the Common Stock were as follows:
Fiscal
------
2000 High Low
---- ---- ---
First Quarter (through September 30, 1999) $ 2.94 $1.63
Second Quarter (through December 31, 1999) $ 6.56 $1.63
Third Quarter (through March 31, 2000) $ 4.50 $2.19
Fourth Quarter (through June 30, 2000) $ 3.38 $1.31
2001
----
First Quarter (through September 30, 2000) $ 1.75 $0.91
Second Quarter (through December 31, 2000) $ 1.78 $0.66
Third Quarter (through March 31, 2001) $ 1.78 $0.88
Fourth Quarter (through June 30, 2001) $ 1.28 $0.74
Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
At June 30, 2001, there are 4,886,667 shares of Common Stock issuable
upon exercise of outstanding options. Of the 4,886,667 options, 5,000 are
exercisable at $.50 per share, 735,000 are exercisable at $1.00 per share,
3,000,000 are exercisable at $1.25 per share, 310,000 are exercisable at $1.50
per share, 656,167 are exercisable at $2.00 per share, 84,000 are exercisable at
$2.50 per share, 81,500 are exercisable at $4.50 per share, and 15,000 are
exercisable at $5.00 per share. Subsequent to year end, 3,000,000 of the
outstanding options expired unexercised. The Company has registered for resale
under the 1933 Act all of the Common Stock underlying the options. All of the
aforesaid options have been issued by the Company to employees, Directors,
officers and consultants.
As of June 30, 2001, the following Warrants were outstanding:
4,000 1996-B Warrants;
1,500 1997 Warrants;
2,500 1998-A Warrants;
5,000 1998-B Warrants;
200,400 consultant warrants;
1,580,828 Swartz Private Equity, LLC warrants;
1,000,000 Automated Merchandising Systems, Inc. warrants;
5,338,800 2001-B Warrants; and
100,000 GEMA Warrants.
As of June 30, 2001, the Company has registered for resale
under the 1933 Act all of the Common Stock underlying these warrants (other than
those underlying the GEMA Warrants and 2001-B Warrants).
As of June 30, 2001, there are $5,896,500 face value of Senior
Notes Outstanding which are convertible into 4,621,200 shares of Common Stock,
of these, $5,656,500 are due December 31, 2003, with the remainder due December
31, 2001.
On June 30, 2001 there were 1,167 record holders of the Common
Stock and 596 record holders of the Preferred Stock.
The holders of the Common Stock are entitled to receive such dividends as
the Board of Directors of the Company may from time to time declare out of funds
legally available for payment of dividends. Through the date hereof, no cash
dividends have been declared on the Company's securities. No dividend may be
paid on the Common Stock until all accumulated and unpaid dividends on the
Preferred Stock have been paid. As of June 30, 2001, such accumulated unpaid
dividends amount to $4,621,150 and an additional $413,219 of dividends accrued
on August 1, 2001.
During fiscal year 2001, certain holders of the Company's
Preferred Stock converted 11,160 shares into 11,160 shares of Common Stock.
Certain of these shareholders also converted cumulative preferred dividends of
$87,030 into 8,703 shares of Common Stock.
As of June 30, 2001, there were 555,284 shares of Common Stock issuable
upon conversion of the outstanding Preferred Stock and 462,115 shares issuable
upon the conversion of cumulative Preferred Dividends, which when and if issued
would be freely tradeable under the Act.
Subsequent to June 30, 2001 and through September 28, 2001, the
following equity activity occurred:
On September 14, 2001, the Company completed the 2001-B Private
Placement. An additional $2,116,054 has been received in cash from July
1, 2001 through September 28, 2001 related to this Private Placement
Subsequent to June 30, 2001, the Company executed a Securities Purchase
Agreement with a private placement investment company for the purchase of
$225,000 of Convertible Debentures bearing 9 3/4 percent interest with a
maturity date of August 3, 2003. Interest is payable by the Company monthly in
arrears. The Debenture is convertible at any time after the earlier of the
effectiveness of the registration statement or 90 days following issuance, at
the lower of $1.00 per share or 80% of the lowest closing bid price of the
Common Stock during the 30 days preceding exercise. As of September 20, 2001,
the Company has received $100,000 with the remainder to be received when the
Company completes the registration of the conversion shares. In July 2001, the
investment company also paid gross proceeds of $50,000 to the Company to secure
the right to exercise up to 500,000 warrants for a one year period commencing on
the date on which the Registration Statement is first declared effective. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Certain holders of the Company's Preferred Stock converted 4,325 shares
into 4,325 shares of Common Stock; certain of these shareholders also converted
cumulative preferred dividends of $38,920 into 3,892 shares of Common Stock.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements
This Form 10-KSB 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, including the media capable version of
the e-Port, or if actually commercialized, to obtain commercial acceptance
thereof, (v) the ability of the Company to compete with its competitors to
obtain market share, or (vi) the ability of the Company to obtain sufficient
funds through operations or otherwise to repay its debt obligations or to fund
development and marketing of its products. 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.
Introduction
The Company had a net loss during the years ended June 30, 2001 and
2000 of $10,956,244 and $8,404,481, respectively, and anticipates incurring
operating losses through fiscal 2002.
Results of Operations
Fiscal year ended June 30, 2001:
For the fiscal year ended June 30, 2001, the Company had a net loss of
$10,956,244. The loss applicable to common shares of $11,792,785 or $.70 loss
per common share (basic and diluted) was derived by adding the $10,956,244 net
loss, the $836,541 of cumulative preferred dividends, and dividing by the
weighted average shares outstanding of 16,731,999.
Revenues for the fiscal year ended June 30, 2001 were $1,451,002, a
decrease of $603,339 or 29% from the prior year, primarily due to a decrease of
$745,000 or 55% in equipment and installation sales of our higher priced
Business Express(R) or MBE Business Express(R) and Business Express(R) Limited
Service Series (LSS). Offsetting this decrease were increases in the sale of the
Company's standalone TransAct(R) control system of $129,000 or 462% and the
initial sales of the non-media e-Port(TM) control system of $19,000 or 100%.
Operating expenses for the fiscal year ended June 30, 2001 were
$9,620,675, representing a $746,333 or 8% increase over the prior year. The
primary contributors to these increases were compensation expense and general
and administrative expense offset by reductions in cost of sales, as detailed
below.
Cost of sales decreased by $442,555 from the prior year, primarily
reflecting the decrease in the Business Express(R) or MBE Business Express(TM)
and Business Express(R) LSS centers sold. General and administrative expenses of
$5,628,014 increased by $626,182 or 13%. This increase was due to increased
product development costs of $450,000, public relations expenses of $188,000,
license expense for DoubleClick Adserver software of $120,000, market research
expenses of $88,000, trade show and related travel expenses of $74,000, offset
by a decrease in legal expenses of $238,000, primarily associated with the MBE
litigation which has been settled in fiscal year 2001.
Compensation expense was $2,966,776, an increase of $463,611 or 19%
from the previous year. The increase was due to an increase in executive bonus
expense of $234,000 or 66%, of which $201,000 of this increase was non-cash.
Additional increases in salaries and related employee benefits of $169,000 or
9%, are due to increased personnel activities in all areas of the Company and an
increase of $51,000 in the matching 401K Company contributions instituted in
July 2000.
Depreciation expense of $209,646 increased by $99,095, which is
directly attributable to the increased depreciable asset base.
Other income and expense decreased by $481,909, primarily as a result
of the extension of the amortization period of the debt discount due to the
exchange of certain 1999 Senior Notes into 2000 Senior Notes, which is a
non-cash expense.
In November 2000, the Emerging Issues Task Force (EITF) of the
Financial Accounting Standards Board (FASB) required companies to adopt a new
methodology for computing the beneficial conversion feature of convertible
securities, which is to be applied retroactively for commitments entered into on
or after May 20, 1999. Accordingly, a one-time, non-cash charge of $821,000 has
been recorded for the cumulative effect of accounting change as required under
the guidance provided by the EITF.
The exchange of the 1999 Senior Notes to the 2000 Senior Notes was
determined to be a substantial modification of the terms of the original debt
instrument and, accordingly, the Company wrote-off the unamortized debt discount
and other issuance costs associated with the exchange of the 1999 Senior Notes
in the amount of $863,000. Such amount has been reported as a non-cash
extraordinary item in the fiscal year 2001 statement of operations.
Fiscal year ended June 30, 2000:
For the fiscal year ended June 30, 2000, the Company had a net loss of
$8,404,481. The loss applicable to common shares of $9,334,559 or $.92 loss per
common share (basic and diluted) was derived by adding the $8,404,481 net loss
and the $930,078 of cumulative preferred dividends and dividing by the weighted
average shares outstanding of 10,135,905.
Revenues for the fiscal year ended June 30, 2000 were $2,054,341, a
decrease of $1,836,175 or 47% under the prior year, reflecting the large Prime
Hospitality rollout of the MBE Business Express(R) in fiscal year 1999.
Operating expenses for the fiscal year ended June 30, 2000 were
$8,874,342, representing a $1,578,714 or 22% increase over the prior year. The
primary contributors to this increase were general and administrative expenses
and compensation expense offset by a reduction in cost of equipment sales, as
detailed below.
Cost of sales decreased by $1,704,128 from the prior year, primarily
reflecting the decrease in the Business Express(R) or MBE Business Express(R)
centers sold. General and administrative expenses of $5,001,832 increased by
$2,314,088 or 86%. This increase is primarily due to legal expenses associated
with the pending MBE litigation, which amounted to approximately $1,600,000 an
increase of $1,000,000 over the prior year. All but approximately $150,000 of
these expenses were non-cash as the legal counsel was paid for services by the
issuance of the Company's common stock. Other general and administrative
expenses increased by approximately $1,300,000. Components of this increase
include an increase in research and development costs of $356,280, increases in
outside marketing and operational services of $654,381, increased charges for
consulting and professional fees of $300,436 primarily to fund public relations,
increases in costs related to the rental and maintenance of the company's
corporate office of $98,496 and one time expenses for relocation of personnel of
$55,418. Offsetting these increases was a decrease in trade show costs of
$26,630, or 37%.
Compensation expense was $2,503,165, an increase of $949,976 or 61%
from the previous year. The increase was due to the non-cash expense of $293,700
relating to the compensation charge recorded for bonuses to employees for work
performed in fiscal year 2000, and increases in salaries of $656,276, or 42%,
which is due to increased personnel activities in all areas of the Company.
Other expenses increased by $1,337,968. Of this increase, $976,380 was
non-cash, due to amortization of debt discount relating to the outstanding
Senior Notes. Cash interest expense accounted for an increase of $493,462 offset
by an increase in interest income of $82,707.
Depreciation expense of $110,551 increased by $18,778, which is
directly attributable to the increased depreciable asset base.
Plan of Operations
As of June 30, 2001, the Company had a total of 1,474 credit card
activated control systems installed in the field as follows: Business Express(R)
or MBE Business Express(R) 1,066, Business Express(R) Limited Service (LSS) 170,
Copy Express(TM) 23, Debit Express(TM) 10, Public PC(R) 3, Fax/Printer
Express(TM) 6, standalone TransAct(TM) 122 and non-media e-Port(TM) 74. Through
June 30, 2001 total license and transaction fees earned by the Company from
these systems were $647,317, an increase of $6,976 or 1% over the prior year.
During the past year the Company has focused on presenting the multiple
capabilities of its new e-port(TM) by developing several product lines of
e-Port(TM). The "audit plus credit" version contains all the functionality of
the current TransAct(TM) terminal for credit card processing, control and data
management, plus the added ability to audit vending product usage and vending
machine status. Through August, 2001, over 100 pre-production units have been
distributed to test sites, distributors and operators. Some minor refinements
are being worked on, and limited production quantities are scheduled for
delivery in late September and November 2001.
The Company believes that the media capable version of e-Port(TM) is
nearing completion. This proposed product would offer capability for public
access electronic commerce and advertising using the Internet, in addition to
the capabilities of the audit plus credit version. For this web enabled version,
the Company is working with RadiSys, a contract manufacturer providing value
added design, development, fulfillment and product warranty services. The
Company anticipates that limited quantities of this Internet ready e-Port(TM)
may be delivered during the second quarter of fiscal year 2002.
Concurrent with the above developments to the e-Port(TM) product line,
IBM is working with the Company to develop an internet capable version of the
existing network, which is designed to support transaction processing,
advertising and e-commerce on a worldwide basis with enhanced security features.
Expenditures have been made to recode our existing system in an internet
friendly programming language and to use a more appropriate operating system.
In June, 2001, the Company and IBM signed an Agreement which
establishes the basis for a strategic alliance between the two companies. The
two companies will combine their respective products and capabilities to target
sales to the intelligent vending, retail point of sale, and networked home
applications markets. Cooperation is currently underway to identify customers,
trade shows, and marketing avenues.
The Company has also been cultivating relationships in the vending
marketplace. Coca Cola has contracted with Marconi Online Systems, Inc., a
subsidiary of Marconi plc, a British telecommunications company, to provide
"intelligent vending" solutions for portions of its vending machines. Through
our Company's business alliance with Marconi, executed in April of 2001, our
e-Port(TM) and associated network could be used in connection with Marconi's
fulfillment of the Coca Cola contract. Other major soda vending players are also
being
cultivated, including most of the manufacturers of vending machines and
electronic components, vending product manufacturers and distributors, and large
operators of major vending franchise routes. Vending companies who deal with
other vended products are also being contacted, including those who vend prepaid
phone cards and hot meals.
Additional plans for the coming fiscal year include further activity in
the advertising and media arenas and development of strategic partnering
relationships. Recently, the Company has signed a contract with United Taxi
Alliance of New York, Inc., a newly formed New York non-profit corporation, to
sell media capable e-Ports to UTA over a three year period.
Liquidity and Capital Resources
During the fiscal year ended June 30, 2001, the Company completed
several financing transactions. Net proceeds of $2,722,536 were realized from
private placement offerings of Common Stock and $2,112,100 was realized from the
exercise of Common Stock Purchase Warrants. As of June 30, 2001, the Company had
a working capital deficit of $2,390,543, which included cash and cash
equivalents of $817,570 and inventory of $560,410.
During the fiscal year ended June 30, 2001, net cash of $3,568,924 was
used by operating activities, primarily due to the net loss of $10,956,244,
offset by a non-cash charge of $974,222 for Common Stock, options and warrants
issued for services and interest in lieu of cash payments, and $764,736 of non-
cash amortization of the debt discount relating to the Senior Notes. During the
fiscal year ended June 30, 2001, net cash used in investing activities was
$3,318,466, principally due to the increase in software development costs of
$2,938,111 relating to the e-Port(TM). The net cash provided by financing
activities of $5,845,600 was attributable primarily to net proceeds generated
from the issuance of Common Stock through private placements and exercise of
Common Stock Purchase Warrants described in the prior paragraph and $1,174,818
of net proceeds generated through the issuance of 2000 Senior Notes.
During fiscal 2002, the Company anticipates additional capitalization
of approximately $1.6 million for software development on its network.
During fiscal year 2001 and through September 2001, the Company sold a
total of 746.88 Units in a private placement offering at a price of $6,000 per
unit. Each unit consisted of 10,000 shares of Common Stock and warrants to
purchase up to 20,000 shares of Common Stock at $.50 per share. One-half of the
warrants are exercisable on or before December 31, 2001 and the balance are
exercisable on or before June 30, 2002. Of the units sold, 618.0 were for cash
and 128.88 were issued in exchange for services rendered to the Company. Of the
units sold, 479.94 were sold subsequent to June 30, 2001.
During July 2001, the Company issued to La Jolla Cove Investors, Inc. a
warrant to purchase up to 500,000 shares of Common Stock. The warrant can be
exercised at any time in whole or in part within one year following the
effectiveness of the registration statement covering the resale of the shares
issuable upon exercise of the warrant. The exercise price of the warrant is the
lower of $1.00 or 80% of the lowest closing bid price of the Common Stock during
the 20 trading days prior to exercise. The Company has agreed to prepare and
file at its cost and expense a registration statement covering the resale by La
Jolla of the shares underlying the warrant. At the time of the issuance of the
warrant, La Jolla paid to the Company a non-refundable fee of $50,000 to be
credited towards the exercise price under the warrant. A broker-dealer received
a commission of $3,500 in connection with this warrant.
During August 2001, the Company issued to La Jolla a $225,000
Convertible Debenture bearing 9 3/4 percent interest with a maturity date of
August 2, 2003. Interest is payable by the Company monthly in arrears. The
Debenture is convertible at any time after the earlier of the effectiveness of
the registration statement referred to below or 90 days following issuance at
the lower of $1.00 per share or 80% of the lowest closing bid price of the
Common Stock during the 20 days preceding exercise. If on the date of conversion
the closing bid price of the shares is $.40 or below, the Company shall have the
right to prepay the portion being converted at 150% of the principal amount
being converted. In such event, La Jolla shall have the right to withdraw its
conversion notice. At the time of conversion of the Debenture, the Company has
agreed to issue to La Jolla warrants to purchase an amount of Common Stock equal
to ten times the number of shares actually issued upon conversion of the
Debenture. The warrants are exercisable at any time for two years following
issuance and at the related conversion price of the Debenture. The Company has
agreed to prepare and file at its expense a registration statement covering the
resale of the shares of Common Stock underlying the Debenture as well as the
related warrants issuable upon conversion of the Debenture. La Jolla paid to the
Company the sum of $100,000 at the time of the issuance of the Debenture and has
agreed to pay $125,000 at the time of the effective date of the registration
statement.
In August 2001, the Company issued a warrant to a consultant, to
purchase up to 150,000 shares of Common Stock at $.70 per share. The warrant is
exercisable at any time prior to two years following issuance. The Company has
agreed to prepare and file at its expense a registration statement covering the
resale of the shares of Common Stock underlying the warrant.
In September 2001, the Company commenced a private placement offering
of up to 2,000,000 shares of Common Stock at $.50 per share. The offering is
exempt from the registration requirements of the Act pursuant to Section 4(2)
and Rule 506 thereunder and is being offered and sold only to accredited
investors. For each share purchased, the investor shall also receive a warrant
to purchase one share of Common Stock at $.50 per share at any time prior to
March 31, 2002. The Company has agreed to prepare and file at its expense a
registration statement covering the resale of the shares of Common Stock and the
shares of Common Stock underlying the warrants. To date, $260,000 has been
deposited and subscription agreements for $591,143 have been received.
In September 2001, the Company (i) extended the expiration date of the
warrants to purchase up to 1,000,000 shares issued to a consultant from August
31, 2001 until October 31, 2001; (ii) issued 200,000 options to an employee, and
100,000 options to each of two consultants. The options are fully vested and are
exercisable at $.70 per share at any time prior to June 30, 2003; and (iii)
reduced the purchase price for the shares of Common Stock which can be purchased
with the quarterly interest payments made on the Senior Notes from $1.00 to $.50
for the quarters ending September 30, 2001 and December 31, 2001. In June 2001,
the Company reduced the purchase price for the Common Stock from $1.00 to $.80
for the interest payment due for the quarter ended June 30, 2001.
To date, the Company has received nominal funds from Swartz Private
Equity, LLC under its equity credit line with Swartz. The Company does not
anticipate any significant use of the Swartz credit line in the future.
The Company has incurred losses of $11.0 million and $8.4 million
during each of the fiscal years ending June 30, 2001 and 2000, respectively, and
an accumulated deficit from inception through June 30, 2001 amounting to $39.2
million and a shareholders deficit of $2.8 million. The Company anticipates that
for the year ending June 30, 2002 there will be a negative cash flow from
operations in excess of $3 million thus, the Company will require additional
debt or equity financing which may not be readily available. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The Company's independent auditors have included an explanatory paragraph in
their report on the Company's June 30, 2001 financial statements. The Company
believes that the funds available at June 30, 2001 combined with events
anticipated to occur including the anticipated revenues to be generated during
fiscal year 2002, the potential capital to be raised from the exercise of the
Common Stock Purchase Warrants, the funds anticipated to be received in future
private placements, and the ability to reduce anticipated expenditures, if
required, will allow the Company to continue as a going concern.
Commitments
The Company leases approximately 10,000 square feet in Wayne,
Pennsylvania for a monthly rental of $12,705 plus utilities and operating
expenses. The lease expires on June 30, 2002.
The Company has acquired inventory financing using IBM Global
Financing. The debt to IBM is secured primarily by the inventory being financed
and bears an annual interest rate of 10%, subject to adjustments if the
outstanding balance is outstanding greater than 180 days. As of June 30, 2001,
$45,785 of debt is outstanding under this arrangement.
USA Technologies, Inc.
Financial Statements
Years ended June 30, 2001 and 2000
Contents
Report of Independent Auditors...............................................F-1
Financial Statements
Balance Sheets...............................................................F-2
Statements of Operations.....................................................F-3
Statements of Shareholders' Deficit..........................................F-4
Statements of Cash Flows.....................................................F-6
Notes to Financial Statements................................................F-7
Report of Independent Auditors
Board of Directors and Shareholders
USA Technologies, Inc.
We have audited the accompanying balance sheets of USA Technologies, Inc. as of
June 30, 2001 and 2000, and the related statements of operations, shareholders'
deficit, and cash flows for each of the two years in the period ended June 30,
2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of USA Technologies, Inc. at June
30, 2001 and 2000, and the results of its operations and its cash flows for each
of the two years in the period ended June 30, 2001, in conformity with
accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming USA
Technologies, Inc. will continue as a going concern. As discussed in Note 2 to
the financial statements, the Company has never been profitable and continues to
incur losses from operations and anticipates that it will require additional
debt or equity financing which may not be readily available. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets, including
software development costs, or the amounts and classification of liabilities
that might result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
September 7, 2001, except for Note 14,
as to which the date is September 20, 2001
F-1
USA Technologies, Inc.
Balance Sheets
June 30
2001 2000
-----------------------------
Assets
Current assets:
Cash and cash equivalents $ 817,570 $ 1,859,360
Accounts receivable, less allowance for uncollectible
accounts of $28,000 and $50,000 in 2001 and 2000,
respectively 64,752 603,171
Inventory 560,410 992,980
Prepaid expenses and other current assets 428,825 300,607
Deposits - 192,000
Subscriptions receivable 29,000 12,199
-----------------------------
Total current assets 1,900,557 3,960,317
Property and equipment, net 761,324 384,847
Software development costs, at cost 3,087,415 149,304
Other assets 31,765 14,740
-----------------------------
Total assets $ 5,781,061 $ 4,509,208
=============================
Liabilities and shareholders' deficit
Current liabilities:
Accounts payable $ 2,607,570 $ 1,194,391
Accrued expenses 1,355,595 554,243
Equipment line of credit 45,785 183,196
Convertible Senior Notes 211,704 -
Current obligations under capital leases 70,446 9,493
-----------------------------
Total current liabilities 4,291,100 1,941,323
Convertible Senior Notes, less current portion 4,236,281 2,688,402
Obligations under capital leases, less current portion 53,577 34,965
-----------------------------
Total liabilities 8,580,958 4,664,690
Shareholders' deficit:
Preferred Stock, no par value:
Authorized shares - 1,800,000
Series A Convertible Preferred - Authorized shares -
900,000
Issued and outstanding shares - 555,284 and 566,444 at
June 30, 2001 and 2000, respectively (liquidation
preference of $10,173,990 at June 30, 2001) 3,933,253 4,012,266
Common Stock, no par value:
Authorized shares - 62,000,000
Issued and outstanding shares - 21,450,755 and
13,375,291 at June 30, 2001 and 2000, respectively 32,977,922 24,204,050
Deferred compensation and other (502,000) (206,000)
Accumulated deficit (39,209,072) (28,165,798)
-----------------------------
Total shareholders' deficit (2,799,897) (155,482)
-----------------------------
Total liabilities and shareholders' deficit $ 5,781,061 $ 4,509,208
=============================
See accompanying notes.
F-2
USA Technologies, Inc.
Statements of Operations
Year ended June 30
2001 2000
---------------------------
Revenues:
Equipment sales $ 803,685 $ 1,414,000
License and transaction fees 647,317 640,341
---------------------------
Total revenues 1,451,002 2,054,341
Operating expenses:
Cost of sales 816,239 1,258,794
General and administrative 5,628,014 5,001,832
Compensation 2,966,776 2,503,165
Depreciation 209,646 110,551
---------------------------
Total operating expenses 9,620,675 8,874,342
---------------------------
(8,169,673) (6,820,001)
Other income (expense):
Interest income 60,034 91,054
Interest expense:
Coupon or stated rate (587,769) (598,239)
Non-cash amortization of debt discount (764,736) (1,011,874)
Less: Amounts capitalized 230,000 -
---------------------------
Total interest expense (1,122,505) (1,610,113)
Other income (expense) (40,100) (65,421)
---------------------------
Total other income (expense) (1,102,571) (1,584,480)
---------------------------
Loss before cumulative effect of accounting change and (9,272,244) (8,404,481)
extraordinary item
Cumulative effect of accounting change (821,000) -
---------------------------
Loss before extraordinary item (10,093,244) (8,404,481)
Extraordinary loss on exchange of debt (863,000) -
---------------------------
Net loss (10,956,244) (8,404,481)
Cumulative preferred dividends (836,541) (930,078)
---------------------------
Loss applicable to common shares $(11,792,785) $(9,334,559)
===========================
Loss per common share (basic and diluted):
Loss before cumulative effect of accounting change and
extraordinary item $ (0.60) $ (0.92)
Cumulative effect of accounting change (0.05) -
Extraordinary loss on exchange of debt (0.05) -
---------------------------
Loss per common share (basic and diluted) $ (0.70) $ (0.92)
===========================
Weighted average number of common shares outstanding (basic and
diluted) 16,731,999 10,135,905
===========================
See accompanying notes.
F-3
USA Technologies, Inc.
Statements of Shareholders' Deficit
Series A
Convertible
Preferred Common Deferred Subscriptions Accumulated
Stock Stock Compensation Receivable Deficit Total
----------------------------------------------------------------------------------------------------
Balance, June 30, 1999 $4,537,128 $14,277,763 $ - $ (83,983) $(19,374,437) $(643,529)
Issuance of 210,523 shares of
Common Stock to employees
as compensation - 505,746 - - - 505,746
Issuance of 578,000 shares of
Common Stock in exchange
for consulting services - 1,156,000 - - - 1,156,000
Conversion of 74,133 shares of
Preferred Stock to 74,133
shares of Common Stock (524,862) 524,862 - - - -
Conversion of $386,880 of
cumulative preferred
dividends into 38,688
shares of Common Stock at
$10.00 per share - 386,880 - - (386,880) -
Deferred compensation -
employee stock awards -
120,000 shares at $2.00 per
share - 240,000 (240,000) - - -
Compensation expense related
to deferred stock awards - - 34,000 - - 34,000
Exercise of 911,600 Common
Stock warrants at $.50 per
share - 455,800 - - - 455,800
Exercise of 252,750 Common
Stock warrants at $1.00 per
share - 252,750 - - - 252,750
Exercise of 110,000 Consultant
warrants at $2.00 per share - 220,000 - - - 220,000
Exercise of 34,000 Common
Stock warrants at $2.50 per
share - 85,000 - - - 85,000
Exercise of 10,000 Common
Stock options at $1.50 per
share - 15,000 - - - 15,000
Exercise of 6,500 Common Stock
options at $2.50 per share - 16,250 - - - 16,250
Issuance of 250,000 Common
Stock warrants in exchange
for professional services - 99,000 - - - 99,000
Issuance of 218,000 shares of
Common Stock from the
conversion of $545,000 of
the 12% Senior Notes - 352,881 - - - 352,881
Issuance of 3,560,000 shares
of Common Stock at $1.00
per share in connection
with the 1999-B Private
Placement, net of offering
costs of $96,058 - 3,463,942 - - - 3,463,942
Issuance of 1,200,000 shares of
Common Stock at $2.00 per
share in connection with the
2000-A Private Placement,
net of offering costs of
$222,647 - 2,177,353 - - - 2,177,353
Reduction of 20,000 shares of
Common Stock and 10,000
warrants issued in connection
with the cancellation of
$50,000 Senior Notes issued
in fiscal 1999 - (25,177) - - - (25,177)
Subscriptions receivable
collected - - - 83,983 - 83,983
Net loss - - - - (8,404,481) (8,404,481)
----------------------------------------------------------------------------------------------------
Balance, June 30, 2000 4,012,266 24,204,050 (206,000) - (28,165,798) (155,482)
F-4
USA Technologies, Inc.
Statements of Shareholders' Deficit (continued)
Series A
Convertible Deferred
Preferred Common Compensation Accumulated
Stock Stock and Other Deficit Total
-----------------------------------------------------------------------------
Conversion of 11,160 shares of
Preferred Stock to 11,160 shares
of Common Stock $ (79,013) $ 79,013 $ - $ - $ -
Conversion of $87,030 of cumulative
preferred dividends into 8,703
shares of Common Stock at $10.00
per share - 87,030 - (87,030) -
Issuance of 418,250 shares of Common
Stock to employees as compensation - 474,995 - - 474,995
Compensation expense related to
deferred stock awards - - 103,000 - 103,000
Issuance of 200,000 shares of Common
Stock in exchange for consulting
services - 200,000 - - 200,000
Exercise of 2,112,100 Common Stock
warrants at $1.00 per share - 2,112,100 - - 2,112,100
Issuance of 24,000 shares of Common
Stock from the conversion of
$35,000 Senior Notes - 28,024 - - 28,024
Issuance of 895,000 shares of Common
Stock at $1.00 per share in
connection with the 2000-B Private
Placement, net of offering costs
of $117,849 - 777,151 - - 777,151
Issuance of 450,000 shares of Common
Stock at $1.00 per share in
connection with the 2001-A Private
Placement, net of offering costs
of $22,500 - 427,500 - - 427,500
Issuance of 2,669,400 shares of
Common Stock at $0.60 per share in
connection with the 2001-B Private
Placement, net of offering costs
of $54,755 - 1,546,885 - - 1,546,885
Issuance of 1,136,300 shares of
Common Stock in connection with
the 2000 12% Convertible Senior
Note Offering - 1,215,843 - - 1,215,843
Debt discount relating to beneficial
conversion feature on the 2000 12%
Convertible Notes 409,104 409,104
Issuance of 121,541 shares of Common
Stock in lieu of cash payment for
interest on the 2000 12%
Convertible Senior Notes - 114,927 - - 114,927
Issuance of options to distributor 420,000 (420,000)
Expense associated with options
issued to distributor - - 21,000 - 21,000
Other - 60,300 - - 60,300
Issuance of 29,010 shares of Common
Stock at $1.05 per share in
connection with the $20 million
equity line Investment Agreement,
net of offering costs of $30,461 - - - - -
Issuance of 1,580,828 Common Stock
commitment warrants in connection
with $20 million Equity Line
Investment Agreement - - - - -
The cumulative effect of accounting
change related to the beneficial
conversion feature associated with
the 1999 Convertible Senior Notes - 821,000 - - 821,000
Net loss - - - (10,956,244) (10,956,244)
-----------------------------------------------------------------------------
Balance, June 30, 2001 $ 3,933,253 $ 32,977,922 $ (502,000) $ (39,209,072) $ (2,799,897)
=============================================================================
See accompanying notes.
F-5
USA Technologies, Inc.
Statements of Cash Flows
Year ended June 30
2001 2000
--------------------------------
Operating activities
Net loss $ (10,956,244) $ (8,404,481)
Adjustments to reconcile net loss to net cash used in
operating activities:
Cumulative effect of accounting change 821,000 -
Extraordinary loss on exchange of debt 863,000 -
Charges incurred in connection with stock awards and the
issuance of Common Stock and Common Stock Purchase Warrants 859,295 1,696,846
Depreciation 209,646 110,551
Interest amortization relating to Senior Notes 764,736 1,011,874
Interest expense on the 2000 Senior Notes paid through the
issuance of Common Stock 114,927 -
Changes in operating assets and liabilities:
Accounts receivable 538,419 (241,708)
Inventory 345,009 131,642
Prepaid expenses, deposits, and other assets 356,757 (376,451)
Accounts payable 1,713,179 230,903
Accrued expenses 801,352 102,042
--------------------------------
Net cash used in operating activities (3,568,924) (5,738,782)
Investing activities
Purchase of property and equipment (380,355) (173,532)
Increase in software development costs (2,938,111) (149,304)
--------------------------------
Net cash used in investing activities (3,318,466) (322,836)
Financing activities
Net proceeds from the issuance of Common Stock and the exercise of
Common Stock Purchase Warrants and Options 4,834,636 6,686,095
Net repayment of equipment line of credit (137,411) (621,289)
Collection of subscriptions receivable 12,199 200,657
Repayment of principal on capital lease obligations (38,642) (9,501)
Proceeds from issuance of the 2000 Senior Notes, net of issuance
costs of $73,682 1,174,818 -
--------------------------------
Net cash provided by financing activities 5,845,600 6,255,962
--------------------------------
Net (decrease) increase in cash and cash equivalents (1,041,790) 194,344
Cash and cash equivalents at beginning of year 1,859,360 1,665,016
--------------------------------
Cash and cash equivalents at end of year $ 817,570 $ 1,859,360
================================
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 472,842 $ 593,472
================================
Issuance of New Senior Notes in exchange for services rendered $ 610,000 $ -
================================
Issuance of Common Stock options to distributor $ 420,000 $ -
================================
Conversion of Convertible Preferred Stock to Common Stock $ 79,013 $ 524,862
================================
Conversion of Cumulative Preferred Dividends to Common Stock $ 87,030 $ 386,880
================================
Prepaid stock expenses through issuance of Common Stock $ 42,000 $ 77,900
================================
Subscriptions receivable $ 29,000 $ -
================================
Conversion of Senior Notes to Common Stock $ 28,024 $ 352,881
================================
Transfer of inventory to property and equipment $ 87,561 $ 131,214
================================
Capital lease obligations incurred $ 118,207 $ 26,982
================================
Cancellation of Senior Notes $ - $ 50,000
================================
Property and equipment acquired with the issuance of
Common Stock $ - $ 20,000
================================
See accompanying notes.
F-6
USA Technologies, Inc.
Notes to Financial Statements
June 30, 2001
1. Business
USA Technologies, Inc., a Pennsylvania corporation (the "Company"), was
incorporated on January 16, 1992. The Company is a provider and licensor of
unattended, credit card activated control systems for the copy, fax, debit card,
personal computer and vending industries. The Company's customers are
principally located in the United States and are comprised of hotels, retail
locations, university libraries and public libraries. The Company generates its
revenues from the direct sale of its control systems and configured business
equipment utilizing its control systems, from retaining a percentage of the
gross licensing fees generated by the control systems, and from a monthly
administrative service fee.
The Company offers the Business Express(R) and Business Express(R) Limited
Service (LSS) principally to the hospitality industry. The Business Express(R)
and Business Express(R) Limited Service (LSS) combines the Company's business
applications for computers, copiers and facsimile machines into a business
center unit.
The Company's next generation control system (e-Port(TM)), which includes
capabilities for interactive multimedia and e-commerce, acceptance of other
forms of electronic payments and remote monitoring of host machine data is being
marketed and sold to operators, distributors and original equipment
manufacturers (OEM) primarily in the vending industry. No significant revenues
have been generated from the e-Port(TM) as the product has not been released in
the marketplace (Note 2).
During June 2001, the Company and IBM entered into a one year, non-exclusive
strategic marketing agreement in order to market and sell information technology
solutions to customers in the intelligent vending, retail point of sale and
networked home application markets. The product offerings would consist of the
Company's ePort(TM) and related network and IBM's products and services in the
United States and Canada.
2. Accounting Policies
Basis of Financial Statement Presentation
The financial statements of the Company have been prepared assuming the Company
will continue as a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
Accordingly, the financial statements do not include any adjustments to recorded
asset values, including software development costs, that might be necessary
should the Company be unable to continue in existence. The Company has never
been profitable, has incurred losses of $11.0 million and $8.4 million during
each of the fiscal years ending June 30, 2001 and 2000, respectively,
F-7
USA Technologies, Inc
Notes to Financial Statements (continued)
2. Accounting Policies (continued)
Basis of Financial Statement Presentation (continued)
and cumulative losses from its inception through June 30, 2001 amounting to
approximately $36 million. Losses have continued through September 2001 and are
expected to continue throughout fiscal year 2002. Further, the Company has a
shareholders' deficit of $2.8 million at June 30, 2001. The Company's ability to
meet its future obligations is dependent upon the success of its products in the
marketplace and its ability to raise capital, which may not be readily
available, until the Company's products can generate sufficient operating
revenues. These factors raise doubt about the Company's ability to continue as a
going concern. Management believes that actions presently being taken will allow
for the Company to continue as a going concern. Such actions include the
generation of revenues from operations, additional private placement offerings,
the exercise of Common Stock purchase warrants and options, and continued
efforts to reduce costs.
Cumulative Effect of Accounting Change
During fiscal year 1999, the Company issued $4,618,000 (as adjusted) of $10,000
principal amount of Senior Notes. The Notes also included detachable equity
instruments (see Note 9). During October 1999, the Company added a conversion
feature to the Senior Notes whereby the Senior Notes were immediately
convertible into Common Stock at $2.50 per share at the option of the holder. At
the time of the addition of the conversion feature, the Company determined that,
based on the fair value of the Company's Common Stock and specified conversion
prices, and, in accordance with the then applicable accounting pronouncements,
these Senior Notes did not contain an embedded conversion feature.
In November 2000, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board (FASB) reached a consensus on Issue 00-27,
Application of EITF Issue 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios to
Certain Convertible Instruments," whereby it was concluded that an issuer should
calculate the intrinsic value of a conversion option using the effective
conversion price, based on the proceeds received allocated to the convertible
instrument instead of the specified conversion prices in the instrument. Issue
00-27 requires companies to apply the prescribed methodology for computing the
beneficial conversion feature of convertible securities through a cumulative
catch-up accounting change (in the quarter that includes November 2000) for any
such security issued after May 20, 1999, the effective date of EITF 98-5.
F-8
USA Technologies, Inc
Notes to Financial Statements (continued)
2. Accounting Policies (continued)
Cumulative Effect of Accounting Change (continued)
Accordingly, the Company recorded a one-time, non-cash charge during fiscal year
2001 of $821,000 to record the cumulative effect of an accounting change as
required by the EITF.
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash Equivalents
Cash equivalents represent all highly liquid investments with original
maturities of three months or less. Cash equivalents are comprised of a money
market fund and certificates of deposit.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or market.
Property and Equipment
Property and equipment is recorded at cost. The straight-line method of
depreciation is used over the estimated useful lives of the related assets.
Concentration of Credit Risk
Financial instruments that subject the Company to a concentration of credit risk
consist principally of cash and accounts receivable. The Company maintains cash
with various financial institutions. The Company performs periodic evaluations
of the relative credit standing of those financial institutions, and the
Company's policy is designed to limit exposure to any one institution. The
Company does not require collateral or other security to support credit sales,
but provides an allowance for bad debts based on historical experience and
specifically identified risks.
F-9
USA Technologies, Inc
Notes to Financial Statements (continued)
2. Accounting Policies (continued)
Revenue Recognition
Revenue from the sale of equipment is recognized upon installation and customer
acceptance of the related equipment. License and transaction fee revenue is
recognized upon the usage of the Company's credit card activated control
systems.
Software Development Costs
The Company capitalizes software development costs 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. During May
2000, the Company reached technological feasibility for the development of the
e-Port(TM) control system that would offer capability for public access
electronic commerce and advertising using the Internet and, accordingly, the
Company commenced capitalization of software development costs related to the
e-Port(TM). Costs capitalized were approximately $2,938,000 and $149,000 during
the years ended June 30, 2001 and 2000, respectively.
Amortization of software development costs will be 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. Amortization of such costs will commence when the
e-Port(TM) becomes available for general release to customers, which is
anticipated in fiscal year 2002. 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. The Company anticipates capitalization of an
additional $1.6 million during fiscal 2002 prior to the release of the
e-Port(TM) to the marketplace.
Research and Development Expenses
Research and development expenses are expensed as incurred. Research and
development expenses, which is included in general and administrative and
compensation expenses in the statement of operations, was $1,260,000 and
$554,000 for the years ended June 30, 2001 and 2000, respectively.
Accounting for Stock Options
Financial Accounting Standards Board Statement ("SFAS") No. 123, Accounting for
Stock-Based Compensation, provides companies with a choice to follow the
provisions of SFAS 123 in determination of stock-based
F-10
USA Technologies, Inc
Notes to Financial Statements (continued)
2. Accounting Policies (continued)
compensation expense or to continue with the provisions of Accounting Principles
Board Opinion No. 25 ("APB 25"). The Company has elected to follow the
provisions of APB 25. Under APB 25, if the exercise price of the Company's stock
options equals or exceeds the market price of the underlying Common Stock on the
date of grant, no compensation expense is recognized. The effect of applying
SFAS 123 to the Company's stock-based awards results in net loss and net loss
per common share that are disclosed on a pro forma basis in Note 12.
Loss Per Common Share
Basic earnings per share is calculated by dividing income (loss) applicable to
common shares by the weighted average common shares outstanding for the period.
Diluted earnings per share is calculated by dividing income (loss) applicable to
common shares by the weighted average common shares outstanding for the period
plus the dilutive effect (unless such effect is anti-dilutive) of equity
instruments. No exercise of stock options, purchase rights, stock purchase
warrants, or the conversion of preferred stock, cumulative preferred dividends
or Senior Notes was assumed during fiscal 2001 or 2000 because the assumed
exercise of these securities would be antidilutive.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable, other
current assets, accounts payable and accrued expenses reported in the balance
sheets equal or approximate fair value due to their short maturities. The fair
value of the Company's Senior Notes approximates book value as such notes are at
market rates currently available to the Company.
3. Joint Venture
During September 1997, the Company entered into a five-year Joint Venture
Agreement with Mail Boxes Etc. ("MBE") to operate under the name "MBE Express
Joint Venture" (hereinafter referred to as "Joint Venture") and exclusively sell
and market the Company's Business Express(R) product under the name MBE Business
Express(TM). The Joint Venture Agreement outlined the terms for sharing costs
and profits. During September 1998, MBE commenced a legal action against the
Company in the Superior Court of the State of California, (subsequently removed
to the United States District Court for the southern District of California),
alleging that 195 terminals purchased by MBE were defective and a refund of
$141,260 plus lost profits (claimed to be several hundred thousand dollars) were
sought by MBE. MBE further claimed that it was not obligated to purchase 600
additional terminals ordered in April 1998. The Company filed a counterclaim
against MBE which claimed numerous areas where MBE breached the Joint Venture
Agreement, breached its fiduciary responsibility, and trade libel. On May 14,
1999, the Company notified MBE that the Company was terminating the Joint
Venture Agreement, citing the numerous breaches of the Joint Venture Agreement.
Obligations for continued servicing of MBE Business Express's were met by the
Company.
During June 2001, the Company and MBE settled the litigation between them. As
part of the settlement, MBE assigned to the Company all of the rights in the
Joint Venture. The Company also agreed to pay MBE $160,000 and the parties
agreed to mutually release all claims against one another.
F-11
USA Technologies, Inc
Notes to Financial Statements (continued)
4. Property and Equipment
Property and equipment consist of the following:
June 30
Useful Lives 2001 2000
----------------------------------------------------------
Control systems 3 years $ 533,055 $ 377,997
Computer equipment and purchased
software 3 years 609,775 205,270
Furniture and equipment 5 years 190,836 170,398
Leasehold improvements Lease term 90,313 86,628
Vehicles 5 years 10,258 10,258
--------------------------------------
1,434,237 850,551
Less accumulated depreciation 672,913 465,704
--------------------------------------
$ 761,324 $ 384,847
======================================
5. Accrued Expenses
Accrued expenses consist of the following:
June 30
2001 2000
---------------------------------------
Accrued consulting fees $ 435,000 $ -
Accrued professional fees 439,478 186,808
Accrued software license and support costs 154,229 159,268
Accrued compensation and related sales commissions 125,668 91,592
Accrued interest 91,585 -
Accrued product warranty costs 52,466 56,684
Accrued other 31,414 55,150
Advanced customer billings 25,755 4,741
---------------------------------------
$ 1,355,595 $ 554,243
=======================================
6. Related Party Transactions
At June 30, 2001 and 2000, approximately $70,000 and $19,000, respectively, of
the Company's accounts payable and accrued expenses were due to a Board member
for legal services performed. During the years ended June 30, 2001 and 2000, the
Company incurred approximately $271,000 and $193,000, respectively, for these
services.
7. Commitments
o During May 1999, the Company entered into an agreement with IBM whereby IBM
agreed to be the executional partner for certain aspects of the Company's
business, including project management services, asset procurement,
configuration and testing of equipment, site preparation, installation,
maintenance services, and
F-12
USA Technologies, Inc
Notes to Financial Statements (continued)
o asset management. The agreement provides for an increase from 1,000 to
5,000 locations and expanded the array of Company products which are
eligible for IBM installation. In connection with this agreement, the
Company has also entered into an inventory financing arrangement with IBM
Credit Corporation whereby IBM Credit Corporation granted the Company a
$1.5 million equipment line of credit. The outstanding balance is secured
by the underlying inventory. Interest accrues on the outstanding balance at
10% per annum, subject to adjustment if the outstanding balance is
outstanding greater than 180 days. At June 30, 2001 and 2000, respectively,
$45,785 and $183,196 was outstanding under this agreement.
o In connection with an employment agreement, expiring June 30, 2002, the
Company's Chief Executive Officer has been granted in the event of a "USA
Transaction," as defined, which among other events includes a change in
control of the Company, irrevocable and fully vested rights equal to that
number of shares of Common Stock that when issued to him equals eight
percent of all the then issued and outstanding shares of the Company's
Common Stock. The Chief Executive Officer is not required to pay any
consideration for such shares. The stock rights have no expiration and are
not affected by the Chief Executive Officer's termination of employment.
o At June 30, 2001, the Company has entered into purchase commitments with
vendors for inventory of approximately $1,300,000.
o The Company conducts its operations from various facilities under operating
leases. Rent expense under such arrangements was approximately $188,000 and
$140,000 during the years ended June 30, 2001 and 2000, respectively.
During the years ended June 30, 2001 and 2000, the Company entered into
agreements to lease $118,207 and $26,982, respectively, of computer
equipment that were accounted for as capital leases. This computer
equipment is included in property and equipment in the accompanying
financial statements. Capital lease amortization of $33,544 and $8,097 is
included in depreciation expense for the years ended June 30, 2001 and
2000, respectively.
o As discussed in Note 2, the Company anticipates spending an additional
$1.6 million during fiscal 2002 to complete the e-Port(TM) software
development.
Future minimum lease payments subsequent to June 30, 2001 under capital and
noncancelable operating leases are as follows:
Capital Leases Operating Leases
---------------------------------------
2002 $ 88,349 $ 174,000
2003 47,381 9,000
2004 11,689 3,000
---------------------------------------
Total minimum lease payments 147,419 $ 186,000
===================
Less amount representing interest 23,396
--------------------
Present value of net minimum lease payments 124,023
Less current obligations under capital leases 70,446
--------------------
Obligations under capital leases, less current portion $ 53,577
====================
F-13
USA Technologies, Inc
Notes to Financial Statements (continued)
8. Income Taxes
At June 30, 2001 and 2000, the Company had net operating loss carryforwards of
approximately $35,109,000 and $23,481,000, respectively, to offset future
taxable income expiring through approximately 2021. At June 30, 2001 and 2000,
the Company recorded a deferred tax asset of approximately $12,418,500 and
$9,374,000, respectively, which was reduced by a valuation allowance of the same
amount as the realization of the deferred tax asset is not certain.
The timing and extent in which the Company can utilize future tax deductions in
any year may be limited by provisions of the Internal Revenue Code regarding
changes in ownership of corporations.
The deferred tax assets arose primarily from the use of different accounting
methods for financial statement and income tax reporting purposes as follows:
June 30
2001 2000
--------------------------------------
Deferred tax asset:
Net operating loss carryforwards $ 13,237,000 $ 8,895,000
Compensation expense on stock option re-pricing 170,500 170,500
Deferred research and development costs 125,000 216,000
Other 131,000 152,000
--------------------------------------
13,663,500 9,433,500
Deferred tax liabilities:
Software Development Costs (1,245,000) (60,000)
--------------------------------------
12,418,500 9,373,500
Valuation allowance (12,418,500) (9,373,500)
--------------------------------------
Deferred tax asset, net $ - $ -
======================================
9. Senior Note Offerings
During September 1998, the Company's Board of Directors authorized a private
placement offering (the "1999 Senior Note Offering"). Each unit, as amended,
sold in the offering consisted of a 12% Senior Note in the principal amount of
$10,000, 2,000 1999-A Common Stock Purchase Warrants (each warrant entitled the
holder to purchase one share of Common Stock at $1.00 through December 31, 2001)
and 1,000 shares of Series B Equity Participating Preferred Stock (Series B). A
total of 461.8 units (as adjusted)
F-14
USA Technologies, Inc
Notes to Financial Statements (continued)
9. Senior Note Offerings (continued)
were sold in the Senior Note Offering. The Series B was converted into 1,847,200
shares of Common Stock in connection with the Company's fiscal year 1999 reverse
stock split. In October 1999, a conversion feature was added to the Senior Notes
whereby the Notes were convertible into Common Stock at the rate of $2.50 per
share any time through the Senior Notes maturity of December 31, 2001.
During October 2000, the Company authorized a $6,700,000 private placement
offering ("2000 Senior Note Offering") of 670 units at a unit price of $10,000.
Each unit consists of a 2000 12% Convertible Senior Note in the principal amount
of $10,000 maturing December 31, 2003 and 2,000 shares of Restricted Common
Stock. Each 2000 12% Senior Note is convertible into Common Stock at $1.25 per
share anytime through its maturity date. Holders of the 1999 12% Senior Notes
had the right to exchange their 1999 Notes into 2000 Senior Notes. All payments
of interest on the 2000 Notes can be used by the holder, at the holder's option,
to purchase shares of Common Stock at $1.00 per share (subsequently reduced in
June 2001 to $.80 per share and in September 2001 to $.60 per share). During the
year ended June 30, 2001, the Company issued 121,541 shares of Common Stock in
lieu of cash payment for interest on the 2000 Senior Notes. In connection with
the 2000 Senior Notes issued during fiscal year 2001, the Company issued
1,136,300 shares of Common Stock. The fair value of the Common Stock on the date
such shares were granted of $1,215,843 and the embedded beneficial conversion in
the 2000 Senior Notes of $409,104 was recorded as a debt discount. During fiscal
year 1999, 545,000 shares of such rates were converted into 218,000 shares of
Common Stock.
The Company sold 568.15 units in the 2000 Senior Note Offering during fiscal
year 2001 of which 382.3 units ($3,823,000) of the 1999 Senior Notes were
exchanged for 2000 Senior Notes, 124.85 units were purchased with cash,
resulting in gross proceeds of $1,248,500 and 61 units were issued in exchange
for services provided by consultants in the amount of $610,000. The exchange of
the 1999 Senior Notes to the 2000 Senior Notes was determined to be a
substantial modification of the terms of the original debt instrument and,
accordingly, the Company wrote-off the unamortized debt discount and other
issuance costs associated with the exchange of the 1999 Senior Notes in the
amount of $863,000. Such amount has been reported as a non-cash extraordinary
item in the fiscal year 2001 statement of operations.
F-15
USA Technologies, Inc
Notes to Financial Statements (continued)
9. Senior Note Offerings (continued)
A summary of the 1999 Senior Note and the 2000 Senior Note activities are as
follows:
1999 Senior 2000 Senior
Notes Notes
--------------------------------------
Outstanding at June 30, 1999 $ 4,668,000 $ -
Cancelled (50,000) -
Converted into Common Stock (545,000) -
--------------------------------------
Outstanding at June 30, 2000 4,073,000 -
Issued for cash and services - 1,858,500
Exchange 1999 Senior Notes for 2000 Senior Notes (3,823,000) 3,823,000
Converted into Common Stock (10,000) (25,000)
--------------------------------------
Outstanding at June 30, 2001 240,000 5,656,500
Less: Unamortized debt discount and other issuance costs (28,296) (1,420,219)
--------------------------------------
Balance at June 30, 2001 $ 211,704 $ 4,236,281
======================================
The unamortized debt discount and other issuance costs represents fees paid in
connection with these financings, the estimated fair value of the detachable
equity instruments issued in connection with these financings, and any
beneficial conversion embedded in the debt at the commitment date, which are
being amortized over the remaining life of the respective debt instruments. Debt
discount amortization, which has been reflected as interest expense in the
statements of operations, was approximately $765,000 and $1,012,000 for the
years ended June 30, 2001 and 2000, respectively.
10. Series A Preferred Stock
The authorized Preferred Stock may be issued from time to time in one or more
series, each series with such rights, preferences or restrictions as determined
by the Board of Directors. Each share of Series A Preferred Stock shall have the
right to one vote and is convertible at any time into one share of Common Stock.
Each share of Common Stock entitles the holder to one voting right. Series A
Preferred Stock provides for an annual cumulative dividend of $1.50 per share
payable to the shareholders of record in equal parts on February 1 and August 1
of each year. Cumulative unpaid dividends at June 30, 2001 and 2000 amounted to
$4,621,150 and $3,871,639, respectively. Cumulative unpaid
F-16
USA Technologies, Inc
Notes to Financial Statements (continued)
10. Series A Preferred Stock (continued)
dividends are convertible into common shares at $10.00 per common share at the
option of the shareholder. During the years ended June 30, 2001 and 2000,
certain holders of the Preferred Stock converted 11,160 and 74,133 shares,
respectively, into 11,160 and 74,133 shares of Common Stock, respectively.
Certain of these shareholders also converted cumulative preferred dividends of
$87,030 and $386,880, respectively, into 8,703 and 38,688 shares of Common Stock
during the years ended June 30, 2001 and 2000, respectively. The Series A
Preferred Stock may be called for redemption at the option of the Board of
Directors at any time on and after January 1, 1998 for a price of $11.00 per
share plus payment of all accrued and unpaid dividends. No such redemption has
occurred as of June 30, 2001. In the event of any liquidation, the holders of
shares of Series A Preferred Stock issued shall be entitled to receive $10.00
for each outstanding share plus all cumulative unpaid dividends. If funds are
insufficient for this distribution, the assets available will be distributed
ratably among the preferred shareholders.
11. Common Stock Transactions
During the year ended June 30, 2001, the Company's Board of Directors authorized
the following private placement offerings of the Company's Common Stock to
accredited investors:
o 2000-B offering for the issuance of 895,000 shares of Common Stock at
$1.00 per share generating net proceeds of $777,151 after deducting
related offering costs;
o 2001-A offering for the issuance of 450,000 shares of Common Stock at
$1.00 per share generating net proceeds of $427,500 after deducting
related offering costs;
o 2001-B offering for the issuance of 8,400,000 shares of Common Stock at
$.60 per share. Through June 30, 2001, the Company issued 2,669,400
shares of Common Stock generating net proceeds of $1,546,885 after
deducting related offering costs. Additionally, each dollar invested
entitled the purchaser to receive one Common Stock warrant at $.50 per
share expiring in December 2001 and one Common Stock warrant at $.50 per
share expiring in June 2002.
F-17
USA Technologies, Inc
Notes to Financial Statements (continued)
11. Common Stock Transactions (continued)
During April 2001, the Company granted 6,000,000 fully vested options to a
distributor in connection with the signing of a five-year distribution
agreement. The options were granted in two 3,000,000 increments. Options in the
first 3,000,000 increment had an exercise price of $1.00 and expired 90 days
after the parties entered into the distribution agreement. The second 3,000,000
had an exercise price of $1.25 and expired 180 days after the parties entered
into the distribution agreement. The estimated fair value of these options was
$420,000. The related pro rata charge will be recorded as a reduction of
revenues or as selling, general, and administrative expense, to the extent
revenues have not been earned, over the term of the distribution agreement.
During April 2001, the Company's Board of Directors authorized the granting of a
fully vested warrant to purchase 75,000 shares of Common Stock to a consultant.
The warrants are exercisable for a period of five years from the date of grant
at $1.25 per share. The warrants were issued in exchange for services and
resulted in consulting expense of $52,500, which was recorded during fiscal year
2001.
During March 2001, the Company issued a warrant to purchase 1,000,000 shares of
Common Stock in connection with an OEM agreement between the Company and a
distributor. The warrants initially had an exercise price of $1.50 per share and
were exercisable through June 30, 2001. This warrant was subsequently amended
and the current exercise price is $1.00 and the warrant expires on October 31,
2001 (as amended).
During February 2001, the Company's Board of Directors authorized the issuance
of 200,000 shares of Common Stock to a consultant for services previously
provided by the consultant to the Company. A charge of $200,000 was recorded
during fiscal year 2001 based on the fair value of the Company's Common Stock on
the date the shares were granted.
During the year ended June 30, 2001, the Company issued 418,250 shares of Common
Stock to certain employees and officers. The shares were fully vested on the
date of grant; accordingly, the Company recorded compensation expense of
$474,995 during fiscal year 2001 based on the fair value of the Company's Common
Stock on the date the shares were granted.
F-18
USA Technologies, Inc
Notes to Financial Statements (continued)
11. Common Stock Transactions (continued)
During September 2000, the Company entered into an Investment Agreement with
Swartz Private Equity, LLC for an equity line up to $20 million over a period
not to exceed three years. Investments are determined monthly based on the
current market prices of the Company's Common Stock in accordance with the terms
of the Agreement. The purchase price per share for Swartz would equal 91% of the
market price of the Common Stock at the time of purchase, and additional
warrants at the same price would be granted in an amount equal to 10% of the
number of shares actually purchased. Swartz received 1,200,000 Commitment
Warrants with 10 year terms at an initial exercise price of $1.00, adjusted to
lower market pricing if applicable, and will be granted additional Commitment
Warrants at the same price and term, if required, to keep the number of
Commitment Warrants equal to 5% (decreasing over a five year period to 0%) of
the outstanding Common Stock of the Company on a fully diluted basis. An
additional 380,828 warrants were granted during fiscal 2001 in connection with
this antidilution provision. During the year ended June 30, 2001, Swartz
purchased 29,010 shares of Common Stock pursuant to the Investment Agreement.
There were no net proceeds to the Company from the sale of these shares after
deducting the related cash offering expenses previously incurred.
During February 2000, the Company's Board of Directors awarded 120,000 shares of
the Company's Common Stock, at $2.00 per share, to certain executive officers.
Pursuant to their employment agreements, these officers will be issued the
Common Stock if employed by the Company on June 30, 2002. During fiscal year
2000, the Company recorded deferred compensation of $240,000 in connection with
these awards. Compensation expense of $103,000 and $34,000 has been recorded to
reflect the amortization of the shares earned during the years ended June 30,
2001 and 2000, respectively.
During January 2000, the Company's Board of Directors authorized a $2,000,000
private placement offering of 1,000,000 shares of restricted Common Stock at
$2.00 per share (the "2000-A" offering). This offering was later amended to
1,300,000 shares. During fiscal year 2000, 1,200,000 shares were sold,
generating net proceeds to the Company of $2,177,353.
During October 1999, the Company's Board of Directors authorized a private
placement offering (the "1999-B" offering) to accredited investors of 150 units
(later increased to 356 units by the Board of Directors) at a unit price of
$10,000. Each unit of the $3,560,000 Offering consists of 10,000 shares of
restricted Common Stock at $1.00 per
F-19
USA Technologies, Inc
Notes to Financial Statements (continued)
11. Common Stock Transactions (continued)
share, and 10,000 1999-B Common Stock purchase warrants. During fiscal year 2000
all 356 units were sold, resulting in net proceeds of $3,463,942 ($3,560,000
less offering costs of $96,058) to the Company. Each 1999-B Common Stock
purchase warrant entitled the holder to purchase one share of restricted Common
Stock for $2.00 at any time through March 31, 2000. The 1999-B Common Stock
purchase warrants were modified several times between January 2000 and August
2000 reducing their exercise price to $1.00 per share and extending the
expiration date of the warrants to December 31, 2000. Additionally, those 1999-B
Common Stock purchase warrant holders who exercised their purchase warrants on
or before December 31, 2000 were granted a further extension of the warrants'
expiration date to March 31, 2001. As a result of these reductions in the
exercise price, the Company's Board of Directors authorized the refunding of the
$1 reduction per warrant to those investors who exercised their warrants prior
to the exercise price reduction.
During July 1999, the Board of Directors granted fully vested warrants to
purchase 250,000 shares of the Company's Common Stock to two consultants. These
warrants were issued in exchange for financial and public relations consulting
services and resulted in consulting expense of $99,000. The warrants are
exercisable for two years from date of issuance. The exercise prices were
modified by the Company on various dates since their issuance. During fiscal
year 2000, the Company issued 134,000 shares of Common Stock upon the exercise
of these warrants, resulting in gross proceeds of $285,000. The exercise price
of the remaining 116,000 warrants is $1.00 per share.
A summary of Common Stock Warrant activity for fiscal years 2001 and 2000 is as
follows:
Warrants
-------------------
Outstanding at June 30, 1999 1,212,200
Issued 3,807,400
Exercised (1,308,350)
-------------------
Outstanding at June 30, 2000 3,711,250
Issued 8,889,628
Exercised (2,112,100)
Cancelled (2,255,750)
-------------------
Outstanding at June 30, 2001 8,233,028
===================
F-20
USA Technologies, Inc
Notes to Financial Statements (continued)
11. Common Stock Transactions (continued)
The exercise price and exercise dates of outstanding and exercisable warrants
outstanding at June 30, 2001 is as follows:
Outstanding and
Exercisable Exercise Price Expiration Date
----------------------------------------------------------------------------
2,669,400 $ 0.50 December 31, 2001
2,669,400 0.50 June 30, 2002
1,200,000 0.91 August 29, 2010
1,000,000 1.00 August 30, 2001
377,927 1.00 April 24, 2011
125,400 1.00 August 3, 2001
2,901 1.03 April 30, 2011
75,000 1.25 June 30, 2006
100,000 2.00 June 30, 2002
4,000 3.00 February 28, 2002
1,500 4.00 July 2, 2002
2,500 4.00 March 5, 2003
5,000 4.00 August 17, 2003
----------------------------
8,233,028
============================
During the years ended June 30, 2001 and 2000, the Company's Board of Directors
made numerous amendments to the outstanding Common Stock warrants whereby the
Company reduced the exercise price and extend the expiration terms. The above
table reflects the status of the warrants as of June 30, 2001.
At June 30, 2000, the Company had outstanding 11,740 Common Stock purchase
rights. These Common Stock purchase rights, issued in 1993 and expired in fiscal
2001, allowed the holder to purchase shares of the Company's Common Stock at
$10.00 per share.
12. Stock Options
The Company's Board of Directors has granted options to employees to purchase
shares of Common Stock at or above fair market value. The option term and
vesting schedule are established by the contract that granted the option.
F-21
USA Technologies, Inc
Notes to Financial Statements (continued)
12. Stock Options (continued)
The following table summarizes all stock option activity:
Common Shares
Under Options Exercise Price Per
Granted Share
------------------------------------------
Balance at June 30, 1999 917,100 $ .50-$5.00
Granted 120,000 $ 2.00
Canceled or Expired (35,833) $ 1.50-$4.50
Exercised (16,500) $ 1.50-$2.50
------------------------------------------
Balance at June 30, 2000 984,767 $ .50-$5.00
Granted 6,935,000 $ 1.00-$1.50
Canceled or expired (3,033,100) $ 1.00-$2.50
------------------------------------------
Balance at June 30, 2001 4,886,667 $ .50-$5.00
==========================================
As discussed in Note 11, 3,000,000 of the outstanding options at June 30, 2001
expired unexercised subsequent to year end.
The price range of the outstanding and exercisable Common Stock options at June
30, 2001 is as follows:
Weighted
Average
Remaining
Option Options Contract Life Options
Exercise Prices Outstanding (Yrs.) Exercisable
--------------------------------------------------------------------------------
$ 0.50 5,000 1.80 5,000
$ 1.00 735,000 5.54 285,000
$ 1.25 3,000,000 .18 3,000,000
$ 1.50 310,000 1.96 310,000
$ 2.00 656,167 3.45 656,167
$ 2.50 84,000 1.96 84,000
$ 4.50 81,500 1.35 81,500
$ 5.00 15,000 .56 15,000
---------------------- --------------------
4,886,667 4,436,667
====================== ====================
F-22
USA Technologies, Inc
Notes to Financial Statements (continued)
12. Stock Options (continued)
Pro forma information regarding net loss and net loss per common share
determined as if the Company is accounting for stock options granted under the
fair value method of SFAS 123 is as follows:
June 30
2001 2000
-----------------------------------------
Net loss applicable to common shares as reported $ (11,792,785) $ (9,334,559)
under APB 25
Stock option expense per SFAS 123 (524,845) (329,062)
-----------------------------------------
Pro forma net loss $ (12,317,630) $ (9,663,621)
=========================================
Loss per common share as reported $ (.70) $ (.92)
Pro forma net loss per common share $ (.74) $ (.95)
The fair value for the Company's stock options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for fiscal years 2001 and 2000; risk-free interest
rate of 5.5% and 6.0%, respectively, an expected life of 2 years; no expected
cash dividend payments on Common Stock and volatility factors of the expected
market price of the Company's Common Stock, based on historical volatility of
1.100 and 1.332, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. As noted above, the Company's stock options are vested over an
extended period. In addition, option models require the input of highly
subjective assumptions including future stock price volatility. Because the
Company's stock options have characteristics significantly different from those
of traded options, and because changes in the subjective assumptions can
materially affect the fair value estimates, in management's opinion, the
Black-Scholes model does not necessarily provide a reliable measure of the fair
value of the Company's stock options. The Company's pro forma information
reflects the impact of the reduction in price of certain stock options. The pro
forma results above are not necessarily reflective of the effects of applying
SFAS 123 in future periods.
F-23
USA Technologies, Inc
Notes to Financial Statements (continued)
12. Stock Options (continued)
As of June 30, 2001, the Company has reserved shares of Common Stock for the
following:
Exercise of Common Stock options 4,886,667
Exercise of Common Stock warrants 8,233,028
Conversions of Preferred Stock and cumulative
Preferred Stock dividends 1,017,399
Conversions of Senior Notes 4,621,200
------------------
18,758,294
==================
13. Retirement Plan
The Company's Savings and Retirement Plan (the Plan) allows employees who have
attained the age of 21 and have completed six months of service to make
voluntary contributions up to a maximum of 15% of their annual compensation, as
defined in the Plan. Through June 30, 2000, the Plan did not provide for any
matching contribution by the Company, however, starting at the beginning of
fiscal year 2001, the Company has amended the Plan to include a Company matching
contribution of $.50 for each $1.00 contributed, up to 10% of an employees
contribution. The Company contribution for fiscal year ending June 30, 2001 was
approximately $51,000.
14. Subsequent Events
Through September 20, 2001, the Company completed the 2001-B Private Placement.
An additional $1,863,654 has been received in cash subsequent to June 30, 2001
related to this Private Placement.
Subsequent to June 30, 2001, the Company's Board of Directors initiated the
2001-C Private Placement for up to 2,000,000 shares to a limited number of
accredited investors consisting of restricted Common Stock at $.50 per share
with one associated warrant to purchase Common Stock at $.50 per share, expiring
in March 2002.
F-24
USA Technologies, Inc
Notes to Financial Statements (continued)
14. Subsequent Events (continued)
Subsequent to June 30, 2001, the Company executed a Securities Purchase
Agreement with a private placement investment company for the purchase of
$225,000 of Convertible Debentures due in August 2003. The debentures bear
interest at 9.75% and is payable monthly in arrears. The debenture is
convertible at a price equal to the lesser of $1.00 or 80% of the lowest closing
bid price of the Company's Common Stock during the 20 day period prior to the
conversion. At the time of conversion of the Debenture, the Company will issue
to the holder warrants to purchase an amount of Common Stock equal to ten times
the number of shares issued upon the conversion of the warrants. The warrants
are exercisable at the related conversion price of the debenture.
As of September 20, 2001, the Company received $100,000 of the $225,000
Convertible Debentures with the remainder to be received when the Company
completes the registration of the underlying conversion shares. The Company also
issued 500,000 Common Stock warrants to the purchaser for $50,000. These
warrants are exercisable at the same terms as the underlying debentures and
expire one year from the date a Registration Statement is declared effective.
Subsequent to June 30, 2001, the Company received $29,000 of cash related to the
subscription receivable recorded as an asset on the June 30, 2001 balance sheet.
15. Quarterly Financial Information (Unaudited)
The Company has restated its interim financial information for each of the
interim periods in the fiscal year ended June 30, 2001. The restated
financial statements reflect (i) the extraordinary loss on the exchange of
debt during the second quarter, which was the period in which the exchange
occurred, (ii) the cumulative effect of an accounting change during the
second quarter related to the calculation of the beneficial conversion of the
1999 Senior Notes, and (iii) the capitalization of interest on the Company's
sofware development project.
The following tables present unaudited quarterly information for the year ended
June 30, 2001 as reported and as restated:
As reported
-----------
Third Second First
Quarter Quarter Quarter
----------- ----------- -----------
Interest expense $ 370,314 $ 362,129 $ 363,258
=========== =========== ===========
Loss before cumulative effect of accounting
change and extraordinary item $(2,650,455) $(1,937,693) $(1,638,659)
Cumulative effect of accounting change - - -
Extraordinary loss on exchange of debt - - -
----------- ----------- -----------
Net loss $(2,650,455) $(1,937,693) $(1,638,659)
=========== =========== ===========
Net loss per common share (basic and diluted) $(0.18) $(0.12) $(0.14)
As Adjusted
-----------
Third Second First
Quarter Quarter Quarter
----------- ----------- -----------
Interest expense $ 244,996 $ 315,708 $ 340,009
=========== =========== ===========
Loss before cumulative effect of accounting
change and extraordinary item $(2,524,737) $(1,891,272) $(1,615,410)
Cumulative effect of accounting change - (821,000) -
Extraordinary loss on exchange of debt - (863,000) -
----------- ----------- -----------
Net loss $(2,524,737) $(3,575,272) $(1,615,410)
=========== =========== ===========
Net loss per common share (basic and diluted) $(0.17) $(0.23) $(0.14)
====== ====== ======
F-25
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
PART III
Item 9. Directors and Executive Officers of the Registrant
MANAGEMENT
Directors and Executive Officers
The Directors and executive officers of the Company, as of June 30,
2001, together with their ages and business backgrounds are as follows.
Name Age Position(s) Held
---- --- ----------------
George R. Jensen, Jr. 52 Chief Executive Officer,
Chairman of the Board of
Directors
Stephen P. Herbert 38 President, Director
Haven Brock Kolls, Jr. 35 Vice President - Research and
Development
Leland P. Maxwell 54 Senior Vice President, Chief
Financial Officer, Treasurer
Michael K. Lawlor 39 Vice-President-Marketing and Sales
William W. Sellers (1)(2) 79 Director
Henry B. duPont Smith 39 Director
William L. Van Alen, Jr. (1)(2) 67 Director
Steven Katz (1) 52 Director
Douglas M. Lurio (2) 44 Director
Edwin R. Boynton 46 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 Chief Executive Officer and Director of
the Company since January 1992. Mr. Jensen was Chairman, Director, and Chief
Executive Officer of American Film Technologies, Inc. ("AFT") from 1985 until
1992. AFT was in the business of creating color imaged versions of
black-and-white films. From 1979 to 1985, Mr. Jensen was Chief Executive Officer
and President of International Film Productions, Inc. Mr. Jensen was the
Executive Producer of the twelve hour miniseries, "A.D.", a $35 million dollar
production filmed in Tunisia. Procter and Gamble, Inc., the primary source of
funds, co-produced and sponsored the epic, which aired in March 1985 for five
consecutive nights on the NBC network. Mr. Jensen was also the Executive
Producer for the 1983 special for public television, "A Tribute to Princess
Grace". From 1971 to 1978, Mr. Jensen was a securities broker, primarily for the
firm of Smith Barney, Harris Upham. Mr. Jensen was chosen 1989 Entrepreneur of
the Year in the high technology category for the Philadelphia, Pennsylvania area
by Ernst & Young LLP and Inc. Magazine. Mr. Jensen received his Bachelor of
Science Degree from the University of Tennessee and is a graduate of the
Advanced Management Program at the Wharton School of the University of
Pennsylvania.
Stephen P. Herbert was elected a Director of the Company in April 1996,
and joined the Company on a full-time basis on May 6, 1996. Prior to joining the
Company 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.
21
Haven Brock Kolls, Jr., joined the Company on a full-time basis in May
1994 and was elected an executive officer in August 1994. From January 1992 to
April 1994, Mr. Kolls was Director of Engineering for International Trade
Agency, Inc., an engineering firm specializing in the development of control
systems and management software packages for use in the vending machine
industry. Mr. Kolls was an electrical engineer for Plateau Inc. from 1988 to
December 1992. His responsibilities included mechanical and electrical
computer-aided engineering, digital electronic hardware design, circuit board
design and layout, fabrication of system prototypes and software development.
Mr. Kolls is a graduate of the University of Tennessee with a Bachelor of
Science Degree in Engineering.
Leland P. Maxwell joined the Company on a full-time basis on February
24, 1997 as Chief Financial Officer, Senior Vice President and Treasurer. Prior
to joining the Company, Mr. Maxwell was the corporate controller for Klearfold,
Inc., a privately-held manufacturer of specialty consumer packaging. From 1992
to 1996, Mr. Maxwell was the regional controller for Jefferson Smurfit/Container
Corporation of America, a plastic packaging manufacturer, and from 1986 to 1992
was the divisional accounting manager. Prior thereto, he held financial
positions with Safeguard Business Systems and Smithkline-Beecham. Mr. Maxwell
received a Bachelor of Arts degree in History from Williams College and a Master
of Business Administration-Finance from The Wharton School of the University of
Pennsylvania. Mr. Maxwell is a Certified Public Accountant.
Michael K. Lawlor joined USA Technologies in 1997. In September of
1999, he was promoted to Senior Vice President, Sales and Marketing. Mr. Lawlor
joined PepsiCo in their sales department in 1986 after graduating from the
University of Texas with a degree in Marketing. He rose through the ranks at
PepsiCo over the course of nine years, and departed the company in 1995 as a
National Accounts Sales Manager. After leaving PepsiCo, Mr. Lawlor joined
Aladdin Industries, a leading manufacturer of promotional drinkware, as Director
of Restaurant Sales. During his tenure at Aladdin, he was responsible for
securing Coca-Cola's business at the 1996 Summer Olympics in Atlanta, Georgia.
William W. Sellers joined the Board of Directors of the Company in May
1993. Mr. Sellers founded The Sellers Company in 1949 which has been nationally
recognized as the leader in the design and manufacture of state-of-the-art
equipment for the paving industry. Mr. Sellers has been awarded five United
States patents and several Canadian patents pertaining to this equipment. The
Sellers Company was sold to Mechtron International in 1985. Mr. Sellers is
Chairman of the Board of Sellers Process Equipment Company which sells products
and systems to the food and other industries. Mr. Sellers is actively involved
in his community. Mr. Sellers received his undergraduate degree from the
University of Pennsylvania.
Henry B. duPont Smith joined the Board of Directors of the Company in
May 1994. Since January 1992, Mr. Smith has been a Vice President of The
Rittenhouse Trust Company and since September 1991 has been a Vice President of
Rittenhouse Financial Services, Inc. From September 1991 to December 1992, he
was a registered representative of Rittenhouse Financial Securities, Inc. Mr.
Smith was an Assistant Vice President of Mellon Bank, N.A. from March 1988 to
July 1991, and an investment officer of Provident National Bank from March 1985
to March 1988. Mr. Smith received a Bachelor of Arts degree in Accounting in
1984 from Franklin & Marshall College.
William L. Van Alen, Jr., joined the Board of Directors of the Company
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.
22
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 Price Waterhouse &
Co. in audit, tax and management advisory services; two years of corporate
planning with Revlon, Inc.; five years with National Patent Development
Corporation (NPDC) in strategic planning, merger and acquisition, technology
in-licensing and out-licensing, and corporate turnaround experience as President
of three NPDC subsidiaries; and two years as a Vice President and General
Manager of a non-banking division of Citicorp, N.A.
Douglas M. Lurio joined the Board of Directors of the Company in June
1999. Mr. Lurio is President of Lurio & Associates, P.C., attorneys-at-law,
which he founded in 1991. He specializes in the practice of corporate and
securities law. Prior thereto, he was a partner with Dilworth, Paxson LLP. Mr.
Lurio received a Bachelor of Arts Degree in Government from Franklin & Marshall
College, a Juris Doctor Degree from Villanova Law School, and a Masters in Law
(Taxation) from Temple Law School.
Edwin R. Boynton joined the Board of Directors in July 1999. He is a
partner of Stradley Ronon Stevens & Young LLP, and is a member of and currently
the chair of the firm's estates department. Mr. Boynton received his bachelor of
arts degree from Harvard University in 1976 and his Juris Doctor degree from
Duke University in 1979.
Item 10. Executive Compensation
The following table sets forth certain information with respect to
compensation paid or accrued by the Company during the fiscal years ended June
30, 1999, June 30, 2000 and June 30, 2001 to each of the executive officers and
the other employee of the Company named below. Except as set forth below, no
individual who was serving as an executive officer of the Company at the end of
the fiscal years ended June 30, 1999, June 30, 2000 or June 30, 2001 received
salary and bonus in excess of $100,000 in any such fiscal year.
Summary Compensation Table
Fiscal
Name and Principal Position Year Annual Compensation Long Term Compensation
------------------------------------------------------------------------------------------------------
Salary Bonus Other Restricted Securities
(1) Annual Stock Underlying
Compensation Awards Options
------------------------------------------------------------------------------------------------------
George R. Jensen, Jr., 2001 $135,000 $140,000 -- -- 300,000
Chief Executive Officer, 2000 $117,500 $ 0 -- $80,000 (2) 180,000
1999 $100,000 $ 0 -- --
Stephen P. Herbert, 2001 $125,000 $134,400 -- -- 80,000
President 2000 $107,500 $ 94,000 -- $80,000 (2) 45,000
Leland P. Maxwell, Chief 2001 $108,000 $ 44,240 -- -- 50,000
Financial Officer,Treasurer 2000 $ 99,000 $ 29,000 -- -- 15,000
H. Brock Kolls, Senior Vice 2001 $120,000 $ 97,440 -- -- 80,000
President, Research& 2000 $105,000 $ 44,000 -- $80,000 (2) 30,000
Development
Michael K. Lawlor, Senior 2001 $100,000 $ 38,640 -- 50,000
Vice President, Sales and 2000 $ 83,200 $ 35,500 $43,000 (3) 20,000
Marketing
Adele H. Hepburn 2001 $ 91,000 $171,700 -- --
Director of Investor 2000 $ 91,000 $147,800 -- --
Relations 1999 $ 91,000 $ 51,500 -- --
23
(1) For fiscal year 2000, represents shares of Common Stock issued to the
executive officers valued at $2.00 per share, the closing bid price on the
date of issuance. For Mr. Lawlor, the bonus also includes a $5,500 sales
commission. For fiscal year 2001, represents shares of Common Stock issued
to the executive officers valued at $1.12, the closing price on the
effective day of authorization. For Mr. Lawlor, the bonus also includes a
$1,265 sales commission. The bonus amounts for all fiscal years for
Adele Hepburn consist of cash payments from the Company.
(2) Represents shares of Common Stock issued to such executive officers if
employed by the Company on June 30, 2002. The shares have been valued at
$2.00 per share, the closing bid price on the date of grant.
(3) Represents payment by the Company of relocation expenses.
The following table sets forth information regarding stock options
granted during the fiscal year 2001 to the Company's executive officers named
below:
OPTION GRANTS DURING FISCAL YEAR ENDED JUNE 30, 2001
Name Number of Percent of Exercise Expiration
Securities Total Options Price Date
Underlying Granted to Per
Options Employees in Share
Granted Fiscal Year
George R. Jensen, Jr. 200,000 47.2% $1.50 June 30, 2003
33,333 $1.00 October 20, 2006
33,333 $1.00 July 20, 2007
33,334 $1.00 April 20, 2008
Stephen P. Herbert 26,667 12.6% $1.00 October 20, 2006
26,667 $1.00 July 20, 2007
26,666 $1.00 April 20, 2008
H. Brock Kolls 26,667 12.6% $1.00 October 20, 2006
26,667 $1.00 July 20, 2007
26,666 $1.00 April 20, 2008
Leland P. Maxwell 16,667 7.9% $1.00 October 20, 2006
16,667 $1.00 July 20, 2007
16,666 $1.00 April 20, 2008
Michael K. Lawlor 16,667 7.9% $1.00 October 20, 2006
16,667 $1.00 July 20, 2007
16,666 $1.00 April 20, 2008
Executive Employment Agreements
The Company has entered into an employment agreement with Mr. Jensen
which expires June 30, 2002. The Agreement is automatically renewed from year to
year unless canceled by Mr. Jensen or the Company. The agreement provides for an
annual base salary of $135,000 effective March 1, 2000. Mr. Jensen is entitled
to receive such bonus or bonuses as may be awarded to him by the Board of
Directors. In determining whether to pay such a bonus, the Board would use its
subjective discretion. The Agreement requires Mr. Jensen to devote his full time
and attention to the business and affairs of the Company, and obligates him not
to engage in any investments or activities which would compete with the Company
during the term of the Agreement and for a period of one year thereafter. The
agreement provides that if Mr. Jensen is employed by the Company on June 30,
2002, the Company will issue to him 40,000 shares of Common Stock.
24
The agreement also grants to Mr. Jensen in the event a "USA
Transaction" (as defined below) occurs after the date thereof that number of
shares of Common Stock as shall when issued to him equal five percent (increased
in June 1999 to eight percent) of all the then issued and outstanding shares of
Common Stock (the "Rights"). Mr. Jensen is not required to pay any additional
consideration for such shares. At the time of any USA Transaction, all of the
shares of Common Stock underlying the Rights 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 Rights are irrevocable and fully vested, have no expiration date,
and will not be affected by the termination of Mr. Jensen's employment with the
Company for any reason whatsoever. If a USA Transaction shall occur at a time
when there not a sufficient number of authorized but unissued shares of Common
Stock, then the Company shall as a condition of such USA Transaction promptly
take any and all appropriate action to make available a sufficient number of
shares of Common Stock. In the alternative, the Company may structure the USA
Transactions so that Mr. Jensen would receive the same amount and type of
consideration in connection with the USA Transaction as any other holder of
Common Stock.
On January 21, 1999, Mr. Jensen purchased ten (10) units of the 1999
Senior Note placement offering for $100,000. In full payment for such Units, Mr.
Jensen has agreed to forego any base salary otherwise payable to him under his
employment agreement during the period of time commencing on April 1, 1999 and
ending on June 30, 2000, or such longer period of time as may be required based
upon his monthly net base salary after all applicable withholding taxes and
other deductions. At June 30, 2000, $12,199 was outstanding. Subsequent to year
end, the $12,199 has been received in full.
The Company has entered into a one-year employment agreement with Mr.
Herbert which expires on April 30, 2002. The agreement is automatically renewed
from year to year thereafter unless canceled by Mr. Herbert or the Company. The
Agreement provides for an annual base salary of $125,000 per year effective
March 1, 2000. Mr. Herbert is entitled to receive such bonus or bonuses as the
Board of Directors may award to him. The Agreement requires Mr. Herbert to
devote his full time and attention to the business and affairs of the Company
and obligates him not to engage in any investments or activities which would
compete with the Company during the term of the agreement and for a period of
one year thereafter. The agreement provides that if Mr. Herbert is employed by
the Company on June 30, 2002, the Company will issue to him 40,000 shares of
Common Stock.
Mr. Kolls has entered into a one-year employment agreement with the
Company which expires on April 30, 2002, and is automatically renewed from year
to year thereafter unless canceled by Mr. Kolls or the Company. The agreement
provides for an annual base salary of $120,000 per year effective March 1, 2000.
Mr. Kolls is also entitled to receive such bonus or bonuses as may be awarded to
him by the Board of Directors. The Agreement requires Mr. Kolls to devote his
full time and attention to the business and affairs of the Company, and
obligates him not to engage in any investments or activities which would compete
with the Company during the term of his agreement and for a period of one year
thereafter. The agreement provides that if Mr. Kolls is employed by the Company
on June 30, 2002, the Company will issue to him 40,000 shares of Common Stock.
Mr. Maxwell has entered into an employment agreement with the Company
which expires on June 30, 2002, and is automatically renewed from year to year
thereafter unless cancelled by Mr. Maxwell or the Company. The agreement
provides for an annual base salary of $108,000 per year effective March 1, 2000.
Mr. Maxwell is also entitled to receive such bonus or bonuses as the Board of
Directors may award to him. The Agreement requires Mr. Maxwell 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.
25
Mr. Lawlor has entered into an employment agreement with the Company
which expires on June 30, 2002, and is automatically renewed from year to year
thereafter unless cancelled by Mr. Lawlor or the Company. The agreement provides
for an annual base salary of $100,000 per year effective March 1, 2000. Mr.
Lawlor is also entitled to receive such bonus or bonuses as the Board of
Directors may award to him. The Agreement requires Mr. Lawlor 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.
Director Compensation and Stock Options
Members of the Board of Directors do not currently receive any cash
compensation for serving on the Board of Directors or any Committee thereof.
In July 1993, the Company issued to each of Messrs. Kapourelos,
Sellers, and Van Alen fully vested options to purchase 10,000 shares of Common
Stock at an exercise price of $2.50 per share. In March 1998, the expiration
date of these options was extended from June 30, 1998 to June 30, 2000 and in
April 1998, the exercise price was reduced from $2.50 to $1.50.
In March 1995, the Company issued to Mr. Smith fully vested options to
purchase 10,000 shares of Common Stock, to Mr. Sellers fully vested options to
purchase 5,500 shares of Common Stock, to Mr. Kapourelos fully vested options to
purchase 7,000 shares of Common Stock, and to Mr. Van Alen fully vested options
to purchase 2,500 shares of Common Stock. The exercise price of these options is
$2.50 per share and they must be exercised on or before February 29, 2000. In
April 1998, the exercise price of these options was reduced from $2.50 to $1.50.
In March 1998, the Company extended the expiration date of the
following options to purchase shares of Common Stock from June 30, 1998 to the
close of business on June 30, 2000: Peter G. Kapourelos - 10,000 options;
William W. Sellers - 10,000 options; Keith L. Sterling - 10,000 options; and
William L. Van Alen, Jr. - 10,000 options.
In April 1998, the Company reduced from $2.50 to $1.50 the exercise
price of the following options to purchase Common Stock issued to the following
Directors of the Company: Peter G. Kapourelos - 17,000 options; William W.
Sellers - 15,500 options; William L. Van Alen, Jr. - 12,500 options; and Henry
B. duPont Smith - 10,000 options.
During June and July 1999, the Company granted 10,000 options to each
of the seven Directors who were not executive officers of the Company. Each
option is exercisable at $2.00 per share at any time for five years following
the vesting thereof.
In February 2001, the Board of Directors granted a total of 300,000
options to purchase Common Stock at $1.00 per share to outside members of the
Board. Of these, 120,000 options vested immediately; 90,000 options vested on
June 30, 2001; and 90,000 will vest on June 30, 2002. The options may be
exercised at any time within five years following the vesting.
All of the Common Stock underlying the options held by all Directors
was registered by the Company under the Act, for resale by the holder thereof.
Such registration was at the Company's cost and expense.
26
The Board of Directors is responsible for awarding stock options. Such
awards are made in the subjective discretion of the Board. Other than the
repricing of the options by the Company in April 1998, the exercise price of all
the above options represents on the date of issuance of such options an amount
equal to or in excess of the market value of the Common Stock issuable upon the
exercise of the options. In connection with the April 1998 repricing of stock
options, the exercise prices of all these fully vested options were below the
fair market value on the date or repricing, therefore, the Company recorded a
charge to compensation expense during fiscal year 1998.
All of the foregoing options are non-qualified stock options and not
part of a qualified stock option plan and do not constitute incentive stock
options as such term is defined under Section 422 of the Internal Revenue Code,
as amended, and are not part of an employee stock purchase plan as described in
Section 423 thereunder.
Executive Stock Options
In August 1999, the Company issued to an executive officer fully vested
options to acquire up to 20,000 shares of Common Stock at $2.00 per share. The
options are exercisable at any time within five years following issuance. The
Company issued the options pursuant to the exemption from registration set forth
in Section 4(2) of the Act. The Company registered for resale under the Act the
Common Stock underlying the options.
In November 1999, the Company issued fully vested options to purchase
an aggregate of 90,000 shares of Common Stock to its executive officers as
follows: Stephen P. Herbert - 45,000 options; Haven Brock Kolls - 30,000
options; and Leland Maxwell - 15,000 options. Each option is exercisable at
$2.00 per share at any time within five years following issuance.
In October 2000, the Company issued to George R. Jensen, Jr., fully
vested options to acquire up to 200,000 shares of Common Stock at $1.50 per
share. The options were exercisable at any time within two years following
issuance. In February 2001, the Company extended the expiration date of these
options until June 30, 2003.
In April 2001, the Company issued the following options to purchase an
aggregate of 360,000 shares of Common Stock to its executive officers as
follows: George R. Jensen, Jr. - 100,000; Stephen P. Herbert - 80,000 options;
Haven Brock Kolls - 80,000 options; Leland Maxwell - 50,000 options; and Michael
Lawlor - 50,000 options. Each option is exercisable at $1.00 per share at any
time within five years following vesting. The options vest one-third in October
2001, one-third in July 2002 and the balance in April 2003.
The Board of Directors is responsible for awarding stock options. Such
awards are made in the subjective discretion of the Board. The exercise price of
all the above options represents on the date of issuance of such options an
amount equal to or in excess of the market value of the Common Stock issuable
upon the exercise of the options.
All of the foregoing options are non-qualified stock options and not
part of a qualified stock option plan and do not constitute incentive stock
options as such term is defined under Section 422 of the Internal Revenue Code,
as amended, and are not part of an employee stock purchase plan as described in
Section 423 thereunder.
27
Item 11. Security Ownership of Certain Beneficial Owners and Management
Common Stock
The following table sets forth, as of June 30, 2001, the beneficial
ownership of the Common Stock of each of the Company's directors and executive
officers, as well as by the Company's directors and executive officers as a
group. Except as set forth below, the Company is not aware of any beneficial
owner of more than five percent of the Common Stock. Except as otherwise
indicated, the Company believes that the beneficial owners of the Common Stock
listed below, based on information furnished by such owners, have sole
investment and voting power with respect to such shares, subject to community
property laws where applicable.
Number of Shares
Name and Address of Common Stock Percent
of Beneficial Owner Beneficially Owned(1) of Class(2)
------------------- --------------------- ----------
George R. Jensen, Jr. 755,000 shares(3) 1.90%
517 Legion Road
West Chester, Pennsylvania 19382
Stephen P. Herbert 378,050 shares(4) *
536 West Beach Tree Lane
Strafford, Pennsylvania 19087
Haven Brock Kolls, Jr. 328,850 shares(5) *
1573 Potter Drive
Pottstown, PA 19464
Leland P. Maxwell 137,050 shares(6) *
401 Dartmouth Road
Bryn Mawr, Pennsylvania 19010
Michael K. Lawlor 99,550 shares(7) *
131 Lisa Drive
Paoli, PA 19301
Edwin R. Boynton 140,500 shares(8) *
104 Leighton Drive
Bryn Mawr, Pennsylvania 19010
Steven Katz 45,000 shares(9) *
20 Rebel Run Drive
East Brunswick, New Jersey 08816
Douglas M. Lurio 113,713 shares(10) *
2005 Market Street, Suite 2340
Philadelphia, Pennsylvania 19103
William W. Sellers 519,075 shares(11) 1.31%
394 East Church Road
King of Prussia, Pennsylvania 19406
Henry B. duPont Smith 77,000 shares(12) *
350 Mill Bank Road
Bryn Mawr, Pennsylvania 19010
William L. Van Alen, Jr. 77,500 shares(13) *
Cornerstone Entertainment, Inc.
P.O. Box 727
Edgemont, Pennsylvania 19028
Marconi Online Systems, Inc. 3,000,000 shares(14) 7.55%
120 Interstate North Parkway,
Suite 118
Atlanta, GA 30339
All Directors and Executive Officers
As a Group (11 persons) 2,706,288 shares(15) 6.81%
---------
*Less than one percent (1%)
28
(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, or shares of Common Stock issuable upon
exercise of options currently exercisable, or exercisable within 60 days of June
30, 2001, are deemed to be beneficially owned for purposes hereof.
(2) On June 30, 2001 there were 21,450,755 shares of Common Stock and 555,284
shares of Series A Preferred Stock issued and outstanding. For purposes of
computing the percentages under this table, it is assumed that all shares of
issued and outstanding Preferred Stock have been converted into 555,284 shares
of Common Stock, that all of the options to acquire Common Stock which have been
issued and are fully vested as of June 30, 2001 (or within 60-days of June 30,
2001) have been converted into 4,436,667 shares of Common Stock. For purposes of
computing such percentages it has also been assumed that all of the remaining
Purchase Warrants have been exercised for 8,233,028 shares of Common Stock; that
all of the Senior Notes have been converted into 4,621,200 shares of Common
Stock; and that all of the accrued and unpaid dividends on the Preferred Stock
as of June 30, 2001 have been converted, into 462,115 shares of Common Stock.
Therefore, for purposes of computing the percentages under this table, there are
39,759,049 shares of Common Stock issued and outstanding.
(3) Includes 380,000 shares of Common Stock issuable upon the exercise of
options, 160,000 shares issuable upon conversion of Senior Notes, and 10,000
shares of Common Stock beneficially owned by his spouse. Does not include the
right granted to Mr. Jensen under his Employment Agreement to receive eight
percent (8%) of the issued and outstanding Common Stock upon the occurrence of a
USA Transaction (as defined therein). See "Executive Employment Agreements".
(4) Includes 210,000 shares of Common Stock issuable to Mr. Herbert upon the
exercise of options, and 1,000 shares of Common Stock beneficially owned by his
child.
(5) Includes 170,000 shares of Common Stock issuable to Mr. Kolls upon the
exercise of options, 18,000 shares of Common Stock owned by his spouse, and
24,000 shares issuable to his spouse upon conversion of her Senior Note.
(6) Includes 70,000 shares of Common Stock issuable to Mr. Maxwell upon the
exercise of options.
(7) Includes 50,000 shares of Common Stock issuable to Mr. Lawlor upon exercise
of options.
(8) Includes 5,500 shares of Common Stock issuable upon conversion of the 5,500
shares of Series A Preferred Stock. Includes 45,000 vested shares of Common
Stock issuable upon exercise of options, and 16,000 shares issuable upon
conversion of his Senior Note. Does not include any shares of Common Stock
issuable upon conversion of any accrued and unpaid dividends in the Series A
Preferred Stock.
(9) Includes 45,000 shares of Common Stock issuable upon exercise of options.
(10) Includes 42,213 shares of Common Stock held jointly with Mr. Lurio's
spouse, 45,000 shares of Common Stock issuable upon exercise of options, and
24,000 shares issuable upon conversion of Senior Notes.
(11) Includes 21,245 shares of Common Stock owned by the Sellers Pension Plan of
which Mr. Sellers is a trustee, 4,651 shares of Common Stock owned by Sellers
Process Equipment Company of which he is a Director, and 9,929 shares of Common
Stock owned by Mr. Seller's wife. Includes 60,500 shares of Common Stock
issuable upon exercise of options, 40,000 shares issuable upon conversion of his
Senior Notes.
(12) Includes 12,000 shares of Common Stock issuable upon conversion of the
12,000 shares of Preferred Stock beneficially owned by Mr. Smith. Includes
55,000 shares of Common Stock issuable upon exercise of options. Does not
include any shares of Common Stock issuable upon conversion of any accrued and
unpaid dividends on the Series A Preferred Stock.
29
(13) Includes 57,500 shares of Common Stock issuable to Mr. Van Alen upon
exercise of options.
(14) Pursuant to the Alliance Agreement entered into between Marconi and USA on
April 20, 2001, Marconi had the option to purchase up to 3,000,000 shares of
Common Stock at $1.25 per share at any time through September 5, 2001. The
option expired unexercised on that date.
(15) Includes all shares of Common Stock described in footnotes (2) through (13)
above.
Preferred Stock
The following table sets forth, as of June 30, 2001 the beneficial
ownership of the Preferred Stock by the Company's directors and executive
officers, as well as by the Company's directors and executive officers as a
group. Except as set forth below, the Company is not aware of any beneficial
owner of more than five percent of the Preferred Stock. Except as otherwise
indicated, the Company believes that the beneficial owners of the Preferred
Stock listed below, based on information furnished by such owners, have sole
investment and voting power with respect to such shares, subject to community
property laws where applicable.
Number of Shares
Name and Address of of Preferred Stock Percent
Beneficial Owner Beneficially Owned of Class(l)
------------------- ------------------ -----------
Edwin R. Boynton
104 Leighton Avenue
Bryn Mawr, Pennsylvania 19010 5,500 *
Henry B. duPont Smith
350 Mill Bank Road
Bryn Mawr, Pennsylvania 19010 12,000(2) 2.2%
All Directors and
Executive Officers
As a Group (11 persons) 17,500 3.2%
--------------
*Less than one percent (1%)
(1) There were 555,284 shares of Preferred Stock issued and outstanding as of
June 30, 2001.
(2) Includes 2,000 shares of Preferred Stock held by trusts for the benefit of
Mr. Smith's children of which he is a trustee.
Item 12. Certain Relationships and Related Transactions
On January 21, 1999, Mr. Jensen purchased ten units pursuant to the
Company's private placement offering of Senior Notes for $100,000. In full
payment, Mr. Jensen has agreed to forgo any base salary otherwise payable to him
under his employment agreement during the period of time commencing on April 1,
1999 and ending on June 30, 2000, or such longer period as required. Mr. Jensen
made full payment by June 30, 2000.
In June and July 1999, the Company issued options to purchase an
aggregate of 470,000 shares of Common Stock to its executive officers and an
aggregate of 70,000 shares of Common Stock to its directors who were not
executive officers. Each option is exercisable at $2.00 per share of Common
Stock. See "Management - Director Compensation and Stock Options" and "Executive
Stock Options".
30
In July 1999, the Company extended the expiration dates until June 30,
2001 of the options to acquire Common Stock held by the following directors,
officers, and employees: Adele Hepburn - 77,000 options; H. Brock Kolls - 20,000
options; Henry duPont Smith - 10,000 options; William Sellers - 15,500 options;
Peter Kapourelos - 17,000 otions; and William Van Alen - 12,500 options. All of
the foregoing options would have expired in the first two calendar quarters of
the year 2000 or the first calendar quarter of year 2001. In February, 2001, all
these options were further extended until June 30, 2003, and in addition the
expiration dates of the following additional options were also extended to June
30, 2003: H. Brock Kolls - 20,000 options; Stephen Herbert - 40,000 options;
Michael Lawlor - 3,750 options; George Jensen - 200,000 options.
During the fiscal year ended June 30, 2000 and June 30, 2001, the
Company paid Lurio & Associates, P.C., of which Mr. Lurio is President,
professional fees of approximately $196,000 and $220,000 respectively, for legal
services rendered to the Company by such law firm.
In August 1999, the Company issued to Stephen P. Herbert, President of
the Company, an aggregate of 25,000 shares of Common Stock. Such Common Stock
was issued in exchange for services rendered or to be rendered to the Company by
Mr. Herbert. The shares of Common Stock were valued at $2.00 per share, the
closing bid price on the date of the grant. The Company has registered these
shares under the Act.
In August 1999, the Company issued to Leland P. Maxwell, Chief
Financial Officer of the Company, an aggregate of 10,500 shares of Common Stock.
Such Common Stock was issued in exchange for services rendered or to be rendered
to the Company by Mr. Maxwell. The shares of Common Stock were valued at $2.00
per share, the closing bid price on the date of the grant. The Company has
agreed to register these shares under the Act.
In August 1999, the Company issued to Michael Lawlor, Vice President of
the Company, an aggregate of up to 25,000 shares of Common Stock. Such Common
Stock was issued in exchange for services rendered and to be rendered to the
Company by Mr. Lawlor. The shares of Common Stock were valued at $2.00 per
share, the closing bid price on the date of the grant. The Company has
registered these shares under the Act.
In August 1999, the Company also issued to Mr. Lawlor fully vested
options to acquire up to 20,000 shares of Common Stock at $2.00 per share. The
options are exercisable at any time within five years following issuance. The
Company has agreed to register under the Act the Common Stock underlying the
options for resale by Mr. Lawlor.
In August 1999, the Company issued to Joseph Donahue, Vice President of
the Company, an aggregate of 15,000 shares of Common Stock. Such Common Stock
will be issued in exchange for services to be rendered to the Company by Mr.
Donahue. The shares of Common Stock were valued at $2.00 per share, the closing
bid price on the date of the grant. The Company has agreed to register these
shares under the Act.
In August 1999, the Company issued to each of Stephen Herbert,
President, Leland Maxwell, Chief Financial Officer, and Haven Brock Kolls, Vice
President Research and Development, 2,000 shares of Common Stock. Such Common
Stock was issued in exchange for services rendered or to be rendered to the
Company. The shares of Common Stock were valued at $2.00 per share, the closing
bid price on the date of the grant. The Company has registered these shares
under the Act.
In November 1999, the Company issued fully vested options to purchase
an aggregate of 90,000 shares of Common Stock to its executive officers as
follows: Stephen P. Herbert - 45,000 options; Haven Brock Kolls - 30,000
options; and Leland Maxwell - 15,000 options. Each option is exercised at $2.00
per share of Common Stock at any time within five years following issuance. The
Company has agreed to register the Common Stock underlying these options for
resale under the Act.
31
During February 2000, the Company issued an aggregate of 87,500 shares
of Common Stock to five executive officers: George Jensen - 25,000 shares;
Stephen Herbert - 20,000 shares; Haven Brock Kolls - 20,000 shares; Leland
Maxwell - 12,500 shares; Michael Lawlor - 10,000 shares. Such shares were issued
as a bonus for services rendered and to be rendered for the calendar year 2000.
The shares were valued at $2.00 per share, the closing bid price on the date of
issuance. The Company has registered these shares under the Act.
In February 2000, in connection with his relocation to the
Philadelphia, Pennsylvania area, the Company agreed to pay the costs of
relocation for Michael Lawlor, Vice President of the Company. As of June 30,
2000, a total of approximately $43,000 has been paid for this purpose.
In April, 2000, the Board of Directors authorized the Company to issue
up to 25,000 shares of Common Stock to current or future employees, directors or
consultants as compensation or bonus. Through June 30, 2001, all shares have
been issued.
In October 2000, the Company issued to George R. Jensen, Jr., fully
vested options to acquire up to 200,000 shares of Common Stock at $1.50 per
share. The options were exercisable at any time within two years following
issuance. In February 2001, the Company extended the expiration date of these
options until June 30, 2003.
In February 2001, the Board of Directors granted a total of 300,000
options to purchase Common Stock at $1.00 per share to outside members of the
Board. Of these, 120,000 options vested immediately; 90,000 options vested on
June 30, 2001; and 90,000 will vest on June 30, 2002. The options may be
exercised at any time within five years following the vesting.
In April 2001, the Company issued the following options to purchase an
aggregate of 360,000 shares of Common Stock to its executive officers as
follows: George R. Jensen, Jr. - 100,000; Stephen P. Herbert - 80,000 options;
Haven Brock Kolls - 80,000 options; Leland Maxwell - 50,000 options; and Michael
Lawlor - 50,000 options. Each option is exercisable at $1.00 per share at any
time within five years following vesting. The options vest one-third in October
2001, one-third in July 2002 and the balance in April 2003. The Company also
issued the following shares of Common Stock to its executive officers as
follows: George R. Jensen, Jr. - 125,000 shares; Stephen P. Herbert - 120,000
shares; Haven Brock Kolls - 87,000 shares; Leland Maxwell - 39,500 shares; and
Michael Lawlor - 34,500 shares.
In September 2001, the Company paid a bonus to Adele Hepburn in the
amount of $200,000 consisting of 33.33 units of the 2001-B private placement
offering which closed on September 14, 2001.
32
PART IV
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K
a. Financial Statements filed herewith at Item 7 hereof Include
balance sheets at June 30, 2001 and 2000 and statements of
operations, shareholders' deficit, and cash flows, for the years
ended June 30, 2001 and 2000. All other schedules for which
provision is made in regulation S-B of the Commission are not
required under the related instruction or are not applicable and
therefore have been omitted.
b. During the last quarter of the fiscal year ended June 30, 2001, the
Company filed a Form 8-K on April 24, 2001 and June 4, 2001 (as
updated on September 25, 2001), each reporting an event under
Item 5.
c. The Exhibits filed as part of, or incorporated by reference into
this Form 10-KSB are listed below.
Exhibit
Number Description
-------------------------------------------------------
3.1 Articles of Incorporation of Company filed on January
16, 1992 (Incorporated by reference to Exhibit 3.1 to
Form SB-2 Registration Statement No. 33-70992).
3.1.1 First Amendment to Articles of Incorporation of the
Company filed on July 17, 1992 (Incorporated by
reference to Exhibit 3.1.1 to Form SB-2 Registration
Statement No. 33-70992).
3.1.2 Second Amendment to Articles of Incorporation of the
Company filed on July 27, 1992 (Incorporated by
reference to Exhibit 3.1.2 to Form SB-2 Registration
Statement No. 33-70992).
3.1.3 Third Amendment to Articles of Incorporation of the
Company filed on October 5, 1992 (Incorporated by
reference to Exhibit 3.1.3 to Form SB-2 Registration
Statement No. 33-70992).
33
3.1.4 Fourth Amendment to Articles of Incorporation of the
Company filed on October 18, 1993 (Incorporated by
reference to Exhibit 3.1.4 to Form SB-2 Registration
Statement No. 33-70992).
3.1.5 Fifth Amendment to Articles of Incorporation of the
Company filed on June 7, 1995(Incorporated by Reference
to Exhibit 3.1 to Form SB-2 Registration Statement No.
33-98808).
3.1.6 Sixth Amendment to Articles of Incorporation of the
Company filed on May 1, 1996 (Incorporated by Reference
to Exhibit 3.1.6 to Form SB-2 Registration Statement No.
333-09465).
3.1.7 Seventh Amendment to Articles of Incorporation of the
Company filed on March 24, 1997 (Incorporated by
reference to Exhibit 3.1.7 to Form SB-2 Registration
Statement No. 333-30853).
3.1.8 Eighth Amendment to Articles of Incorporation of the
company filed on July 5, 1998 (Incorporated by reference
to Exhibit 3.1.8 to Form 10-KSB for the fiscal year ended
June 30, 1998).
3.1.9 Ninth Amendment to Articles of Incorporation of the
Company filed on October 1, 1998 (Incorporated by
reference to Exhibit 3.1.9 to Form SB-2 Registration
Statement No. 333-81591).
3.1.10 Tenth Amendment to Articles of Incorporation of the
Company filed on April 12, 1999 (Incorporated by
reference to Exhibit 3.1.10 to Form SB-2 Registration
Statement No. 333-81591).
3.1.11 Eleventh Amendment to Articles of Incorporation of the
Company filed on June 7, 1999 (Incorporated by reference
to Exhibit 3.1.11 to Form SB-2 Registration Statement No.
333-81591).
3.2 By-Laws of the Company (Incorporated by reference to
Exhibit 3.2 to Form SB-2 Registration Statement No.
33-70992).
4.1 Warrant Agreement dated as of June 21, 1995 between the
Company and American Stock Transfer and Trust Company
(Incorporated by reference to Exhibit 4.1 to Form SB-2
Registration Statement N. 33-98808, filed October 31,
1995).
4.2 Form of Warrant Certificate (Incorporated by reference to
Exhibit 4.2 to Form SB-2 Registration Statement, No.
33-98808, filed October 31, 1995).
4.3 1996 Warrant Agreement dated as of May 1, 1996 between
the Company and American Stock Transfer and Trust Company
(Incorporated by reference to Exhibit 4.3 to Form SB-2
Registration Statement No. 333-09465).
4.4 Form of 1996 Warrant Certificate (Incorporated by
reference to Exhibit 4.4 to Form SB-2 Registration
Statement No. 333-09465).
34
4.5 Form of 1997 Warrant (Incorporated by reference to
Exhibit 4.1 to Form SB-2 Registration Statement No.
333-38593, filed February 4, 1998).
4.6 Form of 12% Senior Note (Incorporated by reference to
Exhibit 4.6 to Form SB-2 Registration Statement No.
333-81591).
4.7 Warrant Certificate of I. W. Miller Group, Inc.
(Incorporated by reference to Exhibit 4.7 to Form SB-2
Registration Statement No. 84513).
4.8 Warrant Certificate of Harmonic Research, Inc.
(Incorporated by reference to Exhibit 4.8 to Form SB-2
Registration Statement No. 333-84513).
4.9 Registration Rights Agreement dated August 3, 2001 by and
between the Company and La Jolla Cove Investors, Inc.
4.10 Securities Purchase Agreement dated August 3, 2001
between the Company and La Jolla Cove Investors, Inc.
4.11 Form of Conversion Warrants to be issued by the Company
to La Jolla Cove Investors, Inc.
4.12 $225,000 principal amount 9 3/4% Convertible Debenture
dated August 3, 2001 issued by the Company to La Jolla
Cove Investors, Inc.
4.13 Warrant certificate dated July 11, 2001 from the Company
to La Jolla Cove Investors, Inc.
4.14 August 2, 2001 letter from La Jolla Cove Investors, Inc.
to the Company
10.1 Employment and Non-Competition Agreement between the
Company and Adele Hepburn dated as of January 1, 1993
(Incorporated by reference to Exhibit 10.7 to Form SB-2
Registration Statement No. 33-70992).
10.2 Adele Hepburn Common Stock Options dated as of July 1,
1993 (Incorporated by reference to Exhibit 10.12 to Form
SB-2 Registration Statement No. 33-70992).
10.3 Certificate of Appointment of American Stock Transfer &
Trust Company as Transfer Agent and Registrar dated
October 8, 1993 (Incorporated by reference to Exhibit
10.23 to Form SB-2 Registration Statement No. 33-70992).
10.4 Employment and Non-Competition Agreement between the
Company and H. Brock Kolls dated as of May 1, 1994
(Incorporated by reference to Exhibit 10.32 to Form SB-2
Registration Statement No. 33-70992)
10.4.1 First Amendment to Employment and Non-Competition
Agreement between the Company and H. Brock Kolls dated as
of May 1, 1994 (Incorporated by reference to Exhibit
10.13.1 to Form SB-2 Registration Statement No.
333-09465).
10.4.2 Third Amendment to Employment and Non-Competition
Agreement between the Company and H. Brock Kolls dated
Agreement between the Company and H. Brock Kolls dated
February 22, 2000 (Incorporated by reference to Exhibit
10.3 to Form S-8 Registration Statement No. 333-341006).
35
10.5 H. Brock Kolls Common Stock Options dated as of May 1,
1994 (Incorporated by reference to Exhibit 10.42 to Form
SB-2 Registration Statement No. 33-70992).
10.5.1 H. Brock Kolls Common Stock Options dated as of March 20,
1996 (Incorporated by reference to Exhibit 10.19 to Form
SB-2 Registration Statement No. 33-70992)
10.6 Barry Slawter Common Stock Options dated as of August 25,
1994 (Incorporated by reference to Exhibit 10.43 to Form
SB-2 Registration Statement No. 33-70992).
10.7 Employment and Non-Competition Agreement between the
Company and Michael Lawlor dated June 7, 1996
(Incorporated by reference to Exhibit 10.28 to Form SB-2
Registration Statement No. 333-09465).
10.7.1 First Amendment to Employment and Non-Competition
Agreement between the Company and Michael Lawlor dated
February 22, 2000 (Incorporated by reference to Exhibit
10.5 to Form S-8 Registration Statement No. 333-34106).
10.8 Michael Lawlor Common Stock Option Certificate dated as
of June 7, 1996 (Incorporated by reference to Exhibit
10.29 to Form SB-2 Registration Statement No.333-09465).
10.9 Employment and Non-Competition Agreement between the
Company and Stephen P. Herbert dated April 4, 1996
(Incorporated by reference to Exhibit 10.30 to Form SB-2
Registration Statement No. 333-09465).
10.9.1 First Amendment to Employment and Non-Competition
Agreement between the Company and Stephen P. Herbert
dated February 22, 2000 (Incorporated by reference to
Exhibit 10.2 to Form S-8 Registration Statement No.
333-34106).
10.10 Stephen P. Herbert Common Stock Option Certificate dated
April 4, 1996 (Incorporated by reference to Exhibit 10.31
to Form SB-2 Registration Statement No. 333-09465).
10.11 RAM Group Common Stock Option Certificate dated as of
August 22, 1996 (Incorporated by reference to Exhibit
10.34 to Form SB-2 Registration No. 33-98808).
10.12 RAM Group Common Stock Option Certificate dated as of
November 1, 1996 (Incorporated by reference to Exhibit
10.35 to Form SB-2 Registration No. 33-98808).
10.13 Joseph Donahue Common Stock Option Certificate dated as
of September 2, 1996 (Incorporated by reference to
Exhibit 10.37 to Form SB-2 Registration No. 33-98808).
10.14 Employment and Non-Competition Agreement between the
Company and Leland P. Maxwell dated February 24, 1997
(Incorporated by reference to Exhibit 10.39 to Form SB-2
Registration No. 33-98808)
36
10.14.1 Second Amendment to Employment and Non-Competition
Agreement between the Company and Leland P. Maxwell dated
February 22, 2000 (Incorporated by reference to Exhibit
10.4 to Form S-8 Registration Statement No. 333-34106)
10.15 Leland P. Maxwell Common Stock Option Certificate dated
February 24, 1997 (Incorporated by reference to Exhibit
10.40 to Form SB-2 Registration No. 33-98808).
10.16 Letter between the Company and GEM Advisers, Inc. signed
May 15, 1997 (Incorporated by reference to Exhibit 10.1
to Form 8-K filed on May 22, 1997).
10.17 H. Brock Kolls Common Stock Option Certificate dated as
of June 9, 1997 (Incorporated by reference to Exhibit
10.43 to Form SB-2 Registration Statement 333-30853).
10.18 Stephen Herbert Common Stock Option Certificate dated as
of June 9, 1997 (Incorporated by reference to Exhibit
10.44 to Form SB-2 Registration Statement No. 333-30853).
10.19 Michael Feeney Common Stock Option Certificate dated as
of June 9, 1997 (Incorporated by reference to Exhibit
10.46 to Form SB-2 Registration Statement No. 333-30853).
10.20 Joint Venture Agreement dated September 24, 1997 between
the Company and Mail Boxes Etc. (Incorporated by
reference to Exhibit 10.47 to Form 10-KSB filed on
September 26, 1997).
10.21 Employment and Non-competition Agreement between the
Company and George R. Jensen, Jr. dated November 20, 1997
(Incorporated by reference to Exhibit 10.1 to Form 8-K
filed on November 26, 1997).
10.21.1 First Amendment to Employment and Non-Competition
Agreement between the Company and George R. Jensen, Jr.,
dated as of June 17, 1999.
10.21.2 Second Amendment to Employment and Non-Competition
Agreement between the Company and George R. Jensen, Jr.
dated February 22, 2000 (Incorporated by reference to
Exhibit 10.1 to Form S-8 Registration Statement No.
333-34106).
10.22 Agreement between the Company and Promus Hotels, Inc.
dated May 8, 1997 (incorporated by reference to Exhibit
10.49 to Form SB-2 Registration Statement No. 333-38593,
filed on February 4, 1998).
10.23 Agreement between the Company and Choice Hotels
International, Inc. dated April 24, 1997 (Incorporated by
reference to Exhibit 10.50 to Form SB-2 Registration
Statement No. 333-38593, filed on February 4, 1998).
10.24 Agreement between the Company and PNC Merchant Services
dated July 18, 1997 (Incorporated by reference to Exhibit
10.51 to Form SB-2 Registration Statement No. 333-38593,
filed on February 4, 1998).
37
10.25 Separation Agreement between the Company and Keith L.
Sterling dated April 8, 1998 (Incorporated by reference
to Exhibit to Exhibit 10.1 to Form 10-QSB filed May 12,
1998).
10.26 Phillip A. Harvey Common Stock Option Certificate dated
as of April 22, 1999 (Incorporated by reference to
Exhibit 10.35 to Form SB-2 Registration Statement No.
333-81591).
10.27 Consulting Agreement between Ronald Trahan and the
Company dated November 16, 1998 (incorporated by
Reference to Exhibit 28 to Registration Statement No.
333-67503 on Form S-8 filed on November 18, 1998).
10.28 Consulting Agreement between Mason Sexton and the Company
dated March 10, 1999 (incorporated by reference to
Exhibit 28 to Registration Statement No. 333-74807 on
Form S-8 filed on March 22, 1999).
10.29 Financial Public Relations Agreement between the Company
and I. W. Miller Group, Inc. dated August 1, 1999
(Incorporated by reference to Exhibit 10.38 to Form SB-2
Registration Statement No. 333-84513).
10.30 Consulting Agreement between Harmonic Research, Inc. and
the Company dated August 3, 1999 (Incorporated by
reference to Exhibit 10.39 to Form SB-2 Registration
Statement No. 333-84513).
10.31 Investment Agreement between the Company and Swartz
Private Equity, LLC dated September 15, 2000
(Incorporated by reference to Exhibit 10.1 to Form 8-K
dated September 21, 2000).
10.32 Commitment Warrant issued to Swartz Private Equity LLC
dated August 23, 2000 (Incorporated by reference to
Exhibit 10.2 to Form 8-K dated September 21, 2000).
10.33 Warrant Anti-Dilution Agreement between the Company and
Swartz Private Equity, LLC dated September 15, 2000
(Incorporated by reference to Exhibit 10.3 to Form 8-K
dated September 21, 2000).
10.34 Registration Rights Agreement between the Company and
Swartz Private Equity dated September 15, 2000
(Incorporated by reference to Exhibit 10.4 to Form 8-K
dated September 21, 2000).
10.35 Agreement for Wholesale Financing and Addendum for
Scheduled Payment Plan with IBM Credit Corporation dated
May 6, 1999 (Incorporated by reference to Exhibit 10.40
to Form 10KSB for the fiscal year ended June 30, 1999).
10.36 Agreement dated August 29, 2001 between the Company and
United Taxi Alliance (Incorporated by reference to
Exhibit 10.1 to Form 8-K filed September 25, 2001).
23 Consent of Ernst & Young LLP, Independent Auditors
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
USA TECHNOLOGIES, INC.
By: /s/ George R. Jensen, Jr.
-------------------------------
George R. Jensen, Jr., Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ George R. Jensen, Jr. Chairman of the Board of Directors, September 28, 2001
---------------------------- Chief Executive Officer
George R. Jensen, Jr. (Principal Executive Officer)
/s/ Leland P. Maxwell Vice President and Chief Financial September 28, 2001
---------------------------- Officer (Principal Accounting Officer)
Leland P. Maxwell
/s/ William W. Sellers Director September 28, 2001
----------------------------
William W. Sellers
/s/ Stephen P. Herbert Director September 28, 2001
----------------------------
Stephen P. Herbert
/s/ William L. Van Alen, Jr. Director September 28, 2001
----------------------------
William L. Van Alen, Jr.
/s/ Douglas M. Lurio Director September 28, 2001
--------------------------
Douglas M. Lurio
Director September __, 2001
--------------------------
Steven Katz
Director September __, 2001
--------------------------
Henry B. duPont Smith
Director September __, 2001
--------------------------
Edwin R. Boynton
39