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, 2002 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 . . . .$1,682,701.
As of September 23, 2002, there were outstanding 71,319,789 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 $13,550,760 on September
23, 2002 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 12
3. Legal Proceedings 12
4. Submission of Matters to a Vote of Security Holders 13
PART II
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Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 14
6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
7. Financial Statements 25
8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 26
PART III
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Item 9. Directors and Executive Officers of the Registrant 26
10. Executive Compensation 28
11. Security Ownership of Certain Beneficial Owners
and Management 33
12. Certain Relationships and Related Transactions 36
PART IV
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Item 13. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 37
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,
including wireless payment processing, 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 cashless payment system. At a basic level, the e-Port (TM)
integrates with copiers, vending machines or other host equipment and gathers
information about sales and operations of the host equipment and also allows a
consumer to use a credit card to make a purchase. There are capabilities for
multiple forms of cashless payment processing including "micropayments", control
and data management, and auditing capability for vending operators, kiosk
operators and others wishing to place equipment or products on a network. With
the acquisition of Stitch Networks (see below), the Company has acquired
wireless connectivity in addition to the above capabilities. At an enhanced
level, the e-Port (TM) contains additional capabilities, such as a display
screen which could display interactive advertising/media, and could, with some
additional development, allow simple e-commerce transactions while the consumer
is making routine purchases from the vending machine, whether by using a credit
card, smart card or any other payment device such as a cellular phone, at
vending machines, convenience stores, gas pumps and other retail points-of-sale.
Thus, advertisers could operate virtual electronic storefronts that could
provide consumers with promotional offers at actual retail locations.
As part of its strategy to be a broad provider of network and financial
services, the Company acquired Stitch Networks in May 2002 as a wholly owned
subsidiary. The Company acquired Stitch to strengthen its position as a leading
provider of wireless remote monitoring and cashless and mobile commerce
solutions. Stitch designs and employs embedded connectivity solutions that
enable network servers to monitor and control vending machines and appliances
over the internet. Prior to the acquisition, on December 31, 2000, Stitch
executed a Vending Placement, Supply and Distribution Agreement with Eastman
Kodak Company, Maytag Corporation and Dixie Narco, Inc., which formed a
strategic alliance to market and execute a national vending program for the sale
of one-time use camera and film products. The Agreement provides for an initial
term of three years ending December 31, 2003, with additional provisions for
early termination and extensions as defined. Furthermore, the Agreement also
provides for exclusivity among the parties for the term of the Agreement
relating to the sale of camera and film products from vending machines within
the Continental United States. (See Note 3 to the consolidated financial
statements included herein)
The Company is also a leading provider and licensor of unattended, credit
card activated control systems for the hospitality industry (business centers).
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 the retention of a portion of the monies generated from all
credit card transactions conducted through its control systems.
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 has been approved and recommended as a solution for
business center needs by Marriott for its hotels.
USA Technologies is the 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 or MBE Business Express, at nearly 400 hotel, library and retail
locations nationwide. Business Express and MBE Business Express offer thousands
of business travelers and consumers the unprecedented opportunity to conduct
e-business/e-commerce 24 hours a day with the swipe of a credit card. The
Business Express 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 , 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, 2002, 394 Business Express or MBE Business Express
locations are installed. The Company also markets a product line extension to
the Business Express , called the Business Express 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,
2002, 99 LSS units are included in the total of 394 Business Express or MBE
Business Express locations installed. The Company also sells its TransAct 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 Authorized Reseller Program to sign up various independent and national
dealers and distributors. As of June 30, 2002, 13 dealers are participating in
the program.
As of June 30, 2002, the Company had a total installed base of 1,309
control systems, primarily 727 Business Express control systems, 168 Business
Express Limited Service (LSS) control systems, and 229 standalone TransAct
control systems located at various hospitality locations throughout the United
States and Canada. In addition, there were 157 e-Port (TM) control systems
located at vending locations in the United States and 323 Kodak vending
machines. Through June 30, 2002 total license and transaction fee revenues
received by the Company from these systems, although growing, has not been
sufficient to cover operating expenses.
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.
We have been granted 15 patents related to our technology, and our
wholly owned subsidiary, Stitch Networks, has been granted one. One patent 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 other domestic and
foreign patents are pending.
Currently, the Company has as its core business two key components:
cashless control systems (basically, the hardware); and a financial services and
auditing network. A third future component is a proposed interactive media and
ad serving network.
The first component is our cashless control system, e-Port (TM) , or
its predecessor technology, TransAct. TransAct , as outlined above, is currently
installed in locations throughout North America while e-Port (TM) was unveiled
in October 2000 at the National Automatic Merchandising Association (NAMA)
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, our technology
may be applied in other industries such as copiers, retail point of sale, mass
transit, and wherever pervasive computing, embedded systems and other cashless
payment systems are used. e-Port (TM) technology is 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.
- Audit. The audit only e-Port (TM) is an embedded device that can be
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integrated with existing copiers, vending machines or other 'host'
equipment. The auditing feature would capture supply chain data (units
sold, what sold, price of units sold) and other machine information, and
send the information back to either a customer's network or to the USA
network for reporting.
- Audit/Cashless. This version of e-Port (TM) can, in addition to
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gathering information about the sales and operation in the host equipment
(the auditing portion), allow a user to use a credit card or other cashless
method to make a purchase (as well as cash). 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 audit information. The acquisition of Stitch Networks has added
multiple forms of wireless connectivity to the above capabilities,
including RFID (radio frequency identification) and cell phone.
- Audit/Cashless/Interactive. In addition to the above benefits of network
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control and remote monitoring, increased sales opportunity provided by the
credit cards, and wireless connectivity, this interactive capability
provides potential for revenue generation through interactive advertising
on the LCD screen.
e-Port (TM) features multiple connectivity options. These include the
ability to send and receive data via land lines, radio waves (like a home
cordless phone), wireless modems, and always-on phone connections. 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.
The Company has contracted with two manufacturers for e-Port (TM) .
Masterwork Electronics Corporation, a leader in the manufacture of electronics
for the vending industry, manufactures the version of e-Port (TM) without the
LCD color touch screen. The other manufacturer, RadiSys Corporation, is a leader
in developing and mass-producing embedded systems, and has produced the e-Port
(TM) with the LCD screen and internet and advertising capability. The Company
entered into a Development and Manufacturing Agreement ("DMA") with RadiSys in
June, 2000. RadiSys has significant manufacturing expertise in the embedded chip
market and is partially owned by Intel. This e-Port (TM) client uses programming
developed by IBM simultaneously with IBM's work to enhance the "USAlive" server
network, all of which became available as an integrated package as of April,
2002, offering internet connectivity and screen capability in addition to the
audit and cashless functions.
Our customers' terminals are currently integrated into a network 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 has developed an enhanced network,
which is IP compliant and has wireless capability. The Company anticipates that
an additional $0.5 million may be incurred and expensed for legacy integration
and specific vending machine integration in the first half of fiscal 2003.
The second component involves financial services and auditing. This
capability provides users with auditing capability as well as turnkey credit
card and banking capability.
- USA utilizes a patented method of batch processing in order to conduct
affordable credit card transactions of as little as $1.00.
- USA provides users of the e-Port (TM) and TransAct with the ability to
instantly accept credit cards in an unattended location.
- USA acts as a 'super merchant' for its customers - thereby helping them to
avoid getting certified with credit card processors to do unattended
transactions.
- USA provides all the refunds, payments, and reporting of the credit card
transactions.
- 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. These
ads would be served to a more captive audience than is possible with traditional
web based advertising. The targeting of media via the Company's network may be
possible because the data base could 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, supermarket). The Company has secured a
license from DoubleClick for its advertising software for use in this regard.
For the years ended June 30, 2002 and 2001, the Company has expensed
approximately $1,187,000 and $1,260,000, respectively for the development of its
proprietary technology. These amounts include the expense of outside consultants
and contractors as well as compensation paid to certain of the Company's
employees and is reflected in compensation and general and administrative
expense in the accompanying consolidated financial statements. Through March 31,
2002 the Company had capitalized approximately $5.3 million for the services of
IBM, to program the enhancements to the Company's proprietary "USAlive" server
network and to the e-Port (TM) client. During the fourth quarter of fiscal 2002,
the e-Port (TM) product and related network became available for general release
to the Company's customers. Management performed an evaluation of the commercial
success and preliminary market acceptance of the e-Port (TM) product and network
pursuant to SFAS 121 during the fourth quarter. Accordingly, during the fourth
quarter of fiscal 2002, the Company recorded an impairment charge of
approximately $2.7 million to
reflect the software development costs at its fair value. See Note 2 to the
Consolidated Financial Statements.
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 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, with 27.3
billion credit/debit card transactions in 2001
- 1.7 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. Within this micropayment market, the largest single component
is vending, which is a $40 billion market.
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 nee 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.
CASHLESS PAYMENT PROCESSING
Each of the Company's cashless control systems records and transmits
all transaction data to the Company, which then forwards it to the credit card
processor and related system involving the banks and the credit card companies
such as Visa, MasterCard and American Express. Based on the transaction data,
the payment for services rendered or product purchased is then electronically
transfered to the Company's bank (less various financial charges). The Company
then forwards to the location its agreed upon share of the funds, through check
or EFT. In hospitality, if the Company has sold the business center equipment to
the location, the portion retained by the Company is generally 5% of the gross
revenues. In cases where the Company continues to own the equipment, the portion
retained can be as high as 90% of gross revenues. In the Kodak program, charges
for product have been negotiated to give Stitch a reasonable margin. In addition
the Company charges a fixed monthly management fee which is generally $20-$25
per control system for existing hospitality locations.
PRODUCT LINES
THE E-PORT (TM) FOR VENDING
In general, our wireless vending service enables:
- cashless transactions including credit cards, smart cards, student
Ids, PDAs and cell phones;
- real-time access to monitor inventory, sales, audit (cash and credit)
and machine maintenance via the internet from any PC;
- the potential of an added revenue stream with the LCD color touch
screen for displaying interactive advertising and content.
With the acquisition of Stitch Networks, the Company has acquired vending
business with Eastman Kodak. This consists of locating specially designed Kodak
vending machines in high profile venues across the United States such as
amusement parks, zoos, and sports stadiums. The vending machines dispense
disposable cameras and associated film.
The e-Port (TM) allows a consumer to use a credit card or other forms of
cashless payment to make a purchase, and also gathers information about sales
and operations of the host equipment. Additional capabilities can include
internet connectivity and wireless communications. With some additional effort,
capability for public access electronic commerce and advertising is possible.
THE BUSINESS EXPRESS (R) FOR HOTELS
The hotel/motel hospitality industry has become more competitive as chains
increase efforts to attract the most profitable customer: the business traveler
or conference attendee, who accounts for the majority of hotel occupancy, stays
longer and spends more per visit than the leisure traveler. For these reasons,
hotels have become responsive to the needs of the business traveler. The
Business Express enables a hotel to address some of these needs, while offering
the possibility of generating incremental revenue.
The Business Express utilizes the Company's existing applications for
computers, copiers, and facsimile equipment, and combines them into a branded
product in a functional kiosk type workstation. All devices are cashless,
therefore eliminating the need for an attendant normally required to provide
such services.
Our hotel service enables:
- cashless transactions using credit cards and room cards for payment;
- access to unattended 24/7 business center services for hotel guests;
- access to vending machines for hotel guests with the use of their room
card.
E-SUDS (TM) FOR LAUNDRY
With the acquisition of Stitch Networks, the Company has acquired
additional product line enhancements. One such enhancement is our university
laundry services which enable:
- students to go on-line and check the availability of laundry machines
and receive email or a page when their laundry cycles are complete;
- students to charge the cost of their laundry to their credit card or
student account;
- laundry operators to access inventory, sales, audit and maintenance
via the internet from any PC;
- laundry operators to benefit from additional revenue through the sale
of detergent automatically added to the wash cycle.
MARKETING
As of June 30, 2002, the Company was marketing and selling its products
through its full time staff consisting of six people. The Company is primarily
focused on the vending, hospitality, office equipment and laundry industries,
but has expanded product distribution into new industries, including
transportation and multi-housing.
In the vending industry, the e-Port (TM) is being purchased by soft drink
bottlers and independent vending operators throughout the USA and Canada. On the
soft drink bottler side, heavy effort is being put into securing initial
distribution agreements with the top ten Coke and Pepsi bottlers. The initial
installations of e-Port (TM)s are already complete for a number of bottlers. At
a corporate level, the Dr. Pepper/7-Up Company announced in October 2002 at the
Dr. Pepper National Bottling meeting that it has selected USA Technologies to
make available its cashless payment services in its vending machines throughout
the United States. Dr. Pepper will offer our e-Port (TM) not only to its own
bottlers, but also to Coca-Cola and Pepsi bottlers that distribute Dr. Pepper
products. The Dr. Pepper Company has completed its first implementation of
e-Port (TM) with The Pepsi Cola Bottler of Central Virginia, with numerous
vending machines using e-Port (TM), with a Sprint-enabled wireless solution.
Three of the premier national independent vending operators, Compass,
ARAMARK and Sodexho, have already installed e-Port (TM) in various locations,
with plans for additional purchases based on the success of the initial e-Port
(TM)s. One major vending operator, International Vending Management, has signed
a contract with the Company.
In March 2002, the Company signed an agreement with MEI (Mars Electronics),
a world leader in the manufacturing and supplier of electronic coin mechanisms
and dollar bill acceptors to the vending industry. MEI has agreed to sell and
distribute an MEI branded cashless payment system to be developed by the
Company, as part of its portfolio of vending solutions, which would include a
comprehensive suite of cashless payment services and vending software management
tools. The Company has performed its developmental work, and the combined
offering will be introduced at the fall NAMA in October (the primary annual
vending trade show) with commercial availability planned for early 2003. By
contract, MEI has committed to buy a minimum of 10,000 unit of the USA product
over the course of 24 month agreement or pay the Company $4.00 per unity for any
shortfall. In addition, all MEI payment systems in the field would have the
option to connect to the Company's network and produce recurring revenues.
The Stitch Kodak program continues to install machines, with over 350 units
installed to date, including high profile locations such as Yankee Stadium, Time
Square and Six Flags Amusement Parks. New Kodak machines are being installed
weekly, which collectively represent recurring revenues to the Company from
service fees as well as sales of disposable cameras and film.
The Company continues to work with the top vending machine manufacturers,
including Automatic Products, AMS, U-Select-It, Crane Merchandising Systems,
FastCorp and Dixie Narco, in order to incorporate our e-Port (TM) technology
into vending machines at the factory (OEM); and with authorized resellers,
including Betson Enterprises, HA Franz, Brady Distributing and Weymouth
Distributing. The Company's Vending Machines for the Kodak Program are purchased
from Dixie Narco and the film and cameras are purchased directly from Eastman
Kodak Company. Dixie Narco is a large worldwide manufacturer of vending machines
owned by Maytag Corporation. Maytag Corporation owns Maytag Holdings, Inc., who
is also a shareholder of the Company (see Part III, Item 12).
In October, 2002, the Company signed a Strategic Alliance Agreement with
ZiLOG Corporation, a semiconductor company which is the largest supplier of
microprocessors to the retail point of sale industry. The agreement allows the
Company's proprietary network software (USAlive) to be embedded on a chip
produced by ZiLOG. The Company would license its software to the purchaser and
would receive a license fee. A second revenue stream could be generated when
those who buy the retail point of sales terminals begin to use them, because
they could elect to use the USA network which is embedded on the chip. The
Company believes that these fees could become the primary driver of
profitability for the Company in the intermediate and longer term. The Company
believes that the cost of e-Port (TM) to our customers could decline with this
activity.
In the hospitality industry, Business Express continues to be one of the
premier solutions for automated business centers. The Company has relationships
with two of the most recognized global hotel chains, Marriott and Hilton Hotels.
The addition of e-Port (TM) technology for vending machines located in hotels
now offers a "one-stop shopping" experience to hotels who also have or are
considering purchasing a USA business center. Recently, the Company completed
development of an e-Port (TM) application using hotel room keys, and 40 vending
machines are now operating successfully with such technology at the 1,400 room
Gaylord Palms Resort Hotel in Florida.
In laundry, American Sales Inc. signed a five year agreement to purchase
units of Stitch's e-Suds laundry solution for their university locations in the
Midwest, with initial installations to begin in December. The Agreement provides
that if ASI purchases at least 9,000 units over the contract period, then ASI
shall have exclusive rights to the units in Ohio, Kentucky, Indiana, Michigan
and Marshall University. The Company has additionally begun working with two of
the premier laundry operators, Web Services and the MacGray Company. These two
companies have already implemented the e-Port (TM) solution, with discussions
underway to implement the e-Suds solution.
The Company continues to work with IBM, including recent installations of
its wireless (802.11) e-Port (TM) in prominent hotel vending machines.
PROCUREMENT
The Company's e-Port (TM) has been completed in a mass producible form
factor, by an independent contract manufacturer, RadiSys. 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 additional
manufacturing capability for e-Port (TM).
The Company anticipates obtaining the other components of its business
center (computers, printers, fax and copy machines) through Decision One and
CDW. Orders are regularly placed for expected orders weeks 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 , and the
locations may not order the Business Express , 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 , C3X, TransAct , and Public PC, and has applied for federal
registration of its trademarks Copy Express and e-Port (TM). Through its wholly
owned subsidiary, Stitch Networks, the Company has secured three trademarks:
eVend.Net, eSuds.Net and Stitch Networks.
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, 15 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. 6,152,845 entitled "Credit and Bank Issued Debit
Card Operated System and Method for Controlling a Prepaid Card
Encoding/Dispensing Machine"; U.S. Patent No. 6,321,985B1 entitled "System and
Method for Networking and Controlling Vending Machines"; U.S. Patent No.
D437,890 entitled "Electronic Commerce Terminal Enclosure with a Hooked
Fastening Edge for a Vending Machine"; U.S. Patent No. D441,401 entitled
"Electronic Commerce Terminal Enclosure with brackets". Two foreign patents have
been granted to the Company, Canadian Patent No. D199-1014 entitled "Sign
Holder" and Canadian Patent No. D199-1038 entitled "Laptop Data Port Enclosure".
To date, one United States patent has been issued to its subsidiary, Stitch
Networks: U.S. Patent No. 6,021,626 entitled "Forming, Packaging, Storing,
Displaying and Selling Clothing".
The Company also has 50 pending patent applications.
EMPLOYEES
As of June 30, 2002, the Company had 44 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 $14,000 plus utilities and operating expenses. The lease
expired on June 30, 2002, and subsequently the Company has leased these
facilities on a month to month basis. With the acquisition of Stitch Networks,
the Company acquired 12,225 square feet of rented space in Kennett Square, PA.
The rent is $11,153 per month and the lease expires on March 2005. The Company
is consolidating facilities, and therefore has vacated the rented space in
Kennett Square. For that reason, the Company has accrued for the remaining
payments of the lease of approximately $354,000 as part of the Stitch purchase
price as of June 30, 2002 (see Note 3 to the Consolidated Financial Statements).
The Company is attempting to secure a tenant to sublease the space for the
duration of the lease and is in default under the lease since August, 2002.
Subsequent to June 30, 2002, the Company also signed a lease for 16.5 months for
$4,000 per month for additional space in Malvern, PA for business activities.
ITEM 3. LEGAL PROCEEDINGS
In August 2002, Fieldman Hay & Ullman, LLP(FHU) filed an action against the
Company in the Supreme Court of the State of New York located in the County of
New York. The Complaint alleges that the Company owes FHU the cash sum of
$624,051 for legal services rendered by FHU on behalf of the Company in
connection with litigation involving the Company and Mail Boxes Etc. USA, Inc.
The Company has removed the action to the Federal District Court for the
Southern District of New York and intends to file various preliminary objections
and to assert various defenses to the Complaint, including that FHU agreed to
accept Common Stock of the Company in satisfaction of any amount due and that it
has already satisfied all of its obligations to FHU.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders was held on March 21, 2002.
(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. 28,565,083 577,554
Stephen P. Herbert 28,630,305 512,332
William W. Sellers 28,646,942 495,695
William L. Van Alen, Jr. 28,599,193 543,444
Steven Katz 28,289,461 853,176
Douglas M. Lurio 28,557,533 584,104
Edwin R. Boynton 28,652,342 490,295
(c) In addition to the election of directors, the following
other matters were also voted on and approved at the Annual Meeting:
Ratification of the appointment of Ernst & Young LLP
as independent public accountants for the Company
for its 2002 fiscal year:
Affirmative Votes 28,711,263
Negative Votes 238,280
Abstaining Votes 146,204
Approval of the increase to the number of authorized
shares of Common Stock to 85,000,000:
Affirmative Votes 12,937,523
Negative Votes 1,685,937
Abstaining Votes 252,566
(c) A Special Meeting of Shareholders was held on May 14, 2002.
The following matters were voted on and approved:
Approval of the proposal to amend the By-laws to increase the number of
Directors of the Company to 10:
Affirmative Votes 29,601,608
Negative Votes 822,599
Abstaining Votes 122,816
Approval of the increase to the number of authorized
shares of Common Stock from 85,000,000 to 150,000,000:
Affirmative Votes 13,579,906
Negative Votes 1,169,272
Abstaining Votes 198,985
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
------
2001 HIGH LOW
---- ---- ---
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
2002
----
First Quarter (through September 30, 2001) $ 1.05 $ 0.60
Second Quarter (through December 31, 2001) $ 0.74 $ 0.34
Third Quarter (through March 31, 2002) $ 0.80 $ 0.39
Fourth Quarter (through June 30, 2002) $ 0.41 $ 0.20
Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
At June 30, 2002, there are 5,290,485 shares of Common Stock issuable upon
exercise of outstanding options. The following table shows the number of options
outstanding and their exercise price:
OPTION
OPTIONS OUTSTANDING EXERCISE PRICE
------------------- --------------
2,475,318 $ .165
550,000 $ .40
5,000 $ .50
400,000 $ .70
735,000 $ 1.00
305,000 $ 1.50
651,167 $ 2.00
84,000 $ 2.50
80,000 $ 4.50
5,000 $ 5.00
-------------------
5,290,485 Total
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 or consultants.
As of June 30, 2002, the following Warrants were outstanding:
1,500 1997 Warrants;
2,500 1998-A Warrants;
5,000 1998-B Warrants;
875,000 consultant warrants;
1,580,828 Swartz Private Equity, LLC warrants;
3,971,163 2001-B and C Warrants;
100,000 GEMA Warrants; and
303,829 Warrants associated with Stock for interest.
As of June 30, 2002, 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 the Warrants associated with Stock for
interest).
As of June 30, 2002 there are $10,292,676 face value of Senior Notes
Outstanding which are convertible into 19,038,462 shares of Common Stock, of
these, $5,034,000 are due December 31, 2003, $4,814,593 are due December 31,
2004 and $444,083 are due December 31, 2005.
On June 30, 2002 there were 989 record holders of the Common Stock and 582
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, 2002, such accumulated unpaid
dividends amount to $5,175,571 and an additional $396,962 of dividends accrued
on August 1, 2002.
During fiscal year 2002, certain holders of the Company's Preferred Stock
converted 26,002 shares into 26,002 shares of Common Stock. Certain of these
shareholders also converted cumulative preferred dividends of $268,140 into
26,814 shares of Common Stock.
As of June 30, 2002, there were 529,282 shares of Common Stock issuable
upon conversion of the outstanding Preferred Stock and 517,557 shares issuable
upon the conversion of cumulative Preferred Dividends, which when and if issued
would be freely tradeable under the Act.
During the quarter ended June 30, 2002, the following issuances of Common
Stock were authorized: 11,507 shares from the conversion of Preferred Stock;
12,007 shares from the conversion of cumulative Preferred dividends; 334,168
from the exercise of Warrants; 61,728 shares from the conversion of Convertible
Debentures and 617,280 shares from the related exercise of Warrants; 390,000
shares in exchange for professional services; 300,882 shares in lieu of interest
on the 12% convertible Notes; 1,250,000 shares to Officers as compensation; and
23,637,341 shares issued in connection with the acquisition of Stitch Networks
Corporation (See Note 3 to the Consolidated Financial Statements).
Subsequent to June 30, 2002 and through September 28, 2002, the following
equity activity occurred:
During September 2002, the Company sold 2,000,000 shares of restricted
Common Stock at $.12 per share for aggregate proceeds of $240,000.
The Company had received signed subscription documents for the 2002-A
Private Placement of Senior Notes for $2,103,000, of which $1,694,000 has been
deposited and the remainder of $409,000 was for services.
La Jolla Cove Investors converted Debentures and exercised warrants. The
investor utilized previously remitted funds to the Company which was reflected
as a deposit in the June 30, 2002 consolidated financial statements.
Specifically, La Jolla converted $21,000 of 9 3/4 percent Convertible
Debentures, for which the Company issued 201,227 shares of stock, and exercised
2,012,270 warrants to purchase Common Stock at an average price of $.104 per
share. The Company had previously executed a Securities Purchase Agreement with
La Jolla for the purchase of $225,000 (increased by $100,000 on June 18, 2002)
of Convertible Debentures bearing 9 3/4 percent interest with a maturity date of
August 3, 2003 (extended to August 2, 2004 on June 18, 2002). Interest is
payable by the Company monthly in arrears. The Debenture is convertible at any
time after the earlier of the effectiveness of the registration statement or 90
days following issuance, at the lower of $1.00 per share or 80% (later lowered
to 72%) of the lowest closing bid price of the Common Stock during the 30 days
preceding exercise. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
GENERAL
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and the accompanying notes. Actual results could differ
from those estimates. We believe the following accounting policies include the
estimates that are the most critical and could have the most potential impact on
our results of operations.
REVENUE RECOGNITION
Revenue from the sale of equipment is recognized upon shipment, or if
installation services are purchased, upon installation of the equipment of the
related equipment. License and transaction fee revenue (including transaction
processing revenue) is recognized upon the usage of the Company's credit card
activated control systems. Revenue from the sale of products from the Company's
vending machines is recognized upon the acceptance by the customer of the
products. Monthly fees for the use of vending machines equipped with embedded
Internet connectivity technology is recognized upon usage of the equipment.
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 control system and related network and, accordingly, the Company
commenced capitalization of software development costs related to this product.
Costs capitalized were approximately $2,239,000 and $2,938,000 during the years
ended June 30, 2002 and 2001, respectively. Amortization of software development
costs commence when the product becomes available for general release to
customers. 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 commences when the
product becomes available for general release to it customers. The Company
reviews the unamortized software development costs at each balance sheet date
and, if necessary, will write down the balance to net realizable value if the
unamortized costs exceed the net realizable value of the asset.
During the fourth quarter of fiscal 2002, the e-Port product and related
network became available for general release to the Company's customers.
Management performed an evaluation of the commercial success and preliminary
market acceptance of the e-Port product and network pursuant to SFAS 121 during
the fourth quarter. As a result the Company wrote down to fair value $2,663,000
of software development costs related to the e-Port and the related network.
The unamortized balanced is being amortized over an estimated useful life of
two years. Amortization expense during the year ended June 30, 2002, including
the above impairment adjustment of $2,663,000, was $2,996,000.
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 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, (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
(vii) the ability of the Company to obtain approval of its pending patent
applications; or (viii) the ability of the Company to satisfy its accounts
payable and accrued liabilities. Although the Company believes that the forward
looking statements contained herein are reasonable, it can give no assurance
that the Company's expectations will be met.
INTRODUCTION
The Company has a net loss during the years ended June 30, 2002 and
2001 of $17,314,807 and $10,956,244, respectively, and anticipates incurring
operating losses into fiscal 2003.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 2002:
For the fiscal year ended June 30, 2002, the Company had a net loss of
$17,314,807. The loss applicable to common shares of $18,137,368 or $0.50 loss
per common share (basic and diluted) was derived by adding the $17,314,807 net
loss, the $822,561 of cumulative preferred dividends, and dividing by the
weighted average shares outstanding of 35,994,157.
Revenues for the fiscal year ended June 30, 2002 were $1,682,701
an increase of $231,699 or 16% from the prior year, primarily due to the sales
of Kodak disposable cameras and film from Stitch Networks.
Operating expenses for the fiscal year ended June 30, 2002 were
$16,999,478, representing a $7,378,803 or 77% increase over the prior year. The
primary contributors to this increase were compensation expense, general and
administrative expense and depreciation and amortization expense, as detailed
below.
Cost of sales increased by $102,709 from the prior year, primarily
reflecting the cost of product relating to Stitch Networks Corporation. General
and administrative expenses of $7,989,651 increased by $2,361,637 or 42%. This
increase was due to increased consultant fees of $1,125,724, promotion expense
of $1,574,252 and public relations expenses of $454,812 offset by a decrease in
legal expenses of $992,181, primarily associated with the MBE litigation which
was settled in fiscal year 2001.
Compensation expense was $4,654,662, an increase of $1,687,886 or 57% from
the previous year. The increase was due to an increase in officer stock bonus
expense of $905,624 or 151%. Included in bonus expense was $1,264,135 of
non-cash expense. In addition, compensation expense increased due to an increase
in corporate salaries of $342,921 or 113%, a total of $475,682 of corporate
saleries were non-cash.
Depreciation and amortization expense of $3,436,217 increased by
$3,226,571, which is directly attributable to the non cash amortization of
software development costs. The amortization was primarily due to a $2,663,000
impairment adjustment taken to write down the capitalized costs to fair value
in the 4th quarter of the fiscal year.
Other income and expense increased by $895,459, primarily as a result
of the amortization to interest expense of the beneficial conversion feature of
the 2001-D Convertible Senior Note, which is a non-cash expense.
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 and Business Express Limited Service Series (LSS). Offsetting
this decrease were increases in the sale of the Company's standalone TransAct
control system of $129,000 or 462% and the initial sales of the non-media e-Port
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 and Business Express 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 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.
PLAN OF OPERATIONS
As of June 30, 2002, the Company had a total of 1,632 credit card
terminals installed in the field as follows: Hospitality related, 923
(consisting of Business Express , MBE Business Express, Business Express Limited
Service (LSS), and other); standalone TransAct 229; e-Port 157; and Cash Free
200 (Kodak) 323. Through June 30, 2002 total license and transaction fees earned
by the Company from these systems were $778,906, an increase of $131,589 or 20%
over the prior year.
During the past year the Company has focused on presenting the
multiple capabilities of the e-port by developing several product lines of
e-Port and by the acquisition of Stitch Networks. The "audit plus cashless"
version contains all the functionality for multiple forms of cashless payment
processing including credit card processing, control and data management, plus
the added ability to audit vending product usage and vending machine status.
Through June 30 2002, over 525 units have been sold to distributors, soft drink
bottlers and operators. Additional in-house work continues, to enable the e-Port
to be compatible with the largest feasible portion of the installed base of 8
million vending machines in the United States, many of which have slightly
different connectivity requirements. With the acquisition of Stitch Networks,
the Company has acquired a wireless "audit plus cashless" product line and is
pursuing and securing customers for that product.
An enhanced version of e-Port offers capability for internet and
wireless connectivity, in addition to the capabilities of the audit plus credit
version. For this product, the Company is working with RadiSys, a contract
manufacturer providing value added design, development, fulfillment and product
warranty services.
Concurrent with the above developments to the e-Port product line,
IBM is working with the Company to enhance 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 are
combining their respective products and capabilities to target sales to the
intelligent vending, retail point of sale, and networked home applications
markets. Customers have been identified, and trade shows have been attended.
In the vending industry, the e-Port is being purchased by soft drink
bottlers and independent vending operators throughout the USA and Canada. On the
soft drink bottler side, heavy effort is being put into securing initial
distribution agreements with the top ten Coke and Pepsi bottlers. The initial
installations of e-Ports are already complete for a number of bottlers. At a
corporate level, the Dr. Pepper/7-Up Company announced in October 2002 at the
Dr. Pepper National Bottling meeting that it has selected USA Technologies to
make available its cashless payment services in its vending machines throughout
the United States. Dr. Pepper will offer our e-Port not only to its own
bottlers, but also to Coca-Cola and Pepsi bottlers that distribute Dr. Pepper
products. The Dr. Pepper Company has completed its first implementation of
e-Port with The Pepsi Cola Bottler of Central Virginia, with numerous vending
machines using e-Port, with a Sprint-enabled wireless solution.
Three of the premier national independent vending operators, Compass,
ARAMARK and Sodexho, have already installed e-Port in various locations, with
plans for additional purchases based on the success of the initial e-Ports. One
major vending operator, International Vending Management, has signed a contract
with the Company.
In March 2002, the Company signed an agreement with MEI (Mars Electronics),
a world leader in the manufacturing and supplier of electronic coin mechanisms
and dollar bill acceptors to the vending industry. MEI has agreed to sell and
distribute an MEI branded cashless payment system to be developed by the
Company, as part of its portfolio of vending solutions, which would include a
comprehensive suite of cashless payment services and vending software management
tools. The Company has performed its developmental work, and the combined
offering will be introduced at the fall NAMA in October (the primary annual
vending trade show) with commercial availability planned for early 2003. By
contract, MEI has committed to buy a minimum of 10,000 units of the USA product
over the course of 24 month agreement, or pay the Company $4.00 for each unit
less than 10,000. In addition, all MEI payment systems in the field would have
the option to connect to the Company's network and produce recurring revenues.
The Stitch Kodak program continues to install machines, with over 350 units
installed to date, including high profile locations like Yankee Stadium, Time
Square and Six Flags Amusement Parks. New Kodak machines are being installed
weekly, which collectively represent recurring revenues to the Company from
service fees as well as sales of disposable cameras and film.
The Company continues to work with the top vending machine manufacturers,
including Automatic Products, AMS, U-Select-It, Crane Merchandising Systems,
FastCorp and Dixie Narco, in order to incorporate our e-Port technology into
vending machines at the factory (OEM); and with authorized resellers, including
Betson Enterprises, HA Franz, Brady Distributing and Weymouth Distributing. The
Company's Vending Machines for the Kodak Program are purchased from Dixie Narco
and the film and cameras are purchased directly from Eastman Kodak Company.
In October 2002, the Company signed a Strategic Alliance Agreement
with ZiLOG Corporation, a semiconductor company which is the largest supplier of
microprocessors to the retail point of sale industry. The agreement allows the
Company's proprietary network software (USAlive) to be embedded on a chip
produced by ZiLOG. The Company would license its software to the purchaser and
would receive a fee from the licensing of each such chip. A second revenue
stream could be generated when those who buy the retail point of sales terminals
begin to use them, because they could elect to use the USA network which is
embedded on the chip. The Company believes that these fees could become the
primary driver of profitability for the Company in the intermediate and longer
term. The company believes that the cost of e-Port to our customers could
decline with this activity.
In the hospitality industry, Business Express continues to be one of
the premier solutions for automated business centers. The Company has
relationships with two of the most recognized global hotel chains, Marriott and
Hilton Hotels. The addition of e-Port technology for vending machines located
in hotels now offers a "one-stop shopping" experience to hotels who also have or
are considering purchasing a USA business center. Recently, the Company
completed development of an e-Port application using hotel room keys, and 40
vending machines are now operating successfully with such technology at the
1,400 room Gaylord Palms Resort Hotel in Florida.
In laundry, American Sales Inc. signed a five year agreement to
purchase units of Stitch's e-Suds laundry solution for their university
locations in the Midwest, with initial installations to begin in December. The
agreement provides that if ASI purchases at least 9,000 units over the contract
period, then ASI shall have exclusive rights to the units in Ohio, Kentucky,
Indiana, Michigan and Marshall University. The Company has additionally began
working with two of the premier laundry operators, Web Services and the MacGray
Company. These two companies have already implemented the e-Port solution, with
discussions underway to implement the e-Suds solution.
The Company continues to work with IBM, including a recent
installation of its wireless (802.11) e-Port in a prominent hotel vending
machine.
In September, 2002, the Company signed an Agreement with IBM to host
its network at a remote location which is secure and equipped with 24/7 backup
protection. The Company believes that the security and professionalism of the
hosting arrangement will be a significant factor in assuring customers of the
reliability of the financial and data management services which the Company is
providing.
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal year ended June 30, 2002, the Company completed
several financing transactions. Net proceeds of $3,912,765 were realized from
private placement offerings of Common Stock including the exercise of Common
Stock Purchase Warrants and Options, and net proceeds of $3,944,233 were
realized from private placement offerings of Senior Notes. As of June 30, 2002,
the Company had a working capital deficit of $4,607,486, which included cash and
cash equivalents of $557,970 and inventory of $877,814.
During the fiscal year ended June 30, 2002, net cash of $6,133,766 was
used by operating activities, primarily due to the net loss of $17,314,807
offset by a non-cash charge of $4,532,533 for Common Stock, options and warrants
issued for services; $3,032,479 of non cash amortization primarily to record an
impairment charge of $2,663,000 to reduce such software development costs to
fair value; and $1,513,118 of non-cash amortization of the debt discount
relating to the Senior Notes. During the fiscal year ended June 30, 2002, net
cash used in investing activities was $63,459 principally due to the increase in
software development costs of $2,238,771 relating to the e-Port and associated
network, offset by the cash
acquired in the Stitch acquisition. The net cash provided by financing
activities of $5,937,625 was attributable primarily to net proceeds generated
from the issuance of Common Stock through private placements, exercise of Common
Stock Purchase Warrants, and net proceeds generated through the issuance of 2001
and 2002 Senior Notes, as described in the prior paragraph, offset by the
paydown during June 2002 of $2,165,000 of debt assumed in the Stitch
acquisition.
During fiscal 2003, the Company anticipates expensing additional
expenditures of approximately $0.5 - $1.0 million for enhancements to its
software development on its network.
In June 2002, the Company commenced a private placement offering (the
2002-A offering) of up to $4,000,000 of Convertible Senior Notes. The offering
consists of up to 400 units at $10,000, convertible into Common Shares at $.20
per share. Each noteholder initially was to receive 20,000 Common Stock warrants
for each unit purchased. However, subsequent to June 30, 2002, the offering was
amended to replace the warrants with 20,000 shares of Common Stock for each
unit. 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. The Company has agreed to prepare and file at its
expense a registration statement covering the resale of the shares of Common
Stock. Through September 27, 2002, approximately $1,694,000 has been deposited
and subscription agreements for services of approximately $409,000 have been
received. Mr. Jensen and Mr. Herbert have each subscribed for $100,000 into this
offering, as compensation for services rendered and to be rendered.
During August 2001, the Company issued to La Jolla Cove Investors a
$225,000 (increased by $100,000 on June 18, 2002) 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 the
lower of $1.00 per share or 80% (later lowered to 72%) of the lowest closing bid
price of the Common Stock during the 20 days preceding exercise. La Jolla is
limited to no more than 5% of the investment that is convertible during any
month. 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 filed 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. At June
30, 2002, there were $243,000 Convertible Debentures outstanding with a due date
extended (by Agreement on June 18, 2002) to August 2, 2004. Subsequent to June
30, 2002, La Jolla converted $21,000 of Debentures into 201,227 shares of Common
Stock and exercised Warrants at an average price of approximately $.104 per
share to purchase 2,012,270 shares of Common Stock. The investor utilized money
previously remitted to the Company which was reflected as a liability in the
June 30, 2002 consolidated financial statements.
In connection with the Stitch acquisition (Note 3 to the Consolidated
Financial Statements), the Company assumed long term debt of $3,976,000 which
included a vending equipment borrowing facility and working capital loans. The
Company repaid $2,165,000 of the working capital loans in June 2002. All but
$225,000 of these working capital loans bear interest at a variable rate based
on the bank's prime rate. These loans are secured by the assets of Stitch. At
June 30, 2002 $275,000 of working capital loans are outstanding of which
$225,000, which bears interest at 6.75%, was payable on July 8, 2002 and $50,000
was payable on demand. Subsequent to June 30, 2002, the Company has made
interest only payments to the bank. On July 26, 2002, August 29, 2002 and
September 27, 2002 the bank agreed to extend the due date of these notes until
September 1, 2002, October 1, 2002, and November 1, 2002, respectively. In
connection with this extension, the Company paid $13,000 of fees to the bank.
At June 30, 2002 the Company also has a $1.5 million borrowing
facility available (the Facility) to fund the purchase of vending machines
placed at locations where Kodak film products are sold. Borrowings are made from
time to time under the facility, with repayment schedules set at the time of
each borrowing, including equal monthly payments over 36 months and an interest
rate based upon 495 basis points over the three year U.S. Treasury Notes. The
Company has granted the bank a security interest in the film products vending
machines. Repayment of principal is also insured by a Surety Bond issued by a
third-party insurer in exchange for an initial fee paid by the Company.
Subsequent to June 30, 2002, the Company has not borrowed any additional funds
under this facility.
The Company has incurred losses of $17.3 million and $11.0 million during
each of the fiscal years ending June 30, 2002 and 2001, respectively, and an
accumulated deficit from inception through June 30, 2002 amounting to $53.3
million. At June 30, 2002 the Company's working capital deficit is $4,607,486.
The Company believes that for the year ending June 30, 2003 there could be a
breakeven cash flow from operations; nevertheless, there is no guaranty
this will happen and the possibility exists that 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, 2002 financial statements.
The Company believes that the funds available at June 30, 2002 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
current and perhaps future private placements, and the ability to reduce
anticipated expenditures, if required, will allow the Company to continue as a
going concern.
The Company has scheduled a special meeting of shareholders for October 28, 2002
in order to consider a proposal to increase the authorized shares of Common
Stock from 150,000,000 to 200,000,000 which has been approved by the Board of
Directors.
COMMITMENTS
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 $14,000 plus utilities and operating expenses. The lease
expired on June 30, 2002, and subsequently the Company has leased these
facilities on a month to month basis. With the acquisition of Stitch Networks,
the Company acquired 12,225 square feet of rented space in Kennett Square, PA.
The rent is $11,153 per month and the lease expires on March 2005. The Company
is consolidating facilities, and therefore has vacated the rented space in
Kennett Square. For that reason, the Company has accrued for the remaining
payments of the lease of approximately $354,000 as part of the Stitch purchase
price as of June 30, 2002 (see Note 3 to the Consolidated Financial Statements).
The Company is attempting to secure a tenant to sublease the space for the
duration of the lease and is in default under the lease since August, 2002.
Subsequent to June 30, 2002, the Company also signed a lease for 16.5 months for
$4,000 per month for additional space in Malvern, PA for business activities.
USA Technologies, Inc.
Consolidated Financial Statements
Years ended June 30, 2002 and 2001
Contents
Report of Independent Auditors F-1
Consolidated Financial Statements
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Shareholders' Equity (Deficit) F-4
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
Report of Independent Auditors
USA Technologies, Inc.
Board of Directors and Shareholders
We have audited the accompanying consolidated balance sheets of USA
Technologies, Inc. as of June 30, 2002 and 2001, and the related consolidated
statements of operations, shareholders' equity (deficit), and cash flows for
each of the two years in the period ended June 30, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of USA Technologies,
Inc. at June 30, 2002 and 2001, and the consolidated results of its operations
and its cash flows for each of the two years in the period ended June 30, 2002,
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, continues to
incur losses from operations, has continued to require forebearance agreements
on debt obligations, 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, or the
amounts and classification of liabilities that might result from the outcome of
this uncertainty.
/s/ Ernst & Young, LLP
Philadelphia, Pennsylvania
September 27, 2002
F-1
USA Technologies, Inc.
Consolidated Balance Sheets
June 30
2002 2001
----------------------------
Assets
Current assets:
Cash and cash equivalents $ 557,970 $ 817,570
Accounts receivable, less allowance for uncollectible
accounts of $37,000 and $28,000 in 2002 and 2001,
respectively 340,293 64,752
Inventory 877,814 560,410
Prepaid expenses and other current assets 124,865 428,825
Subscriptions receivable 35,000 29,000
----------------------------
Total current assets 1,935,942 1,900,557
Property and equipment, net 1,932,427 761,324
Software development costs, at cost, less accumulated
amortization of $2,995,979 and $0 in 2002
and 2001, respectively 2,330,207 3,087,415
Goodwill 6,800,827 -
Intangibles, less accumulated amortization of $36,500 2,883,500 -
Other assets 29,117 430,765
----------------------------
Total assets $ 15,912,020 $ 6,180,061
============================
Liabilities and shareholders' equity (deficit)
Current liabilities:
Accounts payable $ 3,081,495 $ 2,607,570
Accrued expenses 2,131,289 1,355,595
Deposits 480,000 -
Current obligations under long term debt 850,644 116,231
Convertible Senior Notes - 211,704
----------------------------
Total current liabilities 6,543,428 4,291,100
Convertible Senior Notes, less current portion 6,289,825 4,236,281
Long term debt, net of current portion 762,085 53,577
Convertible debenture 65,543 -
----------------------------
Total liabilities 13,660,881 8,580,958
Shareholders' equity (deficit):
Preferred Stock, no par value:
Authorized shares-1,800,000
Series A Convertible Preferred-Authorized shares -
900,000
Issued and outstanding shares-529,282 and 555,284 at
June 30, 2002 and 2001, respectively (liquidation
preference of $10,468,391 at June 30, 2002) 3,749,158 3,933,253
Common Stock, no par value:
Authorized shares-150,000,000 and 62,000,000 at
June 30, 2002 and 2001, respectively
Issued and outstanding shares-66,214,188 and
21,450,755 at June 30, 2002 and 2001, respectively 55,443,750 32,977,922
Subscriptions receivable (149,750) -
Deferred compensation - (103,000)
Accumulated deficit (56,792,019) (39,209,072)
----------------------------
Total shareholders' equity (deficit) 2,251,139 (2,400,897)
----------------------------
Total liabilities and shareholders' equity (deficit) $ 15,912,020 $ 6,180,061
============================
See accompanying notes.
F-2
USA Technologies, Inc.
Consolidated Statements of Operations
Year ended June 30
2002 2001
----------------------------
Revenues:
Equipment sales $ 903,795 $ 803,685
License and transaction fees 778,906 647,317
----------------------------
Total revenues 1,682,701 1,451,002
Operating expenses:
Cost of sales 918,948 816,239
General and administrative 7,989,651 5,628,014
Compensation 4,654,662 2,966,776
Depreciation and amortization 3,436,217 209,646
----------------------------
Total operating expenses 16,999,478 9,620,675
----------------------------
(15,316,777) (8,169,673)
Other income (expense):
Interest income 15,791 60,034
Interest expense:
Coupon or stated rate (966,974) (587,769)
Non-cash amortization of debt discount (1,513,118) (764,736)
Less: amounts capitalized 492,658 230,000
----------------------------
Total interest expense (1,987,434) (1,122,505)
Other expense (26,387) (40,100)
----------------------------
Total other income (expense) (1,998,030) (1,102,571)
----------------------------
Loss before cumulative effect of accounting change
and extraordinary item (17,314,807) (9,272,244)
Cumulative effect of accounting change - (821,000)
----------------------------
Loss before extraordinary item (17,314,807) (10,093,244)
Extraordinary loss on exchange of debt - (863,000)
----------------------------
Net loss (17,314,807) (10,956,244)
Cumulative preferred dividends (822,561) (836,541)
----------------------------
Loss applicable to common shares $(18,137,368) $(11,792,785)
============================
Loss per common share (basic and diluted):
Loss before cumulative effect of accounting change
and extraordinary item $ (0.50) $ (0.60)
Cumulative effect of accounting change - (0.05)
Extraordinary loss on exchange of debt - (0.05)
----------------------------
Loss per common share (basic and diluted) $ (0.50) $ (0.70)
============================
Weighted average number of common shares
outstanding (basic and diluted) 35,994,157 16,731,999
============================
See accompanying notes.
F-3
USA Technologies, Inc.
Consolidated Statements of Shareholders' Equity (Deficit)
Series A
Convertible Common Deferred Accumulated
Preferred Stock Stock Compensation Deficit Total
-----------------------------------------------------------------------------
Balance, June 30, 2000 $ 4,012,266 $24,204,050 $ (206,000) $(28,165,798) $ (155,482)
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 stock options to distributor - 420,000 - - 420,000
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 (103,000) (39,209,072) (2,400,897)
F-4
USA Technologies, Inc.
Consolidated Statements of Shareholders' Equity (Deficit)
Series A
Convertible Common Deferred Subscriptions Accumulated
Preferred Stock Stock Compensation Receivable Deficit Total
-------------------------------------------------------------------------------------
Conversion of 26,002 shares of Preferred
stock to 26,002 shares of Common Stock (184,095) 184,095 - - -
Conversion of $268,140 of cumulative
preferred dividends into 26,814 shares of
Common Stock at $10.00 per share 268,140 (268,140)
Issuance of 2,784,134 shares of Common
Stock in exchange for professional services 1,330,944 1,330,944
Issuance of 500,000 Common Stock
Warrants in exchange for professional
services 115,000 115,000
Issuance of 2,340,000 shares of Common
Stock to Officers as compensation 981,000 981,000
Issuance of 200,000 Common Stock Options
in exchange for professional services 66,000 66,000
Issuance of 498,000 shares of Common
Stock from the conversion of $622,500 of
the 2000 12% Senior Notes at $1.25 per
share 622,500 622,500
Exercise of 26,667 Common Stock warrants
at $.50 per share 13,334 13,334
Exercise of 1,806,862 Common Stock
Warrants at $.10 per share 180,687 180,687
Exercise of 500,000 Common Stock
Warrants at $.29 per share, net of offering
costs of $2,100 142,900 142,900
Issuance of 333,678 shares of Common
Stock from the conversion of $82,000 of 9-
3/4% debentures, and the related exercise of
Common Stock Warrants at varying prices
per share to purchase 3,336,780 shares of
Common Stock, net of offering costs of
15,750 886,250 886,250
Issuance of 4,726,040 shares of Common
Stock in connection with the 2001-B Private
Placement, net of offering costs of $259,672 2,754,371 2,754,371
Issuance of 4,046,684 shares of Common
Stock in Connection with the 2001-C Private
Placement, net of offering costs of $84,272 1,992,852 (149,750) 1,843,102
Issuance of 674,431 shares of Common
Stock in lieu of cash payment for interest on
the Convertible Senior Notes and the
issuance of 303,829 warrants 301,856 301,856
Debt discount relating to beneficial
conversion feature on the 2001 12% Senior
Notes 3,742,813 3,742,813
Debt discount relating to beneficial
conversion feature on the $325,000,
9-3/4% Convertible Debenture 325,000 325,000
Issuance of Common Stock in connection
with Stitch acquisition 7,800,323 7,800,323
Issuance of Common Stock Options and
Common Stock Warrants in connection with
Stitch acquisition 729,323 729,323
Compensation expense related to deferred
stock awards 103,000 103,000
Other 28,440 28,440
Net loss (17,314,807) (17,314,807)
----------------------------------------------------------------------------------
Balance, June 30, 2002 $ 3,749,158 $55,443,750 $ - S (149,750) $(56,792,019) $2,251,139
==================================================================================
See accompanying notes
F-5
USA Technologies, Inc.
Consolidated Statements of Cash Flows
Year ended June 30
2002 2001
----------------------------------
Operating activities:
Net loss $(17,314,807) $(10,956,244)
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 4,532,533 859,295
Depreciation 403,738 209,646
Amortization 3,032,479 -
Loss on property and equipment 195,722 -
Interest amortization relating to Senior Notes 1,513,118 764,736
Interest expense on the Senior Notes paid through the issuance of
Common Stock 301,856 114,927
Charges incurred in connection with Senior Notes 1,000,085 -
Changes in operating assets and liabilities:
Accounts receivable (232,653) 538,419
Inventory (36,642) 345,009
Prepaid expenses and other assets 774,845 356,757
Accounts payable (259,627) 1,713,179
Accrued expenses (44,413) 801,352
----------------------------------
Net cash used in operating activities (6,133,766) (3,568,924)
Investing activities:
Cash acquired in connection with Stitch Acquisition, net of financing costs 2,278,229 -
Purchase of property and equipment (102,917) (380,355)
Increase in software development costs (2,238,771) (2,938,111)
----------------------------------
Net cash used in investing activities (63,459) (3,318,466)
Financing activities:
Net proceeds from the issuance of Common Stock and the exercise of
Common Stock Purchase Warrants and Options 3,912,765 4,834,636
Net repayment of long-term debt (2,533,363) (176,053)
Collection of subscriptions receivable 29,000 12,199
Proceeds from the issuance of convertible debenture 325,000 -
Repayment of the Senior Notes (240,000) -
Proceeds received the from deposits for future financings 500,000
Proceeds from issuance of the Senior Notes, net of issuance costs 3,944,223 1,174,818
----------------------------------
Net cash provided by financing activities 5,937,625 5,845,600
----------------------------------
Net decrease in cash and cash equivalents (259,600) (1,041,790)
Cash and cash equivalents at beginning of year 817,570 1,859,360
----------------------------------
Cash and cash equivalents at end of year $ 557,970 $ 817,570
==================================
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 603,312 $ 472,842
==================================
Issuance of Common Stock options to distributor $ - $ 420,000
==================================
Issuance of Common Stock, Common Stock Options and Warrants in
connection with Stitch acquisition $ 8,529,646 $ -
==================================
Conversion of Convertible Preferred Stock to Common Stock $ 184,095 $ 79,013
==================================
Conversion of Cumulative Preferred Dividends to Common Stock $ 268,140 $ 87,030
==================================
Prepaid stock expenses through issuance of Common Stock $ - $ 42,000
==================================
Subscriptions receivable $ 35,000 $ 29,000
==================================
Conversion of Senior Notes to Common Stock $ 622,500 $ 28,024
==================================
Transfer of inventory to property and equipment $ - $ 87,561
==================================
Capital lease obligations incurred $ - $ 118,207
==================================
Beneficial conversion feature related to Senior Notes $ 3,742,813 $ 409,104
==================================
Beneficial conversion feature related to Convertible Debenture $ 325,000 $ -
==================================
See accompanying notes.
F-6
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
1. Business
USA Technologies, Inc., a Pennsylvania corporation (the Company), was
incorporated on January 16, 1992. The Company provides unattended cashless
payment/control systems and associated network and financial services for the
copy, fax, debit card, smart card personal computer, laundry, and vending
industries. The Company's devices make available credit and debit card and other
payment methods in connection with the sale of a variety of products and
services. The Company's customers are principally located in the United States
and are comprised of hotels, chains, consumer package goods companies,
information technology and vending operators. The Company 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 and Business Express Limited Service
(LSS) principally to the hospitality industry. The Business Express and
Business Express Limited Service (LSS) combines the Company's business
applications for computers, copiers and facsimile machines into a business
center unit. The Company has developed its next generation of cashless
control/payment systems (e-Port), which includes capabilities for interactive
multimedia and e-commerce, acceptance of other forms of electronic payments and
remote monitoring of host machine data and is being marketed and sold to
operators, distributors and original equipment manufacturers (OEM) primarily in
the vending industry.
The Company's wholly owned subsidiary, Stitch Networks Corporation (Stitch)
designs and employs embedded connectivity solutions that enable network servers
to monitor and control vending machines and appliances over the internet (Note
3). On December 31, 2000, Stitch executed a Vending Placement, Supply and
Distribution Agreement (the Agreement) with Eastman Kodak Company, Maytag
Corporation and Dixie Narco, Inc., which formed a strategic alliance to market
and execute a national vending program for the sale of one-time use camera and
film products. The Agreement provides for an initial term of three years ending
December 31, 2003, with additional provisions for early termination and
extensions as defined. Furthermore, the Agreement also provides for exclusivity
among the parties for the term of the Agreement relating to the sale of camera
and film products from vending machines within the Continental United States.
F-7
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
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, principally software development costs, goodwill and other
intangibles, that might be necessary should the Company be unable to continue in
existence. The Company has never been profitable, has incurred losses of $17.3
million and $11.0 million during each of the fiscal years ending June 30, 2002
and 2001, respectively, and cumulative losses from its inception through June
30, 2002 amounting to approximately $53.3 million. Losses have continued through
September 2002 and are expected to continue throughout fiscal year 2003.
Additionally, the Company has continued to require forebearance agreements on
debt obligations (Note 8) and is in the process of renegotiating the terms of
the debt. 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.
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Consolidation
The accompanying consolidated financial statements include the accounts of
Stitch. All significant intercompany accounts and transactions have been
eliminated in consolidation.
F-8
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
2. Accounting Policies (continued)
Cash Equivalents
Cash equivalents represent all highly liquid investments with original
maturities of three months or less. Cash equivalents are comprised of a money
market fund and certificates of deposit.
Inventory
Inventory, which principally consists of finished goods, components, and
packaging materials, is stated at the lower of cost (first-in, first-out basis)
or market. The Company maintains a valuation reserve, which reflects the
Company's estimate of the impact on inventory of potential obsolescence, excess
quantities, and declines in market values.
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.
Goodwill and Intangible Assets
Goodwill represents the excess of cost over fair value of the net assets
acquired from Stitch. Intangible assets include patents ($1,870,000) and
trademarks ($1,050,000) acquired in the Stitch acquisition. Amortization of
these intangibles is computed on the straight-line basis over 10 years.
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. Approximately 41% and 12% respectively of the
Company's accounts receivable and revenues for the year ended June 30, 2002 is
concentrated with one customer.
F-9
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
2. Accounting Policies (continued)
Revenue Recognition
Revenue from the sale of equipment is recognized upon shipment, or upon
installation of the equipment if installation services are purchased of the
related equipment. License and transaction fee revenue (including transaction
processing revenue) is recognized upon the usage of the Company's credit card
activated control systems. Revenue from the sale of products from the Company's
vending machines is recognized upon the acceptance by the customer of the
products. Monthly fees for the use of vending machines equipped with embedded
Internet connectivity technology is recognized upon usage of the equipment.
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 product and related network and, accordingly, the Company commenced
capitalization of software development costs related to this product. Costs
capitalized were approximately $2,239,000 and $2,938,000 during the years ended
June 30, 2002 and 2001, respectively. Amortization of software development costs
will commence when the product becomes available for general release to
customers. 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 commences when the
product becomes available for general release to its customers. The Company
reviews the unamortized software development costs at each balance sheet date
and, if necessary, will write down the balance to net realizable value if the
unamortized costs exceed the net realizable value of the asset.
During the fourth quarter of fiscal 2002, the e-Port product and related network
became available for general release to the Company's customers. Management
performed an evaluation of the commercial success and preliminary market
acceptance of the e-Port product and network pursuant to SFAS 121 during the
fourth quarter. As a result the Company wrote down $2,663,000 of software
development costs related to the e-Port and the related network. The unamortized
balanced after the impairment charge is being
F-10
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
2. Accounting Policies (continued)
Software Development Costs (continued)
amortized over an estimated useful life of two years. Amortization expense
during the year ended June 30, 2002, including the above impairment adjustment
of $2,663,000, was $2,996,000.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expense for the years
ended June 30, 2002 and 2001 was approximately $429,000 and $88,000,
respectively.
Research and Development Expenses
Research and development expenses are expensed as incurred. Research and
development expenses, which are included in general and administrative and
compensation expenses in the consolidated statements of operations, were
$1,187,000 and $1,260,000 for the years ended June 30, 2002 and 2001,
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 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 13.
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,
F-11
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
2. Accounting Policies (continued)
Loss Per Common Share (continued)
cumulative preferred dividends or Senior Notes was assumed during fiscal 2002 or
2001 because the assumed exercise of these securities would be antidilutive.
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 included detachable equity
instruments (see Note 10). 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 proscribed 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.
Accordingly, the Company recorded a one-time, noncash charge during fiscal year
2001 of $821,000 to record the cumulative effect of an accounting change as
required by the EITF.
Reclassification
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 $420,000 estimated fair value of the options was amortized as a
reduction of selling, general, and administrative expenses over the term of the
distribution agreement. During the third quarter of fiscal year 2002 and
pursuant to EITF 00-18 Accounting Recognition for
F-12
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
2. Accounting Policies (continued)
Reclassification (continued)
Certain Transactions Involving Equity Instruments Granted to Other Than
Employees, the Company presented the unamortized balance in other assets, and
reclassified the June 30, 2001 balance from a contra-equity account to other
assets for a consistent presentation. As of June 30, 2002, the distribution
agreement is no longer in effect and, accordingly, the Company wrote off the
unamortized balance of $315,000.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable, other
current assets, accounts payable and accrued expenses reported in the
consolidated balance sheets equal or approximate fair value due to their short
maturities. The fair value of the Company's Senior Notes, Debentures, and other
Long-Term Debt approximates book value as such notes are at market rates
currently available to the Company.
Impairment of Long Lived Assets
In accordance with Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of, the Company reviews its property
and equipment and unamortized intangible assets whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. The Company estimates the future cash flows expected to result
from operations and if the sum of the expected undiscounted future cash flows is
less than the carrying amount of the long-lived asset, the Company recognizes an
impairment loss by reducing the unamortized cost of the long-lived asset to its
estimated fair value.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets. Statement 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. Statement 141 also includes guidance on the initial recognition and
measurement of goodwill and other intangible assets arising from business
combinations completed after June 30, 2001. Statement 142 prohibits the
amortization of goodwill and intangible assets with indefinite
F-13
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
2. Accounting Policies (continued)
New Accounting Pronouncements (continued)
useful lives. Statement 142 requires that these assets be reviewed for
impairment at least annually. Intangible assets with finite lives will continue
to be amortized over their estimated useful lives. As Statement 142 is effective
for fiscal years beginning after December 15, 2001, the Company will adopt the
Statement on July 1, 2002. Although the Company did not adopt Statement 142
until fiscal year 2003, the nonamortization provisions of Statement 142 for
combinations initiated after June 30, 2001 are applicable for the Company
effective July 1, 2001.
Under Statement 142 the Company will test goodwill for impairment during fiscal
year 2003 using the two-step process prescribed in Statement 142. The first step
is a screen for potential impairment, while the second step measures the amount
of the impairment, if any. The Company expects to perform the first of the
required impairment tests of goodwill and indefinite lived intangible assets as
of July 1, 2002 in the first quarter of fiscal year 2003. If the first test
indicates a potential impairment, the second phase will be completed to
calculate any actual impairment. Any impairment charge resulting from these
transitional impairment tests will be reflected as the cumulative effect of a
change in accounting principle in the first quarter of fiscal year 2003. The
Company has not yet determined what the effect of these tests will be on the
earnings and financial position of the Company.
The FASB recently issued Statement No. 144, Accounting for the Impairment of
Disposal of Long-Lived Assets, that is applicable to financial statements issued
for fiscal years beginning after December 15, 2001. The FASB's new rules on
asset impairment supersede FASB Statement 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and portions of
APB Opinion 30, Reporting the Results of Operations. This Standard provides a
single accounting model for long-lived assets to be disposed of and
significantly changes the criteria that would have to be met to classify an
asset as held-for-sale. Classification as held-for-sale is an important
distinction since such assets are not depreciated and are stated at the lower of
fair value and carrying amount. This Standard also requires expected future
operating losses from discontinued operations to be displayed in the period in
which the losses are incurred, rather than as of the measurement date as
presently required. The provisions of this Standard are not expected to have a
significant effect on the Company's financial position or results of operations.
F-14
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
3. Acquisition of Stitch Networks Corporation
On May 14, 2002, USA Acquisition Corp., a wholly owned subsidiary of the Company
acquired Stitch pursuant to an Agreement and Plan of Merger by and among the
Company, USA Acquisition Corp., Stitch and the stockholders of Stitch. The
Company acquired Stitch to strengthen its position as a leading provider of
wireless remote monitoring and cashless and mobile commerce solutions. At the
close of the transaction on May 14, 2002, Stitch became a wholly owned
subsidiary of the Company. The acquisition was accounted for using the purchase
method and, accordingly, the results of the operations of Stitch have been
included in the accompanying consolidated statements of operations since the
acquisition date. The purchase price consisted of the issuance of 22,762,341
shares of Common Stock of the Company in exchange for the outstanding shares of
Stitch and the issuance of warrants to purchase up to 7,587,447 shares of Common
Stock of the Company at $.40 per share at any time through June 30, 2002. The
purchase price also included the assumption of outstanding Stitch stock options
that were converted into options to purchase an aggregate of 2,475,318 shares of
the Company's Common Stock at $.165 per share at any time prior to May 14, 2007,
warrants to purchase up to 412,553 shares of the Company's Common Stock at $.40
per share at any time through June 30, 2002 and acquisition related expenses
which included the issuance of 875,000 shares of Common Stock to an investment
banking firm. None of the warrants issued in connection with the acquisition
were exercised as of June 30, 2002. A total of 4,800,000 shares of the Common
Stock issued to the former stockholders of Stitch are being held in escrow to
secure the former stockholder's indemnification obligations under the Agreement
and Plan of Merger. Such shares are subject to cancellation if there is a breach
of the indemnification (as defined). In connection with the acquisition, the
Company's shareholders voted in May of 2002 to increase the number of authorized
shares of Common Stock to 150,000,000.
During June 2002, the Company determined that it would vacate the office space
previously occupied by Stitch. Accordingly, the Company accrued the remaining
lease exit costs relating to this property in the amount of approximately
$354,000 as part of the cost of Stitch. While the Company is attempting to
sublease this space, no provision for recovery has been estimated at this time.
F-15
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
3. Acquisition of Stitch Networks Corporation (continued)
The following table summarizes the preliminary purchase price allocation of the
fair value of the assets and liabilities assumed at the date of acquisition:
Current assets $ 2,710,000
Property and equipment 1,700,000
Goodwill 6,801,000
Intangibles 2,920,000
Current liabilities (1,554,000)
Long-term debt (3,976,000)
-----------------
$ 8,601,000
=================
Long-term debt of $2,165,000 was repaid during June 2002.
Unaudited pro-forma combined results of the Company as if the Company acquired
Stitch on July 1, 2000 and July 1, 2001 are as follows:
Year ended June 30
2002 2001
------------------------------
Revenues $ 2,869,466 $ 1,953,250
Loss before cumulative effect of accounting change and
extraordinary item (19,583,216) (15,058,358)
Cumulative effect of accounting change - (821,000)
------------------------------
Loss before extraordinary item (19,583,216) (15,879,358)
------------------------------
Extraordinary loss on exchange of debt - (863,000)
Net loss (19,583,216) (16,742,358)
------------------------------
Cumulative preferred dividends (822,561) (836,541)
Loss applicable to common shares $ (20,405,777) $(17,578,849)
==============================
Loss before cumulative effect of accounting change and
extraordinary item $ (0.36) $ (0.40)
==============================
Cumulative effect of accounting change $ - $ (0.02)
==============================
Extraordinary loss on exchange of debt $ - $ (0.02)
==============================
Loss per common share (basic and diluted) $ (0.36) $ (0.44)
==============================
Weighted average number of common shares
outstanding (basic and diluted) 56,676,823 40,369,340
==============================
F-16
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
4. Property and Equipment
Property and equipment consist of the following:
Useful June 30
Lives 2002 2001
------------------------------------
Computer equipment and
purchased software 3 years $ 1,855,459 $ 609,775
Vending machines and related
components 7 years 1,050,220 -
Control systems 3 years 982,371 533,055
Furniture and equipment 5-7 years 503,110 190,836
Leasehold improvements Lease term 94,031 90,313
Vehicles 5 years 10,258 10,258
-------------------------
4,495,449 1,434,237
-------------------------
Less accumulated depreciation (2,563,022) (672,913)
-------------------------
$ 1,932,427 $ 761,324
=========================
5. Accrued Expenses
Accrued expenses consist of the following:
June 30
2002 2001
----------------------
Accrued professional fees $ 628,372 $ 439,478
Accrued lease termination payments, net 344,934 -
Accrued other 264,518 31,414
Accrued compensation and related sales commissions 225,917 125,668
Accrued interest 209,885 91,585
Accrued software license and support costs 144,755 154,229
Accrued taxes and filing fees 134,411 -
Accrued product warranty costs 85,827 52,466
Accrued consulting fees 62,480 435,000
Advanced customer billings 30,190 25,755
----------------------
$2,131,289 $1,355,595
======================
F-17
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
6. Related Party Transactions
At June 30, 2002 and 2001, approximately $30,000 and $70,000, 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, 2002 and 2001, the
Company incurred approximately $213,000 and $271,000, respectively, for these
services. During the year ended June 30, 2002, certain Board members
participated in various offerings of debt or equity of the Company for a total
investment of approximately $277,500.
Stitch purchases vending machines from Dixie-Narco, Inc. (Dixie), an affiliate
of a shareholder of the Company. There were no purchases from Dixie for the
period May 14, 2002 to June 30, 2002. Amounts payable to Dixie of $124,333 are
included in accounts payable in the accompanying 2002 consolidated balance
sheet.
7. Commitments
- 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 seven
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.
The employment agreement was extended to June 30, 2004.
- The Company conducts its operations from various facilities under operating
leases. Rent expense under such arrangements was approximately $220,000 and
$188,000 during the years ended June 30, 2002 and 2001, respectively.
Future minimum lease payments are reflected below. During the years ended
June 30, 2002 and 2001, the Company entered into agreements to lease $0 and
$118,207 of computer equipment accounted for as capital leases. This
computer equipment is included in property and equipment in the
accompanying consolidated financial statements. Capital lease amortization
of approximately $54,000 and $34,000 is included in depreciation expense
for the years ended June 30, 2002 and 2001, respectively.
F-18
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
7. Commitments (continued)
Future minimum lease payments subsequent to June 30, 2002 under capital and
noncancelable operating leases are as follows:
Capital Leases Operating Leases
----------------------------------
2003 $ 52,942 $ 155,000
2004 15,960 109,000
2005 1,779 80,000
2006 - 20,000
----------------------------------
Total minimum lease payments 70,681 $ 364,000
=================
Less amount representing interest 7,697
---------------
Present value of net minimum lease payments 62,984
Less current obligations under capital leases 46,300
---------------
Obligations under capital leases, less current portion $ 16,684
===============
8. Long-Term Debt
Long-term debt consists of the following:
June 30
2002 2001
-----------------------
Bank facility $1,255,113 $ -
Working capital loans 275,000 -
IBM inventory financing 19,632 45,785
Capital lease obligations (Note 7) 62,984 124,023
-----------------------
1,612,729 169,808
Less current portion 850,644 116,231
-----------------------
$ 762,085 $ 53,577
=======================
At June 30, 2002 the Company has a $1.5 million bank facility available (the
Facility) to fund the purchase of vending machines placed at locations where
Kodak film products are sold. Borrowings are made from time to time under the
Facility, with repayment schedules set at the time of each borrowing, including
equal monthly payments over 36 months and an interest rate based upon 495 basis
points over the three year U.S. Treasury Notes. The Company has granted the bank
a security interest in the film products vending machines. Repayment of
principal is also insured by a Surety Bond issued by a third-party insurer in
exchange for an initial fee paid by the Company. Subsequent to June 30, 2002,
the Company has not borrowed any additional funds under this Facility.
F-19
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
8. Long-Term Debt (continued)
In connection with the Stitch acquisition (Note 3), the Company assumed long
term debt of $3,976,000 which included a vending equipment borrowing facility
and working capital loans. The Company repaid $2,165,000 of the working capital
loans in June 2002. All but $225,000 of these working capital loans bear
interest at a variable rate based on the bank's prime rate. These loans are
secured by the assets of Stitch. At June 30, 2002 $275,000 of working capital
loans are outstanding of which $225,000, which bears interest at 6.75%, was
payable on July 8, 2002 and $50,000 was payable on demand. Subsequent to June
30, 2002, the Company has made interest only payments to the bank. On July 26,
2002, August 29, 2002 and September 27, 2002 the bank agreed to extend the due
date of these notes until September 1, 2002, October 1, 2002, and November 1,
2002, respectively under several forebearance agreements. In connection
these extensions, the Company paid $13,000 of fees to the bank.
The Company also had an inventory financing arrangement whereby IBM Credit
Corporation originally granted the Company a $1.5 million equipment line of
credit. This arrangement expired in fiscal year 2002. The outstanding balance at
June 30, 2002 and 2001, of $19,632 and $45,785, respectively, 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.
9. Income Taxes
At June 30, 2002 and 2001, the Company had net operating loss carryforwards of
approximately $54,769,000 and $31,234,000, respectively, to offset future
taxable income expiring through approximately 2022. At June 30, 2002 and 2001,
the Company recorded a net deferred tax asset of approximately $20,546,000 and
$12,418,500, respectively, which was principally reduced by a valuation
allowance of the same amount as the realization of the deferred tax asset is not
certain, principally due to the lack of earnings history.
The timing and extent in which the Company can utilize future tax deductions in
any year may be limited by provisions of the Internal Revenue Code regarding
changes in ownership of corporations. Stitch had net operating loss
carryforwards of approximately
F-20
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
9. Income Taxes (continued)
$10,985,000 at the acquisition date. Such net operating loss carryforwards are
limited under these provisions as to the amount available to offset future
taxable income and such limited amounts are reflected below.
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
2002 2001
---------------------------
Deferred tax assets:
Net operating loss carryforwards $ 19,837,000 $ 13,237,000
Compensation expense on stock option re-pricing - 170,500
Deferred research and development costs 480,000 125,000
Software development costs 1,008,000 -
Other 392,000 131,000
---------------------------
21,717,000 13,663,500
Deferred tax liabilities:
Intangibles (1,171,000) -
Software development costs - (1,245,000)
---------------------------
20,546,000 12,418,500
Valuation allowance (20,546,000) (12,418,500)
---------------------------
Deferred tax asset, net $ - $ -
===========================
Amounts assigned to intangibles acquired in the Stitch acquisition exceeded the
tax basis. Such excess will increase taxable income as the Intangibles
(excluding goodwill) are amortized. The net operating loss caryyforwards will be
used to offset the increase in taxable income. Accordingly, the Company recorded
a deferred tax liability of $1,171,000 and a deferred tax asset in the same
amount related to these intangibles at the acquisition date.
10. Senior Notes and Debentures
During June 2002, the Company commenced a $2,500,000 2002-A private placement
offering (subsequently increased to $4,000,000 in September, 2002) consisting of
12% Convertible Senior Notes due December 31, 2005. Each $10,000 Note is
convertible into Common Stock at $.20 per share at any time through June 30,
2004 and interest is payable quarterly. Each Noteholder initially received
20,000 Common Stock warrants, however subsequent to June 30, 2002, the Board of
Directors amended the offering to replace the warrants with 20,000 shares of
Restricted Common Stock. Through June 30, 2002, the Company sold 444.08 units
generating proceeds of $444,083, of which $35,000 is reflected as subscriptions
receivable. Such amounts were collected subsequent to June
F-21
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
10. Senior Notes and Debentures (continued)
30, 2002. The offering was scheduled to terminate June 30, 2002 with extension
possible for up to an additional 60 days. The offering was extended to September
30, 2002, with right of further extension for an additional 30 days. As of
September 27, 2002, the Company had signed subscription agreements for
$2,103,000, of which $1,694,000 was received in cash which has been deposited.
The remainder is for services.
During fiscal year 2002, the Company commenced a $2,500,000 2001-D private
placement offering (later increased to $6,500,000), consisting of 12%
Convertible Senior Notes due December 31, 2004. Each $10,000 Note is convertible
into Common Stock at $.40 per share, and interest is payable quarterly. Certain
stockholders of the Company, who received warrants to purchase Common Stock of
the Company as a part of earlier private placements, were offered the
opportunity to cancel a portion of such warrants and to receive an equivalent
number of new warrants at $.10 expiring on December 31,2002 if they invested in
the 2001-D offering. The original warrants were scheduled to expire December 31,
2001 or March 31, 2002 (according to their original terms) at $.50. The fair
value of the new warrants issued to 2001-D participants was determined using the
Black-Scholes valuation method in the amount of $3,424,000. Such amount was
allocated to equity. The debt discount is being amortized to interest expense
through December 31, 2004. Through June 30, 2002, the Company issued 481.4 units
generating net cash proceeds of $3,906,740. An additional $907,853 of notes were
issued to consultants for services rendered. The 2001-D offering was extended by
the Company to close on October 31, 2002.
During August 2001, the Company executed a Securities Purchase Agreement with an
investment company for the purchase of $225,000 of a 9.75% Convertible Debenture
(the "Debenture") due August 2003. Interest on the Debenture is payable monthly
in arrears. On June 18, 2002, the investment company increased the Debenture by
$100,000, extended the maturity date of the $325,000 to August 2004 and lowered
the conversion rate. The investment company also paid the Company $300,000
towards a future exercise of Common Stock warrants. Of this amount $20,000 was
used during June 2002 to exercise Common Stock warrants. The remaining balance
of $280,000 is reflected in deposits at June 30, 2002.
The Debenture is convertible at a price equal to the lesser of $1.00 or 72% (80%
prior to June 18, 2002) of the lowest closing bid price of the Company's Common
Stock during the 20 day period prior to the conversion. The Company reserves the
right to prepay the portion of the Debenture that the investment company elected
to convert, plus interest, at 150% of such amount, if the price of Common Stock
is less than $0.40 per share. At the time of conversion, the Company will issue
to the holder warrants to purchase an amount
F-22
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
10. Senior Notes and Debentures (continued)
of Common Stock equal to ten times the number of shares issued upon the
conversion of the Debenture. The warrants are exercisable at the same conversion
price as the Debenture. Due to the significance of the beneficial conversion
feature associated with this instrument, the entire $325,000 of proceeds has
been allocated to the warrants, and is included in equity. The debt discount is
being amortized to interest expense over the term of the Debenture. During
fiscal year 2002, the investment company converted $82,000 of the Debenture,
resulting in the issuance of 333,678 shares of Common Stock. The investment
company also exercised warrants resulting in the issuance of 3,336,780 shares of
Common Stock and generating net cash proceeds of $886,250.
During fiscal year 1999, the Company's Board of Directors authorized a private
placement offering (the "1999 Senior Note Offering"). Each unit, as amended,
consisted of a 12% Senior Note in the principal amount of $10,000, maturing on
December 31, 2001, 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) were sold in this
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. During
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 fiscal year 2001, the Company authorized a private placement offering
("2000 Senior Note Offering") of 670 units at a unit price of $10,000. Each unit
consisted of a 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 Senior Note is convertible into Common Stock at $1.25 per share anytime
through its maturity. This offering provided for the holders of the 1999 Senior
Notes to exchange their 1999 Senior 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 specific prices established by the Board
of Directors.
During fiscal year 2001 the Company issued 1,136,300 shares of Common Stock in
connection with the 2000 Senior Notes. 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 equity. The debt
discount is being amortized to interest expense through December 31, 2003.
Through June 30, 2002, $647,500 of such Notes were converted into 518,000 shares
of Common Stock
F-23
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
10. Senior Notes and Debentures (continued)
The Company sold 568.15 units in the 2000 Senior Note Offering 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.
During the years ended June 30, 2002 and 2001, the Company issued 674,431 and
121,541 shares of Common Stock respectively, in lieu of cash payment for
interest on the Senior Notes.
A summary of the various Senior Note activities are as follows:
1999 Senior 2000 Senior 2001 Senior 2002 Senior
Notes Notes Notes Notes
----------------------------------------------------------
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
Converted into Common Stock (622,500)
Repaid at maturity (240,000)
Issued for cash and services 4,814,593 444,083
Less: Unamortized debt discount
and other issuance costs - (750,295) (2,928,567) (323,989)
----------------------------------------------------------
Balance at June 30, 2002 $ - $ 4,283,705 $ 1,886,026 $ 120,094
==========================================================
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
F-24
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
10. Senior Notes and Debentures (continued)
remaining life of the respective debt instruments. Debt discount amortization,
which has been reflected as interest expense in the consolidated statements of
operations, was approximately $1,513,000 and $765,000 for the years ended June
30, 2002 and 2001, respectively.
11. 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, 2002 and 2001 amounted to
$5,175,571 and $4,621,150, respectively. Cumulative unpaid dividends are
convertible into common shares at $10.00 per common share at the option of the
shareholder. During the years ended June 30, 2002 and 2001, certain holders of
the Preferred Stock converted 26,002 and 11,160 shares, respectively, into
26,002 and 11,160 shares of Common Stock, respectively. Certain of these
shareholders also converted cumulative preferred dividends of $268,140 and
$87,030, respectively, into 26,814 and 8,703 shares of Common Stock during the
years ended June 30, 2002 and 2001, 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,
2002. In the event of any liquidation, the holders of shares of Series A
Preferred Stock issued shall be entitled to receive $10.00 for each outstanding
share plus all cumulative unpaid dividends. If funds are insufficient for this
distribution, the assets available will be distributed ratably among the
preferred shareholders.
12. Common Stock Transactions
During the years ended June 30, 2002 and 2001, the Company's Board of Directors
authorized the following private placement offerings of the Company's Common
Stock:
- 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;
- 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;
F-25
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
12. Common Stock Transactions (continued)
- 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. During fiscal year 2002 the Company
issued 4,726,040 shares of Common Stock from this offering generating
additional net proceeds of $2,754,371. 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.
- 2001-C offering for the issuance of 4,500,000 shares of Common Stock
at $.50 per share. In each share purchased the holder received a
warrant to purchase a share of Common Stock at $.50 per share expiring
May 2002. The Company issued 4,046,684 shares of Common Stock
generating net proceeds of $1,992,852 after deducting related offering
costs. Of this amount, $149,750 has not been received, and,
accordingly is reflected in subscriptions receivable at June 30, 2002.
The Company issued 2,784,137 and 200,000 shares of Common Stock for professional
services during the years ended June 30, 2002 and 2001, respectively. Such
shares were valued based on the fair value of the Company's Common Stock on the
date the shares were granted. During the year ended June 30, 2002 and 2001, the
Company also issued 2,340,000 and 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 $981,000 during fiscal
year 2002 and $474,995 during fiscal year 2001 based on the fair value of the
Company's Common Stock on the date the shares were granted.
During fiscal year 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 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.
F-26
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
12. Common Stock Transactions (continued)
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. No purchases were made during the fiscal year
ended June 30, 2002. The agreement was terminated during April 2002.
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 would be issued the
Common Stock if employed by the Company on June 30, 2002. The Company recorded
deferred compensation of $240,000 in connection with these awards. Compensation
expense of $103,000 has been recorded to reflect the amortization of the shares
earned during each of the years ended June 30, 2002 and 2001, respectively. All
officers were employed by the Company as of June 30, 2002.
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 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.
F-27
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
12. Common Stock Transactions (continued)
A summary of Common Stock Warrant activity for the years ending June 30, 2002
and 2001 is as follows:
Warrants
-------------
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
Issued 22,602,593
Exercised (1,833,529)
Cancelled (22,162,272)
-------------
Outstanding at June 30, 2002 6,839,820
=============
The exercise price and exercise dates of outstanding and exercisable warrants
outstanding at June 30, 2002 are as follows:
Outstanding and
Exercisable Exercise Price Expiration Date
-----------------------------------------------------
3,971,163 $ 0.10 December 31, 2002
303,829 0.20 June 30, 2004
150,000 0.70 August 2, 2003
650,000 0.70 November 23, 2003
1,200,000 0.91 August 29, 2010
377,927 1.00 April 24, 2011
2,901 1.03 April 30, 2011
75,000 1.25 June 30, 2006
100,000 2.00 June 22, 2003
1,500 4.00 July 2, 2002
2,500 4.00 March 5, 2003
5,000 4.00 August 17, 2003
----------------
6,839,820
================
During the years ended June 30, 2002 and 2001, the Company's Board of Directors
made numerous amendments to the outstanding Common Stock Warrants whereby the
Company reduced the exercise price and extended the expiration terms. The above
table reflects the status of the warrants as of June 30, 2002.
F-28
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
13. Stock Options
The Company's Board of Directors has granted options to employees and its Board
members to purchase shares of Common Stock at or above fair market value. The
option term and vesting schedule are established by the contract that granted
the option.
The following table summarizes all stock option activity during the years ended
June 30, 2002 and 2001:
Common Shares
Under Options Exercise Price Per
Granted Share
-----------------------------------
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
Granted 4,505,318 $ .165-$.70
Canceled or expired (4,101,500) $ .40-$5.00
-----------------------------------
Balance at June 30, 2002 5,290,485 $ .165-$5.00
===================================
The price range of the outstanding Common Stock options at June 30, 2002 is as
follows:
Weighted Average
Option Remaining Options
Exercise Prices Options Outstanding Contract Life (Yrs.) Exercisable
------------------------------------------------------------------------------
$.165 2,475,318 4.87 2,475,318
$.40 550,000 2.78 550,000
$.50 5,000 0.80 5,000
$.70 400,000 0.97 400,000
$1.00 735,000 4.47 615,002
$1.50 305,000 0.98 305,000
$2.00 651,167 2.48 651,167
$2.50 84,000 0.96 84,000
$4.50 80,000 1.10 80,000
$5.00 5,000 0.17 5,000
------------- ---------------
5,290,485 5,170,487
============= ===============
F-29
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
13. 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
2002 2001
----------------------------
Net loss applicable to common shares as
reported under APB 25 $(18,137,368) $(11,792,785)
Stock option expense per SFAS 123 (985,046) (524,845)
----------------------------
Pro forma net loss $(19,122,414) $(12,317,630)
============================
Loss per common share as reported $ (0.50) $ (.70)
Pro forma net loss per common share $ (0.53) $ (.74)
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 2002 and 2001: an expected life of
2 years; no expected cash dividend payments on Common Stock, respectively; and
for fiscal 2002 a risk-free interest rate of 4.5% to 5.5% and for fiscal 2001,
5.5%, and volatility factors of the expected market price of the Company's
Common Stock, based on historical volatility of .85 to .95 for fiscal 2002, and
1.100 for fiscal 2001.
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-30
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
13. Stock Options (continued)
As of June 30, 2002, the Company has reserved shares of Common Stock for the
following:
Exercise of Common Stock options 5,290,485
Exercise of Common Stock warrants 6,839,820
Conversion of remaining Debentures
and exercise of related warrants 19,038,462
Conversions of Preferred Stock
and cumulative Preferred Stock
dividends 1,046,839
Conversions of Senior Notes 19,172,264
------------
51,387,870
============
14. Retirement Plan
The Company's Savings and Retirement Plan (the Plan) allows employees who have
attained the age of 21 and have completed six months of service to make
voluntary contributions up to a maximum of 15% of their annual compensation, as
defined in the Plan. Through June 30, 2000, the Plan did not provide for any
matching contribution by the Company, however, starting at the beginning of
fiscal year 2001, the Company has amended the Plan to include a Company matching
contribution up to 10% of an employee's compensation. The Company contribution
for the years ended June 30, 2002 and 2001 was approximately $48,000 and
$51,000, respectively.
15. Contingencies
In the normal course of business, various legal actions and claims are pending
or may be instituted or asserted in the future against the Company. The Company
does not believe that the resolution of these matters will have a material
effect on the financial position or results of operations of the Company.
F-31
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 September
30, 2002, together with their ages and business backgrounds are as follows.
Name Age Position(s) Held
---- --- ----------------
George R. Jensen, Jr. 53 Chief Executive Officer,
Chairman of the Board of
Directors
Stephen P. Herbert 39 President, Chief Operating
Officer, Director
Haven Brock Kolls, Jr. 36 Vice President - Research and
Development
Leland P. Maxwell 55 Senior Vice President, Chief
Financial Officer, Treasurer
Michael K. Lawlor 40 Vice-President-Marketing and
Sales
William W. Sellers (1)(2) 80 Director
William L. Van Alen, Jr. (1)(2) 68 Director
Steven Katz (1) 53 Director
Douglas M. Lurio (2) 45 Director
Edwin R. Boynton 47 Director
Kenneth C. Boyle 38 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.
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.
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.
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.
Kenneth C. Boyle joined the Board of Directors in May 2002. Mr. Boyle
is the Vice President & General Manager - eBusiness of the Maytag Corporation.
He leads Maytag's global eBusiness unit, which explores and develops e-commerce
opportunities and Web enabled business models that support profitable growth
across Maytag's business units. He is responsible for all eBusiness efforts at
the corporate level as well as business and brand specific activities at the
operating unit level, inclusive of partnerships and strategy development. Prior
to Maytag, Mr. Boyle served as a director of business development with iXL, a
major global e-consulting firm. He was responsible for developing long-term,
strategic relationships with Global 2000 companies and assisting them with
consulting services to transform their traditional business models by leveraging
Internet technology. Mr. Boyle began his career with Delta Air Lines. His
ten-year career with Delta included management positions in sales and marketing
and founding Delta's e-commerce department. While there he led the development
and implementation of initiatives to drive sales via the Internet,
Internet-connected kiosks, smart card programs and other digital avenues.
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, 2000, June 30, 2001 and June 30, 2002 to each of the executive officers 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, 2000, June 30, 2001 or June 30, 2002 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., 2002 $135,000 $288,000 $80,000 (4)
Chief Executive Officer, 2001 $135,000 $140,000 -- 300,000
2000 $117,500 $0 -- $80,000 (2) 180,000
Stephen P. Herbert, 2002 $125,000 $270,000 $80,000 (4)
President 2001 $125,000 $134,400 -- 80,000
2000 $107,500 $94,000 -- $80,000 (2) 45,000
Leland P. Maxwell, Chief 2002 $110,308 $151,200 --
Financial Officer, Treasurer 2001 $108,000 $44,240 -- 50,000
2000 $99,000 $29,000 -- 15,000
H. Brock Kolls, Senior Vice 2002 $125,769 $180,000 $50,000 (4) 50,000
President, Research & 2001 $120,000 $97,440 -- 80,000
Development 2000 $105,000 $44,000 -- $80,000 (2) 30,000
Michael K. Lawlor, Senior 2002 $103,846 $151,200 --
Vice President, Sales and 2001 $100,000 $38,640 -- 50,000
Marketing 2000 $83,200 $35,500 $43,000 (3) 20,000
Adele H. Hepburn 2002 $91,000 $472,609 --
Director of Investor 2001 $91,000 $171,700 --
Relations 2000 $91,000 $147,800 --
(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. For fiscal year 2002, represents shares of Common
Stock issued to the executive officers valued at $.45 per share, which was
the market value on the date of grant. For Mr. Maxwell and Mr. Lawlor in
2002, the bonus also includes 90,000 shares of Common Stock valued at $.38,
which was the market price on the day of grant. This stock was awarded to
reimburse them for tax payments incurred as a result of the award of a
previous bonus. For Adele Hepburn in fiscal 2002, the bonus includes
$408,267 of non cash compensation, as follows: 435,334 shares of Common
Stock at $.60; 384,334 Warrants at $.10; and 217,668 Warrants at $.50 which
have been exercised into the 2001 - D 12% Senior Notes due December 31,
2003.
(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.
(4) Represents cash payments authorized to reimburse certain executive officers
for tax payments incurred from the award of a previous bonus.
The following table sets forth information regarding stock
options granted during the fiscal year 2002 to the Company's executive officers
named below:
OPTION GRANTS DURING FISCAL YEAR ENDED JUNE 30, 2002
Name Number of Percent of Exercise Expiration
Securities Total Options Price Date
Underlying Granted to Per
Options Employees in Share
Granted Fiscal Year
H. Brock Kolls 50,000 01.5% $0.40 April 15, 2005
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Mr. Jensen
which expires June 30, 2004. The agreement provides for an annual base salary of
$180,000 effective April 15, 2002. Mr. Jensen is entitled to receive such bonus
or bonuses as may be awarded to him by the Board of Directors. In determining
whether to pay such a bonus, the Board would use its subjective discretion. The
Agreement requires Mr. Jensen to devote his full time and attention to the
business and affairs of the Company, and obligates him not to engage in any
investments or activities which would compete with the Company during the term
of the Agreement and for a period of one year thereafter.
The agreement also grants to Mr. Jensen in the event a "USA Transaction"
(as defined below) occurs after the date thereof that number of shares of Common
Stock as shall when issued to him equal five percent (amended first to eight
percent and then reduced in November 2001 to seven 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.
During the year ended June 30, 2002 the Company issued to Mr. Jensen
640,000 shares of fully vested Common Stock as a bonus, and authorized payment
of $80,000 as reimbursement for income taxes payable due to an earlier Company
bonus. By an earlier agreement, Mr. Jensen was awarded 40,000 shares of Common
Stock of as June 30, 2002.
The Company has entered into an employment agreement with Mr. Herbert
which expires on June 30, 2004. The Agreement provides for an annual base salary
of $165,000 per year effective April 15, 2002. Mr. Herbert is entitled to
receive such bonus or bonuses as the Board of Directors may award to him. The
Agreement requires Mr. Herbert to devote his full time and attention to the
business and affairs of the Company and obligates him not to engage in any
investments or activities which would compete with the Company during the term
of the agreement and for a period of one year thereafter. In the year ended June
30, 2002, the Company issued to Mr. Herbert 600,000 shares of fully vested
Common Stock as a bonus, and authorized payment of $80,000 as reimbursement for
income taxes payable due to an earlier Company bonus. By an earlier agreement,
Mr. Herbert was awarded 40,000 shares of Common Stock as of June 30, 2002.
Mr. Kolls has entered into an employment agreement with the Company which
expires on June 30, 2004. The agreement provides for an annual base salary of
$150,000 per year effective April 15, 2002. Mr. Kolls is also entitled to
receive such bonus or bonuses as may be awarded to him by the Board of
Directors. The Agreement requires Mr. Kolls to devote his full time and
attention to the business and affairs of the Company, and obligates him not to
engage in any investments or activities which would compete with the Company
during the term of his agreement and for a period of one year thereafter. In the
fiscal year ended June 30, 2002, the Company issued to Mr. Kolls 400,000 shares
of fully vested Common Stock as a bonus, and authorized payment of $50,000 as
reimbursement for income taxes payable due to an earlier Company bonus. Mr.
Kolls was also granted, effective April 15, 2002, fully vested options to
purchase up to 50,000 shares of Common Stock at $ 0.40. By an earlier agreement,
Mr. Kolls was awarded 40,000 shares of Common Stock as of June 30, 2002.
Mr. Maxwell has entered into an employment agreement with the Company
which expires on June 30, 2003, 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 $120,000 per year effective April 15,
2002. 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. In the fiscal year ended June 30, 2002, the Company issued to Mr.
Maxwell 260,000 shares of fully vested Common Stock as a bonus, and an
additional 90,000 shares of fully vested Common Stock to replace shares sold by
Mr. Maxwell to pay income taxes payable due to an earlier Company bonus.
Mr. Lawlor has entered into an employment agreement with the Company which
expires on June 30, 2003, 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 $120,000 per year effective April 15, 2002. 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. In the fiscal year ended June 30, 2002, the Company issued to Mr.
Lawlor 260,000 shares of fully vested Common Stock as a bonus, and an additional
90,000 shares of fully vested Common Stock to replace shares sold by Mr. Lawlor
to pay income taxes payable due to an earlier Company bonus.
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.
In April 2002, the Board of Directors granted a total of 500,000 options to
purchase Common Stock at $.40 per share to outside directors of the Board, as
compensation for serving the one-year term which commenced March 21, 2002. The
options are fully vested and are exercisable at any time prior to April 12,
2005.
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.
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 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.
In April 2002, the Company issued to Haven Brock Kolls, fully vested
options to acquire up to 50,000 shares of Common Stock at $.40 per share. The
options are exercisable at any time until April, 2005.
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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
COMMON STOCK
The following table sets forth, as of June 30, 2002, 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. 1,150,666 shares(3) *
517 Legion Road
West Chester, Pennsylvania 19382
Stephen P. Herbert 1,031,384 shares(4) *
536 West Beach Tree Lane
Strafford, Pennsylvania 19087
Haven Brock Kolls, Jr. 844,184 shares(5) *
1573 Potter Drive
Pottstown, PA 19464
Leland P. Maxwell 323,384 shares(6) *
401 Dartmouth Road
Bryn Mawr, Pennsylvania 19010
Michael K. Lawlor 392,884 shares(7) *
131 Lisa Drive
Paoli, PA 19301
Edwin R. Boynton 386,750 shares(8) *
104 Leighton Drive
Bryn Mawr, Pennsylvania 19010
Steven Katz 160,000 shares(9) *
20 Rebel Run Drive
East Brunswick, New Jersey 08816
Douglas M. Lurio 381,713 shares(10) *
2005 Market Street, Suite 2340
Philadelphia, Pennsylvania 19103
William W. Sellers 986,577 shares(11) *
394 East Church Road
King of Prussia, Pennsylvania 19406
William L. Van Alen, Jr. 367,501 shares(12) *
Cornerstone Entertainment, Inc.
P.O. Box 727
Edgemont, Pennsylvania 19028
La Jolla Cove Investors, Inc. 22,708,920 shares(13) 19.31%
7817 Herschel Avenue, Suite 200
La Jolla, California 92037
David Goodman 12,653,185 10.76%
31 Springbrook Lane
Newark, Delaware 19711
Maytag Holdings, Inc. 11,128,255 9.46%
403 West Fourth Street North
Newton, Iowa 50208
PA Early Stage 6,568,347 5.59%
435 Devon Park Drive Bldg. 500
Wayne, PA 19087
All Directors and Executive Officers
As a Group (11 persons) 6,045,043 shares(14) 5.14%
---------
*Less than one percent (1%)
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and derives from either voting or
investment power with respect to securities. Shares of Common Stock issuable
upon conversion of the Preferred Stock, or shares of Common Stock issuable upon
exercise of options currently exercisable, or exercisable within 60 days of June
30, 2002, are deemed to be beneficially owned for purposes hereof.
(2) On June 30, 2002 there were 66,214,188 shares of Common Stock and 529,282
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 529,282 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, 2002 (or within 60-days of June 30,
2002) have been converted into 5,290,485 shares of Common Stock. For purposes of
computing such percentages it has also been assumed that all of the remaining
Purchase Warrants have been exercised for 6,839,820 shares of Common Stock; that
all of the Senior Notes have been converted into 19,172,264 shares of Common
Stock; that all of the Convertible Debentures have been converted and related
Warrants have been exercised into 19,038,462 shares of Common Stock; and that
all of the accrued and unpaid dividends on the Preferred Stock as of June 30,
2002 have been converted, into 517,557 shares of Common Stock. Therefore, for
purposes of computing the percentages under this table, there are 117,602,058
shares of Common Stock issued and outstanding.
(3) Includes 446,666 shares of Common Stock issuable upon the exercise of
options, 160,000 shares issuable upon conversion of Senior Notes, and 14,000
shares of Common Stock beneficially owned by his spouse. Does not include the
right granted to Mr. Jensen under his Employment Agreement to receive seven
percent (7%) of the issued and outstanding Common Stock upon the occurrence of a
USA Transaction (as defined herein). See "Executive Employment Agreements".
(4) Includes 263,334 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 273,334 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 103,334 shares of Common Stock issuable to Mr. Maxwell upon the
exercise of options.
(7) Includes 83,334 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 160,000 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 160,000 shares of Common Stock issuable upon exercise of options.
(10) Includes 42,213 shares of Common Stock held jointly with Mr. Lurio's
spouse, 160,000 shares of Common Stock issuable upon exercise of options, and
99,000 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 175,500 shares of Common Stock
issuable upon exercise of options, 100,000 shares of Common Stock issuable upon
exercise of Warrants, and 56,000 shares issuable upon conversion of his Senior
Notes.
(12) Includes 172,500 shares of Common Stock issuable to Mr. Van Alen upon
exercise of options.
(13) Includes 3,670,458 shares of Common Stock owned by La Jolla, and 19,038,462
shares of Common Stock issuable upon conversion of Convertible Debentures and
exercise of related Warrants.
(14) Includes all shares of Common Stock described in footnotes (2) through (12)
above.
PREFERRED STOCK
The following table sets forth, as of June 30, 2002 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 1.0%
All Directors and
Executive Officers
As a Group (11 persons) 5,500 1.0%
--------------
(1) There were 529,282 shares of Preferred Stock issued and outstanding as of
June 30, 2002.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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, 2002 and June 30, 2001, the
Company paid Lurio & Associates, P.C., of which Mr. Lurio is President,
professional fees of approximately $209,000 and $220,000 respectively, for legal
services rendered to the Company by such law firm.
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 November 2001 the Company agreed to issue a bonus in January 2002
to its Executive Officers, consisting of 1,080,000 shares of Common Stock, and
1,080,000 options to purchase Common stock at $.40 per share. In January 2002
the Company issued the 1,080,000 shares. In April 2002 the Company issued
1,080,000 shares of Common Stock to its Executive Officers as a bonus in lieu of
the previously granted options, and cancelled these options.
In April 2002, the Company: 1) issued to Haven Brock Kolls, fully
vested options to acquire up to 50,000 shares of Common Stock at $.40 per share.
The options are exercisable at any time until April, 2005; (2) granted a total
of 500,000 options to purchase Common Stock at $.40 per share to outside
directors of the Board, as compensation for serving the one-year term which
commenced March 21, 2002. The options are fully vested and are exercisable at
any time prior to April 12, 2005; (3) authorized $80,000 each to George R.
Jensen and Stephen P. Herbert and $50,000 to Haven Brock Kolls as reimbursement
for taxes paid as a result of the award of a previous bonus; and (4) authorized
90,000 shares of stock each to Leland P. Maxwell and Michael Lawlor as
reimbursement for taxes paid as a result of the award of a previous bonus.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. Consolidated Financial Statements filed herewith at Item 7 hereof include
consolidated balance sheets at June 30, 2002 and 2001 and consolidated
statements of operations, shareholders' equity (deficit), and consolidated
cash flows, for the years ended June 30, 2002 and 2001. 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 first quarter of the fiscal year ending June 30, 2002, the
Company filed a Form 8-K on July 29, 2002 reporting an event under Item 2
and Item 7.
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).
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).
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 % 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.
4.15 Subscription Agreement dated October 26, 2001 by and between the
Company and Ratner & Prestia, P.C. (incorporated by
reference to Exhibit 4.15 to Form SB-2 Registration
Statement No. 333-72302).
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).
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).
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).
10.25 Separation Agreement between the Company and Keith L.
Sterling dated April 8, 1998 (Incorporated by reference
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 and Plan of Merger dated April 10, 2002, by and among the
Company, USA Acquisitions, Inc., Stitch Networks
Corporation, David H. Goodman, Pennsylvania Early Stage
Partners, L.P., and Maytag Holdings, Inc. (Incorporated
by reference to Exhibit 2.1 to Form 10-QSB for the
quarter ended March 31, 2002).
..
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.
/s/ George R. Jensen, Jr.
By: _______________________________
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, October 15, 2002
------------------------- Chief Executive Officer
George R. Jensen, Jr. (Principal Executive Officer)
/s/ Leland P. Maxwell Vice President and Chief Financial October 15, 2002
-------------------------- Officer (Principal Accounting Officer)
Leland P. Maxwell
/s/ William W. Sellers Director October 15, 2002
--------------------------
William W. Sellers
/s/ Stephen P. Herbert Director October 15, 2002
--------------------------
Stephen P. Herbert
/s/ William L. Van Alen, Jr. Director October 15, 2002
-------------------------------------
William L. Van Alen, Jr.
/s/ Douglas M. Lurio Director October 15, 2002
--------------------------
Douglas M. Lurio
Director October __, 2002
--------------------------
Steven Katz
Director October __, 2002
--------------------------
Kenneth C. Boyle
Director October __, 2002
--------------------------
Edwin R. Boynton
CERTIFICATION
I, George R. Jensen, Jr., certify that:
1. I have reviewed the Registrant's Form 10-KSB annual report for the year
ended June 30, 2002;
2. Based on my knowledge, this annual report does not contain any untrue
statement of material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the time period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report.
By: /s/ George R. Jensen, Jr.
-----------------------------
Name: George R. Jensen, Jr.
Title: Principal Executive Officer
CERTIFICATION
I, Leland P. Maxwell, certify that:
1. I have reviewed the Registrant's Form 10-KSB annual report for the year
ended June 30, 2002;
2. Based on my knowledge, this annual report does not contain any untrue
statement of material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the time period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report.
By: /s/ Leland P. Maxwell
-----------------------------
Name: Leland P. Maxwell
Title: Principal Financial Officer