PROSPECTUS
USA TECHNOLOGIES, INC.
8,553,925 shares of Common Stock
THE OFFERING
The resale of up to 8,553,925 shares of common stock in the over-the-
counter market at the prevailing market price or in negotiated transactions.
We will receive no proceeds from the sale of the shares by the selling
shareholders. However, we will receive proceeds from the sale of shares issuable
upon the exercise of warrants or options by the selling shareholders. Also, the
proceeds of sales of some of the shares will be applied against our debt
obligations. Because the selling shareholders will offer and sell the shares at
various times, we have not included in this prospectus information about the
price to the public of the shares or the proceeds to the selling shareholders.
Our common stock is included for quotation on the over-the-counter
bulletin board under the symbol "USTT." The closing bid price for the common
stock on April 8, 2002 was $.40 per share.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
PURCHASE SHARES ONLY IF YOU CAN AFFORD A COMPLETE LOSS.
Please refer to Risk Factors beginning on Page 4.
Neither the SEC nor any state securities commission has approved or
disapproved of the securities or passed on the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal offense.
The date of this prospectus is April 11, 2002.
No person has been authorized to give any information or to make any
representations other than those contained in this prospectus and, if given or
made, such information or representation must not be relied upon as having been
authorized. This prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities other than the securities to
which the prospectus relates or an offer to sell or the solicitation of an offer
to buy such securities in any circumstances in which such offer or solicitation
is unlawful. Neither the delivery of this prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of USA since the date hereof or that the information
contained herein is current as of any time subsequent to its date.
TABLE OF CONTENTS
Prospectus Summary ....................................................... 1
Risk Factors ............................................................. 4
Use of Proceeds .......................................................... 12
Managements Discussion And Analysis of
Financial Condition And Results
of Operations .......................................................... 13
Business ................................................................. 19
Management ............................................................... 29
Principal Shareholders ................................................... 37
Certain Transactions ..................................................... 40
Selling Shareholders ..................................................... 43
Market for Common Stock .................................................. 98
Description of Securities ................................................ 100
Plan of Distribution ..................................................... 112
Legal Matters ............................................................ 113
Experts .................................................................. 113
Financial Statements ..................................................... F-1
PROSPECTUS SUMMARY
OUR COMPANY
USA Technologies, Inc. was incorporated in Pennsylvania in 1992. We are
an owner and licensor of automated, credit card activated control systems for
use in connection with copying machines, debit card purchase/revalue stations,
facsimile machines, personal computers, computer printers, and vending machines.
Our customers are hotels, university libraries, public libraries, vending
machine operators and retail locations. We generate revenues primarily from the
sale of equipment utilizing our control systems, from retaining a percentage of
the revenues generated from all credit card transactions conducted through our
control systems, and from monthly administrative fees paid by various locations
utilizing our control systems.
OUR PRODUCT
The control systems we have developed which are used in a variety of
products operate as follows:
o The consumer swipes a valid credit card through the control
system.
o The control system transmits the request to the credit card
processor.
o The credit card processor verifies that the credit card is valid
and authorizes the transaction.
o The control system activates the equipment for use by the
consumer.
o Once the consumer finishes using the equipment, the control system
transmits a record of the transaction to the credit card
processor.
o The credit card processor electronically transfers the proceeds
derived from the transaction, less the credit card processor's
charge, to us.
o Finally, we forward money (check or electronic) to each location
representing its share of the proceeds.
1
As of January 30, 2002 we had 1,222 hospitality related control systems
installed in the field as follows:
o 819 Business Express(R) or MBE Business Express(R) control
systems;
o 175 Business Express(R) Limited Service control systems;
o 20 Copy Express(TM) control systems;
o 7 Debit Express(TM) control systems;
o 4 Fax/Printer Express(TM) control systems;
o 3 Public PC(TM) control systems; and
o 194 TransAct(TM) control systems.
In addition, we have shipped and billed 441 non-media e-Port(TM)
control systems as of January 30, 2002, of which approximately 100 have been
installed at vending locations in the United States.
Our executive offices are located at 200 Plant Avenue, Wayne,
Pennsylvania 19087. Our telephone number is (610) 989-0340. Our website is
located at http://www.usatech.com.
KEY FACTS
Shares being offered for resale
to the public: 8,553,925
Total shares of common stock outstanding prior
to the offering, as of January 30, 2002: 35,399,300 (includes
none of the shares being
offered for resale)
Total shares of common stock outstanding after
the offering and exercise of all options/warrants: 72,549,487 (includes
shares issuable
subsequent to
January 30, 2002
and prior to the
date hereof)
Price per share to the public Market price at time
of resale
Total proceeds raised by offering None, however, proceeds
may be received from the
selling shareholders
from the exercise of the
warrants and options
2
ABOUT OUR SELLING SHAREHOLDERS
The selling shareholders are either holders of our common stock or hold
options or warrants to buy our common stock. The selling shareholders will
either sell our stock in the open market, place our stock through negotiated
transactions with other investors, or hold our stock in their own portfolio.
This prospectus covers the resale of our stock by the selling shareholders (or
their respective pledgees, donees, transferees or other successors in interest)
either in the open market or to other investors.
3
RISK FACTORS
An investment in our common stock is very risky. You should be aware
that you could lose the entire amount of your investment. Prior to making an
investment decision, you should carefully consider the following risk factors
and the other information contained in this prospectus.
1. We have a history of losses and our existence may be dependent on
our ability to raise capital (which may not be readily available)
and generate sufficient revenue from operations.
We have experienced losses since inception. We expect to continue to
incur losses through fiscal 2002 as we expend substantial resources on sales,
marketing, and research and development of our products. From our inception over
eight years ago through June 30, 2001, we have incurred net losses of $36
million. For our fiscal years ended June 30, 2001 and 2000, we have incurred net
losses of $10,956,244 and $8,404,481, respectively.
There is currently no basis upon which to assume that our business will
prove financially profitable or generate more than nominal revenues. From
inception, we have generated funds primarily through the sale of securities.
There can be no assurances that we will be able to continue to sell additional
securities. If we fail to generate increased revenues or fail to sell additional
securities you may lose all or a substantial portion of your investment.
Our auditors, Ernst and Young, LLP, have included an explanatory
paragraph in their report on our June 30, 2001 financial statements indicating
that as of June 30, 2001, there is substantial doubt about our ability to
continue as a going concern. Subsequent to June 30, 2001 we have sold additional
securities pursuant to our 2001-B, 2001-C and 2001-D private placement offerings
as well as issuing the convertible debenture and warrants to a private placement
investment company. However, it is possible that in the future our capital
expenditures and operating losses will limit our ability to pay our liabilities
in the normal course of business and that we may not be able to continue as a
going concern.
4
2. We depend on our key personnel.
We are dependent on key management personnel, particularly the Chairman
and Chief Executive Officer, George R. Jensen, Jr. The loss of services of Mr.
Jensen or other executive officers would dramatically affect our business
prospects. Certain of our employees are particularly valuable to us because:
o they have specialized knowledge about our company and operations;
o they have specialized skills that are important to our operations;
or
o they would be particularly difficult to replace.
We have entered into an employment agreement with Mr. Jensen that
expires in June 2002. We have also entered into employment agreements with other
executive officers, each of which contain non-compete agreements. We have
obtained a key man life insurance policy in the amount of $2,000,000 on Mr.
Jensen, and a key man life insurance policy in the amount of $1,000,000 on our
Vice-President-Research and Development, Haven Brock Kolls, Jr.
We do not have and do not intend to obtain key man life insurance
coverage on any of our other executive officers. As a result, we are exposed to
the costs associated with the death of these key employees.
3. The commercial viability of our products has been tested on a
limited basis.
While a number of products or services such as gasoline and public
telephones are currently provided through unattended, credit card activated
terminals, the commercial viability of any of our products has not been
established. Although commercial production and installation of our products has
commenced on a very limited basis, there can be no assurance that:
o our products will be successful or become profitable;
o the demand for our products will be sufficient to enable us to
become profitable; or
o even if our products become commercially viable, they can evolve
or be improved to meet the future needs of the market place.
5
In any such event, investors may lose all or substantially all of their
investment in USA.
4. USA's dependence on proprietary technology and limited ability to
protect our intellectual property may adversely affect our ability
to compete.
A successful challenge to our ownership of our technology could
materially damage our business prospects. Our technology may infringe upon the
proprietary rights of others. Our success is dependent in part on our ability to
obtain patent protection for our proprietary products, maintain trade secret
protection and operate without infringing the proprietary rights of others.
To date, we have pending patent applications, and intend to file
applications for additional patents covering our future products, although there
can be no assurance that we will do so. In addition, there can be no assurance
that we will maintain or prosecute these applications. The United States
Government granted us twelve patents as of June 30, 2001. See "Business -
Patents, Trademarks and Proprietary Information." There can be no assurance
that:
o any of the remaining patent applications will be granted to us;
o we will develop additional products that are patentable or do not
infringe the patents of others;
o any patents issued to us will provide us with any competitive
advantages or adequate protection for our products;
o any patents issued to us will not be challenged, invalidated or
circumvented by others; or
o any of our products would not infringe the patents of others.
If any of the products are found to have infringed any patent, there
can be no assurance that we will be able to obtain licenses to continue to
manufacture and license such product or that we will not have to pay damages as
a result of such infringement. Even if a patent application is granted for any
of our products, there can be no assurance that the patented technology will be
a commercial success or result in any profits to us.
6
5. Competition from others with greater resources could prevent USA
from increasing revenue and achieving profitability.
Competition from other companies which are well established and have
substantially greater resources may reduce our profitability. Many of our
competitors have established reputations for success in the development, sale
and service of high quality products. We face competition from the following
groups:
o companies offering automated, credit card activated control
systems in connection with facsimile machines, personal computers,
debit card purchase/revalue stations, and use of the Internet
and e-mail which directly compete with our products. See
"Business-Competition";
o companies which have developed unattended, credit card activated
control systems currently used in connection with public
telephones, prepaid telephone cards, gasoline dispensing machines,
or vending machines and are capable of developing control systems
in direct competition with USA; and
o businesses which provide access to the Internet and personal
computers to hotel guests. Although these services are not credit
card activated, such services would compete with USA's Business
Express(R).
Competition may result in lower profit margins on our products or may
reduce potential profits or result in a loss of some or all of our customer
base. To the extent that our competitors are able to offer more attractive
technology, our ability to compete could be adversely affected.
6. The termination of any of our relationships with third parties
upon whom we rely for supplies and services that are critical to
our products could adversely affect our business.
We depend on arrangements with third parties for a variety of component
parts used in our products. We have contracted with RadiSys Corporation and
Masterwork Electronics to assist us to develop and manufacture our proposed
e-Port(TM) products. For other components, we do not have supply contracts with
any of our third-party suppliers and we purchase components as needed from time
to time. See "Business-Procurement". We have contracted with IBM to develop our
network services so that these services are Internet capable as well as interact
with our proposed media capable e-Post(TM). If these business relationships are
terminated, the implementation of our business plan may be delayed until an
alternative supplier or service provider can be retained. If we are unable to
find another source or one that is comparable, the content and quality of our
products could suffer and our business, operating results and financial
condition could be harmed.
7
7. We do not expect to pay cash dividends in the foreseeable future.
The holders of our common stock and series A preferred stock are
entitled to receive dividends when, and if, declared by our board of directors.
Our board of directors does not intend to pay cash dividends in the foreseeable
future, but instead intends to retain any and all earnings to finance the growth
of the business. To date, we have not paid any cash dividends on the common
stock or series A preferred stock. Although we issued a special stock dividend
in August 1995 consisting of one-third of a share of common stock for each share
of outstanding series A preferred stock, there can be no assurance that cash
dividends will ever be paid on the common stock.
In addition, our articles of incorporation prohibit the declaration of
any dividends on the common stock unless and until all unpaid and accumulated
dividends on the series A preferred stock have been declared and paid. Through
December 31, 2001, the unpaid and cumulative dividends on the series A preferred
stock equal $4,995,449. The unpaid and cumulative dividends on the series A
preferred stock are convertible into shares of common stock at the rate of
$10.00 per share. Through December 31, 2001, $2,292,135 of unpaid and cumulative
dividends on the Series A preferred stock were converted into 259,290 shares of
common stock. See "Description of Securities-Series A Convertible Preferred
Stock."
8. We may fail to gain market acceptance of our products.
On January 30, 2002, we have installed 1,322 control devices at
commercial locations and revenues, although growing, have been limited. There
can be no assurance that demand for our products will be sufficient to enable us
to become profitable. Likewise, no assurance can be given that we will be able
to install the credit card activated control systems at enough locations or sell
equipment utilizing our control systems to enough locations to achieve
significant revenues or that our operations can be conducted profitably.
Alternatively, the locations which would utilize the control systems may not be
successful locations and our revenues would be adversely affected. We may in the
future lose locations utilizing our products to competitors, or may not be able
to install our products at competitor's locations. Even if our current products
would prove to be commercially viable, there can be no assurance that they can
evolve or be improved to meet the future needs of the market place.
8
9. The lack of an established trading market may make it difficult to
transfer our stock.
Our common stock is traded on the OTC Bulletin Board. Although there is
limited trading in the common stock, there is no established trading market.
Until there is an established trading market, holders of the common stock may
find it difficult to dispose of, or to obtain accurate quotations for the price
of the common stock. See "Description of Securities - Shares Eligible For Future
Sale" and "Market For Common Stock."
10. There are rules governing low-priced stocks that may affect your
ability to resell your shares.
Our common stock is currently considered a "penny stock" under federal
securities laws since its market price is below $5.00 per share. Penny stock
rules generally impose additional sales practice and disclosure requirements on
broker-dealers who sell our shares to certain investors.
Broker-dealers who sell penny stock to certain types of investors are
required to comply with the SEC's regulations concerning the transfer of penny
stock. If an exemption is not available, these regulations require
broker-dealers to:
o make a suitability determination prior to selling penny stock to
the purchaser;
o receive the purchaser's written consent to the transaction; and
o provide certain written disclosures to the purchaser.
These rules may affect the ability of broker-dealers to make a market
in or trade our shares. This, in turn, may affect your ability to resell those
shares in the public market.
11. We are unable to predict the effect that future sales may have on
the market price of our common stock.
We are unable to predict the effect that sales may have on the market
price of our common stock prevailing at the time of such sales. See "Description
of Securities--Shares Eligible for Future Sale" and "Market for Securities".
9
Number of Shares Issued and Outstanding
as of January 30, 2002 Transferability
--------------------------------------- ---------------
35,399,300 shares of common stock all are freely transferable
without restriction or
further registration (other
than shares held by
affiliates of USA); and
549,884 shares of preferred stock all 549,884 are freely
transferable without
restriction or further
registration (other than
shares held by affiliates
of USA).
As of January 30, 2002, there were:
* 35,399,300 shares of Common Stock actually issued and outstanding;
*549,884 shares issuable upon conversion of the currently issued and
outstanding Series A Preferred Stock;
*494,505 shares issuable upon conversion of the accrued and unpaid
dividends on the Series A Preferred Stock of $4,945,049;
*3,356,667 shares issuable upon exercise of outstanding options (of
which 2,046,668 were vested as of such date);
*10,837,851 shares issuable upon exercise of outstanding warrants;
* 8,760,675 shares issuable to La Jolla Cove Investors, Inc. pursuant
to conversion of Convertible Debenture and exercise of related conversion
warrants;
* 4,027,200 shares reserved for issuance upon the conversion of the
outstanding 12% Convertible Senior Notes due 2003;
* 4,478,005 shares reserved for issuance upon the conversion of the
outstanding 12% Convertible Senior Notes due 2004; and
* 350,000 shares reserved for issuance to our employees in lieu of cash
compensation during the months of February, March and April 2002.
10
The common stock, if issued, will be freely tradeable under the Act.
See "Description of Securities".
12. We are obligated to make substantial principal and interest
payments to the holders of the senior notes.
As of December 31, 2001 we had $240,000 of unsecured senior notes
payable December 31, 2001; $5,034,000 of unsecured senior notes payable on
December 31, 2003 and $1,791,202 of unsecured senior notes due on December 31,
2004 which included $895,601 of funded Senior Note deposits subsequently
reclassified into Senior Notes after the Shareholder Meeting. These notes accrue
cash interest at the rate of twelve percent (12%) per year. As of January 30,
2002, we are required to make quarterly interest payments totaling approximately
$208,000, or $832,000 each year.
In an effort to reduce the debt payments, we authorized the voluntary
conversion of the senior notes due December 2003 into shares of common stock at
the rate of $1.25 per share, at any time until maturity and the senior notes due
December 2004 into shares of common stock at the rate of $.40 per share. If all
of the senior notes that were outstanding at December 31, 2001 which are due
December 2003 are converted, we will issue 4,027,200 shares of common stock and
if all of the senior notes due December 2004 are converted, we will issue
4,478,005 shares. We have agreed to use our best efforts to register for resale
under the Act the shares of common stock into which the senior notes are
convertible.
In the event that no additional senior notes are converted, on December
31, 2004, we are obligated to repay the $1,791,202 of the 2001 senior notes and
$5,034,000 of the 2000 senior notes on December 31, 2003. Until the senior notes
have been paid by us, they will be reflected as a liability on our financial
statements, net of the related unamortized discount and other issuance costs.
Our ability to satisfy the debt obligations is dependent on
our future performance, the success of our product lines and on our
ability to raise capital. Our performance is also subject to financial, business
and market factors affecting our business and operations.
We anticipate that the senior notes will be paid from cash from
operations, as well as proceeds from securities offerings. However, there can be
no assurance that we will meet our obligations to pay quarterly interest on or
the principal amount of the senior notes at maturity.
The senior notes are unsecured and thus, in effect, will rank junior to
any senior indebtedness. See "Description of Securities - 12% senior notes." The
payment of the senior notes is subordinated to the prior payment in full of all
existing and future senior indebtedness. In the event of our liquidation,
dissolution, reorganization or similar proceedings, our assets will be available
to pay obligations on the senior notes only after all of the senior indebtedness
has been paid in full, and there can be no assurance that sufficient assets to
pay amounts due on the senior notes will remain.
11
USE OF PROCEEDS
We will not receive any of the proceeds from the sales of our common
stock by the selling shareholders. The list of the selling shareholders entitled
to receive the net proceeds from any sales of our common stock appears on page
43 of this prospectus. We will, however, receive proceeds from the exercise of
any options or warrants by the selling shareholders.
12
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
This prospectus contains certain forward looking statements regarding,
among other things, our anticipated financial and operating results. Forward
looking statements are statements that are not 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 our actual
results to differ materially from those projected, include, for example:
o our ability to generate sufficient sales to generate operating
profits, or to sell products at a profit;
o our ability to raise funds in the future through sales of
securities;
o whether we are able to enter into binding agreements with third
parties to assist in product or network development;
o our ability to commercialize our developmental products, or if
actually commercialized, to obtain commercial acceptance thereof;
o our ability to compete with our competitors and obtain market
share; or
o our ability to obtain sufficient funds through operations or
otherwise to repay our debt obligations or to fund development and
marketing of our products.
Although we believe that the forward looking statements contained in
this prospectus are reasonable, we can give no assurance that our expectations
will be met.
13
Introduction
The Company had a net loss during the years ended June 30, 2001 and
2000 of $10,956,244 and $8,404,481, respectively, and anticipates incurring
operating losses through fiscal 2002.
Quarter and Six Months Ended December 31, 2001
Results of Operations
The fiscal quarter ended December 31, 2001 resulted in a net loss of
$2,462,676 compared to a net loss of $3,575,272 (including the effects of a
non-cash extraordinary loss on exchange of debt of $863,000 and a non-cash
cumulative effect of change in accounting principle of $821,000) for the fiscal
quarter ended December 31, 2000. Losses are projected to continue until
sufficient revenue is generated from equipment sales and licensing fees from the
Company's proprietary technology.
Revenues were $324,882 compared to $258,242 from the previous year's
fiscal quarter. This $66,640 or 26% increase was due to an increase in equipment
sales of the same amount, as sales from license fees remained consistent with
the December quarter of the prior year. Revenue is still well below the level
required for the Company to be profitable.
Cost of sales for the period included labor and equipment of $196,998,
an increase of $61,327 or 45% compared to the same period during the prior
year. This increase is directly attributable to the increase in equipment sales
described above.
General and administrative expenses of $1,468,237 increased by $271,647
or 23% from the same quarter last year. The increase was due principally to
increases in spending for consulting and promotion services of $631,693 (of
which $607,632 was non-cash), and increases in professional fees of $66,537,
partially offset by decreases in spending for legal services of $208,011,
primarily related to the MBE litigation which has been settled, and for outside
services of $194,607.
Compensation expense of $827,720 increased by $342,274 or 71%. Non-cash
compensation in the quarter was $253,845.
The interest expense decrease of $98,775 is primarily due to the
capitalization of software development interest costs associated with the
Company's spending to develop its e-Port(TM) network, partially offset by
smaller increases in cash interest payments and the amortization of the debt
discount. Depreciation expense increased from $34,349 to $81,181, largely due to
an increase in the depreciable asset base.
Of the total of $2,590,560 of operating and other expenses for the
quarter, $1,083,333 were non-cash expenses, primarily consulting, public
relations, employee compensation, depreciation, amortization and interest.
The six month period ended December 31, 2001 resulted in a net loss of
$4,702,312 compared to a net loss of $5,190,682 (including the effects of a non-
cash extraordinary loss on exchange of debt of $863,000 and a non-cash
cumulative effect of change in accounting principle of $821,000) for the
comparable period ended December 31, 2000. Revenues were $690,629 compared to
$665,001, a $25,628 or 4% increase. Of the total revenues, equipment sales
totaled $365,106, an increase of $28,066 or 8%. Cost of sales of $410,031
represented an increase of $23,854, and is directly attributable to the increase
in equipment sales. General and administrative expenses of $2,599,442 increased
by $567,366 or 28%. The principal reason was a large increase in promotion
expense, public relations, and consultant fees of $1,170,538. The increase was
offset by decreases in legal fees of $390,102 mostly related to the pending MBE
litigation and a reduction in outside services of $249,252. Compensation expense
of $1,729,813 increased by $652,338 or 61%. Non-cash compensation was $545,895.
The interest expense decrease of $140,797 is primarily due to the capitalization
of software development interest costs associated with the Company's spending to
develop its e-Port(TM) network.
14
Fiscal year ended June 30, 2001:
For the fiscal year ended June 30, 2001, the Company had a net loss of
$10,956,244. The loss applicable to common shares of $11,792,785 or $.70 loss
per common share (basic and diluted) was derived by adding the $10,956,244 net
loss, the $836,541 of cumulative preferred dividends, and dividing by the
weighted average shares outstanding of 16,731,999.
Revenues for the fiscal year ended June 30, 2001 were $1,451,002, a
decrease of $603,339 or 29% from the prior year, primarily due to a decrease of
$745,000 or 55% in equipment and installation sales of our higher priced
Business Express(R) or MBE Business Express(R) and Business Express(R) Limited
Service Series (LSS). Offsetting this decrease were increases in the sale of the
Company's standalone TransAct(R) control system of $129,000 or 462% and the
initial sales of the non-media e-Port(TM) control system of $19,000 or 100%.
Operating expenses for the fiscal year ended June 30, 2001 were
$9,620,675, representing a $746,333 or 8% increase over the prior year. The
primary contributors to these increases were compensation expense and general
and administrative expense offset by reductions in cost of sales, as detailed
below.
Cost of sales decreased by $442,555 from the prior year, primarily
reflecting the decrease in the Business Express(R) or MBE Business Express(TM)
and Business Express(R) LSS centers sold. General and administrative expenses of
$5,628,014 increased by $626,182 or 13%. This increase was due to increased
product development costs of $450,000, public relations expenses of $188,000,
license expense for DoubleClick Adserver software of $120,000, market research
expenses of $88,000, trade show and related travel expenses of $74,000, offset
by a decrease in legal expenses of $238,000, primarily associated with the MBE
litigation which has been settled in fiscal year 2001.
Compensation expense was $2,966,776, an increase of $463,611 or 19%
from the previous year. The increase was due to an increase in executive bonus
expense of $234,000 or 66%, of which $201,000 of this increase was non-cash.
Additional increases in salaries and related employee benefits of $169,000 or
9%, are due to increased personnel activities in all areas of the Company and an
increase of $51,000 in the matching 401K Company contributions instituted in
July 2000.
15
Depreciation expense of $209,646 increased by $99,095, which is
directly attributable to the increased depreciable asset base.
Other income and expense decreased by $481,909, primarily as a result
of the extension of the amortization period of the debt discount due to the
exchange of certain 1999 Senior Notes into 2000 Senior Notes, which is a
non-cash expense.
In November 2000, the Emerging Issues Task Force (EITF) of the
Financial Accounting Standards Board (FASB) required companies to adopt a new
methodology for computing the beneficial conversion feature of convertible
securities, which is to be applied retroactively for commitments entered into on
or after May 20, 1999. Accordingly, a one-time, non-cash charge of $821,000 has
been recorded for the cumulative effect of accounting change as required under
the guidance provided by the EITF.
The exchange of the 1999 Senior Notes to the 2000 Senior Notes was
determined to be a substantial modification of the terms of the original debt
instrument and, accordingly, the Company wrote-off the unamortized debt discount
and other issuance costs associated with the exchange of the 1999 Senior Notes
in the amount of $863,000. Such amount has been reported as a non-cash
extraordinary item in the fiscal year 2001 statement of operations.
Fiscal year ended June 30, 2000:
For the fiscal year ended June 30, 2000, the Company had a net loss of
$8,404,481. The loss applicable to common shares of $9,334,559 or $.92 loss per
common share (basic and diluted) was derived by adding the $8,404,481 net loss
and the $930,078 of cumulative preferred dividends and dividing by the weighted
average shares outstanding of 10,135,905.
Revenues for the fiscal year ended June 30, 2000 were $2,054,341, a
decrease of $1,836,175 or 47% under the prior year, reflecting the large Prime
Hospitality rollout of the MBE Business Express(R) in fiscal year 1999.
Operating expenses for the fiscal year ended June 30, 2000 were
$8,874,342, representing a $1,578,714 or 22% increase over the prior year. The
primary contributors to this increase were general and administrative expenses
and compensation expense offset by a reduction in cost of equipment sales, as
detailed below.
Cost of sales decreased by $1,704,128 from the prior year, primarily
reflecting the decrease in the Business Express(R) or MBE Business Express(R)
centers sold. General and administrative expenses of $5,001,832 increased by
$2,314,088 or 86%. This increase is primarily due to legal expenses associated
with the pending MBE litigation, which amounted to approximately $1,600,000 an
increase of $1,000,000 over the prior year. All but approximately $150,000 of
these expenses were non-cash as the legal counsel was paid for services by the
issuance of the Company's common stock. Other general and administrative
expenses increased by approximately $1,300,000. Components of this increase
include an increase in research and development costs of $356,280, increases in
outside marketing and operational services of $654,381, increased charges for
consulting and professional fees of $300,436 primarily to fund public relations,
increases in costs related to the rental and maintenance of the company's
corporate office of $98,496 and one time expenses for relocation of personnel of
$55,418. Offsetting these increases was a decrease in trade show costs of
$26,630, or 37%.
Compensation expense was $2,503,165, an increase of $949,976 or 61%
from the previous year. The increase was due to the non-cash expense of $293,700
relating to the compensation charge recorded for bonuses to employees for work
performed in fiscal year 2000, and increases in salaries of $656,276, or 42%,
which is due to increased personnel activities in all areas of the Company.
16
Other expenses increased by $1,337,968. Of this increase, $976,380 was
non-cash, due to amortization of debt discount relating to the outstanding
Senior Notes. Cash interest expense accounted for an increase of $493,462 offset
by an increase in interest income of $82,707.
Depreciation expense of $110,551 increased by $18,778, which is
directly attributable to the increased depreciable asset base.
Plan of Operations
As of January 30, 2002, the Company had a total of 1,222 credit card
activated control systems installed in hospitality locations in the field as
follows: Business Express(R) or MBE Business Express(R) 819, Business Express(R)
Limited Service (LSS) 175, Copy Express(TM) 20, Debit Express(TM) 7, Public
PC(R) 3, Fax Express(TM) 4, and standalone TransAct(TM) 194. In addition, as of
January 30, 2002, 441 non-media e-Port(TM) control systems had been shipped and
billed, of which approximately 100 have been installed at vending locations in
the United States. For the six month period ending December 31, 2001, total
license and transaction fees earned by the Company from these systems were
$325,523 compared to $327,961 for the comparable period in the prior year.
During the past year the Company has focused on presenting the multiple
capabilities of its new e-port(TM) by developing several product lines of
e-Port(TM). The "audit plus credit" version contains all the functionality of
the current TransAct(TM) terminal for credit card processing, control and data
management, plus the added ability to audit vending product usage and vending
machine status. Through January 31, 2002 approximately 400 units have been
distributed to test sites, distributors and operators. Some minor refinements
are being worked on, and limited production quantities were delivered in March
2002.
The Company believes that the media capable version of e-Port(TM) is
nearing completion. This proposed product would offer capability for public
access electronic commerce and advertising using the Internet, in addition to
the capabilities of the audit plus credit version. For this web enabled version,
the Company is working with RadiSys, a contract manufacturer providing value
added design, development, fulfillment and product warranty services. The
Company anticipates that limited quantities of this Internet ready e-Port(TM)
may be delivered during the fourth quarter of fiscal year 2002.
Concurrent with the above developments to the e-Port(TM) product line,
IBM is working with the Company to develop an internet capable version of the
existing network, which is designed to support transaction processing,
advertising and e-commerce on a worldwide basis with enhanced security features.
Expenditures have been made to recode our existing system in an internet
friendly programming language and to use a more appropriate operating system.
In June 2001, the Company and IBM signed an Agreement which establishes
the basis for a strategic alliance between the two companies. The two companies
will combine their respective products and capabilities to target sales to the
intelligent vending, retail point of sale, and networked home applications
markets. Cooperation is currently underway to identify customers, trade shows,
and marketing avenues.
The Company has also been cultivating relationships in the vending
marketplace. Coca Cola has contracted with Marconi Online Systems, Inc., a
subsidiary of Marconi plc, a British telecommunications company, to provide
"intelligent vending" solutions for portions of its vending machines. Through
our Company's business alliance with Marconi, executed in April of 2001, our
e-Port(TM) and associated network could be used in connection with Marconi's
fulfillment of the Coca Cola contract. Other major soda vending players are also
being
17
cultivated, including most of the manufacturers of vending machines and
electronic components, vending product manufacturers and distributors, and large
operators of major vending franchise routes. Vending companies who deal with
other vended products are also being contacted, including those who vend prepaid
phone cards and hot meals.
Additional plans during this fiscal year include further activity in
the advertising and media arenas and development of strategic partnering
relationships. In August, 2001, the Company signed a contract with United Taxi
Alliance of New York, Inc., a newly formed New York non-profit corporation, to
sell media capable e-Ports to UTA over a three year period. To date, UTA has
delayed ordering product but still intends to do so.
During October 2001, the Company unveiled enhancements to its
e-Port(TM) and the USALive(TM) network to the vending industry at Fall NAMA, the
vending industry's semi-annual trade show event. Enhancements included mobile
commerce technology permitting access to vending machines through customer cell
phones; proprietary wireless technology allowing for low cost, highly reliable
connectivity via existing customer telephone connections; and capability for
customers to manage their own e-Port locations and access vending machine data
and transaction data on the web. The e-Port(TM) was demonstrated in the booths
of seven different vending machine manufacturers, and the Company received sales
orders for our e-Port(TM) at the show. From the inception of shipments of
e-Port(TM) to date, the Company has delivered e-Ports to or taken orders from 70
separate customers, many of them on behalf of very large corporations with
well-known brand names, including two Fortune 50 companies.
An investment banker has been retained by the Company to help it plan
and execute the growth of the Company. During April 2002, we extended the
contract of our investment banker for an additional six month period. We are
currently working to acquire complementary technology, products, services and
customers. The goal is to increase potential market applications and increase
near term revenues of the Company.
Liquidity and Capital Resources
During the fiscal year ended June 30, 2001, the Company completed
several financing transactions. Net proceeds of $2,722,536 were realized from
private placement offerings of Common Stock and $2,112,100 was realized from the
exercise of Common Stock Purchase Warrants. As of June 30, 2001, the Company had
a working capital deficit of $2,390,543, which included cash and cash
equivalents of $817,570 and inventory of $560,410.
During the fiscal year ended June 30, 2001, net cash of $3,568,924 was
used by operating activities, primarily due to the net loss of $10,956,244,
offset by a non-cash charge of $974,222 for Common Stock, options and warrants
issued for services and interest in lieu of cash payments, and $764,736 of non-
cash amortization of the debt discount relating to the Senior Notes. During the
fiscal year ended June 30, 2001, net cash used in investing activities was
$3,318,466, principally due to the increase in software development costs of
$2,938,111 relating to the e-Port(TM). The net cash provided by financing
activities of $5,845,600 was attributable primarily to net proceeds generated
from the issuance of Common Stock through private placements and exercise of
Common Stock Purchase Warrants described in the prior paragraph and $1,174,818
of net proceeds generated through the issuance of 2000 Senior Notes.
For the six months ended December 31, 2001, there was a net increase in
cash of $314,924. This was attributable to $2,216,906 of cash used in operating
activities, $1,610,485 of cash used for investing activities, principally
software development cost for the new e-Port(TM) network of approximately $1.6
million, offset by cash provided by financing activities of $4,142,315 primarily
from the issuance of Common Stock, and the 2001-D note offering. The cash used
in operating activities consisted of the operating loss of $4,720,312, partially
offset by $1,914,241 in non cash charges from the issuance of common stock and
warrants, and $525,088 of non cash amortization of debt discount. As of December
31, 2001, total cash on hand was $1,132,494, and the working capital deficit was
$1,457,483.
During fiscal 2002, the Company anticipates additional capitalization
of approximately $2.5 million for software development on its network.
During fiscal year 2001 and through September 2001, the Company sold a
total of 739.5 Units in a private placement offering (2001-B) at a price of
$6,000 per unit. Each unit consisted of 10,000 shares of Common Stock and
warrants to purchase up to 20,000 shares of Common Stock at $.50 per share.
One-half of the warrants are exercisable on or before December 31, 2001 and the
balance are exercisable on or before June 30, 2002. Of the units sold, 615.6
were for cash and 123.9 were issued in exchange for services rendered to the
Company. Of the units sold, 472.56 were sold subsequent to June 30, 2001.
During July 2001, the Company issued to an investor a warrant to
purchase up to 500,000 shares of Common Stock. The warrant can be exercised at
any time in whole or in part within one year following the effectiveness of the
registration statement covering the resale of the shares issuable upon exercise
of the warrant. The exercise price of the warrant is the lower of $1.00 or 80%
of the lowest closing bid price of the Common Stock during the 20 trading days
prior to exercise. The Company has agreed to prepare and file at its cost and
expense a registration statement covering the resale by the investor of the
shares underlying the warrant. At the time of the issuance of the warrant, the
investor paid to the Company a non-refundable fee of $50,000 to be credited
towards the exercise price under the warrant. A broker-dealer received a
commission of $3,500 in connection with this warrant. During the quarter ended
December 31, 2001, all of these warrants were exercised for a cash payment of
approximately $.29 per share.
18
During August 2001, the Company issued to La Jolla a $225,000
Convertible Debenture bearing 9 3/4 percent interest with a maturity date of
August 2, 2003. Interest is payable by the Company monthly in arrears. The
Debenture is convertible at any time after the earlier of the effectiveness of
the registration statement referred to below or 90 days following issuance at
the lower of $1.00 per share or 80% of the lowest closing bid price of the
Common Stock during the 20 days preceding exercise. If on the date of conversion
the closing bid price of the shares is $.40 or below, the Company shall have the
right to prepay the portion being converted at 150% of the principal amount
being converted. In such event, La Jolla shall have the right to withdraw its
conversion notice. At the time of conversion of the Debenture, the Company has
agreed to issue to La Jolla warrants to purchase an amount of Common Stock equal
to ten times the number of shares actually issued upon conversion of the
Debenture. The warrants are exercisable at any time for two years following
issuance and at the related conversion price of the Debenture. The Company has
agreed to prepare and file at its expense a registration statement covering the
resale of the shares of Common Stock underlying the Debenture as well as the
related warrants issuable upon conversion of the Debenture. La Jolla paid to the
Company the sum of $100,000 at the time of the issuance of the Debenture and has
agreed to pay $125,000 at the time of the effective date of the registration
statement.
During the quarter ended December 31, 2001, La Jolla Cove Investors
converted $10,000 of principal and exercised related warrants for 388,500 shares
receiving a total of 427,350 shares of Common Stock. The Debenture was converted
at the rate of $.2574 per share and the exercise price of the warrants was
$.2574 per share and the Company received net proceeds of $83,717. Subsequent to
December 31, 2001 and through March 31, 2002, La Jolla converted an additional
$60,000 of principal and exercised related warrants receiving a total of
2,564,100 shares of Common Stock. The Debenture was converted at the rate of
$.2574 per share and the exercise price of the warrants was $.2574 per share and
the Company received proceeds of approximately $600,000.
In the six months ended December 31, 2001, the Company issued warrants
to an employee and three consultants to purchase up to 800,000 shares of Common
Stock at the market price prevailing at time of issuance ($.70 per share for
150,000 shares and $.40 per share for 650,000 shares). The warrant is
exercisable at any time prior to two years following issuance. The Company has
agreed to prepare and file at its expense a registration statement covering the
resale of the shares of Common Stock underlying the warrant.
The Company sold 4,212,350 shares of Common Stock at $.50 per share.
The offering (2001-C) was exempt from the registration requirements of the Act
pursuant to Section 4(2) and Rule 506 thereunder and was offered and sold only
to accredited investors. For each share purchased, the investor also received a
warrant to purchase one share of Common Stock at $.50 per share at any time
prior to March 31, 2002. The Company has agreed to prepare and file at its
expense a registration statement covering the resale of the shares of Common
Stock and the shares of Common Stock underlying the warrants. Of the 4,212,350
shares sold in the offering, 2,553,666 were issued or will be issued in exchange
for services rendered and 1,658,684 for cash ($829,342).
In October 2001, we issued 200,000 shares to Ratner & Prestia, P.C.,
our intellectual property counsel. The shares were issued in satisfaction of
payables to Ratner of $214,855. We have agreed to register these shares for
resale under the Act at our expense.
In November 2001, the Company commenced a private placement offering of
$2,500,000 principal amount of 12% Convertible Senior Notes due 2004. The
principal amount of each Senior Note is convertible at any time into shares of
Common Stock at the rate of $.40 per share. In January 2002, the offering was
increased to up to $6,500,000 principal amount of Senior Notes. As of April 5,
2002, the Company has sold $3,618,985 of the Senior Notes.
During the first quarter of calendar year 2002, our employees agreed to
take an aggregate of 349,728 shares of our common stock in lieu of cash salary
payments otherwise due to them during the months of April, May and June, 2002.
For purposes thereof the shares were valued at $.40 per share, which was the
fair value of shares at the time.
To date, the Company has received nominal funds from Swartz Private
Equity, LLC under its equity credit line with Swartz and has terminated the
equity line arrangement with Swartz.
19
The Company has incurred net losses of approximately $11.0 million and
$8.4 million during each of the fiscal years ending June 30, 2001 and 2000,
respectively, and an accumulated deficit from inception through June 30, 2001
amounting to $39.2 million and a shareholders deficit at June 30, 2001 of $2.8
million. The Company anticipates that for the year ending June 30, 2002 there
will be a negative cash flow from operations in excess of $3 million thus, the
Company will require additional debt or equity financing which may not be
readily available. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The Company's independent auditors have
included an explanatory paragraph in their report on the Company's June 30, 2001
financial statements. The Company believes that the funds available at June 30,
2001 combined with events anticipated to occur including the anticipated
revenues to be generated during fiscal year 2002, the potential capital to be
raised from the exercise of the Common Stock Purchase Warrants, the funds
anticipated to be received in future private placements, and the ability to
reduce anticipated expenditures, if required, will allow the Company to continue
as a going concern.
Commitments
The Company leases approximately 10,000 square feet in Wayne,
Pennsylvania for a monthly rental of $12,705 plus utilities and operating
expenses. The lease expires on June 30, 2002.
The Company has acquired inventory financing using IBM Global
Financing. The debt to IBM is secured primarily by the inventory being financed
and bears an annual interest rate of 10%, subject to adjustments if the
outstanding balance is outstanding greater than 180 days. As of June 30, 2001
and December 31, 2001, $45,785 and $42,132, respectively, of debt is outstanding
under this arrangement.
BUSINESS
USA Technologies, Inc., a Pennsylvania corporation (the "Company"), was
founded in January 1992. Our vision is to be a major player in the 'Digital,
Networked Economy' by providing the marketplace with embedded technology and
associated network and on-line financial services that will help transform their
businesses. The ultimate goal is to position the Company as the preferred method
and industry standard for cashless micropayments and automated retailing, and to
become a leading point-of-sale, interactive media and network services company.
The Company intends to accomplish this by building on its market
position in networked, unattended consumer payment systems through a new
e-Business solution called e-Port(TM). To this end, the Company has focused on
developing e-Port(TM) - its new credit card payment system. The non-media
version of the e-Port is a device that is integrated with copiers, vending
machines or other host equipment that gathers information about sales and
operations of the host equipment and also allows a consumer to use a credit card
to make a purchase. The media version of the e-Port is currently being
engineered and would enable consumers to view interactive advertising/media, and
to conduct simple, secure and direct e-commerce while making routine purchases
anywhere. The non-media version of the e-Port contains all the functionality of
USA Technologies' current TransAct(TM) system for credit card processing,
micropayments, control and data management and would offer data management and
auditing capability for vending operators, kiosk operators and others wishing to
place equipment or products on a network via embedded computing capability.
The media capable version of the e-Port(TM) would be a non-PC device
offering consumers the opportunity to view interactive advertising and to
conduct e-commerce transactions while making routine purchases with a credit
card, smart card or any other payment device such as a cellular phone, at
vending machines, convenience stores, gas pumps and other high-traffic retail
points-of-sale. The media capable e-Port(TM) also would allow advertisers the
opportunity to operate non-PC electronic storefronts that could provide
consumers with promotional offers at actual retail locations.
The Company is a leading provider and licensor of unattended, credit
card activated control systems for the copying, debit card and personal computer
industries. USA Technologies' devices make available unattended credit card
payment technology in connection with the sale of a variety of products and
services. USA Technologies has historically generated its revenues from the
direct sale of its control systems and the resale of configured office products,
plus network service fees, plus by retaining a portion of the monies generated
from all credit card transactions conducted through its control systems.
We have been granted fifteen patents related to our technology. One of
these is in the area of networked vending machines and credit card technology -
including the use of smart cards. Another is a patented method of batch
processing which enables consumers to engage in cashless micropayments.
Fifty-three other foreign and domestic patents are pending.
20
The Company has entered into a corporate agreement with Promus Hotel
Corporation (Embassy Suites, Hampton, and Doubletree brands) which establishes
itself as a preferred supplier of business center products for those brands. The
Company's Business Express(R) has been approved and recommended as a solution
for business center needs by Marriott for its hotels. The Company is the
exclusive provider of business center solutions to over 100 properties owned by
MeriStar, and the preferred provider of business center products to over 100
additional properties managed by MeriStar. MeriStar is the largest independent
hotel management company in the United States, operating over 200 hotels and
resorts under such known brand names as Hilton, Holiday Inn and Wyndham. As of
June 30, 2001, business centers have been installed at 14 MeriStar locations.
The Company has a national reseller agreement in place with Xerox.
USA Technologies is a market leader in making self-serve, credit card
activated products and services available to consumers everywhere. The Company
has achieved this with the sale and installation of its product, Business
Express(R) or MBE Business Express(R), at hotel, library and retail locations
nationwide. Business Express(R) and MBE Business Express(R) offer thousands of
business travelers and consumers the opportunity to conduct
e-business/e-commerce 24 hours a day with the swipe of a credit card. The
Business Express(R) gives consumers self-serve, public access to the Internet,
copy and fax services, and other 'e-Business services'. At the heart of this
product line is USA Technologies' networked payment solution TransAct(TM), an
automated, credit card consumer payment system which has been utilized with
photocopying machines, facsimile machines, computer printers, vending machines
and debit and smart card purchase/revalue stations. The Company retains all
rights to software and proprietary technology that it licenses to location
operators for their exclusive use. As of June 30, 2001, 367 Business Express(R)
or MBE Business Express(R) units are installed. The Company also markets a
product line extension to the Business Express(R), called the Business
Express(R) Limited Service Series (LSS). The LSS has copier and fax capabilities
plus laptop printing, dataport capabilities and credit card activated phone. The
LSS is targeted to the hospitality mid-market, limited service and economy
properties. As of June 30, 2001, 100 LSS units are included in the total of 367
Business Express(R) or MBE Business Express(R) units installed. The Company also
sells its TransAct(R) credit card device and payment system as a standalone
offering to the world's leading office equipment manufacturers and distributors.
The Company established a TransAct(R) Authorized Reseller Program to sign up
various independent and national dealers and distributors. As of June 30, 2001,
22 dealers are participating in the program.
Currently, the Company has as its core business three components:
unattended credit card control systems; a financial services and auditing
network; and a proposed interactive media and ad serving network.
The first component is our credit card activated control systems. The
current version of the Company's technology is TransAct(TM). This product, as
outlined above, is currently installed in locations throughout North America.
The latest generation of technology that the Company introduced is called the
e-Port(TM). It was unveiled in October 2000 at the National Automatic
Merchandising Association convention in New Orleans, the world's largest vending
trade event.
21
The e-Port(TM) is designed to be a flexible and versatile embedded
system device. While initially targeted to the vending industry, the technology
that has been developed may be applied in many other industries such as copiers,
retail point of sale, mass transit, etc; wherever pervasive computing, embedded
systems and credit card and other cashless payment systems are used.
The e-Port(TM) hardware consists of a circuit board, RAM, Flash Memory,
modem, ports, credit card reader, and propriety software. The Company is in the
process of engineering a media capable e-Port featuring an LCD color touch
screen. The version of e-Port(TM) with the LCD color touch screen is built to
USA's specifications by RadiSys, a leader in developing and mass-producing
embedded systems. The Company entered into a Development and Manufacturing
Agreement ("DMA") with RadiSys Corporation in June, 2000. RadiSys has
significant manufacturing expertise in the embedded chip market and is partially
owned by Intel. The Company also contracts with Masterwork Electronics
Corporation, a leader in the manufacture of electronics for the vending
industry, for the non-media version of e-Port(TM) without the LCD color touch
screen.
Additionally, e-Port(TM) uses the connectivity features developed by
the Company. These include the ability to send and receive data via land lines,
radio waves (like a home cordless phone), wireless modems, always-on phone
connections, etc. The Telecom and Internet connections offered by Sprint support
the hardware developed by the Company. USA Technologies and Sprint have agreed
to a partnership allowing its customers access to many connectivity options at
superior service levels and pricing.
e-Port(TM) technology is anticipated to be available in three primary
configurations. By offering these options, the Company believes that it would
provide a complete set of solutions and applications to solve the needs of
customers and industries from the smallest to the largest, and most demanding.
o e-Port(TM) - Audit. The audit only e-Port(TM) is an embedded
device that is integrated with existing copiers, vending machines
or other 'host' equipment. The auditing feature captures supply
chain data (units sold, what sold, price of units sold, etc.) and
other machine information. It will send the information back to
either a customer's network or to the USA network for reporting.
o e-Port(TM) - Audit/Credit. The Audit/Credit version of the
e-Port(TM) is an embedded device that, in addition to gathering
information about the sales and operation in the host equipment
(the auditing portion) also allows a user to use a credit card or
other cashless method to make a purchase. It will work with cash
and credit as well as credit only. This version will allow a user
to make multiple purchases with one credit card transaction. This
unit relays both the credit and cash sales information back to a
network along with the other audit information.
o e-Port(TM) - Audit/Credit/Interactive. The Audit/Credit/
Interactive version of e-Port(TM) is also known as the media
capable e-Port and is currently being engineered by the Company.
It would allow a user to take advantage of the benefits that
network control and remote monitoring provide, the increased sales
opportunity that the credit cards provides and the potential for
revenue generation that the LCD screen with its interactive ad
could possibly provide.
22
Our customers' terminals are currently networked together using
USALive(TM) - a network service that enables terminal users to easily access
basic audit information, conduct unattended credit card transactions, turnkey
banking, and micropayments. The Company together with IBM Global Services is
currently developing an enhanced network which should provide interactive media
and advertising at point of sale. The Company anticipates that an additional
$2.5 million will be incurred in this regard in fiscal 2002.
The second component involves financial services and auditing. This
capability provides users with auditing capability as well as turnkey credit
card and banking capability.
o USA utilizes a patented method of batch processing in order to conduct
affordable credit card transactions of as little as $1.00.
o USA provides users of the e-Port(TM) and TransAct(TM) with the ability to
instantly accept credit cards in an unattended location.
o USA acts as a 'super merchant' for its customers - thereby helping them to
avoid getting certified with credit card processors to do unattended
transactions.
o USA provides all the refunds, payments, and reporting of the credit card
transactions.
o The auditing capability of the network provides customers with detailed
information on location or host equipment operation, sales, security, etc.
The third component would involve serving targeted, interactive ads to
our proposed media capable e-Ports. In addition to being able to provide highly
targeted ads, it would possibly serve these ads to a more captive audience than
is possible with traditional web based advertising. The targeting of media via
the Company's proposed network may be possible because the data base would be
constantly updated concerning information about each e-Port(TM): state, city,
zip code, make up of users from standpoint of: income, vocation, location of the
machine (school, mall, convention center, movie theater, super market, etc.) A
potential advertiser could possibly select the group they want to target to
advertise to and the USA Ad Serving network could possibly send the ads to the
targeted e-Ports.
The Company has been designated as an authorized equipment reseller by
International Business Machines Corporation and Hewlett-Packard. The Company
believes that it benefits from the association of its control systems with the
well-known brands of business equipment manufactured by these companies.
On September 24, 1997, the Company entered into a Joint Venture
Agreement ("JV") with Mail Boxes Etc. ("MBE"), in order to sell automated,
credit card activated business centers under the name MBE(TM) Business
Express(R). The JV was terminated in May 1999, but the Company continues to
service all MBE(TM) Business Express(R) field installations.
For the years ended June 30, 2001 and 2000, and for the six months
ended December 31, 2001, the Company has expensed approximately $1,260,000,
$554,000, and $154,000, 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
23
expense in the accompanying financial statements. In addition, from May 2000
through December 2001, the Company has capitalized approximately $4.7 million
for the services of IBM, to program the enhanced version of the Company's
proprietary "USAlive" network. See Note 2 to the Financial Statements.
As of January 30, 2002, the Company had a total installed base of 1,222
hospitality related control systems, distributed as follows: 819 Business
Express(R) or MBE Business Express(R) control systems, 175 Business Express(R)
Limited Service (LSS) control systems, 20 Copy Express(TM) control systems, 7
Debit Express(TM) control systems, 4 Fax Express(TM) control systems, 3 Public
PC(R) control systems and 194 standalone TransAct(R) control systems located at
various hotels and libraries throughout the United States and Canada. In
addition, we have shipped and billed 441 non-media e-Port(TM) control systems,
of which approximately 100 have been installed at vending locations in the
United States as of January 30, 2002. Through January 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.
Industry Trends
USA Technologies believes it has positioned itself to claim a piece of
three important market spaces within the new Internet economy: interactive
advertising, electronic commerce and pervasive computing. USA Technologies
intends to continue to leverage its proprietary technologies, e-Port(TM) and
TransAct(TM) payment systems, which put credit card activated goods and
services, e-business and e-commerce at 'arms reach' of consumers. The Company
will attempt to take advantage of four powerful trends:
1. Growth in credit card/cashless transactions
- Transaction volume nearly quadrupled from 1990 to 2000
- 1.3 billion credit cards in circulation
- $2.24 trillion in purchase volume in 2000
- $3.17 trillion in total volume* in 2000
- Preferred method of payment for US consumers
This important trend is driving impressive growth in purchases of credit card
devices, as well as the network services that support use of those terminals
(e.g., credit card processing). Source: The Nilson Report.
(*Total volume includes purchases of goods and services, cash
advances/withdrawals, and commercial funds transfers from business in China.)
2. Growth in cashless micropayments
Visa estimates that in the United States cash transactions below $10 total
nearly $400 billion annually - an attractive market which is virtually untouched
by credit cards. Furthermore research firm Ovum predicts that wireless
micropayments - transactions of less than $10 - will total $200 billion
worldwide by 2005.
3. Emergence of pervasive computing/'Internet Everywhere' appliances (source,
IDC).
Growth in pervasive computing devices is expected to fuel unprecedented
growth of Internet/e-Commerce. These intelligent or 'smart' devices (e.g.
vending machines, personal digital assistants, credit card readers etc.) are
embedded with microprocessors that allow users to gain direct, simple and secure
access to relevant information and services via the Internet without the need
for a PC.
24
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 ("Information Industry Technology
Update 1999-2000" p. 29-30, p.i.) 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 is predicted to hit almost $1.3 trillion a
year by 2003 ("Information Industry Technology Update 1999-2000", p. 16).
Credit Card Processing
Each of the Company's credit card activated control systems records and
transmits all transaction data to the Company, and the Company then forwards
such data to the credit card processor. After receiving transaction information
from the Company, the credit card processor electronically transfers the funds
(less the credit card processor's charge) to the Company. The Company then
forwards to the location its share of the funds.
The Company and each location have agreed on a percentage split of the
gross proceeds from the Company's device. The credit card processor's fees and
cost to forward the location's share of the gross proceeds are all paid for out
of the Company's portion of the gross revenue.
The Company currently retains a portion of the gross revenues from each
control system. If the Company has sold the equipment to the location, the
portion retained is generally 5% of the gross revenues. In cases where the
Company continues to own the equipment, the portion retained can be as high as
90% of gross revenues. In addition the Company charges a fixed monthly
management fee which is generally $20-$25 per control system for existing
hospitality locations.
25
Product Lines
The Business Express(R)
The hotel/motel hospitality industry has become more competitive as
chains increase efforts to attract the most profitable customer: the business
traveler or conference attendee, who accounts for the majority of hotel
occupancy, stays longer and spends more per visit than the leisure traveler. For
these reasons, hotels have become very responsive to the needs of the business
traveler. The Business Express(R) enables a hotel to address some of these
needs, while offering the possibility of generating incremental revenue.
The Business Express(R) utilizes the Company's existing applications
for computers, copiers, and facsimile equipment, and combines them into a
branded product. The Business Express(R) bundles the Public PC(R) unit, the Copy
Express(TM) unit, and the Fax Express(TM) unit, into a functional kiosk type
workstation. All devices are credit card activated, therefore eliminating the
need for an attendant normally required to provide such services.
The MBE(TM) Business Express(R)
The MBE(TM) Business Express(R) bundles together the same components as
the Business Express(R): Public PC(R), Copy Express(TM), and Fax Express(TM),
but under the MBE brand name. In addition, the MBE(TM) Business Express(R)
includes a dial-through service to a nearby MBE store making available the
products and services of the store. The Company terminated the Joint Venture in
May 1999.
The Copy Express(TM)
The Copy Express(TM) provides a cashless method to pay for the use of
photocopying machines. The device is attached to the photocopying machine,
computer printer, or microfilm/fiche printer in a similar manner as attaching a
standard coin acceptor. The device can be attached to either existing or new
equipment. The control system enables customers to photocopy documents with the
use of a credit card.
The Debit Express(TM)
The Company's Debit Express(TM) enables customers to purchase or revalue
their debit cards with the swipe of a credit card and eliminates the need for
cash or for an attendant to handle cash or provide change. The Debit Express(TM)
eliminates any reliance on cash by allowing customers to use a valid credit card
to purchase or place additional value on a debit card.
The Public PC(R)
The Public PC(R) enables the public to utilize functions of a personal
computer on an "as-needed" basis in the public domain. Our system controls
access to the computer and charges for time in use, printed output, and any
modem activity.
TransAct(R) as a Stand Alone Product
USA Technologies produced and patented TransAct(R), a cashless
transaction terminal that enables secure, low cost credit transactions to take
place. As the nerve center for USA's Business Express(R) product line,
TransAct(R) currently enables all business center locations to provide 24/7
business center accessibility, secure transaction settlements and voice and
display instructions for users. TransAct(R) works effectively to transform a la
carte office components into automated, credit card-operated, revenue centers.
To penetrate effectively the "pay as you go" business service markets
within the retail, university, transportation and apartment communities, three
standardized TransAct(R) packages have been developed, priced and launched to
office component dealers who already service these markets. The Company
anticipates that the development of a dealer channel to sell TransAct(R) units
will increase licensing and usage revenue streams.
26
The e-Port(TM)
The e-Port(TM) has two basic versions, both of which contain all the
functionality of the current TransAct(R) terminal for credit card processing,
control and data management. The non-media version of the e-Port is a device
that is integrated with copiers, vending machines or other host equipment that
gathers information about sales and operations of the host equipment and also
allows a consumer to use a credit card to make a purchase. The media capable
version which is currently being engineered would offer, in addition, capability
for public access electronic commerce and advertising using the Internet. With
the media capable e-Port(TM), the Company believes it has positioned itself to
claim a piece of two important market spaces within the new "Internet" economy -
electronic commerce and pervasive computing. This version would enable
e-commerce to be transacted away from the computer and would offer Internet
merchants an extension of their business without brick and mortar outlays. It
could be considered a low cost "physical" location for "virtual" merchants. The
media capable e-Port(TM) would possibly give consumers the opportunity to engage
in interactive advertising and e-commerce while making routine purchases at
millions of points of sale - including our Business Express(R) locations,
vending machines, and convenience stores.
Marketing
As of December 31, 2001, the Company was marketing its products through
its full time staff consisting of five salespeople. The company is primarily
focused on the vending, hospitality and office equipment industries, but has
expanded product distribution into new industries, including transportation,
laundry and multi-housing.
In the vending industry, the non-media e-Port product line is now
commercialized and being used by vending operators and soft drink bottlers in
the USA and Canada. In April 2001, the Company formed a business alliance with
Marconi, who holds the global agreement with the Coca-Cola Company for
intelligent vending. The Company continues to work with the top vending machine
manufacturers, including Automatic Products, AMS, U-Select-It, Rowe
International, Vendtronics, Vendo, Royal and Dixie Narco; expand its authorized
resellers, including Betson Enterprises, State Sales & Service and Weymouth
Distributing; and intends to implement the non-media version of the e-Port with
major national vending operators.
As for the hospitality industry, Business Express continues to be one
of the premier solutions for automated business centers. The Company has
relationships with the two most recognized global hotel chains, Marriott and
Hilton Hotels and two of the largest hotel management companies in the USA,
MeriStar Hotels and Prime Hospitality.
In the office equipment industry, the Company continues to work with
Xerox, its largest authorized reseller on new distribution opportunities. In
addition to Xerox, the Company has added a major new reseller in Canada, Global
Technologies, which has increased the distribution of our TransAct products.
In June, 2001, the Company and IBM signed an Agreement which
establishes the basis for a strategic alliance between the two companies. The
two companies will combine their respective products and capabilities to target
sales to the intelligent vending, retail point of sale, and networked home
applications markets. Cooperation is currently underway to identify customers,
trade shows, and marketing avenues.
27
Procurement
The Company's media capable e-Port(TM) is currently being engineered to
be internet and media capable and easily mass producible, by an independent
contract manufacturer, RadiSys. The Company believes that work is nearing
completion and test units have been received. Product orders to RadiSys are
governed by the Design and Manufacturing Agreement signed in June, 2000.
In March, 2001, a manufacturing agreement between the Company and
Masterwork Electronics was signed, to provide the Company with manufacturing
capability for the non-media version of e-Port(TM). In January, 2002 the Company
placed an order with Masterwork for 700 non-media units. All 700 were received
in March, 2002.
The Company anticipates obtaining the other components of its business
center (computers, printers, fax and copy machines) through CompuCom, a
distributor of IBM products, Hewlett Packard, and copier and fax manufacturers.
Orders are regularly placed for quantities required for expected orders several
months in advance.
Competition
There are currently other businesses offering or announcing unattended,
credit card activated control systems for use in connection with copiers,
printers, personal computers, fax machines, Internet and e-mail access, vending,
retail point of sale, and debit card purchase/revalue stations. In addition, the
businesses which have developed unattended, credit card activated control
systems currently in use in connection with gasoline dispensing, public
telephones, prepaid telephone cards, ticket dispensing machines, vending
machines, or facsimile machines, are capable of developing products or utilizing
their existing products in direct competition with the Company. Many of these
businesses are well established, have substantially greater resources than the
Company and have established reputations for success in the development, sale
and service of high quality products. The Company is aware of businesses that
have developed an unattended, credit card activated control system to be used in
connection with vending machines. Any such increased competition may result in
reduced sales and/or lower percentages of gross revenues being retained by the
Company in connection with its licensing arrangements, or otherwise may reduce
potential profits or result in a loss of some or all of its customer base. The
Company is also aware of several businesses that make available use of the
Internet and use of personal computers to hotel guests in their hotel rooms.
Such services might compete with the Company's Business Express(R), and the
locations may not order the Business Express(R), or if ordered, the hotel guest
may not use it. The Company is aware that credit card activated personal
computer kiosks have been developed and are in the marketplace.
28
Patents, Trademarks and Proprietary Information
We received federal registration approval of our trademarks Business
Express(R), C3X(R), and Public PC(R), and have applied for federal registration
of Copy Express(TM), e-Port(TM), and TransAct(TM).
Much of the technology we have developed is subject to trade secret
protection. To reduce the risk of loss of trade secret protection through
disclosure, we have entered into confidentiality agreements with our key
employees. There can be no assurance that we 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 our technology.
As of June 30, 2001, we have thirty-seven pending patent applications
as well as sixteen pending foreign patents. Through December 31, 2001, thirteen
United States patents have been issued to us:
o U.S. Patent No. 5,619,024 entitled "Credit Card and Bank Issued
Debit Card Operating System and Method for Controlling and
Monitoring Access of Computer and Copy Equipment";
o U.S. Patent No. 5,637,845 entitled "Credit and Bank Issued Debit
Card Operating System and Method for Controlling a Prepaid Card
Encoding/Dispensing Machine";
o U.S. Patent No. D423,474 entitled "Dataport";
o U.S. Patent No. D415,742 entitled "Laptop Dataport Enclosure";
o U.S. Patent No. D418,878 entitled "Sign Holder";
o U.S. Patent No. 6,056,194 entitled "System and Method for
Networking and Controlling Vending Machines";
o U.S. Patent No. D428,047 entitled "Electronic Commerce Terminal
Enclosure";
o U.S. Patent No. D428,444 entitled "Electronic Commerce Terminal
Enclosure for a Vending Machine";
o U.S. Patent No. 6,119,934 entitled "Credit Card, Smart Card and
Bank Issued Debit Card Operated System and Method for Processing
Electronic Transactions";
o U.S. Patent No. 6,152,365 entitled "Credit and Bank Issued Debit
Card Operated System and Method for Controlling a Vending
Machine";
o U.S. Patent No. D437,890 entitled "Electronic Commerce Terminal
Enclosure with a Hooked Fastening Edge for a Vending Machine"; and
o U.S. Patent No. D441,401 entitled "Electronic Commerce Terminal
Enclosure with Brackets".
o U.S. Patent No. 6,321,985 entitled "System and Method for
Networking and Controlling Vending Machines."
In addition, two foreign patents, Canadian Patent No. D87998 entitled
"Sign Holder" and Canadian Patent No. D91645 entitled "Laptop Data Port
Enclosure" have been issued to USA.
Employees
On December 31, 2001, we had 28 full-time employees.
Properties
We lease our principal executive offices, consisting of approximately
10,000 square feet, at 200 Plant Avenue, Wayne, Pennsylvania for a monthly
rental of $12,705 plus utilities and operating expenses. The lease expires on
June 30, 2002. The Company intends to renew their lease for at least one year.
29
Where to get more information
We file annual, quarterly and special reports and other information
with the SEC. You may read and copy any document we file with the SEC at the
SEC's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549. You
may obtain information on the operation of the public reference room by calling
the SEC at 1-800-SEC-0330. The same information may be obtained at the following
Regional Office of the SEC: 7 World Trade Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material can also be obtained from
the Public Reference Section of the SEC's Washington, D.C. office at prescribed
rates.
Our filings may also be accessed through the SEC's web site
(http://www.sec.gov). We will provide a copy of any or all documents
incorporated by reference herein (exclusive of exhibits unless such exhibits are
specifically incorporated by reference therein), without charge, to each person
to whom this prospectus is delivered, upon written or oral request to USA
Technologies, Inc., 200 Plant Avenue, Wayne, Pennsylvania 19087, Attn: George R.
Jensen, Jr., Chief Executive Officer (telephone (610) 989-0340).
We will furnish record holders of our securities with annual reports
containing financial statements audited and reported upon by our independent
auditors, quarterly reports containing unaudited interim financial information,
and such other periodic reports as we may determine to be appropriate or as may
be required by law.
MANAGEMENT
Directors and Executive Officers
Our Directors and executive officers, on the date of this Prospectus,
together with their ages and business backgrounds were 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, 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) 79 Director
William L. Van Alen, Jr. (1)(2) 67 Director
Steven Katz (1) 52 Director
Douglas M. Lurio (2) 45 Director
Edwin R. Boynton 47 Director
(1) Member of Compensation Committee
(2) Member of Audit Committee
30
Each Director holds office until the next Annual Meeting of
shareholders and until his successor has been elected and qualified.
George R. Jensen, Jr., has been our Chief Executive Officer and a
Director since our inception in January 1992. Mr. Jensen was Chairman, Director,
and Chief Executive Officer of American Film Technologies, Inc. ("AFT") from
1985 until 1992. AFT was in the business of creating color imaged versions of
black-and-white films. From 1979 to 1985, Mr. Jensen was Chief Executive Officer
and President of International Film Productions, Inc. Mr. Jensen was the
Executive Producer of the twelve hour miniseries, "A.D.", a $35 million dollar
production filmed in Tunisia. Procter and Gamble, Inc., the primary source of
funds, co-produced and sponsored the epic, which aired in March 1985 for five
consecutive nights on the NBC network. Mr. Jensen was also the Executive
Producer for the 1983 special for public television, "A Tribute to Princess
Grace". From 1971 to 1978, Mr. Jensen was a securities broker, primarily for the
firm of Smith Barney, Harris Upham. Mr. Jensen was chosen 1989 Entrepreneur of
the Year in the high technology category for the Philadelphia, Pennsylvania area
by Ernst & Young LLP and Inc. Magazine. Mr. Jensen received his Bachelor of
Science Degree from the University of Tennessee and is a graduate of the
Advanced Management Program at the Wharton School of the University of
Pennsylvania.
Stephen P. Herbert was elected a Director in April 1996, and joined USA
on a full-time basis on May 6, 1996. Prior to joining us and since 1986, Mr.
Herbert had been employed by Pepsi-Cola,the beverage division of PepsiCo, Inc.
From 1994 to April 1996, Mr. Herbert was a Manager of Market Strategy. In such
position he was responsible for directing development of market strategy for the
vending channel and subsequently the supermarket channel for Pepsi-Cola in North
America. Prior thereto, Mr. Herbert held various sales and management positions
with Pepsi-Cola. Mr. Herbert graduated with a Bachelor of Science degree from
Louisiana State University.
Haven Brock Kolls, Jr., joined USA 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 USA on a full-time basis on February 24, 1997
as Chief Financial Officer, Senior Vice President and Treasurer. Prior to
joining us, 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.
31
Michael K. Lawlor joined USA on a full-time basis in 1997 and was
promoted to Senior Vice President, Sales and Marketing in September 1999. Prior
to joining us, Mr. Lawlor worked with Aladdin Industries, a leading manufacturer
of promotional drinkware, as Director of Restaurant Sales. From 1986 to 1995,
Mr. Lawlor was employed in various sales capacities by Pepsi-Cola and was
National Accounts Sales Manager when he departed in 1995. Mr Lawlor received an
undergraduate degree in Marketing from the University of Texas.
William W. Sellers joined the Board of Directors of USA in May 1993.
Mr. Sellers founded The Sellers Company in 1949 which has been nationally
recognized as the leader in the design and manufacture of state-of-the-art
equipment for the paving industry. Mr. Sellers has been awarded five United
States patents and several Canadian patents pertaining to this equipment. The
Sellers Company was sold to Mechtron International in 1985. Mr. Sellers is
Chairman of the Board of Sellers Process Equipment Company which sells products
and systems to the food and other industries. Mr. Sellers is actively involved
in his community. Mr. Sellers received his undergraduate degree from the
University of Pennsylvania.
William L. Van Alen, Jr., joined the Board of Directors of USA in May
1993. Mr. Van Alen is President of Cornerstone Entertainment, Inc., an
organization engaged in the production of feature films of which he was a
founder in 1985. Since 1996, Mr. Van Alen has been President and a Director of
The Noah Fund, a publicly traded mutual fund. Prior to 1985, Mr. Van Alen
practiced law in Pennsylvania for twenty-two years. Mr. Van Alen received his
undergraduate degree in Economics from the University of Pennsylvania and his
law degree from Villanova Law School.
Steven Katz joined the Board of Directors in May 1999. He is President
of Steven Katz & Associates, Inc., a management consulting firm specializing in
strategic planning and corporate development for technology and service-based
companies in the health care, environmental, telecommunications and Internet
markets. Mr. Katz's prior experience includes five years with 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.
32
Douglas M. Lurio joined the Board of Directors of USA in June 1999. Mr.
Lurio is President of Lurio & Associates, P.C., attorneys-at-law, which he
founded in 1991. He specializes in the practice of corporate and securities law.
Prior thereto, he was a partner with Dilworth, Paxson LLP. Mr. Lurio received a
Bachelor of Arts Degree in Government from Franklin & Marshall College, a Juris
Doctor Degree from Villanova Law School, and a Masters in Law (Taxation) 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.
Executive Compensation
The following table sets forth certain information with respect to
compensation paid or accrued by the Company during the fiscal years ended June
30, 1999, June 30, 2000 and June 30, 2001 to each of the executive officers and
the other employee of the Company named below. Except as set forth below, no
individual who was serving as an executive officer of the Company at the end of
the fiscal years ended June 30, 1999, June 30, 2000 or June 30, 2001 received
salary and bonus in excess of $100,000 in any such fiscal year.
Summary Compensation Table
Fiscal
Name and Principal Position Year Annual Compensation Long Term Compensation
------------------------------------------------------------------------------------------------------
Salary Bonus Other Restricted Securities
(1) Annual Stock Underlying
Compensation Awards Options
------------------------------------------------------------------------------------------------------
George R. Jensen, Jr., 2001 $135,000 $140,000 -- -- 300,000
Chief Executive Officer, 2000 $117,500 $ 50,000 -- $80,000 (2) 180,000
1999 $100,000 $ 0 -- --
Stephen P. Herbert, 2001 $125,000 $134,400 -- -- 80,000
President 2000 $107,500 $ 94,000 -- $80,000 (2) 45,000
Leland P. Maxwell, Chief 2001 $108,000 $ 44,240 -- -- 50,000
Financial Officer,Treasurer 2000 $ 99,000 $ 29,000 -- -- 15,000
H. Brock Kolls, Senior Vice 2001 $120,000 $ 97,440 -- -- 80,000
President, Research& 2000 $105,000 $ 44,000 -- $80,000 (2) 30,000
Development
Michael K. Lawlor, Senior 2001 $100,000 $ 38,640 -- -- 50,000
Vice President, Sales and 2000 $ 83,200 $ 35,500 $43,000 (3) -- 20,000
Marketing
Adele H. Hepburn 2001 $ 91,000 $171,700 -- --
Director of Investor 2000 $ 91,000 $147,800 -- --
Relations 1999 $ 91,000 $ 51,500 -- --
33
(1) For fiscal year 2000, represents shares of Common Stock issued to the
executive officers valued at $2.00 per share, the closing bid price on the
date of issuance. For Mr. Lawlor, the bonus also includes a $5,500 sales
commission. For fiscal year 2001, represents shares of Common Stock issued
to the executive officers valued at $1.12, the closing price on the
effective day of authorization. For Mr. Lawlor, the bonus also includes a
$1,265 sales commission. The bonus amounts for all fiscal years for
Adele Hepburn consist of cash payments from the Company.
(2) Represents shares of Common Stock issued to such executive officers if
employed by the Company on June 30, 2002. The shares have been valued at
$2.00 per share, the closing bid price on the date of grant.
(3) Represents payment by the Company of relocation expenses.
The following table sets forth information regarding stock options
granted during the fiscal year 2001 to the Company's executive officers named
below:
OPTION GRANTS DURING FISCAL YEAR ENDED JUNE 30, 2001
Name Number of Percent of Exercise Expiration
Securities Total Options Price Date
Underlying Granted to Per
Options Employees in Share
Granted Fiscal Year
George R. Jensen, Jr. 200,000 47.2% $1.50 June 30, 2003
33,333 $1.00 October 20, 2006
33,333 $1.00 July 20, 2007
33,334 $1.00 April 20, 2008
Stephen P. Herbert 26,667 12.6% $1.00 October 20, 2006
26,667 $1.00 July 20, 2007
26,666 $1.00 April 20, 2008
H. Brock Kolls 26,667 12.6% $1.00 October 20, 2006
26,667 $1.00 July 20, 2007
26,666 $1.00 April 20, 2008
Leland P. Maxwell 16,667 7.9% $1.00 October 20, 2006
16,667 $1.00 July 20, 2007
16,666 $1.00 April 20, 2008
Michael K. Lawlor 16,667 7.9% $1.00 October 20, 2006
16,667 $1.00 July 20, 2007
16,666 $1.00 April 20, 2008
Executive Employment Agreements
The Company has entered into an employment agreement with Mr. Jensen
which expires June 30, 2002. The Agreement is automatically renewed from year to
year unless canceled by Mr. Jensen or the Company. The agreement provides for an
annual base salary of $135,000 effective March 1, 2000. Mr. Jensen is entitled
to receive such bonus or bonuses as may be awarded to him by the Board of
Directors. In determining whether to pay such a bonus, the Board would use its
subjective discretion. The Agreement requires Mr. Jensen to devote his full time
and attention to the business and affairs of the Company, and obligates him not
to engage in any investments or activities which would compete with the Company
during the term of the Agreement and for a period of one year thereafter. The
agreement provides that if Mr. Jensen is employed by the Company on June 30,
2002, the Company will issue to him 40,000 shares of Common Stock.
34
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 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.
On January 21, 1999, Mr. Jensen purchased ten (10) units of the 1999
Senior Note placement offering for $100,000. In full payment for such Units, Mr.
Jensen has agreed to forego any base salary otherwise payable to him under his
employment agreement during the period of time commencing on April 1, 1999 and
ending on June 30, 2000, or such longer period of time as may be required based
upon his monthly net base salary after all applicable withholding taxes and
other deductions. At June 30, 2000, $12,199 was outstanding. Subsequent to year
end, the $12,199 has been received in full.
The Company has entered into a one-year employment agreement with Mr.
Herbert which expires on June 30, 2002. The agreement is automatically renewed
from year to year thereafter unless canceled by Mr. Herbert or the Company. The
Agreement provides for an annual base salary of $125,000 per year effective
March 1, 2000. Mr. Herbert is entitled to receive such bonus or bonuses as the
Board of Directors may award to him. The Agreement requires Mr. Herbert to
devote his full time and attention to the business and affairs of the Company
and obligates him not to engage in any investments or activities which would
compete with the Company during the term of the agreement and for a period of
one year thereafter. The agreement provides that if Mr. Herbert is employed by
the Company on June 30, 2002, the Company will issue to him 40,000 shares of
Common Stock.
Mr. Kolls has entered into a one-year employment agreement with the
Company which expires on June 30, 2002, and is automatically renewed from year
to year thereafter unless canceled by Mr. Kolls or the Company. The agreement
provides for an annual base salary of $120,000 per year effective March 1, 2000.
Mr. Kolls is also entitled to receive such bonus or bonuses as may be awarded to
him by the Board of Directors. The Agreement requires Mr. Kolls to devote his
full time and attention to the business and affairs of the Company, and
obligates him not to engage in any investments or activities which would compete
with the Company during the term of his agreement and for a period of one year
thereafter. The agreement provides that if Mr. Kolls is employed by the Company
on June 30, 2002, the Company will issue to him 40,000 shares of Common Stock.
Mr. Maxwell has entered into an employment agreement with the Company
which expires on June 30, 2002, and is automatically renewed from year to year
thereafter unless cancelled by Mr. Maxwell or the Company. The agreement
provides for an annual base salary of $108,000 per year effective March 1, 2000.
Mr. Maxwell is also entitled to receive such bonus or bonuses as the Board of
Directors may award to him. The Agreement requires Mr. Maxwell to devote his
full time and attention to the business and affairs of the Company, and
obligates him not to engage in any investments or activities which would compete
with the Company during the term of the agreement and for a period of one year
thereafter.
35
Mr. Lawlor has entered into an employment agreement with the Company
which expires on June 30, 2002, and is automatically renewed from year to year
thereafter unless cancelled by Mr. Lawlor or the Company. The agreement provides
for an annual base salary of $100,000 per year effective March 1, 2000. Mr.
Lawlor is also entitled to receive such bonus or bonuses as the Board of
Directors may award to him. The Agreement requires Mr. Lawlor to devote his full
time and attention to the business and affairs of the Company, and obligates him
not to engage in any investments or activities which would compete with the
Company during the term of the agreement and for a period of one year
thereafter.
Director Compensation and Stock Options
Members of the Board of Directors do not currently receive any cash
compensation for serving on the Board of Directors or any Committee thereof.
In July 1993, the Company issued to each of Messrs. 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. In July 1999, the
expiration date of these options was extended from June 30, 2000 to June 30,
2001. In February 2001, the expiration date was further extended until June 30,
2003. In April 1998, the exercise price was reduced from $2.50 to $1.50.
In March 1995, the Company issued to Mr. Sellers fully vested options
to purchase 5,500 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 was $2.50 per share. In July 1999, the expiration date of these options
was exteded from February 29, 2000 to June 30, 2001. In February 2001, the
expiration date was further extended until June 30, 2000. In April 1998, the
exercise price of these options was reduced from $2.50 to $1.50.
During June and July 1999, the Company granted 10,000 options to each
of the seven Directors who were not executive officers of the Company. Each
option is exercisable at $2.00 per share at any time for five years following
the vesting thereof.
In February 2001, the Board of Directors granted a total of 300,000
options to purchase Common Stock at $1.00 per share to outside members of the
Board. Of these, 120,000 options vested immediately; 90,000 options vested on
June 30, 2001; and 90,000 will vest on June 30, 2002. The options may be
exercised at any time within five years following the vesting.
All of the Common Stock underlying the above options was registered by
the Company under the Act, for resale by the holder thereof. Such registration
was at the Company's cost and expense.
36
The Board of Directors is responsible for awarding stock options. Such
awards are made in the subjective discretion of the Board. Other than the
repricing of the options by the Company in April 1998, the exercise price of all
the above options represents on the date of issuance of such options an amount
equal to or in excess of the market value of the Common Stock issuable upon the
exercise of the options. In connection with the April 1998 repricing of stock
options, the exercise prices of all these fully vested options were below the
fair market value on the date or repricing, therefore, the Company recorded a
charge to compensation expense during fiscal year 1998.
All of the foregoing options are non-qualified stock options and not
part of a qualified stock option plan and do not constitute incentive stock
options as such term is defined under Section 422 of the Internal Revenue Code,
as amended, and are not part of an employee stock purchase plan as described in
Section 423 thereunder.
Executive Stock Options
In August 1999, the Company issued to an executive officer fully vested
options to acquire up to 20,000 shares of Common Stock at $2.00 per share. The
options are exercisable at any time within five years following issuance. The
Company issued the options pursuant to the exemption from registration set forth
in Section 4(2) of the Act.
In November 1999, the Company issued fully vested options to purchase
an aggregate of 90,000 shares of Common Stock to its executive officers as
follows: Stephen P. Herbert - 45,000 options; Haven Brock Kolls - 30,000
options; and Leland Maxwell - 15,000 options. Each option is exercisable at
$2.00 per share at any time within five years following issuance.
In October 2000, the Company issued to George R. Jensen, Jr., fully
vested options to acquire up to 200,000 shares of Common Stock at $1.50 per
share. The options were exercisable at any time within two years following
issuance. In February 2001, the Company extended the expiration date of these
options until June 30, 2003.
In April 2001, the Company issued the following options to purchase an
aggregate of 360,000 shares of Common Stock to its executive officers as
follows: George R. Jensen, Jr. - 100,000; Stephen P. Herbert - 80,000 options;
Haven Brock Kolls - 80,000 options; Leland Maxwell - 50,000 options; and Michael
Lawlor - 50,000 options. Each option is exercisable at $1.00 per share at any
time within five years following vesting. The options vest one-third in October
2001, one-third in July 2002 and the balance in April 2003.
In November 2001, the Company authorized issuance of 1,080,000 fully
vested options to purchase Common Stock to its Executive Officers, provided that
they are employed by the Company on January 2, 2002. The option amounts are:
George R. Jensen, Jr. - 320,000 options; Stephen P. Herbert - 300,000 options;
Haven Brock Kolls 200,000 options; Leland Maxwell - 130,000 options; and Michael
Lawlor - 130,000 options. Each option is exercisable at $.40 per share at any
time following vesting and on or before June 30, 2003. These options became
vested in March, 2002.
All of the shares underlying the above options have been registered by
the Company under the Act for resale by the holder thereof 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. 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.
37
PRINCIPAL SHAREHOLDERS
Common Stock
The following table sets forth, as of January 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 Percent
Name and Address of Common Stock Of
of Beneficial Owner Beneficially Owned(1) Class (2)
------------------- --------------------- ---------
George R. Jensen, Jr. 1,075,000 shares(3) 1.47%
517 Legion Road
West Chester, Pennsylvania 19382
Stephen P. Herbert 1,004,717 shares(4) 1.38%
536 West Beach Tree Lane
Strafford, Pennsylvania 19087
Haven Brock Kolls, Jr. 755,517 shares(5) 1.04%
1573 Potter Drive
Pottstown, Pennsylvania 19335
Leland P. Maxwell 413,717 shares(6) *
401 Dartmouth Road
Bryn Mawr, Pennsylvania 19010
Michael K. Lawlor 376,217 shares (7) *
113 Lisa Drive
Paoli, PA 19301
Edwin R. Boynton 240,500 shares(8) *
104 Leighton Drive
Bryn Mawr, Pennsylvania 19010
Steven Katz 45,000 shares(9) *
20 Rebel Run Drive
East Brunswick, New Jersey 08816
Douglas M. Lurio 263,713 shares(10) *
2005 Market Street, Suite 2340
Philadelphia, Pennsylvania 19103
William W. Sellers 815,744 shares(11) 1.12%
394 East Church Road
King of Prussia, Pennsylvania 19406
Henry B. duPont Smith 77,000 shares(12) *
350 Mill Bank Road
Bryn Mawr, Pennsylvania 19010
William L. Van Alen, Jr. 125,836 shares(13) *
Cornerstone Entertainment, Inc.
P.O. Box 727
Edgemont, Pennsylvania 19028
La Jolla Cove Investors, Inc. 9,615,375 shares (14) 13.18%
7817 Herschel Avenue, Suite 200
La Jolla, California 92037
All Directors and Executive
Officers As a Group (11 persons) 5,546,294 shares(15) 7.60%
* Less than one percent (1%)
38
(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 Series A Preferred Stock, or shares of
Common Stock issuable upon exercise of warrants, senior notes,
convertible debentures or options currently exercisable or convertible,
or exercisable or convertible within 60 days of January 30, 2002, are
deemed to be beneficially owned for purposes hereof.
(2) On January 30, 2002, there were 35,399,300 shares of Common Stock and
545,789 shares of Series A Preferred Stock issued and outstanding. For
purposes of computing the percentages under this table, it is assumed
that the 1,260,000 shares of stock being registered for consultants are
included for the purposes of this table, and that all shares of Series
A Preferred Stock have been converted into Common Stock, all accrued
and unpaid dividends on the Series A Preferred Stock as of January 30,
2002 have been converted into 494,505 shares of Common Stock, all
options which are vested as of January 30, 2002 (or within 60-days
thereof) have been converted into 3,356,667 shares of Common Stock, all
outstanding warrants have been exercised for 10,837,851 shares of
Common Stock, the La Jolla Convertible Debenture and related conversion
warrants have been exercised for 8,760,675 shares, and all outstanding
Convertible Senior Notes have been converted into 12,304,700 shares of
Common Stock. Therefore, for purposes of computing the percentages
under this table, there are 72,549,487 shares of Common Stock issued
and outstanding.
(3) Includes 700,000 shares of Common Stock issuable upon the exercise of
options, 168,000 shares issuable upon conversion of Senior Notes, and
10,000 shares of Common Stock beneficially owned by his spouse. Does
not include the right granted to Mr. Jensen under his Employment
Agreement to receive seven percent (7%) of the issued and outstanding
Common Stock upon the occurrence of a USA Transaction (as defined
herein).
(4) Includes 536,667 shares of Common Stock issuable to Mr. Herbert upon
the exercise of options and 1,000 shares beneficially owned by his
child.
(5) Includes 396,667 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 216,667 shares of Common Stock issuable to Mr. Maxwell upon
the exercise of options.
(7) Includes 196,667 shares of Common Stock issuable to Mr. Lawlor upon the
exercise of options.
(8) Includes 5,500 shares of Common Stock issuable upon conversion of 5,500
shares of Series A Preferred Stock. Includes 45,000 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 on
the Series A Preferred Stock.
(9) Includes 45,000 shares of Common Stock issuable upon exercise of
options.
(10) Includes 42,213 shares of Common Stock held jointly with Mr. Lurio's
spouse, 45,000 shares of Common Stock issuable upon exercise of
options, 100,000 shares issuable upon exercise of warrants, and 24,000
shares issuable upon conversion of his Senior Note.
(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 spouse. Includes
60,500 shares of Common Stock issuable upon exercise of options,
153,334 shares issuable upon exercise of warrants, and 56,000 shares
issuable upon conversion of Senior Notes.
(12) Includes 12,000 shares of Common Stock issuable upon conversion of the
12,000 shares of Series A Preferred Stock beneficially owned by Mr.
Smith. Includes 55,000 shares of Common Stock issuable upon exercise of
options. Does not include any shares of Common Stock issuable upon
conversion of any accrued and unpaid dividends on the Series A
Preferred Stock.
(13) Includes 57,500 shares of Common Stock issuable to Mr. Van Alen upon
exercise of options and 26,668 shares issuable upon exercise of
warrants.
(14) Includes 854,700 shares of Common Stock as well as 8,760,675 shares
issuable upon conversion of Convertible Debenture and exercise of
related conversion warrants.
(15) Includes all shares of Common Stock described in footnotes (2) through
(13) above.
39
Preferred Stock
Series A Preferred Stock
The following table sets forth, as of January 30, 2002, the beneficial
ownership of the Series A 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 Series A Preferred Stock.
Except as otherwise indicated, the Company believes that the beneficial owners
of the Series A Preferred Stock listed below, based on information furnished by
such owners, have sole investment and voting power with respect to such shares,
subject to community property laws where applicable.
Number of Shares
Name and Address of Preferred Stock Percent of
of Beneficial Owner Beneficially Owned Class (1)
------------------- ------------------ ----------
Edwin R. Boynton 5,500 1.0%
104 Leighton Avenue
Bryn Mawr, Pennsylvania 19010
Henry B. duPont Smith 12,000(2) 2.18%
350 Mill Bank Road
Bryn Mawr, Pennsylvania 19010
All Directors and Executive
Officers As a Group (11 persons) 17,500 3.18%
* Less than one percent (1%)
-----------
(1) There were 549,884 shares of Series A Preferred Stock issued and
outstanding as of January 30, 2002.
(2) Includes 2,000 shares of Series A Preferred Stock held by trusts for
the benefit of Mr. Smith's children of which he is a trustee.
40
CERTAIN TRANSACTIONS
On January 21, 1999, Mr. Jensen purchased ten units pursuant to the
Company's private placement offering of Senior Notes for $100,000. In full
payment, Mr. Jensen has agreed to forgo any base salary otherwise payable to him
under his employment agreement during the period of time commencing on April 1,
1999 and ending on June 30, 2000, or such longer period as required. Mr. Jensen
made full payment by June 30, 2000.
In 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; and George Jensen - 200,000 options.
During the fiscal year ended June 30, 2000 and June 30, 2001, the
Company paid Lurio & Associates, P.C., of which Mr. Lurio is President and a
current member of our Board of Directors, professional fees of approximately
$179,000 and $220,000 respectively, for legal services rendered to the Company
by such law firm.
41
During February 2000, the Company issued an aggregate of 87,500 shares
of Common Stock to five executive officers: George Jensen - 25,000 shares;
Stephen Herbert - 20,000 shares; Haven Brock Kolls - 20,000 shares; Leland
Maxwell - 12,500 shares; Michael Lawlor - 10,000 shares. Such shares were issued
as a bonus for services rendered and to be rendered for the calendar year 2000.
The shares were valued at $2.00 per share, the closing bid price on the date of
issuance. The Company has registered these shares under the Act.
In February 2000, in connection with his relocation to the
Philadelphia, Pennsylvania area, the Company agreed to pay the costs of
relocation for Michael Lawlor, Vice President of the Company. As of June 30,
2000, a total of approximately $43,000 has been paid for this purpose.
In April, 2000, the Board of Directors authorized the Company to issue
up to 25,000 shares of Common Stock to current or future employees, directors or
consultants as compensation or bonus. Through June 30, 2001, all shares have
been issued.
In October 2000, the Company issued to George R. Jensen, Jr., fully
vested options to acquire up to 200,000 shares of Common Stock at $1.50 per
share. The options were exercisable at any time within two years following
issuance. In February 2001, the Company extended the expiration date of these
options until June 30, 2003.
In February 2001, the Board of Directors granted a total of 300,000
options to purchase Common Stock at $1.00 per share to outside members of the
Board. Of these, 120,000 options vested immediately; 90,000 options vested on
June 30, 2001; and 90,000 will vest on June 30, 2002. The options may be
exercised at any time within five years following the vesting.
In April 2001, the Company issued the following options to purchase an
aggregate of 360,000 shares of Common Stock to its executive officers as
follows: George R. Jensen, Jr. - 100,000; Stephen P. Herbert - 80,000 options;
Haven Brock Kolls - 80,000 options; Leland Maxwell - 50,000 options; and Michael
Lawlor - 50,000 options. Each option is exercisable at $1.00 per share at any
time within five years following vesting. The options vest one-third in October
2001, one-third in July 2002 and the balance in April 2003. The Company also
issued the following shares of Common Stock to its executive officers as
follows: George R. Jensen, Jr. - 125,000 shares; Stephen P. Herbert - 120,000
shares; Haven Brock Kolls - 87,000 shares; Leland Maxwell - 39,500 shares; and
Michael Lawlor - 34,500 shares.
In September 2001, the Company paid a fiscal year 2002 bonus to Adele
Hepburn in the amount of $200,000 consisting of 33.33 units of the 2001-B
private placement offering which closed on September 14, 2001.
The following executive officers had signed subscription agreements but
had not paid the amounts due thereunder to the Company in connection with the
private placement offering of Common Stock and 2001-C Warrants that closed in
October 2001: George R. Jensen, Jr. - $160,000; Stephen P. Herbert - $150,000;
Haven Brock Kolls - $100,000; Leland P. Maxwell - $75,000; and Michael Lawlor -
$75,000. For each $10,000 subscribed for in the offering, the subscriber is
entitled to receive 10,000 shares and warrants to purchase up to 10,000 shares
at $.50 per share. As detailed in the next paragraph, in January 2002, the
shares of Common Stock subscribed for as well as all of the shares of Common
Stock underlying the 2001-C Warrants subscribed for were issued to the executive
officers by the Company as a bonus.
In January 2002, the Company paid a bonus to the executive officers, as
follows: George R. Jensen, Jr. - 320,000 shares; Stephen P. Herbert - 300,000
shares; Haven Brock Kolls - 200,000 shares; Leland P. Maxwell - 130,000 shares;
and Michael Lawlor - 130,000 shares. These shares represented all of the Common
Stock issuable pursuant to the subscription agreements entered into by these
executive officers referred to above as well as all of the Common Stock
underlying all of the 2001-C Warrants subscribed for by them. In connection with
the issuance of the shares, the executive officers were not required to pay any
amounts due under the subscription agreements or any of the amounts due for the
exercise price of the 2001-C Warrants. As a result of the issuance of these
shares, the Company recorded a non-cash compensation charge of $486,000 in the
quarter ended March 31, 2002. The Company has agreed at its cost and expense to
register all of these shares for resale under the Act.
In November 2001, the Company and Mr. Jensen agreed to reduce the
percentage of shares of Common Stock to be issued to him under his Employment
Agreement in the event of a USA Transaction from eight percent to seven percent
of the issued and outstanding shares.
42
SELLING SHAREHOLDERS
Each of the selling shareholders listed below is, as of the date
hereof, the holder of our common stock or has the right to acquire the number of
shares of common stock set forth opposite such selling shareholder's name. The
issuance of the common stock to the selling shareholders as well as the issuance
of the common stock to the selling shareholders upon exercise of the warrants or
options or upon conversion of the convertible debentures was or will be a
transaction exempt from the registration requirements of the Act and various
state securities laws.
We have agreed, at our expense, to register all of the common stock for
resale by the selling shareholders under the Act. We expect to incur expenses of
approximately $40,000 in connection with the registration statement of which
this prospectus is a part.
The number of shares that may be actually sold by the selling
shareholder will be determined by the selling shareholder. The selling
shareholders are under no obligation to sell all or any portion of the shares
offered, nor are the selling shareholders obligated to sell such shares
immediately under this Prospectus. Particular selling shareholders may not have
a preset intention of selling their shares and may offer less than the number of
shares indicated. Because the selling shareholder may sell all, some or none of
the shares of common stock that the selling shareholder holds, no estimate can
be given as to the number of shares of our common stock that will be held by the
selling shareholder upon termination of the offering. Shares of common stock may
be sold from time to time by the selling shareholders or by pledgees, donees,
transferees or other successors in interest.
The following tables set forth information with respect to each selling
shareholder and the respective amounts of common stock that may be offered
pursuant to this prospectus. None of the selling shareholders has, or within the
past three years has had, any position, office or other material relationship
with us, except as noted below. Except as specifically set forth below,
following the offering, and assuming all of the common stock offered hereby has
been sold, none of the selling shareholders will beneficially own one percent
(1%) or more of the common stock.
LA JOLLA COMMON STOCK
Beneficial Ownership
After Offering
Common Stock Offered --------------
Selling Shareholder Hereby Number Percent
------------------- ------ ------ -------
La Jolla Cove Investors, Inc. 6,623,925 0 *
------------
* Less than one percent.
43
ALEX CONSULTING, INC. COMMON STOCK
Beneficial Ownership
After Offering
Common Stock Offered --------------
Selling Shareholder Hereby Number Percent
------------------- ------ ------ -------
Alex Consulting, Inc.(1) 400,000 shares 0 *
------------
* Less than one percent.
(1) Alex Consulting is presently our financial consultant.
LARRY GERSHMAN COMMON STOCK
Beneficial Ownership
After Offering
Common Stock Offered --------------
Selling Shareholder Hereby Number Percent
------------------- ------ ------ -------
Larry Gershman(1) 90,000 shares 0 *
------------
* Less than one percent.
(1) Mr. Gershman acts as our financial consultant.
EXECUTIVE OFFICER COMMON STOCK
Beneficial Ownership
After Offering
Common Stock Offered --------------
Selling Shareholder(1) Hereby Number Percent
------------------- ------ ------ -------
George R. Jensen, Jr. 320,000 shares 958,333 1.57%
Stephen P. Herbert 300,000 shares 704,717 1.15%
H. Brock Kolls 200,000 shares 555,517 *
Leland P. Maxwell 130,000 shares 283,717 *
Michael P. Lawlor 130,000 shares 246,217 *
--------------
Total 1,080,000 shares
------------
* Less than one percent.
(1) The selling shareholders are our current executive officers. The shares
represent shares underlying stock options granted to our executive officers in
March 2002.
44
EMPLOYMENT AGREEMENT COMMON STOCK
Beneficial Ownership
After Offering
Common Stock Offered --------------
Selling Shareholder(1) Hereby Number Percent
------------------- ------ ------ -------
George R. Jensen, Jr. 40,000 shares 958,333 1.57%
Stephen P. Herbert 40,000 shares 704,717 1.15%
H. Brock Kolls 40,000 shares 555,517 *
------- ---------
120,000 shares 2,218,567
------------
* Less than one percent.
(1) The selling shareholders are our executive officers. The shares represent
shares issuable to each of them under their employment agreements if employed by
us on June 30, 2002.
TECHNOLOGY PARTNERS COMMON STOCK
Beneficial Ownership
After Offering
Common Stock Offered --------------
Selling Shareholder(1) Hereby Number Percent
------------------- ------ ------ -------
Technology Partners (Holdings) LLC 240,000 shares 0 *
------------
* Less than one percent.
(1) Technology Partners is our investment banker. The shares are to be issued
pursuant to our agreement with Technology Partners.
45
MARKET FOR COMMON STOCK
The Common Stock is currently traded on the OTC Electronic Bulletin
Board under the symbol USTT.
The high and low bid prices on the OTC Electronic Bulletin Board for
the Common Stock were as follows:
Fiscal
------
2000 High Low
---- ---- ---
First Quarter (through September 30, 1999) $ 2.94 $1.63
Second Quarter (through December 31, 1999) $ 6.56 $1.63
Third Quarter (through March 31, 2000) $ 4.50 $2.19
Fourth Quarter (through June 30, 2000) $ 3.38 $1.31
2001
----
First Quarter (through September 30, 2000) $ 1.75 $0.91
Second Quarter (through December 31, 2000) $ 1.78 $0.66
Third Quarter (through March 31, 2001) $ 1.78 $0.88
Fourth Quarter (through June 30, 2001) $ 1.28 $0.74
2002
----
First Quarter (through September 30, 2001) $ 1.09 $0.52
Second Quarter (through December 31, 2001) $ 0.77 $0.28
Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
At January 30, 2002, there are 3,356,667 shares of Common Stock
issuable upon exercise of outstanding options. Of the 3,356,667 options,
1,080,000 are exercisable at $.40 per share, 5,000 are exercisable at $.50 per
share, 400,000 are exercisable at $.70 per share, 735,000 are exercisable at
$1.00 per share, 305,000 are exercisable at $1.50 per share, 656,167 are
exercisable at $2.00 per share, 84,000 are exercisable at $2.50 per share,
81,500 are exercisable at $4.50 per share, and 10,000 are exercisable at $5.00
per share. The Company has registered for resale under the 1933 Act all of the
Common Stock underlying the options. All of the aforesaid options have been
issued by the Company to employees, Directors, officers and consultants.
As of January 30, 2002, the following Warrants were outstanding:
4,000 1996-B Warrants;
1,500 1997 Warrants;
2,500 1998-A Warrants;
5,000 1998-B Warrants;
75,000 Investor Relations Group;
1,580,828 Swartz Private Equity, LLC warrants;
5,857,106 2001-B Warrants;
2,411,917 2001-C Warrants; and
100,000 GEMA Warrants.
As of January 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 2001-B Warrants).
As of January 30, 2002, there are $8,345,000 face value of Senior Notes
outstanding for which cash has been collected (including the $895,601 of funded
Senior Note deposits), which are convertible into 12,304,700 shares of Common
Stock. Of the total cash received, $5,034,000 of Notes are payable by the
Company on December 31, 2003, with the remainder payable by the Company on
December 31, 2004.
On January 30, 2002 there were 1,303 record holders of the Common Stock
and 585 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 December 31, 2001, such accumulated unpaid
dividends amount to $4,995,449 and an additional $409,342 of dividends accrued
on February 1, 2002.
During fiscal year 2001, certain holders of the Company's Preferred
Stock converted 11,160 shares into 11,160 shares of Common Stock. Certain of
these shareholders also converted cumulative preferred dividends of $87,030 into
8,703 shares of Common Stock.
46
As of January 30, 2002, there were 545,789 shares of Common Stock
issuable upon conversion of the outstanding Preferred Stock and 494,505 shares
issuable upon the conversion of cumulative Preferred Dividends, which when and
if issued would be freely tradeable under the Act.
Subsequent to January 30, 2002 and through April 5, 2002, the
following equity activity occurred:
* We sold an additional $364,351 of senior notes due 2004 which are
convertible into 910,877 shares at $.40 per share;
* We agreed to issue to Alex Consulting, Inc.a total of 400,000 shares;
* We agreed to issue to Larry Gershman a total of 90,000 shares; and
* We agreed to issue to Technology Partners (Holdings) LLC a total of
240,000 shares.
In March 2002, we entered into a binding letter of intent to acquire
Stitch Networks Corporation. Pursuant to the transaction, Stitch would become
our wholly-owned subsidiary. The letter provides that in exchange for their
Stitch stock, the Stitch stockholders would receive an aggregate of 24,000,000
of our shares of common stock and options to purchase up to 8,000,000 of our
shares of common stock at $.40 per share at any time through June 30, 2002. The
letter also provides that our Board of Directors would be increased to ten
members, with the three vacancies to be filled at the time of closing of the
transaction by persons nominated by Stitch. In order to consummate the proposed
transaction, our shareholders must approve an increase in the authorized shares
from 85,000,000 to 150,000,000. The shareholders' meeting is presently scheduled
for May 10, 2002. The letter provides that the transaction shall be closed no
later than May 17, 2002.
47
DESCRIPTION OF SECURITIES
General
We are authorized to issue up to 85,000,000 shares of common stock, no
par value, and 1,800,000 shares of undesignated preferred stock. As of the date
hereof, 900,000 shares have been designated as series A convertible preferred
stock, no par value.
As of January 30, 2002, there were 35,399,300 shares of common stock
issued and outstanding and 549,884 shares of series A preferred stock issued and
outstanding which are convertible into 549,884 shares of common stock. Through
January 30, 2002, a total of 565,361 shares of preferred stock have been
converted into 641,805 shares of common stock and $2,342,535 of accrued and
unpaid dividends thereon have been converted into 264,330 shares of common
stock.
48
Consultant Warrants
In April 2001, we issued warrants to purchase up to 75,000 shares to
the Investor Relations Group. The warrants are exercisable at any time for
five years at $1.25 per share.
49
We have at our expense registered for resale under the Act all of the
common stock underlying the consultant warrants.
Management Options
As of June 30, 2001, we had issued to our employees and consultants
options to acquire up to:
o 15,000 shares at $5.00 per share;
o 81,500 shares at $4.50 per share;
o 84,000 shares at $2.50 per share;
o 656,167 shares at $2.00 per share;
o 310,000 shares at $1.50 per share;
o 735,000 shares at $1.00 per share;
o 3,000,000 shares at $1.25 per share (which expired unexercised
in September 2001); and
o 5,000 shares at $.50 per share.
In connection with the management options, we have, at our cost and
expense, filed a registration statement under the Act covering the resale of all
the common stock underlying the options.
La Jolla Debenture and Warrants
During July 2001, the Company issued to La Jolla Cove Investors, Inc. a
warrant to purchase up to 500,000 shares of Common Stock. The warrant can be
exercised at any time in whole or in part within one year following the
effectiveness of the registration statement covering the resale of the shares
issuable upon exercise of the warrant. The exercise price of the warrant is the
lower of $1.00 or 80% of the lowest closing bid price of the Common Stock during
the 20 trading days prior to exercise. The Company has agreed to prepare and
file at its cost and expense a registration statement covering the resale by La
Jolla of the shares underlying the warrant. At the time of the issuance of the
warrant, La Jolla paid to the Company a non-refundable fee of $50,000 to be
credited towards the exercise price under the warrant. A broker-dealer received
a commission of $3,500 in connection with this warrant. During the quarter ended
December 31, 2001, La Jolla exercised all of these warrants for a cash payment
of approximately $.29 per share.
During August 2001, the Company issued to La Jolla a $225,000
Convertible Debenture bearing 9 3/4 percent interest with a maturity date of
August 2, 2003. Interest is payable by the Company monthly in arrears. The
Debenture is convertible at any time after the earlier of the effectiveness of
the registration statement referred to below or 90 days following issuance at
the lower of $1.00 per share or 80% of the lowest closing bid price of the
Common Stock during the 20 days (changed to 270 calendar days) preceding
exercise. If on the date of conversion the closing bid price of the shares is
$.40 or below, the Company shall have the right to prepay the portion being
converted at 150% of the principal amount being converted. In such event, La
Jolla shall have the right to withdraw its conversion notice. At the time of
conversion of the Debenture, the Company has agreed to issue to La Jolla
warrants to purchase an amount of Common Stock equal to ten times the number of
shares actually issued upon conversion of the Debenture. The warrants are
exercisable at any time for two years following issuance and at the related
conversion price of the Debenture. The Company has agreed to prepare and file at
its expense a registration statement covering the resale of the shares of Common
Stock underlying the Debenture as well as the related warrants issuable upon
conversion of the Debenture. La Jolla paid to the Company the sum of $100,000 at
the time of the issuance of the Debenture and the balance of $125,000 at the
time of the effective date of the registration statement.
Through March 31, 2002, La Jolla converted $70,000 of principal and
exercised related warrants for 2,719,500 shares receiving a total of 2,991,450
shares of Common Stock. The Debenture was converted at the rate of $.2574 per
share and the exercise price of the warrants was $.2574 per share. The Company
received proceeds of $700,000 in connection with the conversion of the
Debentures and exercise of related warrants.
50
Common Stock
The holder of each share of common stock:
o is entitled to one vote on all matters submitted to a vote of the
shareholders of USA, including the election of directors. There is
no cumulative voting for directors;
o does not have any preemptive rights to subscribe for or purchase
shares, obligations, warrants, or other securities of USA; and
o is entitled to receive such dividends as the Board of Directors
may from time to time declare out of funds legally available for
payment of dividends.
No dividend may be paid on the common stock until all accumulated and
unpaid dividends on the series A preferred stock have been paid. Upon any
liquidation, dissolution or winding up of USA, holders of shares of common stock
are entitled to receive pro rata all of the assets of USA available for
distribution, subject to the liquidation preference of the series A preferred
stock of $10.00 per share and any unpaid and accumulated dividends on the series
A preferred stock.
51
Series A Convertible Preferred Stock
The holders of shares of series A preferred stock:
o have the number of votes per share equal to the number of shares
of common stock into which each such share is convertible (i.e., 1
share of series A preferred stock equals 1 vote);
o are entitled to vote on all matters submitted to the vote of the
shareholders of USA, including the election of directors; and
o are entitled to an annual cumulative cash dividend of $1.50 per
annum, payable when, as and if declared by the Board of Directors.
The record dates for payment of dividends on the series A preferred
stock are February 1 and August 1 of each year. Any and all accumulated and
unpaid cash dividends on the series A preferred stock must be declared and paid
prior to the declaration and payment of any dividends on the common stock. Any
unpaid and accumulated dividends will not bear interest. As of June 30, 2001 the
accumulated and unpaid dividends were $4,621,150, and as of December 31, 2001
were $4,995,449.
Each share of series A preferred stock is convertible at any time into
1 share of fully issued and non-assessable common stock. Accrued and unpaid
dividends earned on shares of series A preferred stock being converted into
common stock are also convertible into common stock at the rate $10.00 per share
of common stock at the time of conversion and whether or not such dividends have
then been declared by USA. As of June 30, 2001, and December 31, 2002 a total of
555,866 and 560,191, respectively, shares of series A preferred stock have been
converted into common stock and accrued and unpaid dividends thereon have been
converted into 255,398 and 259,290, respectively, shares of common stock. The
conversion rate of the series A preferred stock (and any accrued and unpaid
dividends thereon) will be equitably adjusted for stock splits, stock
combinations, recapitalizations, and in connection with certain other issuances
of common stock by USA. Upon any liquidation, dissolution, or winding-up of USA,
the holders of series A preferred stock are entitled to receive a distribution
in preference to the common stock in the amount of $10.00 per share plus any
accumulated and unpaid dividends.
We have the right, at any time, to redeem all or any part of the issued
and outstanding series A preferred stock for the sum of $11.00 per share plus
any and all unpaid and accumulated dividends thereon. Upon notice by USA of such
call, the holders of the series A preferred stock so called will have the
opportunity to convert their shares and any unpaid and accumulated dividends
thereon into shares of common stock. The $11.00 per share figure was the
redemption price approved by the Directors and shareholders of USA at the time
the series A preferred stock was created and first issued. We currently have no
plans to redeem the preferred stock.
We issued a special stock dividend consisting of one-third of a share
of common stock for each share of series A preferred stock issued and
outstanding on August 1, 1995. The stock dividend consisted of an aggregate of
190,860 shares of common stock.
52
12% Senior Notes
As of December 31, 2001, we have outstanding $1,791,202 of Senior Notes
due December 31, 2004 (which included $895,601 of funded Senior Note deposits
subsequently reclassified into Senior Notes after the Shareholder meeting), and
$5,034,000 of Senior Notes due December 31, 2003. The principal amount of each
senior note which is not voluntarily converted shall be payable on the maturity
date thereof, at which time any unpaid and accrued interest shall also become
due. Interest shall accrue at the rate of 12% per annum from and after the date
of issuance and shall be payable quarterly in arrears on December 31, March 31,
June 30, and September 30 of each year until December 31, 2004. The senior notes
are senior to all existing equity securities of USA, including the series A
preferred stock.
Of the senior notes due December 31, 2003, a total of $3,823,000 were
purchased through the exchange of $3,823,000 of the old senior notes. The
principal amount of these notes is convertible at any time into shares of common
stock at the rate of $1.25 per share. The interest paid on these notes is also
convertible into shares of common stock at the rate of $1.00 per share. For the
quarters ended September 31, 2001 and December 31, 2001, the conversion rate was
reduced to $.50 per share and for the quarter ended March 31, 2002 to $.40 per
share.
In November 2001, the Company commenced a private placement offering of
12% Convertible Senior Notes due 2004. The principal amount of each Senior Note
is convertible at any time into shares of Common Stock at the rate of $.40 per
share. As part of this offering, current warrant holders were incented to
participate through a price reduction of some warrants and an extension of time
for exercise of some of these warrants. The warrants were scheduled to expire by
December 31, 2001 or March 31, 2002 (according to their original terms) at $.50
and now become exercisable at $.10 through December 31, 2002. In January 2002,
the offering was increased to up to $6,500,000 principal amount of Senior Notes.
In January 2002, the Company agreed to provide the option to each holder of
these senior notes to elect to accept shares in lieu of receiving cash in
satisfaction of the interest payments otherwise due to them on account of the
last three quarters of 2002. The conversion rate for this interest payment due
for the quarter ended March 31, 2002 was $.40 per share.
The indebtedness evidenced in the Senior Note is subordinated to the
prior payment when due of the principal of, premium, if any, and interest on all
"Senior Indebtedness", as defined herein, of USA as follows: Upon any
distribution of its assets in a liquidation or dissolution of USA, or in
bankruptcy, reorganization, insolvency, receivership or similar proceedings
relating to USA, the Lender shall not be entitled to receive payment until the
holders of Senior Indebtedness are paid in full. Until a payment default occurs
with respect to any Senior Indebtedness, all payments of principal and interest
due to Lender under the senior note shall be made in accordance with this senior
note. Upon the occurrence of any payment default with respect to any Senior
Indebtedness then, upon written notice thereof to USA and Lender by any holder
of such Senior Indebtedness or its representative, no payments of principal or
interest on the senior note shall be made by USA until such payment default has
been cured to the satisfaction of the holder of such Senior Indebtedness or
waived by such holder, provided, however, that if during the 180 day period
following such default, the holder of Senior Indebtedness has not accelerated
its loan, commenced foreclosure proceedings or otherwise undertaken to act on
such default, then USA shall be required to continue making payments under the
senior note, including any which had not been paid during such 180 day period.
In the event that any institutional lender to USA at any time so requires, the
Lender shall execute, upon request of USA, any intercreditor or subordination
agreement(s) with any such institutional lender on terms not materially more
adverse to the Lender then the subordination terms contained in this senior
note.
The term "Senior Indebtedness" shall mean (a) all direct or indirect,
contingent or certain indebtedness of any type, kind or nature (present or
future) created, incurred or assumed by USA with respect to any future bank or
other financial institutional indebtedness of USA or (b) any indebtedness
created, incurred, or assumed, by USA secured by a lien on any of our assets.
53
Notwithstanding anything herein to the contrary, Senior Indebtedness
does not include:
o unsecured accounts payable to trade creditors of USA incurred in
the ordinary course of business;
o any debt owed by USA to any officer, director or stockholder of
USA;
o any obligation of Borrower issued or contracted for as payment in
consideration of the purchase by USA of the capital stock or
substantially all of the assets of another person or in
consideration for the merger or consolidation with respect to
which USA was a party;
o any operating lease obligations of USA;
o any other indebtedness which by its terms is subordinated to the
senior note; or
o any "other indebtedness" which is subordinated to all indebtedness
to which the senior note is subordinated in substantially like
terms as the senior note; which such "other indebtedness" shall be
treated as equal with the indebtedness evidenced by the senior
note.
Common Stock Purchase Warrants
o Each 2001-B warrant entitles its holder to immediately purchase one
share for $.50 subject to reduction at any time. One-half of each holder's
warrants were exercisable at any time prior to December 31, 2001 and the balance
at any time prior to June 30, 2002 (or such later date as may be determined by
USA).
o Each 2001-C warrant entitles its holder to immediately purchase one
share for $.50 subject to reduction at any time. Each warrant expires on April
30, 2002.
54
o Each 1998-B warrant entitles its holder to immediately purchase one
share of common stock. The exercise price is $4.00 per share, subject to
reduction at any time by USA. The 1998-B warrants are exercisable at any time
prior to August 17, 2003, or such later date as may be determined by USA.
o Each 1998-A warrant entitles its holder to immediately purchase one
share of common stock. The exercise price is $4.00 per share, subject to
reduction at any time by USA. The 1998-A warrants are exercisable at any time
prior to March 5, 2003 or such later date as may be determined by USA.
o Each 1997 warrant entitles its holder to immediately purchase one
share of common stock. The exercise price is $4.00 per share, subject to
reduction at any time by USA. The 1997 Warrants are exercisable at any time
prior to July 3, 2002, or such later date as may be determined by USA.
55
The warrants have been issued pursuant to warrant agreements by and
between USA and American Stock Transfer & Trust Company, the warrant agent.
We have registered for resale the common stock underlying the above
warrants under the Act.
The exercise price of the warrants and the number of shares of common
stock issuable upon exercise of the warrants are subject to adjustment in
certain circumstances, including a stock split of, stock dividend on, or a
subdivision, combination or recapitalization of the common stock. Upon the
merger, consolidation, sale of substantially all the assets of USA, or other
similar transaction, the warrant holders shall, at the option of USA, be
required to exercise the warrants immediately prior to the closing of the
transaction, or such warrants shall automatically expire. Upon such exercise,
the warrant holders shall participate on the same basis as the holders of common
stock in connection with the transaction.
The warrants do not confer upon the holder any voting or any other
rights of a shareholder of USA. Upon notice to the warrant holders, USA has the
right, at any time and from time to time, to reduce the exercise price or to
extend the warrant termination date.
56
Shares Eligible for Future Sale
All of the 35,399,300 shares of common stock issued and outstanding on
January 30, 2002 are freely transferable without registration under the Act
(other than shares held by "affiliates" of USA). As of January 30, 2002, there
were 549,884 shares of preferred stock issued and outstanding, all of which are
freely transferable without further registration under the Act (other than
shares held by "affiliates" of USA). The shares of preferred stock issued and
outstanding as of January 30, 2002 are convertible into 549,884 shares of common
stock all of which would be fully transferrable without further registration
under the Act (other than shares held by "affiliates" of USA).
57
Shares of our common stock which are not freely tradeable under the Act
are known as "Restricted Securities" and cannot be resold without registration
under the Act or pursuant to Rule 144 promulgated thereunder.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated), including any affiliate of USA, who
beneficially owns "restricted securities" for a period of at least one year is
entitled to sell within any three-month period, shares equal in number to the
greater of (i) 1% of the then outstanding shares of the same class of shares, or
(ii) the average weekly trading volume of the same class of shares during the
four calendar weeks preceding the filing of the required notice of sale with the
SEC. The seller must also comply with the notice and manner of sale requirements
of Rule 144, and there must be current public information available about USA.
In addition, any person (or persons whose shares must be aggregated) who is not,
at the time of sale, nor during the preceding three months, an affiliate of the
USA, and who has beneficially owned restricted shares for at least two years,
can sell such shares under Rule 144 without regard to the notice, manner of
sale, public information or the volume limitations described above.
Limitation of Liability; Indemnification
As permitted by the Pennsylvania Business Corporation Law of 1988
("BCL"), our By-laws provide that Directors will not be personally liable, as
such, for monetary damages for any action taken unless the Director has breached
or failed to perform the duties of a Director under the BCL and the breach or
failure to perform constitutes self-dealing, willful misconduct or recklessness.
This limitation of personal liability does not apply to any responsibility or
liability pursuant to any criminal statute, or any liability for the payment of
taxes pursuant to Federal, State or local law. The By-laws also include
provisions for indemnification of our Directors and officers to the fullest
extent permitted by the BCL. Insofar as indemnification for liabilities arising
under the Act may be permitted to Directors, officers and controlling persons of
USA pursuant to the foregoing provisions, or otherwise, we have been advised
that in the opinion of the SEC such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our stock and warrants is American
Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005.
58
PLAN OF DISTRIBUTION
The selling shareholders are free to offer and sell the common
shares at such times, in such manner and at such prices as the selling
shareholders may determine. The types of transactions in which the common shares
are sold may include transactions in the over-the-counter market (including
block transactions), negotiated transactions, the settlement of short sales of
common shares, or a combination of such methods of sale. The sales will be at
market prices prevailing at the time of sale or at negotiated prices. Such
transactions may or may not involve brokers or dealers.
The selling shareholders and any of their pledgees, assignees and
successors-in-interest may from time to time effect such transactions by selling
common stock directly to purchasers or through broker-dealers, which may act as
agents or principals. Such broker-dealers may receive compensation in the form
of discounts, concessions, or commissions from the selling shareholders. They
may also receive compensation from the purchasers of common shares for whom such
broker-dealers may act as agents or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions).
The selling shareholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and profit on the resale of the shares
purchased by them may be deemed to be underwriting discounts under the Act.
The selling shareholders also may resell all or a portion of the common
shares in reliance upon Rule 144 under the Act rather than pursuant to this
Prospectus, provided they meet the criteria and conform to the requirements of
such Rule. We have agreed to bear all the expenses (other than selling
commissions) in connection with the registration and sale of the common stock
covered by this prospectus. In some circumstances, we have agreed to indemnify
the selling shareholders against certain losses and liabilities, including
liabilities under the Act.
59
LEGAL MATTERS
The validity of the common stock has been passed upon for us by Lurio &
Associates, P.C., Philadelphia, Pennsylvania 19103.
EXPERTS
The financial statements of USA Technologies, Inc. at June 30, 2001 and
2000, and for each of the two years in the period ended June 30, 2001, appearing
in this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon (which contains
an explanatory paragraph describing conditions that raise substantial doubt
about the Company's ability to continue as a going concern as described in Note
2 to the financial statements) appearing elsewhere herein, and are included in
reliance upon such report given on the authority of such firm as experts in
accounting and auditing.
60
USA Technologies, Inc.
Financial Statements
Years ended June 30, 2001 and 2000
Contents
Report of Independent Auditors...............................................F-1
Financial Statements
Balance Sheets...............................................................F-2
Statements of Operations.....................................................F-3
Statements of Shareholders' Deficit..........................................F-4
Statements of Cash Flows.....................................................F-6
Notes to Financial Statements................................................F-7
Report of Independent Auditors
Board of Directors and Shareholders
USA Technologies, Inc.
We have audited the accompanying balance sheets of USA Technologies, Inc. as of
June 30, 2001 and 2000, and the related statements of operations, shareholders'
deficit, and cash flows for each of the two years in the period ended June 30,
2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of USA Technologies, Inc. at June
30, 2001 and 2000, and the results of its operations and its cash flows for each
of the two years in the period ended June 30, 2001, in conformity with
accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming USA
Technologies, Inc. will continue as a going concern. As discussed in Note 2 to
the financial statements, the Company has never been profitable and continues to
incur losses from operations and anticipates that it will require additional
debt or equity financing which may not be readily available. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets, including
software development costs, or the amounts and classification of liabilities
that might result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
September 7, 2001, except for Note 14,
as to which the date is September 20, 2001
F-1
USA Technologies, Inc.
Balance Sheets
June 30 December 31
2001 2000 2001
----------------------------- -----------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 817,570 $ 1,859,360 $ 1,132,494
Accounts receivable, less allowance for uncollectible
accounts of $39,500 at December 31, 2001 (unaudited),
and $28,000 and $50,000 at June 30, 2001 and 2000,
respectively 64,752 603,171 139,562
Inventory 560,410 992,980 747,765
Prepaid expenses and other current assets 428,825 300,607 721,354
Deposits - 192,000 -
Subscriptions receivable 29,000 12,199 781,500
------------ ------------ ------------
Total current assets 1,900,557 3,960,317 3,522,675
Property and equipment, net 761,324 384,847 630,092
Software development costs, at cost 3,087,415 149,304 4,666,130
Other assets 31,765 14,740 388,865
------------ ------------ ------------
Total assets $ 5,781,061 $ 4,509,208 9,207,762
============ ============ ============
Liabilities and shareholders' deficit
Current liabilities:
Accounts payable $ 2,607,570 $ 1,194,391 $2,716,090
Accrued expenses 1,355,595 554,243 1,027,674
Funds deposited for Senior Notes 895,601
Equipment line of credit 45,785 183,196 42,132
Convertible Senior Notes 211,704 - 240,000
Current obligations under capital leases 70,446 9,493 58,661
------------ ------------ ------------
Total current liabilities 4,291,100 1,941,323 4,980,158
Convertible Senior Notes, less current portion 4,236,281 2,688,402 4,497,228
Convertible Debenture, less current portion 54,792
Obligations under capital leases, less current portion 53,577 34,965 17,798
------------ ------------ ------------
Total liabilities 8,580,958 4,664,690 9,549,976
Shareholders' deficit:
Preferred Stock, no par value:
Authorized shares - 1,800,000
Series A Convertible Preferred - Authorized shares -
900,000
Issued and outstanding shares - 550,959 at
December 31, 2001 (unaudited), and 555,284 and 566,444
at June 30, 2001 and 2000, respectively (liquidation
preference of $10,582,879 at December 31, 2001) 3,933,253 4,012,266 3,902,632
Common Stock, no par value:
Authorized shares - 62,000,000
Issued and outstanding shares - 32,910,612 at
December 31, 2001 (unaudited), and 21,450,755 and
13,375,291 at June 30, 2001 and 2000, respectively 32,977,922 24,204,050 39,774,958
Deferred compensation and other (502,000) (206,000) (51,500)
Accumulated deficit (39,209,072) (28,165,798) (43,968,304)
------------ ------------ ------------
Total shareholders' deficit (2,799,897) (155,482) (342,214)
------------ ------------ ------------
Total liabilities and shareholders' deficit $ 5,781,061 $ 4,509,208 $ 9,207,762
============ ============ ============
See accompanying notes.
F-2
USA Technologies, Inc.
Statements of Operations
Year ended Six months ended
June 30, December 31,
2001 2000 2001 2000
------------------------------- -------------------------------
(Unaudited) (Unaudited)
Revenues:
Equipment sales $ 803,685 $ 1,414,000 $ 365,106 $ 337,040
License and transaction fees 647,317 640,341 325,523 327,961
------------ ------------ ------------ ------------
Total revenues 1,451,002 2,054,341 690,629 665,001
Operating expenses:
Cost of sales 816,239 1,258,794 410,031 386,177
General and administrative 5,628,014 5,001,832 2,575,599 1,988,106
Compensation 2,966,776 2,503,165 1,729,813 1,077,475
Depreciation 209,646 110,551 163,002 67,172
------------ ------------ ------------ ------------
Total operating expenses 9,620,675 8,874,342 4,878,445 3,518,930
------------ ------------ ------------ ------------
(8,169,673) (6,820,001) (4,187,816) (2,853,929)
Other income (expense):
Interest income 60,034 91,054 6,267 46,934
Interest expense:
Coupon or stated rate (587,769) (598,239) (336,998) (256,466)
Non-cash amortization of
debt discount (764,736) (1,011,874) (525,088) (468,920)
Less: amount capitalized 230,000 - 347,166 69,669
------------ ------------ ------------ ------------
Total interest expense (1,122,505) (1,610,113) (514,920) (655,717)
Other income (expense) (40,100) (65,421) (23,843) (43,970)
------------ ------------ ------------ ------------
Total other income (expense) (1,102,571) (1,584,480) (532,496) (652,753)
------------ ------------ ------------ ------------
Loss before cumulative effect of
accounting change and extraordinary item (9,272,244) (8,404,481) (4,720,312) (3,506,682)
Cumulative effect of accounting change (821,000) - - (821,000)
------------ ------------ ------------ ------------
Loss before extraordinary item (10,093,244) (8,404,481) - (4,327,682)
Extraordinary loss on exchange of debt (863,000) - - (863,000)
------------ ------------ ------------ ------------
Net loss (10,956,244) (8,404,481) (4,720,312) (5,190,682)
Cumulative preferred dividends (836,541) (930,078) (413,219) (421,833)
------------ ------------ ------------ ------------
Loss applicable to common shares $(11,792,785) $ (9,334,559) $ (5,133,531) $ (5,612,515)
============ ============ ============ ============
Loss per common share (basic and diluted):
Loss before cumulative effect of
accounting change and extraordinary item $ (0.60) $ (0.92) $ (0.19) $ (0.26)
============ ============ ============ ============
Cumulative effect of accounting change $ (0.05) - $ - $ (0.05)
============ ============ ============ ============
Extraordinary loss on exchange of debt $ (0.05) - $ - $ (0.06)
============ ============ ============ ============
Loss per common share (basic and diluted) $ (0.70) $ (0.92) $ (0.19) $ (0.37)
============ ============ ============ ============
Weighted average number of common shares
outstanding (basic and diluted) 16,731,999 10,135,905 27,313,543 14,996,487
============ ============ ============ ============
See accompanying notes.
F-3
USA Technologies, Inc.
Statements of Shareholders' Deficit
Series A
Convertible
Preferred Common Deferred Subscriptions Accumulated
Stock Stock Compensation Receivable Deficit Total
----------------------------------------------------------------------------------------------------
Balance, June 30, 1999 $4,537,128 $14,277,763 $ - $ (83,983) $(19,374,437) $(643,529)
Issuance of 210,523 shares of
Common Stock to employees
as compensation - 505,746 - - - 505,746
Issuance of 578,000 shares of
Common Stock in exchange
for consulting services - 1,156,000 - - - 1,156,000
Conversion of 74,133 shares of
Preferred Stock to 74,133
shares of Common Stock (524,862) 524,862 - - - -
Conversion of $386,880 of
cumulative preferred
dividends into 38,688
shares of Common Stock at
$10.00 per share - 386,880 - - (386,880) -
Deferred compensation -
employee stock awards -
120,000 shares at $2.00 per
share - 240,000 (240,000) - - -
Compensation expense related
to deferred stock awards - - 34,000 - - 34,000
Exercise of 911,600 Common
Stock warrants at $.50 per
share - 455,800 - - - 455,800
Exercise of 252,750 Common
Stock warrants at $1.00 per
share - 252,750 - - - 252,750
Exercise of 110,000 Consultant
warrants at $2.00 per share - 220,000 - - - 220,000
Exercise of 34,000 Common
Stock warrants at $2.50 per
share - 85,000 - - - 85,000
Exercise of 10,000 Common
Stock options at $1.50 per
share - 15,000 - - - 15,000
Exercise of 6,500 Common Stock
options at $2.50 per share - 16,250 - - - 16,250
Issuance of 250,000 Common
Stock warrants in exchange
for professional services - 99,000 - - - 99,000
Issuance of 218,000 shares of
Common Stock from the
conversion of $545,000 of
the 12% Senior Notes - 352,881 - - - 352,881
Issuance of 3,560,000 shares
of Common Stock at $1.00
per share in connection
with the 1999-B Private
Placement, net of offering
costs of $96,058 - 3,463,942 - - - 3,463,942
Issuance of 1,200,000 shares of
Common Stock at $2.00 per
share in connection with the
2000-A Private Placement,
net of offering costs of
$222,647 - 2,177,353 - - - 2,177,353
Reduction of 20,000 shares of
Common Stock and 10,000
warrants issued in connection
with the cancellation of
$50,000 Senior Notes issued
in fiscal 1999 - (25,177) - - - (25,177)
Subscriptions receivable
collected - - - 83,983 - 83,983
Net loss - - - - (8,404,481) (8,404,481)
----------------------------------------------------------------------------------------------------
Balance, June 30, 2000 4,012,266 24,204,050 (206,000) - (28,165,798) (155,482)
F-4
USA Technologies, Inc.
Statements of Shareholders' Deficit (continued)
Series A
Convertible Deferred
Preferred Common Compensation Accumulated
Stock Stock and Other Deficit Total
-----------------------------------------------------------------------------
Conversion of 11,160 shares of
Preferred Stock to 11,160 shares
of Common Stock $ (79,013) $ 79,013 $ - $ - $ -
Conversion of $87,030 of cumulative
preferred dividends into 8,703
shares of Common Stock at $10.00
per share - 87,030 - (87,030) -
Issuance of 418,250 shares of Common
Stock to employees as compensation - 474,995 - - 474,995
Compensation expense related to
deferred stock awards - - 103,000 - 103,000
Issuance of 200,000 shares of Common
Stock in exchange for consulting
services - 200,000 - - 200,000
Exercise of 2,112,100 Common Stock
warrants at $1.00 per share - 2,112,100 - - 2,112,100
Issuance of 24,000 shares of Common
Stock from the conversion of
$35,000 Senior Notes - 28,024 - - 28,024
Issuance of 895,000 shares of Common
Stock at $1.00 per share in
connection with the 2000-B Private
Placement, net of offering costs
of $117,849 - 777,151 - - 777,151
Issuance of 450,000 shares of Common
Stock at $1.00 per share in
connection with the 2001-A Private
Placement, net of offering costs
of $22,500 - 427,500 - - 427,500
Issuance of 2,669,400 shares of
Common Stock at $0.60 per share in
connection with the 2001-B Private
Placement, net of offering costs
of $54,755 - 1,546,885 - - 1,546,885
Issuance of 1,136,300 shares of
Common Stock in connection with
the 2000 12% Convertible Senior
Note Offering - 1,215,843 - - 1,215,843
Debt discount relating to beneficial
conversion feature on the 2000 12%
Convertible Notes 409,104 409,104
Issuance of 121,541 shares of Common
Stock in lieu of cash payment for
interest on the 2000 12%
Convertible Senior Notes - 114,927 - - 114,927
Issuance of options to distributor 420,000 - 420,000
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)
USA Technologies, Inc.
Statement of Shareholders' Deficit
Series A
Convertible
Preferred Common Deferred Accumulated
Stock Stock Compensation Deficit Total
------------- ----------- -------------- -------------- --------------
Conversion of 4,325 shares of Preferred
Stock to 4,325 shares of Common Stock
(Unaudited) (30,621) 30,621 - - -
Conversion of $38,920 of cumulative
preferred dividends into 3,892 shares of
Common Stock at $10.00 per share (Unaudited) - 38,920 - (38,920) -
Issuance of 1,330,500 shares of Common Stock
in exchange for professional services
(Unaudited) - 500,640 - - 500,640
Issuance of 500,000 Common Stock Warrants
in exchange for professional services
(Unaudited) - 115,000 - - 115,000
Issuance of 200,000 Common Stock Options in
exchange for professional services (Unaudited) - 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
(Unaudited) - 622,500 - - 622,500
Exercise of 30,000 Common Stock warrants at
$1.00 per share (Unaudited) - 30,000 - - 30,000
Compensation expense related to deferred
stock awards (Unaudited) - - 51,500 - 51,500
Exercise of 500,000 Common Stock warrants
at $.29 per share, net of offering costs
(Unaudited) - 142,900 - - 142,900
Issuance of 38,850 shares of Common Stock
from the conversion of $10,000 of 9-3/4%
debentures and the related exercise of
Common Stock warrants at $.2574 per share
to purchase 388,500 shares of Common Stock
(Unaudited) - 83,717 - - 83,717
Issuance of 4,726,040 shares of Common Stock in
connection with the 2001-B Private Placement,
net of offering costs of $108,630 (Unaudited) - 2,765,991 - - 2,765,991
Issuance of 3,704,576 shares of Common Stock in
connection with the 2001-C Private Placement,
net of offering costs of $203,567 and net of
subscriptions receivable of $222,500 (Unaudited) - 1,608,852 - - 1,608,852
Issuance of 235,174 shares of Common Stock
in lieu of cash payment for interest on
the 2000 12% Convertible Senior Note
Offering (Unaudited) - 117,867 - - 117,867
Debt discount relating to beneficial
conversion feature on the 2001 12% Senior
Notes due 2004 (Unaudited) - 429,948 - - 429,948
Debt discount relating to beneficial
conversion feature on the $225,000, 9-3/4%
Convertible Debenture (Unaudited) - 225,000 - - 225,000
Other (Unaudited) - 19,080 - - 19,080
Net loss (Unaudited) - - - (4,720,312) (4,720,312)
------------ ------------ ------------ ------------ -----------
Balance, December 31, 2001 (Unaudited) $ 3,902,632 $ 39,774,958 $ (51,500) $(43,968,304) $ (342,214)
============ ============ ============ ============ ===========
See accompanying notes.
F-5
USA Technologies, Inc.
Statements of Cash Flows
Six months ended
Year ended June 30 December 31
2001 2000 2001 2000
---------------------------- ------------- -------------
(Unaudited) (Unaudited)
Operating activities
Net loss $ (10,956,244) $ (8,404,481) $ (4,720,312) $(3,576,352)
Adjustments to reconcile net loss to net cash used in
operating activities:
Cumulative effect of accounting change 821,000 - -
Extraordinary loss on exchange of debt 863,000 - -
Charges incurred in connection with stock awards and the
issuance of Common Stock and Common Stock Purchase Warrants 859,295 1,696,846 1,914,241 71,775
Depreciation 209,646 110,551 163,002 93,589
Interest amortization relating to Senior Notes 764,736 1,011,874 525,088 468,920
Interest expense on the 2000 Senior Notes paid through the
issuance of Common Stock 114,927 - 117,867
Changes in operating assets and liabilities:
Accounts receivable 538,419 (241,708) (74,810) 378,587
Inventory 345,009 131,642 (187,355) (357,166)
Prepaid expenses, deposits, and other assets 356,757 (376,451) 264,774 152,243
Accounts payable 1,713,179 230,903 108,520 444,252
Accrued expenses 801,352 102,042 (327,921) 192,896
------------- ------------- ------------ ------------
Net cash used in operating activities (3,568,924) (5,738,782) (2,216,906) (2,131,256)
Investing activities
Purchase of property and equipment (380,355) (173,532) (31,770) (221,856)
Increase in software development costs (2,938,111) (149,304) (1,578,715) (724,021)
------------- ------------- ------------ ------------
Net cash used in investing activities (3,318,466) (322,836) (1,610,485) (945,877)
Financing activities
Net proceeds from the issuance of Common Stock and the exercise of
Common Stock Purchase Warrants and Options 4,834,636 6,686,095 2,715,916 2,067,651
Net repayment of equipment line of credit (137,411) (621,289) (3,653) (74,235)
Collection of subscriptions receivable 12,199 200,657 24,000 12,199
Repayment of principal on capital lease obligations (38,642) (9,501) (47,564) (7,489)
Net proceeds from issuance of Senior Notes and Convertible Debenture 1,174,818 - 558,015 12,840
Increase in funds deposited for Senior Notes 895,601 -
Payment of deferred financing costs - - - (49,227)
------------- ------------- ------------ ------------
Net cash provided by financing activities $ 5,845,600 $ 6,255,962 $ 4,142,315 $ 1,961,739
------------- ------------- ------------ ------------
Net (decrease) increase in cash and cash equivalents (1,041,790) 194,344 314,924 (1,115,394)
Cash and cash equivalents at beginning of year 1,859,360 1,665,016 817,570 1,859,360
------------- ------------- ------------ ------------
Cash and cash equivalents at end of year $ 817,570 $ 1,859,360 $ 1,132,494 $ 743,966
============= ============= ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 472,842 $ 593,472 $ 336,998 $ 256,466
============= ============= ============ ============
Issuance of New Senior Notes in exchange for services rendered $ 610,000 $ - $ - $ -
============= ============= ============ ============
Issuance of Common Stock options to distributor $ 420,000 $ - $ - $ -
============= ============= ============ ============
Conversion of Convertible Preferred Stock to Common Stock $ 79,013 $ 524,862 $ 30,621 $ 84,960
============= ============= ============ ============
Conversion of Cumulative Preferred Dividends to Common Stock $ 87,030 $ 386,880 $ 38,920 $ 98,980
============= ============= ============ ============
Prepaid stock expenses through issuance of Common Stock $ 42,000 $ 77,900 $ 557,303 $ -
============= ============= ============ ============
Subscriptions receivable $ 29,000 $ - $ 781,500 $ 510,000
============= ============= ============ ============
Conversion of Senior Notes to Common Stock $ 28,024 $ 352,881 $ 622,500 $ 7,482
============= ============= ============ ============
Transfer of inventory to property and equipment $ 87,561 $ 131,214 $ - $ -
============= ============= ============ ============
Capital lease obligations incurred $ 118,207 $ 26,982 $ - $ 42,630
============= ============= ============ ============
Cancellation of Senior Notes $ - $ 50,000 $ - $ -
============= ============= ============ ============
Property and equipment acquired with the issuance of
Common Stock $ - $ 20,000 $ - $ -
============= ============= ============ ============
Issuance of Common Stock in connection with
2000 Senior Note Offering $ - $ - $ - $ 7,042
============= ============= ============ ============
See accompanying notes.
F-6
USA Technologies, Inc.
Notes to Financial Statements
June 30, 2001
1. Business
USA Technologies, Inc., a Pennsylvania corporation (the "Company"), was
incorporated on January 16, 1992. The Company is a provider and licensor of
unattended, credit card activated control systems for the copy, fax, debit card,
personal computer and vending industries. The Company's customers are
principally located in the United States and are comprised of hotels, retail
locations, university libraries and public libraries. The Company generates its
revenues from the direct sale of its control systems and configured business
equipment utilizing its control systems, from retaining a percentage of the
gross licensing fees generated by the control systems, and from a monthly
administrative service fee.
The Company offers the Business Express(R) and Business Express(R) Limited
Service (LSS) principally to the hospitality industry. The Business Express(R)
and Business Express(R) Limited Service (LSS) combines the Company's business
applications for computers, copiers and facsimile machines into a business
center unit.
The Company's next generation control system (e-Port(TM)), which includes
capabilities for interactive multimedia and e-commerce, acceptance of other
forms of electronic payments and remote monitoring of host machine data is being
marketed and sold to operators, distributors and original equipment
manufacturers (OEM) primarily in the vending industry. No significant revenues
have been generated from the e-Port(TM) as the product has not been released in
the marketplace (Note 2).
During June 2001, the Company and IBM entered into a one year, non-exclusive
strategic marketing agreement in order to market and sell information technology
solutions to customers in the intelligent vending, retail point of sale and
networked home application markets. The product offerings would consist of the
Company's ePort(TM) and related network and IBM's products and services in the
United States and Canada.
2. Accounting Policies
Basis of Financial Statement Presentation
The financial statements of the Company have been prepared assuming the Company
will continue as a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
Accordingly, the financial statements do not include any adjustments to recorded
asset values, including software development costs, that might be necessary
should the Company be unable to continue in existence. The Company has never
been profitable, has incurred losses of $4.7 million (Unaudited) during the six
months ended December 31, 2001, and $11.0 million and $8.4 million during each
of the fiscal years ending June 30, 2001 and 2000, respectively,
F-7
USA Technologies, Inc
Notes to Financial Statements (continued)
2. Accounting Policies (continued)
Basis of Financial Statement Presentation (continued)
and cumulative losses from its inception through June 30, 2001 amounting to
approximately $36 million (approximately $40.7 million through December 31, 2001
- unaudited). Losses have continued through December 31, 2001 and are expected
to continue throughout fiscal year 2002. Further, the Company has a
shareholders' deficit of $300 thousand (Unaudited) at December 31, 2001 and $2.8
million at June 30, 2001. The Company's ability to meet its future obligations
is dependent upon the success of its products in the marketplace and its ability
to raise capital, which may not be readily available, until the Company's
products can generate sufficient operating revenues. These factors raise doubt
about the Company's ability to continue as a going concern. Management believes
that actions presently being taken will allow for the Company to continue as a
going concern. Such actions include the generation of revenues from operations,
additional private placement offerings, the exercise of Common Stock purchase
warrants and options, and continued efforts to reduce costs.
Interim Financial Information
The financial statements and disclosures included herein for the six months
ended December 31, 2001 and 2000 are unaudited. These financial statements and
disclosures have been prepared by the Company in accordance with accounting
principles generally accepted in the United States for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of adjustments of a normal and recurring nature)
considered necessary have been included. Operating results for the six month
period ended December 31, 2001 are not necessarily indicative of the results
that may be expected for the year ended June 30, 2002.
Cumulative Effect of Accounting Change
During fiscal year 1999, the Company issued $4,618,000 (as adjusted) of $10,000
principal amount of Senior Notes. The Notes also included detachable equity
instruments (see Note 9). During October 1999, the Company added a conversion
feature to the Senior Notes whereby the Senior Notes were immediately
convertible into Common Stock at $2.50 per share at the option of the holder. At
the time of the addition of the conversion feature, the Company determined that,
based on the fair value of the Company's Common Stock and specified conversion
prices, and, in accordance with the then applicable accounting pronouncements,
these Senior Notes did not contain an embedded conversion feature.
In November 2000, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board (FASB) reached a consensus on Issue 00-27,
Application of EITF Issue 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios to
Certain Convertible Instruments," whereby it was concluded that an issuer should
calculate the intrinsic value of a conversion option using the effective
conversion price, based on the proceeds received allocated to the convertible
instrument instead of the specified conversion prices in the instrument. Issue
00-27 requires companies to apply the prescribed methodology for computing the
beneficial conversion feature of convertible securities through a cumulative
catch-up accounting change (in the quarter that includes November 2000) for any
such security issued after May 20, 1999, the effective date of EITF 98-5.
F-8
USA Technologies, Inc
Notes to Financial Statements (continued)
2. Accounting Policies (continued)
Cumulative Effect of Accounting Change (continued)
Accordingly, the Company recorded a one-time, non-cash charge during fiscal year
2001 of $821,000 to record the cumulative effect of an accounting change as
required by the EITF.
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 estimated fair value of the options was $420,000 and recorded as
a reduction of revenues or as selling, general, and administrative expenses, to
the extent revenues have not been earned, over the term of the distribution
agreement. Prior to December 31, 2001, the unamortized balance was classified as
a contra-equity account. Pursuant to EITF 00-18, the Company has reclassified
the unamortized balance as an other asset at June 30, 2001.
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash Equivalents
Cash equivalents represent all highly liquid investments with original
maturities of three months or less. Cash equivalents are comprised of a money
market fund and certificates of deposit.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or market.
Property and Equipment
Property and equipment is recorded at cost. The straight-line method of
depreciation is used over the estimated useful lives of the related assets.
Concentration of Credit Risk
Financial instruments that subject the Company to a concentration of credit risk
consist principally of cash and accounts receivable. The Company maintains cash
with various financial institutions. The Company performs periodic evaluations
of the relative credit standing of those financial institutions, and the
Company's policy is designed to limit exposure to any one institution. The
Company does not require collateral or other security to support credit sales,
but provides an allowance for bad debts based on historical experience and
specifically identified risks.
F-9
USA Technologies, Inc
Notes to Financial Statements (continued)
2. Accounting Policies (continued)
Revenue Recognition
Revenue from the sale of equipment is recognized upon installation and customer
acceptance of the related equipment. License and transaction fee revenue is
recognized upon the usage of the Company's credit card activated control
systems.
Software Development Costs
The Company capitalizes software development costs after technological
feasibility of the software is established and through the product's
availability for general release to the Company's customers. All costs incurred
in the research and development of new software and costs incurred prior to the
establishment of technological feasibility are expensed as incurred. During May
2000, the Company reached technological feasibility for the development of the
e-Port(TM) control system that would offer capability for public access
electronic commerce and advertising using the Internet and, accordingly, the
Company commenced capitalization of software development costs related to the
e-Port(TM). Costs capitalized were approximately $2,938,000 and $149,000 during
the years ended June 30, 2001 and 2000, respectively and $1,579,000 (Unaudited)
during the six months ended December 31, 2001.
Amortization of software development costs will be calculated as the greater of
the amount computed using (i) the ratio that current gross revenues for a
product bear to the total of current and anticipated future gross revenues of
that product or (ii) the straight-line method over the remaining estimated
economic life of the product. Amortization of such costs will commence when the
e-Port(TM) becomes available for general release to customers, which is
anticipated in fiscal year 2002. The Company reviews the unamortized software
development costs at each balance sheet date and, if necessary, will write down
the balance to net realizable value if the unamortized costs exceed the net
realizable value of the asset. The Company anticipates capitalization of a total
of $2.0 million during fiscal 2002 prior to the release of the e-Port(TM) to the
marketplace, and some additional expenditures beyond initial release, for
enhancements to the network.
Research and Development Expenses
Research and development expenses are expensed as incurred. Research and
development expenses, which is included in general and administrative and
compensation expenses in the statement of operations, was $1,260,000 and
$554,000 for the years ended June 30, 2001 and 2000, respectively and $154,000
(Unaudited) during the six months ended December 31, 2001.
Accounting for Stock Options
Financial Accounting Standards Board Statement ("SFAS") No. 123, Accounting for
Stock-Based Compensation, provides companies with a choice to follow the
provisions of SFAS 123 in determination of stock-based
F-10
USA Technologies, Inc
Notes to Financial Statements (continued)
2. Accounting Policies (continued)
compensation expense or to continue with the provisions of Accounting Principles
Board Opinion No. 25 ("APB 25"). The Company has elected to follow the
provisions of APB 25. Under APB 25, if the exercise price of the Company's stock
options equals or exceeds the market price of the underlying Common Stock on the
date of grant, no compensation expense is recognized. The effect of applying
SFAS 123 to the Company's stock-based awards results in net loss and net loss
per common share that are disclosed on a pro forma basis in Note 12.
Loss Per Common Share
Basic earnings per share is calculated by dividing income (loss) applicable to
common shares by the weighted average common shares outstanding for the period.
Diluted earnings per share is calculated by dividing income (loss) applicable to
common shares by the weighted average common shares outstanding for the period
plus the dilutive effect (unless such effect is anti-dilutive) of equity
instruments. No exercise of stock options, purchase rights, stock purchase
warrants, or the conversion of preferred stock, cumulative preferred dividends
or Senior Notes was assumed during the three and six months ended December 31,
2001 and fiscal 2001 or 2000 because the assumed exercise of these securities
would be antidilutive.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable, other
current assets, accounts payable and accrued expenses reported in the balance
sheets equal or approximate fair value due to their short maturities. The fair
value of the Company's Senior Notes approximates book value as such notes are at
market rates currently available to the Company.
3. Joint Venture
During September 1997, the Company entered into a five-year Joint Venture
Agreement with Mail Boxes Etc. ("MBE") to operate under the name "MBE Express
Joint Venture" (hereinafter referred to as "Joint Venture") and exclusively sell
and market the Company's Business Express(R) product under the name MBE Business
Express(TM). The Joint Venture Agreement outlined the terms for sharing costs
and profits. During September 1998, MBE commenced a legal action against the
Company in the Superior Court of the State of California, (subsequently removed
to the United States District Court for the southern District of California),
alleging that 195 terminals purchased by MBE were defective and a refund of
$141,260 plus lost profits (claimed to be several hundred thousand dollars) were
sought by MBE. MBE further claimed that it was not obligated to purchase 600
additional terminals ordered in April 1998. The Company filed a counterclaim
against MBE which claimed numerous areas where MBE breached the Joint Venture
Agreement, breached its fiduciary responsibility, and trade libel. On May 14,
1999, the Company notified MBE that the Company was terminating the Joint
Venture Agreement, citing the numerous breaches of the Joint Venture Agreement.
Obligations for continued servicing of MBE Business Express's were met by the
Company.
During June 2001, the Company and MBE settled the litigation between them. As
part of the settlement, MBE assigned to the Company all of the rights in the
Joint Venture. The Company also agreed to pay MBE $160,000 and the parties
agreed to mutually release all claims against one another.
F-11
USA Technologies, Inc
Notes to Financial Statements (continued)
4. Property and Equipment
Property and equipment consist of the following:
June 30 December 31,
Useful Lives 2001 2000 2001
---------------------------------------------------------- --------------
(unaudited)
Control systems 3 years $ 533,055 $ 377,997 $ 479,577
Computer equipment and purchased
software 3 years 609,775 205,270 688,472
Furniture and equipment 5 years 190,836 170,398 194,352
Leasehold improvements Lease term 90,313 86,628 93,348
Vehicles 5 years 10,258 10,258 10,258
-------------------------------------- --------------
1,434,237 850,551 1,466,007
Less accumulated depreciation 672,913 465,704 835,915
-------------------------------------- --------------
$ 761,324 $ 384,847 630,092
====================================== ==============
5. Accrued Expenses
Accrued expenses consist of the following:
June 30 December 31,
2001 2000 2001
--------------------------------------- --------------
(unaudited)
Accrued consulting fees $ 435,000 $ - $ -
Accrued professional fees 439,478 186,808 583,725
Accrued software license and support costs 154,229 159,268 125,385
Accrued compensation and related sales commissions 125,668 91,592 85,910
Accrued interest 91,585 - 105,705
Accrued product warranty costs 52,466 56,684 71,294
Accrued other 31,414 55,150 37,587
Advanced customer billings 25,755 4,741 18,068
--------------------------------------- --------------
$ 1,355,595 $ 554,243 $ 1,027,674
======================================= ==============
6. Related Party Transactions
At June 30, 2001 and 2000 and for the six months ended December 31, 2001,
approximately $70,000, $19,000 and $11,878 (unaudited), respectively, of the
Company's accounts payable and accrued expenses were due to a Board member for
legal services performed. During the years ended June 30, 2001 and 2000 and for
the six months ended December 31, 2001, the Company incurred approximately
$271,000, $176,000 and $74,000 (unaudited), respectively, for these services.
7. Commitments
o During May 1999, the Company entered into an agreement with IBM whereby IBM
agreed to be the executional partner for certain aspects of the Company's
business, including project management services, asset procurement,
configuration and testing of equipment, site preparation, installation,
maintenance services, and
F-12
USA Technologies, Inc
Notes to Financial Statements (continued)
o asset management. The agreement provides for an increase from 1,000 to
5,000 locations and expanded the array of Company products which are
eligible for IBM installation. In connection with this agreement, the
Company has also entered into an inventory financing arrangement with IBM
Credit Corporation whereby IBM Credit Corporation granted the Company a
$1.5 million equipment line of credit. The outstanding balance is secured
by the underlying inventory. Interest accrues on the outstanding balance at
10% per annum, subject to adjustment if the outstanding balance is
outstanding greater than 180 days. At June 30, 2001 and 2000 and at
December 31, 2001, respectively, $45,785, $183,196 and $42,132 (Unaudited)
was outstanding under this agreement.
o In connection with an employment agreement, expiring June 30, 2002, the
Company's Chief Executive Officer has been granted in the event of a "USA
Transaction," as defined, which among other events includes a change in
control of the Company, irrevocable and fully vested rights equal to that
number of shares of Common Stock that when issued to him equals 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.
o At June 30, 2001, the Company has entered into purchase commitments with
vendors for inventory of approximately $1,300,000.
o The Company conducts its operations from various facilities under operating
leases. Rent expense under such arrangements was approximately $188,000 and
$140,000 during the years ended June 30, 2001 and 2000, respectively and
$96,100 during the six months ended December 31, 2001. During the years
ended June 30, 2001 and 2000, and the six months ended December 31, 2001,
the Company entered into agreements to lease $118,207, $26,982 and $1,290
(Unaudited), respectively, of computer equipment that were accounted for as
capital leases. This computer equipment is included in property and
equipment in the accompanying financial statements. Capital lease
amortization of $33,544 and $8,097 is included in depreciation expense for
the years ended June 30, 2001 and 2000, respectively and $19,036
(Unaudited) for the six months ended December 31, 2001.
o As discussed in Note 2, the Company anticipates spending an additional $2.0
million during fiscal 2002 to complete the initial e-Port(TM) software
development, with additional expenditures anticipated for enhancements
thereafter.
Future minimum lease payments subsequent to June 30, 2001 under capital and
noncancelable operating leases are as follows:
Capital Leases Operating Leases
---------------------------------------
2002 $ 88,349 $ 174,000
2003 47,381 9,000
2004 11,689 3,000
---------------------------------------
Total minimum lease payments 147,419 $ 186,000
===================
Less amount representing interest 23,396
--------------------
Present value of net minimum lease payments 124,023
Less current obligations under capital leases 70,446
--------------------
Obligations under capital leases, less current portion $ 53,577
====================
F-13
USA Technologies, Inc
Notes to Financial Statements (continued)
8. Income Taxes
At June 30, 2001 and 2000, the Company had net operating loss carryforwards of
approximately $35,109,000 and $23,481,000, respectively, to offset future
taxable income expiring through approximately 2021. At June 30, 2001 and 2000,
the Company recorded a deferred tax asset of approximately $12,418,500 and
$9,374,000, respectively, which was reduced by a valuation allowance of the same
amount as the realization of the deferred tax asset is not certain.
The timing and extent in which the Company can utilize future tax deductions in
any year may be limited by provisions of the Internal Revenue Code regarding
changes in ownership of corporations.
The deferred tax assets arose primarily from the use of different accounting
methods for financial statement and income tax reporting purposes as follows:
June 30
2001 2000
--------------------------------------
Deferred tax asset:
Net operating loss carryforwards $ 13,237,000 $ 8,895,000
Compensation expense on stock option re-pricing 170,500 170,500
Deferred research and development costs 125,000 216,000
Other 131,000 152,000
--------------------------------------
13,663,500 9,433,500
Deferred tax liabilities:
Software Development Costs (1,245,000) (60,000)
--------------------------------------
12,418,500 9,373,500
Valuation allowance (12,418,500) (9,373,500)
--------------------------------------
Deferred tax asset, net $ - $ -
======================================
9. Senior Note Offerings
During September 1998, the Company's Board of Directors authorized a private
placement offering (the "1999 Senior Note Offering"). Each unit, as amended,
sold in the offering consisted of a 12% Senior Note in the principal amount of
$10,000, 2,000 1999-A Common Stock Purchase Warrants (each warrant entitled the
holder to purchase one share of Common Stock at $1.00 through December 31, 2001)
and 1,000 shares of Series B Equity Participating Preferred Stock (Series B). A
total of 461.8 units (as adjusted)
F-14
USA Technologies, Inc
Notes to Financial Statements (continued)
9. Senior Note Offerings (continued)
were sold in the Senior Note Offering. The Series B was converted into 1,847,200
shares of Common Stock in connection with the Company's fiscal year 1999 reverse
stock split. In October 1999, a conversion feature was added to the Senior Notes
whereby the Notes were convertible into Common Stock at the rate of $2.50 per
share any time through the Senior Notes maturity of December 31, 2001.
During October 2000, the Company authorized a $6,700,000 private placement
offering ("2000 Senior Note Offering") of 670 units at a unit price of $10,000.
Each unit consists of a 2000 12% Convertible Senior Note in the principal amount
of $10,000 maturing December 31, 2003 and 2,000 shares of Restricted Common
Stock. Each 2000 12% Senior Note is convertible into Common Stock at $1.25 per
share anytime through its maturity date. Holders of the 1999 12% Senior Notes
had the right to exchange their 1999 Notes into 2000 Senior Notes. All payments
of interest on the 2000 Notes can be used by the holder, at the holder's option,
to purchase shares of Common Stock at $1.00 per share (subsequently reduced in
June 2001 to $.80 per share and in September 2001 to $.60 per share). During the
year ended June 30, 2001, the Company issued 121,541 shares of Common Stock in
lieu of cash payment for interest on the 2000 Senior Notes. In connection with
the 2000 Senior Notes issued during fiscal year 2001, the Company issued
1,136,300 shares of Common Stock. The fair value of the Common Stock on the date
such shares were granted of $1,215,843 and the embedded beneficial conversion in
the 2000 Senior Notes of $409,104 was recorded as a debt discount. During fiscal
year 1999, $545,000 of such notes were converted into 218,000 shares of Common
Stock.
The Company sold 568.15 units in the 2000 Senior Note Offering during fiscal
year 2001 of which 382.3 units ($3,823,000) of the 1999 Senior Notes were
exchanged for 2000 Senior Notes, 124.85 units were purchased with cash,
resulting in gross proceeds of $1,248,500 and 61 units were issued in exchange
for services provided by consultants in the amount of $610,000. The exchange of
the 1999 Senior Notes to the 2000 Senior Notes was determined to be a
substantial modification of the terms of the original debt instrument and,
accordingly, the Company wrote-off the unamortized debt discount and other
issuance costs associated with the exchange of the 1999 Senior Notes in the
amount of $863,000. Such amount has been reported as a non-cash extraordinary
item in the fiscal year 2001 statement of operations.
F-15
USA Technologies, Inc
Notes to Financial Statements (continued)
9. Senior Note Offerings (continued)
A summary of the Senior Note activities are as follows:
1999 Senior 2000 Senior 2001 Senior Notes
Notes Notes (Unaudited) Note 16
--------------------------------------------------------------
Outstanding at June 30, 1999 $ 4,668,000 $ - -
Cancelled (50,000) - -
Converted into Common Stock (545,000) - -
--------------------------------------------------------------
Outstanding at June 30, 2000 4,073,000 - -
Issued for cash and services - 1,858,500 -
Exchange 1999 Senior Notes for 2000 Senior Notes (3,823,000) 3,823,000 -
Converted into Common Stock (10,000) (25,000) -
--------------------------------------------------------------
Outstanding at June 30, 2001 240,000 5,656,500 -
Issued for cash (unaudited) - - 895,601
Converted into Common Stock (unaudited) - (622,500) -
--------------------------------------------------------------
Outstanding at December 31, 2001 (Unaudited) 240,000 5,034,000 895,601
Less: Unamortized debt discount and other issue costs
(unaudited) - (1,002,425) (429,928)
--------------------------------------------------------------
Balance at December 31, 2001 (unaudited) $ 240,000 $ 4,031,575 $ 465,673
==============================================================
The unamortized debt discount and other issuance costs represents fees paid in
connection with these financings, the estimated fair value of the detachable
equity instruments issued in connection with these financings, and any
beneficial conversion embedded in the debt at the commitment date, which are
being amortized over the remaining life of the respective debt instruments. Debt
discount amortization, which has been reflected as interest expense in the
statements of operations, was approximately $765,000 and $1,012,000 for the
years ended June 30, 2001 and 2000, respectively, and $525,000 (unaudited) for
the six months ended December 31, 2001.
10. Series A Preferred Stock
The authorized Preferred Stock may be issued from time to time in one or more
series, each series with such rights, preferences or restrictions as determined
by the Board of Directors. Each share of Series A Preferred Stock shall have the
right to one vote and is convertible at any time into one share of Common Stock.
Each share of Common Stock entitles the holder to one voting right. Series A
Preferred Stock provides for an annual cumulative dividend of $1.50 per share
payable to the shareholders of record in equal parts on February 1 and August 1
of each year. Cumulative unpaid dividends at June 30, 2001 and 2000 and at
December 31, 2001 amounted to $4,621,150, $3,871,639, and $4,995,449
respectively. Cumulative unpaid
F-16
USA Technologies, Inc
Notes to Financial Statements (continued)
10. Series A Preferred Stock (continued)
dividends are convertible into common shares at $10.00 per common share at the
option of the shareholder. During the years ended June 30, 2001 and 2000 and
during the six months ended December 31, 2001 certain holders of the Preferred
Stock converted 11,160, 74,133 shares and 4,325 (Unaudited), respectively, into
11,160, 74,133 and 4,325 (Unaudited) shares of Common Stock, respectively.
Certain of these shareholders also converted cumulative preferred dividends of
$87,030, $386,880 and $38,920 (Unaudited), respectively, into 8,703, 38,688 and
3,892 (Unaudited) shares of Common Stock during the years ended June 30, 2001
and 2000 and during the six months ended December 31, 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, 2001. In the event of any liquidation, the holders of
shares of Series A Preferred Stock issued shall be entitled to receive $10.00
for each outstanding share plus all cumulative unpaid dividends. If funds are
insufficient for this distribution, the assets available will be distributed
ratably among the preferred shareholders.
11. Common Stock Transactions
During the year ended June 30, 2001, the Company's Board of Directors authorized
the following private placement offerings of the Company's Common Stock to
accredited investors:
o 2000-B offering for the issuance of 895,000 shares of Common Stock at
$1.00 per share generating net proceeds of $777,151 after deducting
related offering costs;
o 2001-A offering for the issuance of 450,000 shares of Common Stock at
$1.00 per share generating net proceeds of $427,500 after deducting
related offering costs;
o 2001-B offering for the issuance of 8,400,000 shares of Common Stock at
$.60 per share. Through June 30, 2001, the Company issued 2,669,400
shares of Common Stock generating net proceeds of $1,546,885 after
deducting related offering costs. Additionally, each dollar invested
entitled the purchaser to receive one Common Stock warrant at $.50 per
share expiring in December 2001 and one Common Stock warrant at $.50 per
share expiring in June 2002.
F-17
USA Technologies, Inc
Notes to Financial Statements (continued)
11. Common Stock Transactions (continued)
During April 2001, the Company granted 6,000,000 fully vested options to a
distributor in connection with the signing of a five-year distribution
agreement. The options were granted in two 3,000,000 increments. Options in the
first 3,000,000 increment had an exercise price of $1.00 and expired 90 days
after the parties entered into the distribution agreement. The second 3,000,000
had an exercise price of $1.25 and expired 180 days after the parties entered
into the distribution agreement. The estimated fair value of these options was
$420,000. The related pro rata charge will be recorded as a reduction of
revenues or as selling, general, and administrative expense, to the extent
revenues have not been earned, over the term of the distribution agreement.
During April 2001, the Company's Board of Directors authorized the granting of a
fully vested warrant to purchase 75,000 shares of Common Stock to a consultant.
The warrants are exercisable for a period of five years from the date of grant
at $1.25 per share. The warrants were issued in exchange for services and
resulted in consulting expense of $52,500, which was recorded during fiscal year
2001.
During March 2001, the Company issued a warrant to purchase 1,000,000 shares of
Common Stock in connection with an OEM agreement between the Company and a
distributor. The warrants initially had an exercise price of $1.50 per share and
were exercisable through June 30, 2001. This warrant was subsequently amended
and the current exercise price is $1.00 and the warrant expires on October 31,
2001 (as amended).
During February 2001, the Company's Board of Directors authorized the issuance
of 200,000 shares of Common Stock to a consultant for services previously
provided by the consultant to the Company. A charge of $200,000 was recorded
during fiscal year 2001 based on the fair value of the Company's Common Stock on
the date the shares were granted.
During the year ended June 30, 2001, the Company issued 418,250 shares of Common
Stock to certain employees and officers. The shares were fully vested on the
date of grant; accordingly, the Company recorded compensation expense of
$474,995 during fiscal year 2001 based on the fair value of the Company's Common
Stock on the date the shares were granted.
F-18
USA Technologies, Inc
Notes to Financial Statements (continued)
11. Common Stock Transactions (continued)
During September 2000, the Company entered into an Investment Agreement with
Swartz Private Equity, LLC for an equity line up to $20 million over a period
not to exceed three years. Investments are determined monthly based on the
current market prices of the Company's Common Stock in accordance with the terms
of the Agreement. The purchase price per share for Swartz would equal 91% of the
market price of the Common Stock at the time of purchase, and additional
warrants at the same price would be granted in an amount equal to 10% of the
number of shares actually purchased. Swartz received 1,200,000 Commitment
Warrants with 10 year terms at an initial exercise price of $1.00, adjusted to
lower market pricing if applicable, and will be granted additional Commitment
Warrants at the same price and term, if required, to keep the number of
Commitment Warrants equal to 5% (decreasing over a five year period to 0%) of
the outstanding Common Stock of the Company on a fully diluted basis. An
additional 380,828 warrants were granted during fiscal 2001 in connection with
this antidilution provision. During the year ended June 30, 2001, Swartz
purchased 29,010 shares of Common Stock pursuant to the Investment Agreement.
There were no net proceeds to the Company from the sale of these shares after
deducting the related cash offering expenses previously incurred.
During February 2000, the Company's Board of Directors awarded 120,000 shares of
the Company's Common Stock, at $2.00 per share, to certain executive officers.
Pursuant to their employment agreements, these officers will be issued the
Common Stock if employed by the Company on June 30, 2002. During fiscal year
2000, the Company recorded deferred compensation of $240,000 in connection with
these awards. Compensation expense of $103,000 and $34,000 has been recorded to
reflect the amortization of the shares earned during the years ended June 30,
2001 and 2000, respectively.
During January 2000, the Company's Board of Directors authorized a $2,000,000
private placement offering of 1,000,000 shares of restricted Common Stock at
$2.00 per share (the "2000-A" offering). This offering was later amended to
1,300,000 shares. During fiscal year 2000, 1,200,000 shares were sold,
generating net proceeds to the Company of $2,177,353.
During October 1999, the Company's Board of Directors authorized a private
placement offering (the "1999-B" offering) to accredited investors of 150 units
(later increased to 356 units by the Board of Directors) at a unit price of
$10,000. Each unit of the $3,560,000 Offering consists of 10,000 shares of
restricted Common Stock at $1.00 per
F-19
USA Technologies, Inc
Notes to Financial Statements (continued)
11. Common Stock Transactions (continued)
share, and 10,000 1999-B Common Stock purchase warrants. During fiscal year 2000
all 356 units were sold, resulting in net proceeds of $3,463,942 ($3,560,000
less offering costs of $96,058) to the Company. Each 1999-B Common Stock
purchase warrant entitled the holder to purchase one share of restricted Common
Stock for $2.00 at any time through March 31, 2000. The 1999-B Common Stock
purchase warrants were modified several times between January 2000 and August
2000 reducing their exercise price to $1.00 per share and extending the
expiration date of the warrants to December 31, 2000. Additionally, those 1999-B
Common Stock purchase warrant holders who exercised their purchase warrants on
or before December 31, 2000 were granted a further extension of the warrants'
expiration date to March 31, 2001. As a result of these reductions in the
exercise price, the Company's Board of Directors authorized the refunding of the
$1 reduction per warrant to those investors who exercised their warrants prior
to the exercise price reduction.
During July 1999, the Board of Directors granted fully vested warrants to
purchase 250,000 shares of the Company's Common Stock to two consultants. These
warrants were issued in exchange for financial and public relations consulting
services and resulted in consulting expense of $99,000. The warrants are
exercisable for two years from date of issuance. The exercise prices were
modified by the Company on various dates since their issuance. During fiscal
year 2000, the Company issued 134,000 shares of Common Stock upon the exercise
of these warrants, resulting in gross proceeds of $285,000. The exercise price
of the remaining 116,000 warrants is $1.00 per share.
A summary of Common Stock Warrant activity for fiscal years 2001 and 2000 is as
follows:
Warrants
-------------------
Outstanding at June 30, 1999 1,212,200
Issued 3,807,400
Exercised (1,308,350)
-------------------
Outstanding at June 30, 2000 3,711,250
Issued 8,889,628
Exercised (2,112,100)
Cancelled (2,255,750)
-------------------
Outstanding at June 30, 2001 8,233,028
Issued (unaudited) 14,783,034
Exercised (unaudited) (918,500)
Expired (unaudited) (9,097,657)
-------------------
Outstanding at December 31, 2001 (unaudited) 12,999,905
===================
F-20
USA Technologies, Inc
Notes to Financial Statements (continued)
11. Common Stock Transactions (continued)
The exercise price and exercise dates of outstanding and exercisable warrants
outstanding at June 30, 2001 is as follows:
Outstanding and
Exercisable Exercise Price Expiration Date
----------------------------------------------------------------------------
2,669,400 $ 0.50 December 31, 2001
2,669,400 0.50 June 30, 2002
1,200,000 0.91 August 29, 2010
1,000,000 1.00 August 30, 2001
377,927 1.00 April 24, 2011
125,400 1.00 August 3, 2001
2,901 1.03 April 30, 2011
75,000 1.25 June 30, 2006
100,000 2.00 June 30, 2002
4,000 3.00 February 28, 2002
1,500 4.00 July 2, 2002
2,500 4.00 March 5, 2003
5,000 4.00 August 17, 2003
----------------------------
8,233,028
============================
The exercise price and exercise dates of outstanding and exercisable warrants
outstanding at December 31, 2001 is as follows (Unaudited):
Outstanding and
Exercisable Exercise Price Expiration Date
----------------------------------------------------------------------------
8,946,145 $ 0.10 December 31, 2002
100,000 0.40 June 30, 2002
349,522 0.50 June 30, 2002
1,135,410 0.50 March 31, 2002
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
4,000 3.00 February 28, 2002
1,500 4.00 July 2, 2002
2,500 4.00 March 5, 2003
5,000 4.00 August 17, 2003
----------------------------
12,999,905
============================
During the years ended June 30, 2001 and 2000 and through December 31, 2001, the
Company's Board of Directors made numerous amendments to the outstanding Common
Stock warrants whereby the Company reduced the exercise price and extend the
expiration terms. The above tables reflect the status of the warrants as of June
30, 2001 and December 31, 2001.
At June 30, 2000, the Company had outstanding 11,740 Common Stock purchase
rights. These Common Stock purchase rights, issued in 1993 and expired in fiscal
2001, allowed the holder to purchase shares of the Company's Common Stock at
$10.00 per share.
12. Stock Options
The Company's Board of Directors has granted options to employees to purchase
shares of Common Stock at or above fair market value. The option term and
vesting schedule are established by the contract that granted the option.
F-21
USA Technologies, Inc
Notes to Financial Statements (continued)
12. Stock Options (continued)
The following table summarizes all stock option activity:
Common Shares
Under Options Exercise Price Per
Granted Share
------------------------------------------
Balance at June 30, 1999 917,100 $ .50-$5.00
Granted 120,000 $ 2.00
Canceled or Expired (35,833) $ 1.50-$4.50
Exercised (16,500) $ 1.50-$2.50
------------------------------------------
Balance at June 30, 2000 984,767 $ .50-$5.00
Granted 6,935,000 $ 1.00-$1.50
Canceled or Expired (3,033,100) $ 1.00-$2.50
------------------------------------------
Balance at June 30, 2001 4,886,667 $ .50-$5.00
Granted (unaudited) 400,000 $ 0.70
Canceled or Expired (unaudited) (3,010,000) $ 1.25- 5.00
------------------------------------------
Balance at December 31, 2002 (unaudited) 2,276,667 $ .50- 5.00
==========================================
As discussed in Note 11, 3,000,000 of the outstanding options at June 30, 2001
expired unexercised subsequent to year end.
The price range of the outstanding and exercisable Common Stock options at June
30, 2001 is as follows:
Weighted
Average
Remaining
Option Options Contract Life Options
Exercise Prices Outstanding (Yrs.) Exercisable
--------------------------------------------------------------------------------
$ 0.50 5,000 1.80 5,000
$ 1.00 735,000 5.54 285,000
$ 1.25 3,000,000 .18 3,000,000
$ 1.50 310,000 1.96 310,000
$ 2.00 656,167 3.45 656,167
$ 2.50 84,000 1.96 84,000
$ 4.50 81,500 1.35 81,500
$ 5.00 15,000 .56 15,000
---------------------- --------------------
4,886,667 4,436,667
====================== ====================
The price range of the outstanding and exercisable Common Stock options at
December 31, 2001 is as follows (Unaudited):
Weighted
Average
Remaining
Option Options Contract Life Options
Exercise Prices Outstanding (Yrs.) Exercisable
--------------------------------------------------------------------------------
$ 0.50 5,000 1.30 5,000
$ 0.70 400,000 1.47 400,000
$ 1.00 735,000 5.04 405,001
$ 1.50 305,000 1.48 305,000
$ 2.00 656,167 2.95 656,167
$ 2.50 84,000 1.45 84,000
$ 4.50 81,500 1.57 81,500
$ 5.00 10,000 0.27 10,000
---------------------- --------------------
2,276,667 1,946,668
====================== ====================
F-22
USA Technologies, Inc
Notes to Financial Statements (continued)
12. Stock Options (continued)
Pro forma information regarding net loss and net loss per common share
determined as if the Company is accounting for stock options granted under the
fair value method of SFAS 123 is as follows:
June 30 Six Months Ended December 31,
2001 2000 2001 2000
------------------------------------- ---------------------------------------
(unaudited) (unaudited)
Net loss applicable to common shares as reported $ (11,792,785) $ (9,334,559) $ (5,133,531) $ (5,612,515)
under APB 25
Stock option expense per SFAS 123 (524,845) (329,062) (279,863) (237,214)
------------------------------------- -------------------------------------
Pro forma net loss $ (12,317,630) $ (9,663,621) $ (5,413,394) $ (5,849,729)
===================================== =====================================
Loss per common share as reported $ (.70) $ (.92) $ (.19) $ (.37)
Pro forma net loss per common share $ (.74) $ (.95) $ (.20) $ (.39)
The fair value for the Company's stock options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for fiscal years 2001 and 2000; risk-free interest
rate of 5.5% and 6.0%, respectively, an expected life of 2 years; no expected
cash dividend payments on Common Stock and volatility factors of the expected
market price of the Company's Common Stock, based on historical volatility of
1.100 and 1.332, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. As noted above, the Company's stock options are vested over an
extended period. In addition, option models require the input of highly
subjective assumptions including future stock price volatility. Because the
Company's stock options have characteristics significantly different from those
of traded options, and because changes in the subjective assumptions can
materially affect the fair value estimates, in management's opinion, the
Black-Scholes model does not necessarily provide a reliable measure of the fair
value of the Company's stock options. The Company's pro forma information
reflects the impact of the reduction in price of certain stock options. The pro
forma results above are not necessarily reflective of the effects of applying
SFAS 123 in future periods.
F-23
USA Technologies, Inc
Notes to Financial Statements (continued)
12. Stock Options (continued)
As of June 30, 2001, the Company has reserved shares of Common Stock for the
following:
Exercise of Common Stock options 4,886,667
Exercise of Common Stock warrants 8,233,028
Conversions of Preferred Stock and cumulative
Preferred Stock dividends 1,017,399
Conversions of Senior Notes 4,621,200
------------------
18,758,294
==================
As of December 31, 2001, the Company has reserved shares of Common Stock for the
following (unaudited):
Exercise of Common Stock options 2,276,667
Exercise of Common Stock warrants 12,999,905
Conversions of Preferred Stock and cumulative
Preferred Stock dividends 1,050,504
Conversions of Senior Notes 8,505,205
------------------
24,832,281
==================
13. Retirement Plan
The Company's Savings and Retirement Plan (the Plan) allows employees who have
attained the age of 21 and have completed six months of service to make
voluntary contributions up to a maximum of 15% of their annual compensation, as
defined in the Plan. Through June 30, 2000, the Plan did not provide for any
matching contribution by the Company, however, starting at the beginning of
fiscal year 2001, the Company has amended the Plan to include a Company matching
contribution of $.50 for each $1.00 contributed, up to 10% of an employees
contribution. The Company contribution for fiscal year ending June 30, 2001 was
approximately $51,000.
14. Subsequent Events
Through September 20, 2001, the Company completed the 2001-B Private Placement.
An additional $1,863,654 has been received in cash subsequent to June 30, 2001
related to this Private Placement.
Subsequent to June 30, 2001, the Company's Board of Directors initiated the
2001-C Private Placement for up to 2,000,000 shares to a limited number of
accredited investors consisting of restricted Common Stock at $.50 per share
with one associated warrant to purchase Common Stock at $.50 per share, expiring
in March 2002.
F-24
USA Technologies, Inc
Notes to Financial Statements (continued)
14. Subsequent Events (continued)
Subsequent to June 30, 2001, the Company executed a Securities Purchase
Agreement with a private placement investment company for the purchase of
$225,000 of Convertible Debentures due in August 2003. The debentures bear
interest at 9.75% and is payable monthly in arrears. The debenture is
convertible at a price equal to the lesser of $1.00 or 80% of the lowest closing
bid price of the Company's Common Stock during the 20 day period prior to the
conversion. At the time of conversion of the Debenture, the Company will issue
to the holder warrants to purchase an amount of Common Stock equal to ten times
the number of shares issued upon the conversion of the warrants. The warrants
are exercisable at the related conversion price of the debenture.
As of September 20, 2001, the Company received $100,000 of the $225,000
Convertible Debentures with the remainder to be received when the Company
completes the registration of the underlying conversion shares. The Company also
issued 500,000 Common Stock warrants to the purchaser for $50,000. These
warrants are exercisable at the same terms as the underlying debentures and
expire one year from the date a Registration Statement is declared effective.
Subsequent to June 30, 2001, the Company received $29,000 of cash related to the
subscription receivable recorded as an asset on the June 30, 2001 balance sheet.
15. Quarterly Financial Information (Unaudited)
The Company has restated its interim financial information for each of the
interim periods in the fiscal year ended June 30, 2001. The restated
financial statements reflect (i) the extraordinary loss on the exchange of
debt during the second quarter, which was the period in which the exchange
occurred, (ii) the cumulative effect of an accounting change during the
second quarter related to the calculation of the beneficial conversion of the
1999 Senior Notes, and (iii) the capitalization of interest on the Company's
sofware development project.
The following tables present unaudited quarterly information for the year ended
June 30, 2001 as reported and as restated:
As reported
-----------
Third Second First
Quarter Quarter Quarter
----------- ----------- -----------
Interest expense $ 370,314 $ 362,129 $ 363,258
=========== =========== ===========
Loss before cumulative effect of accounting
change and extraordinary item $(2,650,455) $(1,937,693) $(1,638,659)
Cumulative effect of accounting change - - -
Extraordinary loss on exchange of debt - - -
----------- ----------- -----------
Net loss $(2,650,455) $(1,937,693) $(1,638,659)
=========== =========== ===========
Net loss per common share (basic and diluted) $(0.18) $(0.12) $(0.14)
As Adjusted
-----------
Third Second First
Quarter Quarter Quarter
----------- ----------- -----------
Interest expense $ 244,996 $ 315,708 $ 340,009
=========== =========== ===========
Loss before cumulative effect of accounting
change and extraordinary item $(2,524,737) $(1,891,272) $(1,615,410)
Cumulative effect of accounting change - (821,000) -
Extraordinary loss on exchange of debt - (863,000) -
----------- ----------- -----------
Net loss $(2,524,737) $(3,575,272) $(1,615,410)
=========== =========== ===========
Net loss per common share (basic and diluted) $(0.17) $(0.23) $(0.14)
====== ====== ======
F-25
16. Events (Unaudited) Subsequent to the Date of the Report of Independent
Auditors
During the quarter ended December 31, 2001, the Company initiated a
$2,500,000 private placement offering the (the "2001-D" offering, increased to
$6,500,000 in January 2002), consisting of 12% Convertible Senior Notes
("Notes") due December 31, 2004. Each $10,000 Unit 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, received an extension of the termination
date and a reduction of the exercise price of a portion of their warrants if
they invested in the 2001-D Offering. The warrants were scheduled to expire by
December 31, 2001 or March 2002 (according to their original terms) at $.50 and
now become exercisable at $.10 through December 31, 2002. The fair value of this
warrant on the date of extension of $429,948 has been recorded in equity, and
this debt discount is being amortized to interest expense through the maturity
date of the Notes. The Convertible Note offering is to close no later than April
30, 2002. As of December 31, 2001, gross proceeds of approximately $1,230,000
had been deposited, and additional signed subscription documents for
approximately $561,000 had been received, for which the Company received cash in
January 2002. Through April 5, 2002, a total of approximately $3,618,985 of
subscriptions and cash have been received in connection with this offering.
During January 2002, the Company modified the terms of the 2001-D
Offering so that pending the March 21, 2002 Annual Shareholder's Meeting only
one-half of the first $3,500,000 of subscriptions could be accepted. If the
Company's shareholders did not approve an increase in the authorized shares of
Common Stock at the Annual Meeting, the Company would have been requested to
return one-half of such initial subscription. Since half of the 2001-D Notes for
which the consideration was received prior to December 31 could have been
returned to the note holder upon the noteholder's election, the Company reported
one-half of the cash and subscriptions receivable (approximately $896,000) prior
to December 31, 2001 as a current liability in the December 31, 2001 balance
sheet. On March 21, 2002 the Shareholders of the Company approved the increase
in authorized common shares to 85,000,000, and therefore all monies have been
kept by the Company.
During the six months ended December 31, 2001, the Company issued
3,704,576 shares of Common Stock in connection with the 2001-C Private Placement
offering. For each share, the Company issued a Common Stock purchase warrant to
purchase one share of restricted Common Stock for $0.50 per share at any time
through March 31, 2002. Of the gross amount, $983,077 are for services, $606,842
are cash proceeds which have been deposited by the Company, and $222,500 has
been classified as a subscription receivable, which has been received in cash
subsequent to December 31, 2001.
During the six months ended December 31, 2001, $10,000 of debentures
issued by the Company to La Jolla Cove Investors were converted resulting in
issuance of 38,850 shares of Common Stock, and the exercise of associated
warrants resulted in the issuance of 388,500 shares of Common Stock and the
generation of net proceeds of $83,717. During the first three months of 2002,
$60,000 of debentures were converted resulting in issuance of 233,100 shares of
Common Stock, and the exercise of associated warrants resulted in the issuance
of 2,331,000 shares of Common Stock at $.2574 per share and the generation of
net proceeds of $600,000.
During the six months ended December 31, 2001, and subject to the
approval of the proposal to increase the authorized shares at the Annual
Shareholder's Meeting, the Company agreed to issue an aggregate of 650,000
warrants to two consultants and one employee at $0.40 per share, which
approximated the market value at the time of the grant. The warrants vest
immediately and are exercisable for a period of two years after issuance. The
warrants will be issued in exchange for consulting services rendered and to be
rendered in the future.
In November 2001, the Company agreed to issue a bonus in January 2002
to its Executive Officers. The bonus consisted of 1,080,000 shares of Common
Stock. In addition, subject to approval of the proposal to increase the
authorized shares at the March 21, 2002 Annual Shareholder's Meeting, the
Company agreed to issue 1,080,000 stock options exercisable at $.40 per share to
the executive officers. The additional options are vested 75% upon issuance and
25% on March 30, 2002.
In March 2002, we entered into a binding letter of intent to acquire
Stitch Networks Corporation. Pursuant to the transaction, Stitch would become
our wholly-owned subsidiary. The letter provides that in exchange for their
Stitch stock, the Stitch stockholders would receive an aggregate of 24,000,000
of our shares of common stock and options to purchase up to 8,000,000 of our
shares of common stock at $.40 per share at any time through June 30, 2002. The
letter also provides that our Board of Directors would be increased to ten
members, with the three vacancies to be filled at the time of closing of the
transaction by persons nominated by Stitch. In order to consummate the proposed
transaction, our shareholders must approve an increase in the authorized shares
from 85,000,000 to 150,000,000. The shareholders' meeting is presently scheduled
for May 10, 2002. The letter provides that the transaction shall be closed no
later than May 17, 2002.
F-26