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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1999
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from _______________ to ______________
Commission File Number 000-24569
CASH TECHNOLOGIES, INC.
(Name of small business issuer in its charter)
Delaware 95-4558331
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1434 W. 11th Street Los Angeles, CA 90015
(Address of principal executive offices) (Zip code)
(213) 745-2000
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
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Title of Each Class on Which Registered
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None None
Securities registered under Section 12(gg) of the Exchange Act: Nasdaq SmallCap
Name of Each Exchange
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Title of Each Class on Which Registered
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Common Stock, $ .01 Par Value Nasdaq SmallCap
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X Check whether the issuer (1) filed all reports required to be filed by
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Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No __
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
The Company's gross revenue for its fiscal year ended May 31, 1999 was
$46,381,668 and its net revenue was $899,836. Gross revenue does not
represent revenue under generally accepted accounting principles. See
"Management Discussion and Analysis".
On August 31, 1999, the aggregate market value of the Common Stock of
Registrant held by non-affiliates of Registrant computed by reference to the
closing bid price $11.25 at which the stock was sold on such date was
approximately $39,247,481
APPLICABLE ONLY TO CORPORATE REGISTRANTS
On May 31, 1999, there were 3,488,665 shares of Common Stock, $ .01 par
value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
In addition to historical information, the information included in this
Form 10-KSB contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), such as those pertaining to the Company's capital resources, performance
and results of operations. Forward-looking statements involve numerous risks and
uncertainties and should not be relied upon as predictions of future events.
Certain such forward-looking statements can be identified by the use of forward-
looking terminology such as "believes," "expects," "may," "will,"
"should," "seeks," "approximately, "intends," "plans," "pro forma,"
"estimates," or "anticipates" or the negative thereof or other variations
thereof or comparable terminology, or by discussions of strategy, plans or
intentions. Such forward-looking statements are necessarily dependent on
assumptions, data or methods that may be incorrect or imprecise and may be
incapable of being realized. The following factors, among others, could cause
actual results and future events to differ materially from those set forth or
contemplated in the forward-looking statements: market acceptance of the
Company's products, limited marketing experience, uncertainty of product
development, dependence upon new technology, need for qualified management
personnel and competition. The success of the Company also depends upon economic
trends generally, governmental regulation, legislation, and population changes.
Readers are cautioned not to place undue reliance on forward-looking statements,
which reflect management's analysis only. The Company assumes no obligation to
update forward-looking statements. See also the Company's reports filed from
time to time with the Securities and Exchange Commission pursuant to the
Securities Act or the Exchange Act.
Item 1. Description of Business
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Introduction
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Cash Technologies, Inc., a Delaware Corporation, was incorporated, August
1995. Unless the context otherwise requires, references herein to the Company
refer to Cash Technologies, Inc., and its wholly-owned subsidiaries, National
Cash Processors, Inc., a Delaware corporation, incorporated in May, 1994, which
became a subsidiary of the Company in January, 1996; CoinBank Automated Systems,
Inc., a Delaware corporation, incorporated in November, 1995; and CoinBank
Automation Handels GmbH, Salzburg, Austria, incorporated in February 1998.
On July 9, 1998, the Company's registration statement for its initial
public offering was declared effective. The offering consisted of 1,485,000
shares of the Company's Common Stock with an initial offering price of $7.00 per
share. Starr Securities, Inc. and Gunn Allen Financial, Inc. acted as
underwriters for the Company's initial public offering. The Company received
gross proceeds (without deduction for commissions and expenses) of $10,395,000
in the offering and net proceeds of $8,467,880. On August 18, 1998, the
underwriters exercised the over-allotment option and purchased an additional
172,750 shares from the Company, the result of which the Company received gross
proceeds (without deduction for commissions and expenses) of $1,209,250 and net
proceeds of $1,010,446. To date the Company has utilized substantially all of
the proceeds of the initial offering for marketing, research and development,
debt repayment and for working capital.
Electronic Message Management Architecture (EMMA) Transaction Processing
System
In 1996, the Company began its development of an enhanced version of an
automated teller machine which was designated the ATM-X(TM). The ATM-X was
designed to provide a range of services not typically offered by ATM machines,
such as electronic bill payment, instant activated phone cards, event ticketing
and others. As development efforts proceeded, the Company discovered a
significant market demand for such a product and the
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need to create a robust transaction processing system that could link the new
ATMs with the worldwide financial networks in order to provide these new
services to ATMs, kiosks and PCs.
In December of 1997, the Company filed a patent application describing its
transaction processing and networking technologies. The technology, which was
later named EMMA (E-commerce Message Management Architecture), allows for the
seamless integration of conventional ATM and credit card (point-of-sale)
networks with non-bank networks and the Internet. The explosion of Internet e-
commerce has created, in management's opinion a demand for EMMA's unique
capabilities to provide e-commerce access from ATMs, as well as increased
security for financial transactions conducted over the public Internet.
Focus on the rapid deployment of ATM-X and EMMA has resulted in increases in
the size of the Company's technical staff. In recent months, the Company has
announced strategic relationships with e-commerce industry leaders for various
aspects of the ATM-X / EMMA effort, including: Concord EFS for ATM and credit
card gateway services; Tidel Engineering, Inc., for manufacturing of ATM-X
machines; CheckFree Holdings, Inc., for electronic bill payment processing
services; and Sensar, Inc. for high accuracy personal identification products.
The Concord relationship gives EMMA access to every major ATM and POS network
and card issuer in the world. Concord's ATM network is one of the largest in
the U.S. and they are one of the largest transaction processors in the nation.
Tidel Engineering is a Texas-based manufacturer of ATMs and the pioneer of
dial-up ATMs. The Company's relationship with Tidel suggests that off-premise
ATM operators, retailers and others will have the ability to readily acquire
ATM-Xs from a well accepted manufacturer as the ATM-X/EMMA concept is rolled
out.
CheckFree is the largest electronic payment processor in the nation, with
more than seventy-five percent of the bill payment market. The Company's
relationship with CheckFree provides EMMA with immediate access to thousands of
billing companies, covering the vast majority of billing companies in the U.S
The Company's technical development agreement with Sensar, Inc. is expected
to result in the ability to bring new e-commerce technologies into commercial
use. By coupling Sensar's identification technology (based on the unique
patterns of the human iris) with EMMA, millions of consumers may be able to use
their ATM cards to make secure purchases on the Internet. Previously, the fear
that computer hackers would decipher PIN numbers had prevented the use of ATM
cards on the World Wide Web. This system, in development, uses a small video
camera that photographs the eye from several feet away, making a positive
identification of the person with accuracy typically greater than that of DNA
typing. The system promises to offer significant advantages for online banking
and trading operations. Merchants could possibly expand their customer base to
those without credit cards and consumers who are afraid to send credit card
information over the Internet.
EMMA's capabilities, with interfaces to the Company's various e-commerce
partners, potentially will allow it to seamlessly interface financial networks,
particularly the four main channels through which trillions of dollars are
transacted each year: (1) the ATM network; (2) the credit card (POS) network;
(3) the Automated Clearing House (ACH) network; and (4) cash, by utilizing
currency acceptors on the ATM-X thus allowing individuals with no ATM card or
credit card to access the services offered.
The EMMA system has been "Certified" (approved for conducting transactions)
through the financial networks for ATM type transaction processing. The system
is now undergoing certification for credit card (POS networks) processing. Once
certification is completed, ATM-X/EMMA pilot installations are expected to begin
in late 1999.
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Commercial Cash Processing
While the Company has, in recent years, expanded its operations into other
technologies, it began and continues to do business as a cash and coin processor
through its National Cash Processors, Inc. subsidiary. Typically, currency is
purchased in bulk at a discount of between 1% and 2% from face value. After
counting, sorting and/or wrapping, the Company either promptly resells the
processed coin and currency at face value plus a small fee (typically $1.00 to
$1.50 per box of 50 rolls of coins and approximately $1.00 per $1,000 worth of
bills sorted) to a variety of customers, including armored car companies, or
deposits it at face value at the Federal Reserve Bank for credit to the
Company's account.
Retail Coin Processing
In 1995, the Company began its development of CoinBank(R) self-service coin
counting and processing machines, distributed through its CoinBank Automated
Systems, Inc. subsidiary. The machines accept and count loose coin, then
generate a receipt redeemable for the amount counted less a service fee of
typically 7-9%. This receipt can then be exchanged for currency. The machines
provide individuals and small businesses with a convenient method for the
disposing of their accumulated loose coin without the need for pre-sorting or
wrapping. The Company has performed extensive field tests with these machines in
Southern California, New England and Europe. The machines can be readily
configured to count coin denominations from most countries in the world. An
important feature of the machines, for which the Company filed for patent
protection in 1997, is their ability to reject extraneous materials such as
foreign objects and slugs, minimizing down time and repairs.
The Company is marketing the machines to Original Equipment Manufacturer
"OEM" customers (manufacturers of cash handling equipment), companies with
existing equipment distribution and service channels and directly to retailers
and financial institutions.
Proposed Acquisition, Sale of Company and Other Transactions
In March 1999, the Company entered into a letter of intent to acquire 51% of
the capital stock of the Austrian based manufacturer of coin counting components
of the Company's Coinbank machines, Geld Bearbeitungs Systems GES.M.B.H. ("GBS")
(the "Acquisition"). GBS is the largest manufacturer of coin processing
equipment in Austria. The Company and GBS are currently parties to a License
and Manufacturing Services Agreement whereby GBS manufactures the Company's
Coinbank machines. The Company is the single largest customer of GBS.
Pursuant to the terms of the Letter of Intent, the Company will acquire 51% of
GBS' capital stock from the existing shareholders for a combination of cash and
Common Stock of the Company. The Letter of Intent states that the principal
owners of GBS have agreed to have key employees of GBS enter into employment and
non-competition agreement with the Company as a condition to closing of the
acquisition. The parties are currently completing their due diligence and
financial statements while negotiating the terms of a definitive purchase
agreement, as well as side agreements such as the terms of the employment
agreements for the key employees. Additionally the Company and GBS are in
dispute over certain matters related to the license and manufacturing agreement
that has delayed negotiation of the acquisition. There can be no assurance that
the transaction will be completed or that the terms of the definitive agreement
will be as described above.
The Company is presently engaged in discussions with two entities regarding
an acquisition of all or part of the Company (including stock and assets
transfers). The Board of Directors has not been requested to consider any
definitive transaction. No letters of intent have been entered into by the
Company. There can be no assurance that any such transactions will be
consummated, or that the terms will be favorable to the Company or its
shareholders.
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Industry (Market) Overview
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Electronic Message Management Architecture (EMMA) Transaction Processing
System
Data networking has been an enabling technology for the Financial Industry.
Using financial networks, financial institutions can present and collect
financial information at the locations where transactions are initiated and
provide services that are an improvement over paper-based transactions. As a
result of networking, financial institutions have changed the way business is
done everywhere and have encouraged the growth of global enterprises.
In recent years, however, the limitations of the aging infrastructure of the
financial networks are being highlighted by the rise of public networking. The
most notable example of public networking, the Internet, depends for its high
availability and security upon advances in network hardware, new protocols, and
high-speed digital communications lines. In contrast, the standard in financial
networking infrastructure is a generation behind the majority of private
business and consumer networks.
This disparity discloses limitations such as the need for more bandwidth (the
volume of information that can pass through the networks) and easier access.
But bandwidth is only one problem. These existing aging financial networks
transact independently via specific industry protocols which by design prohibit
the free flow of information from one network to another--i.e., the POS network
only communicates within the POS network, ATM's transact exclusively via the ATM
network and neither can interface directly with the Internet. This problem
becomes the significant stumbling block for the implementation of advances in
network security, network control and routing.
EMMA potentially offers the financial industry a bridge technology that
provides an alternative to the disparity within existing systems. The EMMA
Platform is meant to provide a solution that will work in parallel with the
current financial networks, interacting with each. It supports the beneficial
features of those networks and overcomes their limitations, leveraging the
billions of dollars and decades of effort already invested in order to provide
new functionality. It promises to provide an up-to-date solution that can
implement the newest technologies, as well as carry the weight of the
transaction volume from older terminals.
Cash Processing
A significant number of companies, including pay phone owners, laundry and
vending machine operators, newspaper distributors, parking meter collectors and
many individuals, including those who work in service industries and receive
frequent tips, accumulate substantial quantities of loose coins in the course of
providing services and products. Many commercial enterprises, including grocery
stores, pharmacies, check cashing institutions and other retail businesses that
provide large amounts of change to consumers in exchange for purchases,
continually require significant quantities of coins. According to the United
States Department of the Treasury, at March 31, 1999, approximately $25.6
billion worth of U.S. coins were in circulation in the economy.
In addition, the traditional method of disposing of large quantities of loose
coins for more convenient forms of money is to deposit coins with banks, wrapped
in canvas bags in prescribed amounts, tagged and sealed pursuant to the
requirements of the Federal Reserve Bank. This is frequently a time-consuming
and costly process. Most large commercial depositors establish in-house
operations in order to undertake the labor-intensive tasks of sorting and
counting coins and transporting them to banks for deposit.
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Cash Processing Facility
The Company operates a cash processing facility in Los Angeles, California,
where it counts loose coin and currency, which it purchases in bulk from a
variety of commercial institutions at a small discount from face value. The
Company then sorts, wraps and resells the processed coin and currency to various
retail customers at face value plus a small fee or deposits it at face value at
the Federal Reserve Bank for credit to the Company's account.
Various businesses, including vending machine and pay phone operators,
transport bulk quantities of coin and currency directly to the Company's coin
processing facility for counting and sale to the Company. The Company delivers a
check or transfers funds by ACH to the customer's account in an amount equal to
the face value of the gross amount of the cash received, less a discount of
typically between 1% and 3%. Disputed calculations may be recounted or compared
with the hard-copy printout produced by the Company's counting machines.
The Company sells sorted, wrapped and boxed coins to various retail buyers at
face value plus a small fee. Certain retail enterprises, including supermarkets
and transportation companies, hire armored car carriers to pick up wrapped coin
from the Company's facilities. Excess unsold quantities of cash are deposited in
the Company's bank account.
Cash Processing Security
The Company's operations are substantially dependent on maintaining the
security of the inventories of coin and currency transported to the Company's
facility and stored on the Company's premises. The Company's coin and currency
processing facility is located in a secured building. There are no windows in
the facility other than a single, bulletproof glass guard lookout. Steel doors
provide the only entrances and a security monitoring company hired by the
Company monitors the facility 24 hours per day, 365 days per year for robbery,
fire and any loss of power or telephone services. Guards control all incoming
and outgoing visitors, as well as, employee access to the facility. Closed
circuit TV cameras, motion sensors and a computerized access control system
monitor and record all activity inside and immediately outside the facility at
all times. Company employees involved with cash handling activities pass through
metal detectors upon both entering and exiting the building.
The physical security systems in place at the Company's facility have been
rated "AA" (the same top rating maintained by most bank and armored car cash
vaults) by Underwriters Laboratories, Inc., which rating will remain effective
until at least 1999, so long as the Company maintains its present monitoring
procedures. Although the Company believes that it has in place adequate security
systems and procedures to safeguard its quantities of coin and currency, there
can be no assurance that the Company's systems and procedures will be sufficient
to ensure against robbery, embezzlement or other losses.
The Company maintains insurance against losses on its premises, including
those due to theft or embezzlement by independent contractors or the Company's
employees, up to an aggregate amount of $5,000,000. Though the Company believes
that it can increase the amount of such coverage if needed with a corresponding
increase in premium payments, there can be no assurance that such insurance will
provide the Company with an adequate level of coverage in the event of any loss,
or that it will be renewed or increased in the future as needed, on commercially
reasonable terms or at all. Moreover, the Company may experience an
unanticipated loss not covered by such insurance. Partially or completely
uninsured losses, if of sufficient magnitude, could have a materially adverse
effect on the Company's business and results of operations. The Company also
maintains insurance for off-site theft of coin from and damages to its CoinBank
machines.
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Retail Coin Processing - CoinBank Machines
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CoinBank Machine Features
CoinBank machines offer small businesses and individuals the opportunity to
dispose of excess coin at a discount from face value without the inconvenience
and costs associated with sorting, counting and wrapping coins for deposit
according to bank specifications. CoinBank machines also provide banks with an
alternative means of providing coin deposit services without the overhead
expenses involved in handling wrapped coin.
In December 1995, the Company commenced developing and marketing the CoinBank
machines, automated self-service coin counting and processing machines designed
to accept and count loose coins for a fee. The CoinBank machine is a
freestanding machine that incorporates hardware and electronic components and
certain software. The Company has developed three different CoinBank machine
models, with variations in coin storage capacity, customer interfaces and
external appearance. The most recently developed CoinBank machine model is
approximately 65" high, 30" wide and 28" deep and contains a large color
interactive touch screen which provides the user prompts as to how to use the
machine and which may be used for advertising displays, a credit/debit card
reader, an encryption PIN pad, a pre-paid phone card dispenser, a Pentium PC and
a thermal printer. It can be connected to the Company's EMMA network to provide
various e-commerce functions. Previous models were slightly smaller and did not
contain a computer screen. Customers place batches of coins into a CoinBank
machine's hopper that feeds coins past a set of sensors that electronically
measure the thickness, diameter and metallic properties of each coin. The
CoinBank machine returns to the user all extraneous materials such as foreign
coins and slugs. The CoinBank machine's software compares these sets of
measurements with standard measurements and acceptable tolerances for U.S. coin
denominations previously programmed in its memory (re-programmable for another
country's denominations), identifies each coin, and either accepts the coin or
rejects it to an outside receptacle. The accepted coins are rapidly counted and
collected in an internal box.
The CoinBank machine calculates the gross value of each batch of coins placed
into it by a customer, deducts a percentage of the gross batch total (typically
7 1/2% to 9%) and prints out a receipt for the net amount. The CoinBank machine
can offer the user a wide assortment of payout options, including a cash
receipt, and with the implementation of EMMA, prepaid phone cards or other like
services. The customer can bring the receipt to a teller window in a financial
institution or cashier, in the case of a retail location, for deposit to a bank
account or in exchange for currency. The CoinBank machine is also capable of
being linked to the ATM network in order to permit customers to directly deposit
funds to a bank account. The Company's software permits the remote monitoring of
its latest models of CoinBank machines to quickly identify machines which need
servicing. The Company's software system also allows monitoring of the amount
collected from each CoinBank machine. Amounts paid out by the financial
institutions or retailers are reimbursed by the Company via check or electronic
transfer.
CoinBank Machine Marketing and Installations (U.S.A.)
The Company has, in the past frequently engaged in market testing of CoinBank
machines by entering into agreements to install CoinBank machines in selected
branches of financial institution and retail stores for specified trial periods
in order to demonstrate the utility and convenience of CoinBank machines.
Through CoinBank machines, these locations are able to offer an additional
service to their customers while receiving a share of the customer fees charged
by the machine
During the past year, the Company has shifted its focus from the completion
of the technical development of the CoinBank machines and their free placement,
to the direct sale of the machines to retailers and financial institutions. The
Company believes that the market opportunities for the sale of the machines are
enormous given the superior unit economics enjoyed by customers who purchase the
machines over the economics of the free placement units. Consequently, the
Company has terminated or declined rolling out most of its free placement
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machine installations, reducing the number of such free placement machines from
168 machines as of March 31, 1999 to 58 machines as of August 1, 1999. The
Company plans to maintain a limited number of machines in the field to
demonstrate the performance and capabilities of the machines to prospective
customers.
The Company is currently in the process of negotiating sales of CoinBank
machines in a number of locations which previously had CoinBank machines
installed on a trial basis, as well as to other prospective institutional and
retail customers. There can be no assurance that any such contracts will be
executed. The Company anticipates that it may also enter into additional market
testing arrangements with other customers for the sale of its machines.
CoinBank Machine Assembly and Supply
The Company is dependent on third-party manufacturers for the production of
the components incorporated into CoinBank machines and currently purchases
substantially all of its requirements of specially designed or modified
components from single source suppliers. The Company purchases certain of these
components pursuant to open purchase orders placed from time to time in the
ordinary course of business. Although the Company currently believes that
alternative sources for these components are readily available, failure or delay
by any manufacturer in providing components to the Company on commercially
reasonable terms, or at all, in the absence of readily available alternative
sources, could result in interruptions in the Company's ability to continue its
assembly and installations of CoinBank machines and have a material adverse
effect on the Company's operations.
The Company currently contracts with one of its suppliers to fabricate the
housing and integrate the components of CoinBank machines.
In January 1997, the Company entered into a five-year Licensing and
Manufacturing Services Agreement with Geld Bearbeitungs Systeme GES.M.B.H., an
Austrian corporation ("GBS"). Pursuant to that agreement, GBS granted the
Company the exclusive, perpetual right to use certain technology incorporated in
CoinBank machines in North and South America and Asia, provided that the Company
purchases a minimum quantity of coin-counting components used in CoinBank
machines over the term of the agreement. Failure to satisfy such minimum
purchase requirement could result in the termination of the Company's agreement
with such manufacturer, which is likely to lead to the termination of the
Company's exclusivity with respect to such technology, which could have a
material adverse effect on the Company. The agreement also requires GBS to
provide information regarding the software, hardware and manufacturing
techniques used in the manufacturing of its money processing equipment to the
Company in exchange for certain payments. The agreement is subject to early
termination in the case of bankruptcy or breach by either party, provided that
if the Company has purchased the minimum number of components from GBS, it will
continue to be entitled to use, sell and distribute CoinBank machines containing
GBS technology. Although the Company believes that alternative sources for
components similar to the components to be supplied by GBS are available,
failure or delay by GBS to provide components to the Company could result in
interruptions in the Company's ability to continue to assemble and install
CoinBank machines and have a material adverse effect on the Company's
operations. (See Item 1. Proposed Acquisition)
In order to have greater control over the manufacturing of the CoinBank
machines, the Company entered into a letter of intent with GBS to acquire 51% of
the stock of GBS. See "Proposed Acquisition".
In August 1998, the Company entered into a three-year distribution agreement
with GBS, subject to successive one-year renewal periods, pursuant to which GBS
granted the Company the exclusive right to distribute and sell cash processing
equipment in all areas of the world not covered by the January 1997 agreement
between GBS and the Company (the "Territory"). Certain financial institutions
in Austria were exempted from the agreement. The Company must purchase a minimum
number of cash processing machines from GBS over a specified period during the
initial three-year term of the April 1997 agreement upon the schedule provided
in the agreement. The agreement provides that failure to satisfy such minimum
purchase requirement will result in the Company having only a non-
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exclusive right to distribute the equipment in the Territory. Though the Company
believes that the minimum purchase requirement is reasonable and achievable,
there can be no assurance that the Company will be able to satisfy such purchase
requirements.
The Company and GBS have recently been in a dispute regarding the 1998
Distribution Agreement. The dispute involves primarily the quantity of machines
to be produced by GBS for the European market. The dispute does not affect the
Company's North American rights pursuant to the January 1997, Licensing
Agreement. Although the Company believes that these matters will be resolved
amicably, there can be no assurance that the dispute can be resolved. The
proposed acquisition of GBS may not occur or may be delayed until resolution of
these disputes is accomplished.
CoinBank Machine -International Placement
Due to the nature of the European business environment, to efficiently market
CoinBank machines in Europe the Company has focused its attention primarily on
the establishment of sales channels through major European equipment
distributors and OEM firms. Presently, the Company is negotiating agreements
with three such distributors and is undergoing evaluation of its equipment with
three OEM manufacturers, which, if successful, would provide the Company with
distribution to most of the major markets in Europe. With the introduction of
Euro currency throughout Europe, the Company anticipates the need for a machine
that can collect the numerous different European coin types during the upcoming
conversion. While the Company anticipates that the CoinBank machine will be well
received by the distributors and their customers and will help solve the immense
Euro conversion problem, there is no guarantee that it will be successful in
completing the pending distribution or OEM agreements. The Company has also
provided evaluation equipment to a Chinese distributor and is exploring the
possibility of establishing a presence in China through an agreement with the
distributor. The CoinBank machine is capable of accepting nearly all-
international coins with software changes. In the future, the Company may seek
to sell or license CoinBank machines to third parties in other international
markets. There can be no assurance that the Company will enter into an agreement
or will otherwise be able to sell or license any CoinBank machines in China or
continue to sell machines in other foreign jurisdictions.
Product Development
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Electronic Message Management Architecture (EMMA) Technical Description
The EMMA platform utilizes techniques that overcome the challenges of
integrating services and transactions onto a single ATM, kiosk or Internet PC.
EMMA converts commands from an ATM-X or other qualified device into message
structures that are widely used in the financial industry. The EMMA platform
implements a flexible message format, allowing multiple transactions at a
financial terminal or any on-line client to be transmitted as a single message
to the EMMA host.
An important aspect of EMMA is its ability to process multiple transactions
"asynchronously" (in parallel). This capability makes multiple transaction
types from a single terminal a convenient reality. In a complex session, in
which several transactions are requested by a customer, for example getting
cash, paying a bill and cashing a check, a number of different external
financial and proprietary networks must be accessed. Waiting for each of these
networks to respond in sequence one at a time would make the user's session
uncomfortably long and be an inefficient use of the machine. Therefore the
ability to process each of these events independently and simultaneously
significantly reduces processing time and makes such services practical.
A significant advantage that EMMA offers over other attempts by certain
financial institutions to provide new services on ATMs is its open architecture.
Any software application which observes the EMMA message structure
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or incorporates a software component (i.e. active-x control) provided by the
Company can successfully complete transactions through the EMMA platform,
allowing ATM makers and other developers to readily produce EMMA-compliant
devices and participate in the burgeoning market for new services.
As the Company's marketing plan includes the future licensing of the EMMA
platform to others who wish to establish or upgrade their own transaction
processing systems, management envisions an environment in which EMMA would be
viewed as a new standard for complex transactions, permitting any software
developer to produce applications capable of generating transactions for
processing through any licensed EMMA processor.
ATM-X
The Company has developed an enhanced version of an automated teller
machine, designated the ATM-X, which is driven by the Company's EMMA transaction
processing platform. The ATM-X includes color graphic displays, and can provide
a full range of bank and non-bank services not typically offered by ATM
machines, such as electronic bill payment, instant activated phone cards, check
cashing and event ticketing.
The Company will rely on third party ATM manufacturers, such as Tidel
Engineering and others, to produce ATM-Xs. The Company used a portion of the
proceeds of its initial public offering for the development, testing and
refinement of the ATM-X and EMMA platform and will continue to expend financial
resources to develop new applications and refinements of the ATM-X (see
"Marketing").
Marketing
- ---------
E-Commerce Message Management Architecture (EMMA) Transaction Processing
System
ATM transactions take place via the worldwide ATM network, which is
comprised of nearly 1,000,000 ATMs. Over 2.3 billion transactions are processed
each month through this system.
Originally in the 1970's and 1980's, the banking industry deployed ATMs as
a cost-cutting measure, with the assumption that operational costs could be
reduced by moving customers from teller lines to self-service machines. This
limited view for the ATM network resulted in design limitations that today
prevent the network from being easily used for other types of transactions. The
Company envisioned a solution to harness the existing network infrastructure to
offer additional banking and non-banking services at the ATM.
EMMA is designed to link global financial systems together for the first
time. Using this existing worldwide ATM infrastructure, the Company expects to
provide consumers with direct access to every major method of commerce,
including Internet Commerce, from a single machine.
Marketing studies are currently underway to determine the mix of services
and associated demographics that will produce optimum results. The Company
envisions producing revenues through the following methods: (1) potential
operation of the Company's ATM and financial transaction kiosks; (2) transaction
processing for third parties; (3) licensing EMMA to other ATM operators; and (4)
the advertising and the sale of transaction data.
ATM-X
The Company believes that there is virtually unlimited opportunity to
deliver financial services in new and expanded venues. One area of intense
growth is the development of off-premise ATM equipment and retail kiosks
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by the traditional ATM manufacturers, such as NCR, Diebold, Tidel and others.
Usually new equipment models have high-powered, graphical user interfaces.
These super-charged terminals have the potential to offer the widest
possible range of financial and commerce services to the public at street level.
EMMA addresses their needs by providing an interface between the older network
hosts and the new terminal platforms.
The Company has not installed any ATM-Xs to date, however it is finalizing
agreements for trial installations which are anticipated to begin during 1999.
The Company will rely on independent sales organizations who market ATMs to
retailers and other non-bank locations to be the primary distributors of ATM-X
machines, along with direct sales to financial institutions. There can be no
assurance that the Company will be successful in marketing the ATM-X either
through these third-party sales organizations or directly.
Commercial Cash Processing and Retail Cash Processing (CoinBank Machines)
Since inception, the Company has conducted only limited marketing
activities and currently has limited marketing and technical experience and
limited financial, personnel and other resources to independently undertake
extensive marketing activities. With respect to Cash Processing and CoinBank
sales the Company conducts substantially all of its own marketing activities and
may hire additional marketing personnel, including possibly independent
contractors to assist it in these efforts. To date, the Company has conducted
marketing of its coin processing services by means of press releases and
articles in trade journals targeted at coin-intensive industries, including pay
phone owners, laundry and vending machine operators and newspaper vendors,
however the Company is not aggressively marketing its commercial cash processing
services, preferring instead to focus its sales resources on its other business
segments. The Company's marketing of CoinBank machines has consisted of entering
into market testing arrangements with a limited number of financial institutions
and retailers and attending certain industry shows. The Company intends to focus
its future CoinBank marketing efforts on the sale of CoinBank machines rather
than a free placement and shared revenue model. Achieving market acceptance for
CoinBank machines will require substantial marketing efforts and the expenditure
of a significant amount of funds.
The Company used a portion of the proceeds of its initial public offering
to expand marketing and promotion of CoinBank machines, including advertising in
preparing marketing brochures, participating in industry trade shows and hiring
additional marketing and sales personnel. The Company's marketing plans may be
subject to change as a result of a number of factors, including changes in
market conditions, the type of marketing requested by the establishments where
CoinBank machines are installed in the future and various other competitive
factors. There can be no assurance that the Company's efforts will result in
significant initial or continued market acceptance, that emerging markets for
CoinBank machines and the Company's coin processing services will not be
limited, or that the Company will succeed in positioning CoinBank machines and
the Company's services as a preferred method of processing large amounts of coin
and currency.
Competition
- -----------
EMMA and ATM-X
The ATM and transaction processing industries are characterized by intense
competition. While the Company is not aware of other companies that offer
identical systems to EMMA/ATM-X, a large number of other technologies and
products will compete for the attention of a finite number of customers. First,
while the Company has encouraged most major ATM manufacturers who have
distribution in the U.S. to produce "ATM-X -class" machines, to the extent that
these manufacturers elect not to do so they may instead compete by offering
customized ATMs to certain customers who seek to independently develop similar
multi-function terminals to the
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ATM-X. For example, several banks have offered limited bill payment capability
on their ATMs. These manufacturers and customers are likely to have
substantially greater financial and other resources than the Company.
Secondly, other transaction processors who also have significantly greater
financial and other resources than the Company may choose to develop and market
a system that competes with EMMA rather than license EMMA.
Thirdly, various companies are attempting to develop, or have developed,
systems that provide one or more of the individual services offered or to be
offered on the ATM-X. For example, one company has developed and deployed an
event ticket kiosk and another has deployed an airline ticket kiosk. To the
extent that such firms are successful in marketing their products, a potential
customer whose needs have been partially satisfied by such "single-focus"
machines may lose some or all of their interest in the EMMA or ATM-X
technologies.
Thus, while the Company believes that is has a "window of opportunity"
during which its products will be viewed as unique and desirable, there can be
no assurance that the Company will be successful in distributing its EMMA and
ATM-X technologies before one or more competitors develop and successfully
market competing products.
Commercial Cash Processing and Retail Coin Processing (CoinBank Machines)
The cash processing industry is highly competitive, and the Company
competes with a variety of banks whose coin processing is handled by armored car
services, most of whom possess substantially greater financial, personnel,
marketing and other resources than the Company. Many large companies in coin-
intensive industries, such as major pay telephone operators, have developed in-
house centers to count, sort and process their cash and deposit it with banks.
Given the foregoing factors and the Company's limited efforts to market
commercial cash processing services, there can be no assurance that the Company
will be able to compete successfully in the cash processing market or that the
Company's present or future competitors or industry changes will not render its
services obsolete or less marketable.
The Company is aware of only one company, CoinStar, Inc., that offers self-
service coin counting machines on a "free-placement basis." To the Company's
knowledge, unlike the Company, which currently focuses its efforts on selling
CoinBank machines, this competitor focuses its marketing efforts on installing
free placement machines only. This competitor has installed its machines
throughout the United States, and in some cases; such installations are near
where the Company has installed or may seek to sell CoinBank machines. There can
be no assurance that potential purchasers of CoinBank machines will not prefer
to employ this competitor's "free placement" machines. Moreover, there can be no
assurance that other companies are not developing or will not seek to develop
functionally equivalent products or services for the disposal of large amounts
of coins in the future. In this regard, the Company is aware of three other
companies that offer self-service coin counting machines for sale in the United
States; Scan Coin, CT Coin and Zimmerman. Certain of the potential competitors
may have greater financial, personnel, marketing and other resources than the
Company. In addition, there are many companies in the coin processing industry
that have the expertise and resources that may encourage them to develop and
market products or services that compete with CoinBank machines or that would
render CoinBank machines obsolete or less marketable. Moreover, potential
customers may elect to establish their own facilities for counting and
processing coins or utilize other methods which they believe to be less costly
or possess other advantages over CoinBank machines. Thus, while the Company
believes that its products have certain proprietary advantages over similar
products on the market, there can be no assurance that the Company will be able
to compete successfully.
In addition, alternatives to the use of coin and currency, such as checks,
credit cards and wire transfer, debit cards, ''smart'' cards and other forms of
electronic currency are increasing. Increasing use of these alternative forms of
payment could reduce the frequency of circulation of coin and currency, which
would result in decreased need for CoinBank machines and the Company's cash
processing services. The market for alternative forms of money transfer is
characterized by frequent introduction of new products and services and is
subject to changing consumer
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<PAGE>
preferences and economic trends. There can be no assurance that the demand for
methods of disposing of coin and currency will not decrease significantly or
that other factors, over which the Company will have no control, will not have a
material adverse effect on the Company's business and results of operations.
Intellectual Property
- ---------------------
Until November 1996, the Company licensed technology and software used in
its business to track inventory and verify customer payments (the "Developed
Software") from First Bancorp, L.P. ("First Bancorp"), a principal
stockholder of the Company and an affiliate of Bruce Korman, the Company's
President and Chief Executive Officer, pursuant to an exclusive license with
First Bancorp. In November 1996, the Company purchased the Developed Software
from First Bancorp in consideration of the issuance of a $50,000 non-interest
bearing promissory note, which was repaid, with a portion of the proceeds of its
initial public offering. See "Certain Transactions."
Although the Company has filed applications with the U.S. Patent Office to
obtain a patent on its CoinBank counting machine and an additional application
with respect to its ATM-X and EMMA products, there can be no assurance that any
patent will be granted, or that if granted, they will afford the Company any
meaningful protection. The Company does not currently hold any patents with
respect to any software or hardware used by it in its operations and there can
be no assurance that any patents will be granted to it. The Company relies on a
combination of trade secrets, technical measures, copyright protection and
nondisclosure agreements with its employees to establish and protect the ideas,
concepts and documentation of the Developed Software. Such methods may not
afford complete protection, and there can be no assurance that third parties
will not independently develop such technology or obtain access to the Developed
Software. Although the Company believes that the Developed Software and other
software used in its operations does not infringe upon the rights of others,
there can be no assurance that the Developed Software or such other software
does not and will not infringe upon the patents or intellectual property rights
of others. See ''Legal Proceedings'' and " Risk Factors"-Litigation.
In the event of infringement, the Company could, under certain
circumstances, be required to obtain a license or modify aspects of the
Developed Software or such other software or refrain from using such software.
There can be no assurance that the Company will have the necessary financial
resources to defend any infringement claim made against it or to successfully
terminate any infringement in a timely manner, upon acceptable terms and
conditions or at all. Failure to do any of the foregoing could have a material
adverse effect on the Company. Moreover, if the Developed Software or other
software used in the Company's business is deemed to infringe upon the rights of
others, the Company could, under certain circumstances, become liable for
damages, which could have a material adverse effect on the Company.
The Company believes that product recognition is an important competitive
factor and promotes the CoinBank name in connection with its marketing
activities. The Company received United States trademark registration for the
"CoinBank" name in September 1997. Although the Company is not aware of any
claims of infringement or other challenges to the Company's rights to use this
trademark, there can be no assurance that the Company's marks do not or will not
infringe upon the proprietary rights of others or that the Company's marks would
be upheld if challenged.
Employees
- ---------
As of May 31, 1999, the Company employed 53 employees and contractors on a
full-time basis, of which 20 were engaged in coin and currency processing, 5
were engaged in technical operations, support and repairs at the Company's
facility, 7 were engaged in customer service and sales, 9 were engaged in
accounting and administration and 12 were engaged in R&D and engineering. None
of the Company's employees are subject to collective bargaining agreements. The
Company believes that its relations with its employees are good.
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Initial Public Offering
- -----------------------
On July 9, 1998, the Company's registration statement for its initial
public offering was declared effective. The offering consisted of 1,485,000
shares of the Company's Common Stock with an initial offering price of $7.00 per
share. Starr Securities, Inc. and Gunn Allen Financial, Inc. acted as
underwriter for the Company's initial public offering. Simultaneously with its
public offering, the Company became a reporting Company under the Securities and
Exchange Act of 1934. The Company received gross proceeds of $10,395,000
(without deduction for commission and expenses) from the initial public offering
and net proceeds of $8,467,880. On August 18, 1998, the underwriters exercised
their over-allotment option and purchased an additional 172,750 shares from the
Company, the result of which the Company received gross proceeds (without
deduction for commission and expenses) of $1,209,250 and net proceeds of
$1,010,446. The proceeds from these activities have been used by the Company.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations".
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Risk Factors
- ------------
Limited Operating History; Significant and Continuing Losses. The Company
opened its coin processing facility in May 1994 and commenced installations of
CoinBank machines at a limited number of bank branches in December 1995. As of
August 10, 1999, the Company has 61 CoinBank machines (including Europe)
installed. Additionally, the Company is continuing to develop its ATM-X machines
with the EMMA technology and has not had any commercial activity from such
machines. Accordingly, the Company has a limited operating history upon which an
evaluation of the Company's performance and prospects can be made. The Company
is subject to numerous risks, expenses, delays, problems and difficulties
frequently encountered in the establishment of a new business. In the last two
years, the Company has incurred significant losses, including net losses of
$5,711,964 and $2,727,145, respectively, for its fiscal years ended May 31, 1999
and 1998. At May 31, 1999, the Company had stockholders Eequity of $435,494 and
an accumulated deficit of $11,288,173. The Company will continue to have a high
level of operating expenses and will be required to make significant up-front
expenditures in connection with both the development of its EMMA System and the
commercialization of CoinBank machines (including, without limitation, salaries
of executive, technical, marketing and other personnel), the Company anticipates
that it will continue to incur significant and increasing losses for the
foreseeable future until such time, if ever, as the Company is able to generate
sufficient revenues to finance its operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Financial
Statements."
Potential Adverse Effect of Low Margins on Future Operating Results. The
Company's cash-processing activities require high-volumes of cash, and is a low-
margin business. Therefore, the impact of possible future adverse events,
including inability to gain market acceptance, unanticipated expenses, increased
competition, unfavorable general economic conditions, decreased demand for coin
processing services or other unforeseen circumstances could have a material
adverse effect on the Company's future operating results. There can be no
assurance that the Company will be able to successfully implement its business
strategy or achieve profitable operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Working Capital Deficit; Significant Capital Requirements. At May 31, 1999,
the Company had a working capital deficit of $392,219. The Company's capital
requirements have been and will continue to be significant, and its cash
requirements have exceeded cash flow from operations since inception. As a
result, the Company was substantially dependent on the proceeds of its initial
public offering in July 1998, and earlier private placements of its debt and
equity securities to satisfy its working capital requirements. The Company will
be dependent upon the proceeds of future Private Placement Offerings or other
public offerings to fund development of the ATM-X machine and EMMA technology,
its short-term working capital requirements, fund certain marketing activities
and to continue implementing its expansion strategy. The Company believes, based
on current proposed plans and assumptions relating to its operations, that
future private placements or other public offerings, together with anticipated
revenues from operations, will be needed to fund the Company's operations and
working capital requirements over the next 12 months. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Financial Statements." Need for Substantial Additional Financing; No Assurance
of Additional Personal Guarantees of Corporate Debt by Officers. In the event
that the Company's plans or assumptions relating to its operations change or
prove to be inaccurate, or if the net proceeds of future private placements or
other public offerings together with revenues generated from operations prove to
be insufficient (due to, among other things, unanticipated expenses, increased
competition, unfavorable general economic conditions, decreased demand for coin
processing services, inability to successfully market CoinBank machines, the
ATM-X or the EMMA system, or other unforeseen circumstances), the Company could
be required to seek other less desirable alternatives. There can be no assurance
that additional financing from any source will be available to the Company when
needed, on commercially reasonable terms, or at all. To the extent that the
Company obtains additional financing through the issuance of additional equity
securities, any such issuance may involve substantial dilution to the Company's
then-existing stockholders. Additionally, to the extent that the Company incurs
indebtedness or issues debt securities, the Company will be subject to all of
the risks associated with incurring substantial indebtedness, including the
risks that interest rates may fluctuate and cash flow may be insufficient to pay
principal
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<PAGE>
and interest on any such indebtedness. Any inability to obtain additional
financing when needed will have a material adverse effect on the Company that
could require the Company to significantly curtail or possibly cease its
operations. In addition, any additional equity financing may involve substantial
dilution to the interests of the Company's then-existing stockholders. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Certain Transactions" and "Financial Statements."
Uncertainty of Market Acceptance. In marketing its services, the Company
is attempting to change the traditional methods, such as in-house processing or
bank processing, by which holders dispose of large quantities of loose coin and
currency. Demand for and market acceptance of CoinBank and ATM-X machines are
subject to a high level of uncertainty. To date the Company has installed and
sold only a limited numbers of CoinBank machines. To date no ATM-X machines have
been installed for public use and are not yet commercially available. There can
be no assurance that the results of the use of CoinBank machine, ATM-X machines
or the EMMA system when deployed will be well-received or that prior results
will be indicative of future market acceptance of the Company's products or
services. Commercial establishments and individuals may elect to utilize other
methods, which they believe to be less costly or possess other advantages over
CoinBank and ATM-X machines or EMMA system. Achieving market acceptance will
require substantial marketing efforts and the expenditure of a significant
amount of funds.
Demand for and market acceptance of the Company's coin and currency
processing services are also subject to a high level of uncertainty. Commercial
establishments and individuals may elect to utilize other methods which they
believe to be less costly or possess other advantages over the Company's coin
and currency processing services, including establishing their own coin counting
and processing operations, or otherwise refraining from seeking to dispose of
excess coin. Achieving market acceptance for the Company's coin processing
services will also require the expenditure of significant funds to inform
businesses of the perceived benefits and cost advantages of the Company's coin
processing services over traditional coin processing methods. See "Business--
Market Overview" and "Business--CoinBank Machines."
Limited Marketing Capabilities. Since inception, the Company has
conducted only limited marketing activities and currently has limited marketing
and technical experience and limited financial, personnel and other resources to
independently undertake extensive marketing activities. The Company utilized a
portion of the proceeds from its Initial Public Offering to expand marketing and
promotion of ATM-X, EMMA system and CoinBank machines as well as the Company's
coin and currency processing services. The Company's marketing plans may be
subject to change as a result of a number of factors, including changes in
market conditions, the nature of the marketing requested or provided by the
establishments where ATM-X and CoinBank machines are installed in the future and
other factors. There can be no assurance that the Company's efforts will result
in significant initial or continued market acceptance, that emerging markets for
ATM-X, EMMA system and CoinBank machines, and the Company's coin and currency
processing services will not be limited, or that the Company will succeed in
positioning ATM-X and EMMA system as a preferred method of financial
transaction. See "Business--Marketing."
Security Risks; Potential Uninsured Losses. The Company's coin-processing
operations are substantially dependent upon maintaining the security of the
inventories of coin and currency transported to the Company's coin processing
facility and held on the Company's premises. Although the Company believes that
it has in place adequate security systems and procedures to safeguard the coin
and currency processed at its coin processing facility, there can be no
assurance that the Company's systems and procedures will be sufficient to ensure
against theft, embezzlement or other losses. The Company has insurance for off-
site theft of coin from and damages to its CoinBank machines. This policy is for
an aggregate amount of $100,000, the Company also maintains insurance against
losses, including those due to theft or embezzlement by independent contractors
or the Company's employees, up to an aggregate amount of $5,000,000. However,
there can be no assurance that such insurance will provide the Company with an
adequate level of coverage in the event of any loss, or that it can be renewed
or increased in the future as needed, on commercially reasonable terms or at
all. Moreover, the Company may experience an unanticipated loss not covered by
such insurance. Partially or completely uninsured losses, if of
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sufficient magnitude, could have a material adverse effect on the Company's
business and results of operations. See "Business--Security."
Technological Factors; Uncertainty of Product Development. As of August
1, 1999, the Company had a total of 58 CoinBank machines installed at locations
in California and New England. Although the CoinBank machines have performed
reliably to date at their current installations, there can be no assurance that,
upon widespread commercial use, CoinBank machines will satisfactorily perform
all of the intended functions or that it will prove reliable in extensive
utilization. Software and other technologies that are incorporated into CoinBank
machines are complex and may contain errors, which will only become apparent
subsequent to widespread commercial use. Remedying such errors could require the
expenditure of a substantial amount of money and could also result in
significant delays in installing additional CoinBank machines or result in
periods in which previously installed CoinBank machines are inoperative, any of
which could have a material adverse effect on the Company. The Company
anticipates that it will continue to seek to upgrade and enhance both the
hardware and software components of CoinBank machines. Such upgrading and
enhancement efforts remain subject to the risks inherent in new product
development, including unanticipated technical or other problems that could
result in material delays in product commercialization or significantly
increased costs. There can be no assurance that development of enhanced CoinBank
machines, if necessary, will be completed successfully, that unanticipated
technical or other problems will not occur that would result in increased costs
or material delays in development or commercialization of CoinBank machines, or
that CoinBank machines will achieve widespread commercial acceptance. There can
also be no assurance that the Company's ATM-X or EMMA system will perform
satisfactorily all of its intended functions or will prove to be reliable in
extensive utilization. See "Business-- Product Development."
Dependence on Independent Contractors. The Company has been and will
continue to be substantially dependent on arrangements with one or more
independent contractors for the installation and servicing of CoinBank machines
and the collection and delivery of collected coins from CoinBank machines to the
Company's processing facility. The Company currently utilizes independent
contractors to handle servicing and collections from CoinBank machines. The
Company is substantially dependent on the ability of the independent contractors
it hires to dedicate sufficient personnel to service the Company. There can be
no assurance that any contractor that the Company utilizes or may utilize will
have sufficient capacity to satisfy the Company's CoinBank machine servicing
requirements during any period of sustained demand. The loss of services of
independent contractors could disrupt the Company's business. Moreover, failure
or delays by independent contractors in collecting from and servicing CoinBank
machines could have a material adverse effect on the Company. See "Business--
CoinBank Machine Assembly and Supply."
Dependence on Third-Party Manufacturers and Third-Party Technology. The
Company assembles CoinBank machines using components supplied by third-party
manufacturers such as GBS. Similarly, the ATM-X machines will be assembled
using third party supplied components and EMMA system will rely upon existing
financial network for transaction processing. As a result, the Company is
dependent on third parties for continued operation. The Company currently
purchases most of its requirements of specially designed or modified components
from single source suppliers. Although the Company believes that alternative
sources for these components are available, failure or delay by any manufacturer
in providing components to the Company could result in interruptions in the
Company's ability to continue to assemble and install CoinBank machines and have
a material adverse effect on the Company's operations. GBS manufactures certain
coin counting equipment used in CoinBank machines. Pursuant to licensing and
manufacturing services and distribution agreements with GBS, the Company has the
exclusive world-wide right (except for sales to certain Austrian financial
institutions) to use the technology which is incorporated in the equipment
manufactured by this supplier. The present agreements require the Company to
make certain minimum purchases of the equipment. Failure to satisfy such minimum
purchase requirements could result in the termination of the Company's agreement
with such manufacturer, which would likely lead to the termination of the
Company's exclusivity with respect to such technology, which could have a
material adverse effect on the Company. As discussed elsewhere in this
document, the Company has entered into a letter of intent to acquire GBS. See
''Business--Assembly and Supply of CoinBank Machines. Failure of the existing
financial network providers to allow access to their network could also have an
adverse effect, or cause the
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company to cease to operate as an EMMA provider." See "Management Discussion
and Analysis of Financial Conditions and Results of Operations."
Limited Customer Base. For the fiscal year ended May 31, 1999
approximately 65% of the Company's revenue was derived from sales of coin to
three customers and currency to one customer, and the Company continues to sell
most of the coin and currency it processes to a limited number of entities. The
Company generally does not enter into long-term written agreements with any
customers with respect to the processing, acquisition or sale of coin and
currency and does not anticipate entering into written contracts for coin
purchases or sales with future customers. The loss of present or any future
significant customers, for any reason, in the absence of significant additional
customers or contracts, could have a material adverse effect on the Company's
financial condition and results of operations. There can be no assurance that
the Company will be able to lessen its dependence on a limited number of
customers for a substantial portion of its revenue. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Uncertainty of Proposed Expansion. To date, the Company has generally
been dependent on processing coins and currency purchased directly from third
parties (other than through CoinBank machines) to generate substantially all of
its revenues. The Company intends to increase its current level of operations,
with an emphasis on marketing ATM-X, EMMA and CoinBank machines. The Company has
achieved limited growth to date, and there can be no assurance that the Company
will be able to successfully expand its operations. Expansion of the Company's
operations will be largely dependent upon the Company's ability to successfully
utilize EMMA via existing ATMs, and future ATM-X machines; hire and retain
skilled technical, marketing and other personnel; establish and maintain
satisfactory relationships with banks and retail businesses; and achieve
significant market acceptance for the use of ATM-X machines, EMMA and the
Company's coin processing services. There can be no assurance that the Company
will be able to successfully implement its business plan or that unanticipated
expenses, problems or technical difficulties will not occur which would result
in material delays in its implementation. The Company's prospects could be
adversely affected by a decline in the economic prospects of particular
individual or commercial customers or segments of coin-intensive markets, which
could result in reduction or deferral of requirements for coin processing
services or the use of ATM-X machines and EMMA system by prospective customers.
There can be no assurance that the Company will be able to achieve significant
market acceptance of ATM-X machines, EMMA or the Company's coin processing
services, achieve significant penetration in new geographic markets or
successfully expand its operations. See "Business--CoinBank Machines."
Competition; Technological Obsolescence. The coin processing industry is
characterized by intense competition and the Company competes primarily with
banks (which typically utilize the services of armored car carriers for their
coin and currency processing), most of which possess substantially greater
financial, personnel, marketing and other resources than the Company. With
respect to CoinBank machines, the Company is aware of one other company that
offers self-service coin counting and processing services through the use of
coin counting machines. To the Company's knowledge, unlike the Company, which
has recently focused its efforts on selling CoinBank machines, this competitor
focuses its marketing efforts on installing its machines in supermarkets on a
free placement basis. This competitor has installed a number of its machines in
the Los Angeles area as well as in other areas of the United States, and, in
some cases, such installations are near where the Company has installed or may
seek to install and/or sell CoinBank machines. There can be no assurance that
potential users of CoinBank machines will not prefer to utilize this
competitor's machines, whether because of preference or perceived convenience of
location or hours of service or otherwise, or that this competitor will not seek
to sell its machines. Moreover, there can be no assurance that other companies
are not developing or will not seek to develop functionally equivalent products
or services for the disposal of large amounts of coins in the future. In
addition, the Company's recently developed ATM-X and EMMA will compete with
existing automated teller machines and services offered by financial
institutions and other companies that provide services similar to those offered
by the ATM-X and EMMA. Certain of the current competitors of the Company as
well as potential competitors may have substantially greater financial,
personnel, marketing and other resources than the Company. In addition, there
are many companies in the coin processing industry that have the expertise and
resources that may encourage them to develop and market products or services
that compete with the Company or that could render the Company's
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products and services obsolete or less marketable. Moreover, with respect to the
marketing of CoinBank machines, potential customers may elect to establish their
own facilities for counting and processing coins or utilize other methods which
they believe to be less costly or possess other advantages over CoinBank
machines and the Company's coin processing services. There can be no assurance
that the Company will be able to compete successfully. See "Business--
Competition."
Potential Adverse Effect of Changing Industry Trends. Alternatives to the
use of coin and currency, such as checks, credit cards and wire transfer, debit
cards, "smart" cards and other forms of electronic currency are increasing.
Increasing use of these alternative forms of payment could reduce the frequency
of circulation of coin and currency, resulting in decreased need for CoinBank
machines and the Company's coin processing services. The market for alternative
forms of money transfer is characterized by frequent introduction of new
products and services and is subject to changing consumer preferences and
economic trends. There can be no assurance that the demand for methods of
disposing of coin and currency will not decrease significantly or that other
factors, over which the Company will have no control, will not have a material
adverse effect on the Company's business and results of operations. See
"Business--Competition."
Geographic Concentration of Business; Changes in Economy. To date, the
Company's operations have been concentrated primarily in Southern California and
the Northeastern U.S.A. The Company's growth prospects will be largely dependent
on its ability to achieve greater penetration in these markets as well as
significant penetration in new geographic markets. The Company's prospects could
be adversely affected by unfavorable general economic conditions, including any
downturns in the California or national economies, which could result in an
unwillingness by consumers to pay cash processing fees or an increased interest
in developing alternative methods of counting and sorting coins, including
creating in-house processing facilities. See "Business."
Risks Relating to International Installations and Sales. The Company is
seeking to sell and install additional CoinBank machines outside of the United
States. In addition, the Company is currently negotiating letters of intent and
other arrangements to sell CoinBank machines and related equipment to purchasers
in various other countries, including several with developing or emerging
economies. To the extent that the Company is able to expand its operations and
sales outside of the United States, of which there can be no assurance, it will
become subject to the risks associated with international operations and sales,
including economic and political instability, currency fluctuations, credit
risks, shipping delays, customs duties, export quotas, foreign government
regulations and other trade restrictions, any of which could have a significant
impact on the Company's ability to operate CoinBank machines effectively outside
of the United States or to deliver CoinBank machines overseas to purchasers on a
competitive and timely basis. See "Business--Possible International Sales of
CoinBank Machines."
Litigation. In June 1997, Coinstar, Inc. ("Coinstar"), a competitor of
the Company, filed a complaint against the Company's subsidiary, CAS, in the
U.S. District Court for the Northern District of California alleging
infringement of one of its patents. In June 1997, CAS filed an answer denying
the claims of Coinstar and interposed a counterclaim seeking declaratory
judgment as to the invalidity and un-enforceability of Coinstar's patent and
instituted a third-party complaint against ScanCoin AB for breach of warranty.
In January 1998, the district court granted CAS's motion for summary
judgment of noninfringement of the CBIII CoinBank models having a solid input
tray. The Court granted in part and denied in part CAS's motion for summary
judgment of noninfringement concerning the earlier CBII model. The Court also
denied CoinStar's motion for summary judgment. In October 1998 Coinstar amended
its complaint to allege infringement by CAS of newly issued U.S. Patent No.
5,799,767 ("the 767 patent"). CAS has filed a motion for summary judgment of
invalidity and non-infringement of the 767 patent. That motion is currently set
to be heard on September 29,1999. Although the company believes that Coinstar's
amended complaint is without merit, there can be no assurance that the Coinstar
litigation will either be settled on terms acceptable to the Company or decided
in favor of the Company. Although there can be no assurance, the Company
believes that the final outcome of this action will not have a material adverse
effect on its financial statements, however if the Company is required to use a
portion of its working capital for litigation expenses, it will have less
financial resources available to it for other purposes, which
20
<PAGE>
could have a material adverse effect on the Company. See "Business--Proprietary
Information" and "Legal Proceedings."
In December 1997, Vindex USA, Inc. filed a complaint against CAS, a
subsidiary of the Company, in the Superior Court of California, Los Angeles
County seeking to recover $40,000, an unspecified amount of commissions and
interest accrued thereon allegedly due it under the terms of a consulting
agreement it alleges was breached by the Company. The Company believes that the
complaint is without merit and is defending this lawsuit.
Uncertainty of Patent and Trademark Protection. Although the Company has
recently filed applications with the U.S. Patent Office to obtain a patent on
its CoinBank counting and dispensing machine and with respect to its ATM-X and
EMMA, there can be no assurance that any patent will be granted, or that if
granted, it will afford the Company any meaningful protection. The Company does
not currently hold any patents with respect to any software or hardware used in
its operations. The Company intends to rely primarily on a combination of trade
secrets, technical measures, copyright protection and nondisclosure agreements
with its employees to establish and protect the ideas, concepts and
documentation of certain software developed by it and used primarily in its coin
processing operations (the "Developed Software"). Such methods may not afford
complete protection, and there can be no assurance that third parties will not
independently develop such technology or obtain access to the Developed
Software. Although the Company believes that its use of the Developed Software
and other software used in its operations does not infringe upon the rights of
others, there can be no assurance that the Company's use of the Developed
Software or such other software does not and will not infringe upon the patents
or intellectual property rights of others. In the event of infringement, the
Company could, under certain circumstances, be required to obtain a license or
modify aspects of the Developed Software or such other software or refrain from
using such software. There can be no assurance that the Company will have the
necessary financial resources to defend any infringement claim made against it
or to successfully terminate any infringement in a timely manner, upon
acceptable terms and conditions or at all. Failure to do any of the foregoing
could have a material adverse effect on the Company. Moreover, if the Developed
Software or any other software or hardware used in the Company's business is
deemed to infringe upon the rights of others, the Company could, under certain
circumstances, become liable for damages, which could have a material adverse
effect on the Company. The Company received United States trademark registration
for the ''CoinBank'' name in September 1997. Although the Company is not aware
of any claims of infringement or other challenges to the Company's rights to use
this trademark, there can be no assurance that the Company's marks do not or
will not infringe upon the proprietary rights of others or that the Company's
marks would be upheld if challenged. See "Business--Proprietary Information."
Potential Damage to CoinBank Machines. During the test marketing of
CoinBank machines, customers have placed objects other than coins in CoinBank
machines, resulting in malfunctions or damage to CoinBank machines. Although the
Company has developed methods intended to reduce damage to CoinBank machines,
and although CoinBank machines have experienced limited inoperability to date,
there can be no assurance that activities of customers will not result in
periods of inoperability, causing a material adverse effect on or significant
fluctuations in the Company's operating results. See "Business--CoinBank
Machines."
Dependence on Key Personnel; Need for Qualified Management Personnel. The
success of the Company will be dependent on the efforts of certain key personnel
of the Company, including Mr. Korman, its President and Chief Executive Officer.
The Company has entered into a three-year employment agreement with Mr. Korman
which will require Mr. Korman to devote not less than 40 hours per week of his
business time to the business of the Company and provides for an initial annual
base salary of $120,000 and base salaries of $150,000 and $180,000 in the second
and third years, respectively. The loss of the services of Mr. Korman could have
a material adverse effect on the Company's business and prospects. Mr. Korman
also participates in other business endeavors, which require a portion of his
business time. Although Mr. Korman has advised the Company that his
participation in outside business matters should not interfere with his
performance of his duties as President and Chief Executive Officer of the
Company, there can be no assurance that a conflict of interest will not arise
with respect to the allocation of Mr. Korman's time or that such conflict would
be resolved in favor of the Company. The success of the Company is also
dependent upon its ability to hire and retain additional qualified management,
21
<PAGE>
marketing, technical, financial and other personnel. Competition for qualified
personnel is intense, and there can be no assurance that the Company will be
able to hire or retain additional qualified personnel. Any inability to attract
and retain qualified management and other personnel would have a material
adverse effect on the Company. See "Management."
Control by Management. Mr. Korman and Mr. Miller, and their respective
affiliates, beneficially own, in the aggregate, approximately 44.5% of the
outstanding Common Stock, as a result, they are and will be in a position to act
together to effectively control the Company, elect the Company's directors,
cause an increase in the authorized capital or the dissolution, merger or sale
of the assets of the Company, and generally direct the affairs of the Company.
See "Management" and "Principal Stockholders."
Limitations of Liability of Directors and Officers. The Company's
Certificate of Incorporation includes provisions to limit, to the full extent
permitted by Delaware law, the personal liability of directors of the Company
for monetary damages arising from a breach of their fiduciary duties as
directors. In addition, the Company's by-laws require the Company to indemnify
any director, officer, employee or agent of the Company to the full extent
permitted by Delaware law. As a result of such provisions in the Certificate of
Incorporation and the by-laws of the Company, stockholders may be unable to
recover damages against the directors and officers of the Company for actions
taken by them which constitute negligence, gross negligence or a violation of
their fiduciary duties, which may reduce the likelihood of stockholders
instituting derivative litigation against directors and officers and may
discourage or deter stockholders from suing directors, officers, employees and
agents of the Company for breaches of their duty of care, even though such an
action, if successful, might otherwise benefit the Company and its stockholders.
See "Management--Limitations of Liability and Indemnification."
Shares Eligible for Future Sale. As of June 1, 1999, the Company had
3,488,665 shares of Common Stock outstanding, of which 1,707,750 shares of
Common Stock were freely tradable without restriction or further registration
under the Securities Act of 1933, as amended (the "Securities Act"). All of
the remaining 1,780,915 shares of Common Stock outstanding were "restricted
securities," as that term is defined under Rule 144 promulgated under the
Securities Act. Pursuant to the provisions of Rule 144, all 1,780,915 of such
shares became eligible for sale, pursuant to Rule 144, commencing July 9, 1999,
all subject to the agreements set forth below. The holders of the 1,780,915
outstanding shares of Common Stock have agreed not to sell such shares until
July 9, 2000 without the prior written consent of the underwriters in the
Company's initial public offering. The Company has granted certain demand and
"piggy-back" registration rights to the holders of 450,000 shares of Common
Stock and an option and warrants to acquire approximately an additional 425,000
additional shares of Common Stock and to the underwriters with respect to the
securities issuable upon exercise of the underwriters' warrants. No prediction
can be made as to the effect, if any, that sales of shares of Common Stock or
even the availability of such shares for sale will have on the market prices
prevailing from time to time. The possibility that substantial amounts of Common
Stock may be sold in the public market may adversely affect the prevailing
market price for the Common Stock and could impair the Company's ability to
raise capital through the sale of its equity securities. See "Shares Eligible
for Future Sale" and "Underwriting."
No Assurance of Public Market; Arbitrary Determination of Offering Prices;
Possible Volatility of Market Price of Common Stock; Underwriters' Potential
Influence on the Market. Prior to its initial public offering completed in July
1999, there was no public trading market for the Company's Common Stock. There
can be no assurance that a regular trading market for the Common Stock will be
sustained. Moreover, the initial public offering price of the Common Stock was
determined by negotiations between the Company and the underwriters and, as
such, was arbitrary in that it does not necessarily bear any relationship to the
assets, book value or potential earnings of the Company or any other recognized
criteria of value and may not be indicative of the price that may prevail in the
public market. The market price of the Company's Common Stock may be highly
volatile, as has been the case with the securities of other emerging companies.
Factors such as the Company's operating results, announcements by the Company or
its competitors and various economic factors in those areas where the Company
conducts its business generally may have a significant impact on the market
price of the Company's securities. In addition, in recent years, the stock
market has experienced a high level of price and volume volatility and market
22
<PAGE>
prices for the stock of many companies have experienced wide price fluctuations,
which have not necessarily been related to the operating performance of such
companies. Although they have no obligation to do so, the underwriters currently
make a market in the Common Stock and may otherwise effect transactions in the
Common Stock. If the underwriters continue to make a market in the Common Stock,
such activities may exert a dominating influence on the market and such activity
may be discontinued at any time. The prices and liquidity of the Common Stock
may be significantly affected to the extent, if any, that the underwriters
participate in such market. See "Underwriting."
Possible De-listing of Securities from Nasdaq System; Risks Relating to Low
Priced "Penny" Stocks. The Company's Common Stock is listed on Nasdaq
SmallCap Market (Symbol "CHNG"). In order to continue to be listed on Nasdaq,
however, the Company must maintain $2,000,000 in net tangible assets or a market
capitalization of at least $35,000,000, or net income of at least $500,000. The
failure to meet at least one of these maintenance criteria in the future may
result in the de-listing of the Company's Common Stock from Nasdaq, and trading,
if any, in the Company's securities would thereafter be conducted in the non-
Nasdaq over-the-counter market. As a result of such de-listing, an investor
could find it more difficult to dispose of, or to obtain accurate quotations as
to the market value of, the Company's securities.
While the Company's market capitalization as of September 7, 1999 was
approximately $41,000,000, which is in excess of the Nasdaq minimum, the
Company's net tangible assets were less than $2,000,000. In order to correct
this condition by increasing its net tangible assets, and to obtain necessary
working capital, the Company has commenced a private offering of securities.
Though there can be no assurance, the Company believes that the private offering
will be successfully completed. If the offering is not completed and the
Company's market value also falls below the minimum $35 million Nasdaq
requirement, it is likely that the Company would be required to submit to Nasdaq
a plan to bring the Company back into compliance with the maintenance criteria.
In such event, there can be no assurance that the plan would be accepted by
Nasdaq and that Nasdaq would not remove the Company's Common Stock from listing
on the SmallCap Market. See "Management Discussion and Analysis - Liquidity".
Although the Company anticipates that the Common Stock will be continue to
be listed for trading on Nasdaq, if the Common Stock were to become de-listed
from trading on Nasdaq and the trading price of the Common Stock were to fall
below $5.00 per share on the date the Common Stock was de-listed, trading in
such securities would also be subject to the requirements of certain rules
promulgated under the Exchange Act, which require additional disclosure by
broker-dealers in connection with any trades involving a stock defined as a
penny stock (generally, any non-Nasdaq equity security that has a market price
of less than $5.00 per share, subject to certain exceptions). Such rules require
the delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith, and impose
various sales practice requirements on broker-dealers who sell penny stocks to
persons other than established customers and accredited investors (generally
institutions). For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. The additional
burdens imposed upon broker-dealers by such requirements may discourage broker-
dealers from effecting transactions in the Company's securities, which could
severely limit the market price and liquidity of such securities and the ability
of purchasers to sell their securities of the Company in the secondary market.
No Dividends. To date, the Company has not paid any cash dividends on the
Common Stock and does not expect to declare or pay dividends on the Common Stock
in the foreseeable future. In addition, the payment of cash dividends may be
limited or prohibited by the terms of future loan agreements or the future
issuance of Preferred Stock. See "Description of Securities."
Authorization and Discretionary Issuance of Preferred Stock. The
Company's Certificate of Incorporation authorizes the Company's Board of
Directors to issue up to 1,000,000 shares of Preferred Stock, from time to time,
in one or more series. The Board of Directors is authorized, without further
approval of the stockholders, to fix the dividend rights and terms, conversion
rights, voting rights, redemption rights and terms,
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<PAGE>
liquidation preferences, and any other rights, preferences, privileges and
restrictions applicable to each new series of Preferred Stock. The issuance of
such stock could adversely affect the voting power of the holders of Common
Stock and, under certain circumstances, make it more difficult for a third party
to gain control of the Company, discourage bids for the Common Stock at a
premium, or otherwise adversely affect the market price of the Common Stock. The
Company has agreed not to issue any shares of Preferred Stock without the
Underwriters' prior consent until the second anniversary of the closing of the
Company's initial public offering and for three years thereafter without the
unanimous approval of the Board of Directors of the Company. See "Description
of Securities."
In order to raise funds for working capital and development of EMMA, on July
27, 1999 the Company commenced a private offering pursuant to Section 4(2) of
the Securities Act of 1933 and Regulation D. The Company is seeking to raise
approximately $5,000,000 in gross proceeds. The Company has not engaged any
broker dealer as placement agent and the Company's officers and directors are
directing the selling efforts. In the event that the Company is assisted by
selling agents it intends to pay commissions of 10% to those eligible to receive
them. The Company is offering up to 52,500 units, each unit comprised of (I)
10 shares of Series A 8% Cumulative Convertible Redeemable Preferred Stock and
(II) 5 Series A Common Stock Purchase Warrants. Each share of the Series A
Preferred Stock is convertible into one share of Common Stock. The Series A
Warrants are exercisable at $12.00 per share. The securities in the private
offering are being sold made in reliance upon the availability of an exemption
from the registration provisions of the Securities Act of 1933 by virtue of the
Company's intended compliance with the provisions of sections 4(2), 4(6) thereof
and rule 506 adopted by the Securities and Exchange Commission thereunder. The
securities have neither been registered with, nor approved or disapproved by,
the SEC or by the securities regulatory authority of any state, and neither the
SEC nor any such state authority has passed upon or endorsed the merits of the
offering, and it is not intended that any of them will.
Going Concern. The Company's independent certified public accountants
included an explanatory paragraph in their report for the year ended May 31,
1999, which indicated a substantial doubt as to the ability of the Company to
continue as a going concern. The Company has suffered significant recurring
losses from operations and at May 31, 1999 had a working capital deficiency and
accumulated deficit. See independent certified public accountant's letter and
Item 6. "Liquidity".
Year 2000 Compliance. The Company, like most other companies, is faced
with the Year 2000 Issue. The Year 2000 issue has developed because some
computer programs were written using a two-digit field rather than a four-digit
field to define the applicable year. As a result any computer program that
affects the Company's activities may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a variety of problems
depending upon the system(s) affected. Potential problems include temporary
inability to process transactions, transfer funds, or engage in similar business
activities. The potential problems associated with the Year 2000 Issue may
cause widespread disruption of business worldwide because of the interdependence
on computer and communication systems.
The Company has completed an initial assessment of potential Year 2000 for
its own computer systems and business processes. Based upon this assessment, the
Company believes its computer software, hardware, and the embedded technologies
will present limited Year 2000 issues. Additionally the Company does not expect
that its CoinBank machines will incur any material problems with the Year 2000
change. The Company has not been able to completely evaluate whether the
software, hardware and embedded technologies used by the third parties, with
whom it conducts business, are Year 2000 compliant. If third parties,
particularly those involved in the regulation and administration of the banking
systems fail to address Year 2000 Issues then the Company may experience
business interruptions, and in a worst case scenario the inability to engage in
the normal course of business. The effect of such related difficulties could
have a materially adverse impact on the financial condition of the Company. The
Company does not believe that any material expenditure will be required to
complete its internal assessment regarding this issue.
The Company does recognize the need for Year 2000 contingency plans because
of the uncertainty associated with this global issue. The Company will replace
any personal computer or network related software or hardware if
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<PAGE>
this issue impacts them. The cost of such replacements is not expected to have a
material impact. Furthermore the Company believes that it will not be able to
require the third parties or governmental agencies with which it conducts
business to resolve all Year 2000 issues. The Company has not developed
comprehensive contingency plans that will assure that it will not be adversely
impacted by the effect of the Year 2000 Issue. The Company does not intend to
prepare such plans.
ITEM 2. DESCRIPTION OF PROPERTY
- ---------------------------------
The Company owns no real estate. The Company leases approximately 13,000
square feet of space at 1434 West 11th Street, Los Angeles, CA, which it uses
for its executive offices and coin processing facility from Prime Financial
Partners, Ltd., an affiliate of Messrs. Korman and Miller. The lease agreement
expires in September 2002 and provides for a base monthly rent of approximately
$5,600. The Company believes that its facilities are sufficient to accommodate
the Company's anticipated future requirements at the present time.
ITEM 3. LEGAL PROCEEDINGS
- ----------------------------
In June 1997, Coinstar, Inc. ("Coinstar"), a competitor of the Company,
filed a complaint against CAS, a subsidiary of the Company, in the U.S. District
Court for the Northern District of California alleging infringement of US Patent
No. 5,564,546 ("the 546 patent"). In June 1997, CAS filed an answer denying the
claims of Coinstar and interposed a counterclaim seeking declaratory judgment as
to the invalidity and unenforceability of Coinstar's patent and instituted a
third-party complaint against ScanCoin AB for breach of warranty
In January 1998, the district court granted CAS's motion for summary judgment
of noninfringement of the CBIII CoinBank models having a solid input tray. The
Court granted in part and denied in part CAS's motion for summary judgment of
noninfringement concerning the earlier CBII model. The Court also denied
CoinStar's motion for summary judgment. In October 1998 Coinstar amended its
complaint to allege infringement by CAS of newly issued U.S. Patent No.
5,799,767 ("the 767 patent"). CAS has filed a motion for summary judgment of
invalidity and non-infringement of the 767 patent. That motion is currently set
to be heard on September 29,1999. Although the company believes that Coinstar's
amended complaint is without merit, there can be no assurance that the Coinstar
litigation will either be settled on terms acceptable to the Company or decided
in favor of the Company. The Company believes that the final outcome of this
action will not have a material adverse effect on its financial statements. See
"Business--Proprietary Information" and "Legal Proceedings."
In December 1997, Vindex USA, Inc. filed a complaint against CAS, a subsidiary
of the Company, in the Superior Court of California, Los Angeles County seeking
to recover $40,000, an unspecified amount of commissions and interest accrued
thereon allegedly due it under the terms of a consulting agreement it alleges
was breached by the Company. The Company believes that the complaint is without
merit and is defending this lawsuit.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------
On June 21, 1999 the Company held its Annual Meeting of Shareholders. Of
the 3,488,665 shares of Common Stock entitled to vote as of the Record Date of
May 12, 1999, 2,917,057 shares were represented either in person or by proxy
(83% of the total shares entitled to vote).
At the Annual Meeting, Shareholders were requested to (I) elect Directors
(II) approve an amendment to the Company's Employee Stock Option Plan and (III)
adopt a Non-Executive Director Stock Option Plan.
1. Election of Directors. Six Directors were elected to the Board of Directors
to serve until the next Annual Meeting and until successors are elected and duly
qualified. The nominees for election were:
Bruce Korman Richard Miller Robert B. Fagenson
Robin Richards Vincent A. Carrino Edward G. Harshfield
Results of Voting
The Shareholders voted as follows with respect to the election of Directors:
Votes For Votes Against
--------- -------------
Bruce Korman 2,896,813 20,244
Robert Fagenson 2,896,813 20,244
Richard Miller 2,896,813 20,244
Vincent Carrino 2,896,813 20,244
Robin Richards 2,896,813 20,244
Edward Harshfield 2,896,813 20,244
2. Adoption of Increase to 1996 Employee Incentive Stock Option Plan.
Shareholders were requested to approve an increase in the number of shares to be
granted under the plan by 200,000 shares to a total of 775,887 shares.
Results of Voting
The Shareholders adopted the amendment to the 1996 Employee Incentive Stock
Option Plan by voting 1,712,594 shares in favor of adoption (94%), 67,240
against adoption and 38,467 abstaining.
3. Adoption of Non-Employee Director Stock Option Plan. Adoption of the Non-
Employee Director Plan was sought to compensate non-employee directors of the
Company who would not otherwise be eligible under the 1996 Employee Incentive
Stock Option Plan. Under the Non-Employee Director Plan, 150,000 shares of
Common Stock are reserved for issuance in connection with stock options and
other stock purchase awards.
Results of Voting
The Shareholders adopted the Non-Employee Director Plan by voting 1,729,291 in
favor of adoption (94%), 71,980 against adoption and 17,030 abstaining.
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PART II
ITEM 5. MARKET OF COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------
The Company's Common Stock commenced trading on the Nasdaq- SmallCap Market on
July 9, 1998. The Company's Common Stock was not traded in any public securities
market prior to July 9, 1998.
The following is the range of closing bid prices for the Common Stock for the
periods indicated below:
<TABLE>
<CAPTION>
Year Ending May 31, 1999 High Low
---- ---
<S> <C> <C>
Q1 July 9 - August 31 $ 9.875 $ 7.875
Q2 September 1 - November 30 8.625 5.250
Q3 December 1 - February 11.875 7.375
Q4 March 1 - May 31 13.750 10.125
</TABLE>
Dividend Policy
- ---------------
The Company has never paid any dividends on the Common Stock, and the Board of
Directors does not intend to declare or pay any dividends on the Common Stock in
the foreseeable future. The Board of Directors currently intends to retain all
available earnings (if any) generated by the Company's operations for the
development and growth of its business. The declaration in the future of any
cash or stock dividends on the Common Stock will be at the discretion of the
Board and will depend upon a variety of factors, including the earnings, capital
requirements and financial position of the Company and general economic
conditions at the time in question. Moreover, the payment of cash dividends on
the Common Stock in the future could be further limited or prohibited by the
terms of financing agreements that may be entered into by the Company (e.g., a
bank line of credit or an agreement relating to the issuance of other debt
securities of the Company) or by the terms of any preferred stock that may be
issued and then outstanding.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- -------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Overview
- --------
The Company was organized in August 1995, but its coin processing operations
were commenced by its now wholly owned subsidiary, National Cash Processors,
Inc. ("NCP") in May 1994. The Company acquired NCP in January 1996 from
certain affiliates of the Company. The CoinBank portion of the business is
conducted through the Company's wholly owned subsidiary CoinBank Automated
Systems, Inc., which was incorporated in November 1995.
The Company currently generates revenues through the purchase of loose United
States coin and currency which is acquired in bulk at a small discount from face
value and then counted, sorted, wrapped and re-sold primarily to a variety of
retail businesses at face value plus a small fee or deposited to the Federal
Reserve Bank for credit to the Company's account. The Company also generates
revenues through the operation of self-service coin counting and processing
machines (CoinBank Machines). The Company's expenses have exceeded net revenues
since inception. For the fiscal year ended May 31, 1997 the Company sustained
net losses of $1,547,805. For the fiscal year ended May 31, 1998 the Company
sustained net losses of $2,727,145. The Company incurred a net loss of
$5,711,964 for the year ended May 31, 1999.
Systems development expenses, marketing expenses, executive salaries and
general and other administrative costs are expected to increase as the Company
continues to develop its ATM-X platform and EMMA processing system as well as
increase its marketing of CoinBank machines. Inasmuch as the Company will
continue to have a high level of operating expenses, the Company will continue
to be required to make certain up-front expenditures in connection with its
proposed CoinBank machine sales effort and development of EMMA transaction
processing system. The Company anticipates that losses will continue for the
foreseeable future.
The Company records as revenue the service fee charged for coin and currency
processed on behalf of a customer but not purchased by the Company. The Company
also records as revenue the service fee charged to persons using CoinBank
machines. Gross revenues include the value of coin and currency processed and
does not represent revenue under generally accepted accounting principles. See
Note 1 of Notes to Consolidated Financial Statements.
The Company intends to focus its future efforts on marketing CoinBank machines
for sale rather than "free placement". Revenues from CoinBank machine sales
have the potential to produce greater short-term profits than revenues generated
by the Company's coin and currency processing services or "free placement"
self-service coin machines. Although revenues generated from CoinBank machines
accounted for only approximately 8% of revenues for the fiscal year ended May
31, 1999, compared to approximately 92% of revenues generated from coin and
currency processing, the Company anticipates that the revenues generated from
the sale of CoinBank machines will eventually become the larger source of future
revenues while processing fee's derived from EMMA transaction processing system
will become the primary source of the Company's future revenues.
The Company was also awarded a contract to count, process and purchase
currency for the Los Angeles County Metropolitan Transportation Authority
("LACMTA") for the period from April 1, 1997 to March 31, 1999 for a fee
approximately 1% of all currency processed. The Company expects to purchase and
process between $35 and $40 million worth of currency on this contract during
fiscal 2000. The contract was renewed from April 1, 1999 - September 30, 1999
and based on the original contract may be renewed by the LACMTA for one
additional six month periods, through March 31, 2000. The Company records as
revenue the service fee charged for the processing of currency processed
pursuant to such contracts. From time to time, the Company may submit bids for
additional similar contracts. There can be no assurance, however, that it will
be awarded any contract for which it submits a bid.
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<PAGE>
Results of Operations
----------------------
Fiscal Year Ended May 31, 1999 Compared to Year Ended May 31, 1998
Gross revenues include the value of the coins and currency processed for the
year ended 1999 and amounted to $ 46,381,668 compared to $55,529,942 for Fiscal
1998. The decrease in coin and currency processed was primarily attributable to
a decrease in the number of coin processing customers during fiscal 1999. This
decrease was a direct result of the Company's planned reduction of certain low
margin coin processing customers. As a result of the elimination of these low
margin coin processing customers net revenues, as a percentage of gross
revenues, for the fiscal 1999, increased to $899,836 or 1.9% of gross revenues
compared to $878,852 or 1.6% of gross revenues for fiscal 1998.
Cost of revenues for the year ended May 31, 1999 was $765,220 or 1.7% of
gross revenue compared to $509,443, or 0.9% of gross revenue in fiscal 1998.
The increase in direct costs was primarily the result of the increased costs
associated with servicing remote CoinBank installations.
Gross profit for the year ended May 31,1999 was $134,616 or 15% of net
revenues, as compared to a gross profit of $369,409 or 42% of net revenues for
the year ended May 31, 1998. The decrease in gross profit was primarily
attributable to the increased direct costs associated with the operation of
CoinBank Automated Systems. Additionally National Cash Processing experienced a
decrease in the volume of MTA currency plus the loss of a large coin processing
customer.
Selling, general and administrative expenses for the year ended May 31, 1999
increased to $5,027,693 compared to expenses of $2,342,610 for the fiscal 1998.
These expenses consisted primarily of wages (and wage related costs), outside
contractor expenses, travel/promotional expenses, professional services and
facilities/office related expenses. The increase in selling, general and
administrative expenses were attributable to the increase in administrative &
marketing personnel and promotion as the Company has expanded its operations and
customer base. Selling, general and administrative expenses also increased as a
direct result of an increase in systems development personnel and activities
associated with the development of the EMMA transaction processing system. The
Company also recorded a charge on the assets held for sale, a result of changing
CoinBank machines from "free placement" units to for-sale units.
Net interest expense for the fiscal years 1999 and 1998 was $516,948 and
$499,840 respectively. The modest increase in interest expense was due to a one-
time bridge financing expense of $80,000.
Depreciation and amortization expenses increased to $299,255 during fiscal
1999 from $251,090 in fiscal 1998. The increase was primarily attributable to
increase in the depreciable value of CoinBank machines, during the period.
As a result of the foregoing, net losses for the years ended May 31, 1999 and
1998 were $5,711,964 and $2,727,145, respectively.
Fiscal Year Ended May 31, 1998 Compared to Year Ended May 31, 1997
Gross revenues include the value of the coins and currency processed for the
year ended May 31, 1998 and amounted to $55,529,942 compared to $19,544,001 for
the comparable 1997 period. The increase in coin and currency processed was
primarily attributable to the Company's contract with the LACMTA, and to a
lesser extent, increased value of coin received from CoinBank machines as well
as an increased number of customers for cash processing and sales during the
1997 period. This increase was a direct result of increased marketing activity
conducted by the Company in the fiscal year ended May 31, 1998. As a result of
the foregoing, net revenues as a
29
<PAGE>
percentage of gross revenues for the fiscal year ended May 31, 1998 increased
1.6% to $878,852 compared to an increase of 1.4% of $273,822 for the comparable
1997 period.
Cost of revenues for the year ended May 31, 1998 was $509,443, or 0.9% of
gross revenue compared to $276,173 or 1.4% of gross revenue in the comparable
1997 period, reflecting primarily an increase in coin and currency purchased for
processing and certain associated labor costs.
Gross profit for the year ended May 31, 1998 was $369,409 or 42% of net
revenues, as compared to a gross profit of $(2,351) or (0.9%) of net revenues
for the year ended May 31, 1997. The increase in gross profit was attributable
to higher volume covering fixed costs.
Selling, general and administrative expenses for the year ended May 31, 1998
increased to $2,342,610 compared to expenses of $1,207,529 for the fiscal year
ended May 31, 1997. Such expenses consisted of office rent, salaries of
executive officers and administrative personnel and other administrative
expenses. The increase in selling, general and administrative expenses is
attributable to the increase in administrative, marketing, personnel and
promotion as the Company has expanded its operations and customer base.
Interest expense, net for the years ended May 31, 1998 and May 31, 1997 was
$499,840 and $228,831 respectively. The increase in interest expense was due to
a higher level of outstanding indebtedness associated with equipment acquired
during the 1997 period.
Depreciation and amortization expenses increased to $251,090 from $105,721.
These increases were attributable to increases in outstanding indebtedness and
in the depreciable value of additional Company's assets, primarily CoinBank
machines, during the 1997 period.
As a result of the foregoing, net losses for the years ended May 31, 1998 and
1997 were $2,727,145 and $1,547,805, respectively.
Liquidity and Capital Resources
- --------------------------------
The Company's capital requirements have been and will continue to be
significant and its cash requirements have been exceeding its cash flow from
operations. At May 31, 1999, the Company had a working capital deficit of
$392,219 and unrestricted cash and cash equivalents of $1,028,586 compared to a
working capital deficit of $4,070,915 and unrestricted cash and cash equivalents
of $210,723 at May 31, 1998. Since inception, the Company has satisfied its
working capital requirements through limited cash flow generated from
operations, the issuance of equity and debt securities, borrowing under a line
of credit, and loans from stockholders and an affiliate of a previous executive
officer of the Company.
Net cash used in operating activities was $5,285,060 for the year ended
May 31, 1999, as compared to net cash used in operating activities of
$1,453,743 for the year ended May 31, 1998. The increase in net cash used in
operating activities during fiscal 1999 was primarily the result of the
Company's expanded operations (and increased operating losses), increase in
accounts receivable, increased coin and currency inventories plus a decrease in
accounts payable.
Net cash used in investing activities was $787,522 for the fiscal year ended
May 31, 1999, as compared to $1,671,419 for the fiscal year ended May 31, 1998.
The decrease in net cash used in investing activities was attributable to a
decrease in purchases of equipment.
Net cash provided by financing activities for the year ended May 31, 1999 was
$6,890,445, as compared to $2,872,280 for the year ended May 31, 1998. The
increase in net cash provided by financing activities was
30
<PAGE>
primarily attributable to Initial Public Offering plus the exercise of the over
allotment option. Sales of proceeds from issuance of common stock netted nearly
$9.5 million.
The Company entered into a credit agreement with GE Capital Corporation (the
"Lender") pursuant to which the Company has borrowed $5,500,000 for the
purchase of CoinBank component equipment, working capital and general corporate
purposes as of February 28, 1998. Amounts drawn under the line of credit are
secured by certain Company's assets. Amounts borrowed under this line bear
interest at approximately 9.0% per annum, payable over a period of 60 months,
subject to certain pre-payment penalties. The Company is required to make
monthly payments of principal and interest on this line of credit, currently
approximately $120,000.
In July 1998, the Company completed an initial public offering of 1,485,000
shares. Net proceeds to the Company were $8,467,880 after deducting offering-
related expenses of $1,927,120. The Company used a portion of the proceeds to
repay outstanding indebtedness of $2,178,000. The majority of the remaining
proceeds were used in the development of new products and upgrades, expansion of
the Company's sales and marketing efforts and general working capital.
On August 18, 1998, the Company sold 172,750 shares of common stock, in
connection with the partial exercise of the underwriter's over-allotment option,
at a price of $7.00 per share for gross proceeds of $1,209,250. Net of
underwriting commissions and the expenses, the Company received net proceeds of
$1,010,446.
During fiscal 1999, the Company used approximately $3.0 million for the
repayment of notes and loans. Approximately $835,000 was used for marketing and
advertising. Approximately $725,000 was used to purchase CoinBank machines and
miscellaneous equipment. Approximately $960,000 was spent for research &
development, networks and related equipment. Approximately $440,000 was spent
for European operations. The remainder of the funds have been used for working
capital and operational expenses. The Company had approximately $750,000
remaining as of May 31, 1999.
The Company intents to offer an equity private placement to institutional
Investors for approximately $5,000,000 through the issuance of convertible
preferred stocks. There can be no assurance that this second phase of financing
will be completed.
In order to raise funds for working capital and development of EMMA, on July
27, 1999 the Company has commenced a private offering pursuant to Section 4(2)
of the Securities Act of 1933 and Regulation D. The Company is seeking to raise
approximately $5,000,000 in gross proceeds. The Company has not engaged any
broker dealer as placement agent and the Company's officers and directors are
directing the selling efforts. In the event that the Company is assisted by
selling agents it intends to pay commissions of 10% to those eligible to receive
them. The Company is offering up to 52,500 units, each unit comprised of (I)
10 shares of Series A 8% Cumulative Convertible Redeemable Preferred Stock and
(II) 5 Series A Common Stock Purchase Warrants. Each share of the Series A
Preferred Stock is convertible into one share of Common Stock. The Series A
Warrants are exercisable at $12.00 per share. The securities in the private
offering are being sold made in reliance upon the availability of an exemption
from the registration provisions of the Securities Act of 1933 by virtue of the
Company's intended compliance with the provisions of sections 4(2), 4(6) thereof
and rule 506 adopted by the Securities and Exchange Commission thereunder. The
securities have neither been registered with, nor approved or disapproved by,
the SEC or by the securities regulatory authority of any state, and neither the
SEC nor any such state authority has passed upon or endorsed the merits of the
offering, and it is not intended that any of them will. The securities may not
be transferred or resold except pursuant to registration under the Securities
Act or an exemption therefrom. There are no assurances that the foregoing
transaction will be completed.
Based on the Company's current proposed plans and assumptions, the Company
anticipates that the net proceeds of its private offering, if successful, will
be sufficient to satisfy its contemplated cash requirements for approximately 8
to 12 months. In the event that the Company's plans change or its assumptions
prove to be inaccurate (due to unanticipated expenses, increased competition,
unfavorable general economic conditions, decreased demand for its services or
otherwise), the Company could be required to seek additional financing sooner
than currently anticipated. The Company has no current arrangements with respect
to, or potential sources of additional financing. Consequently, there can be no
assurance that any additional financing will be available to the Company when
needed, on commercially reasonable terms, or at all.
31
<PAGE>
Going Concern
- -------------
The Company's independent certified public accountants included an explanatory
paragraph in their report for the year ended May 31, 1999, which indicated a
substantial doubt as to the ability of the Company to continue as a going
concern. The Company has suffered significant recurring losses from operations
and at May 31, 1999 had a working capital deficiency. See independent certified
public accountant's letter and Item 6. "Liquidity".
Year 2000
- ----------
The Company, like most other companies, is faced with the Year 2000 Issue. The
Year 2000 issue has developed because some computer programs were written using
a two-digit field rather than a four-digit field to define the applicable year.
As a result any computer program that affects the Company's activities may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a variety of problems depending upon the system(s) affected.
Potential problems include temporary inability to process transactions, transfer
funds, or engage in similar business activities. The potential problems
associated with the Year 2000 Issue may cause widespread disruption of business
worldwide because of the interdependence on computer and communication systems.
The Company has completed an initial assessment of potential Year 2000 for its
own computer systems and business processes. Based upon this assessment, the
Company believes its computer software, hardware, and the embedded technologies
will present limited Year 2000 issues. Additionally the Company does not expect
that its CoinBank 7 machines will incur any material problems with the Year 2000
change. The Company has not been able to completely evaluate whether the
software, hardware and embedded technologies used by the third parties, with
whom it conducts business, are Year 2000 compliant. If third parties,
particularly those involved in the regulation and administration of the banking
systems fail to address Year 2000 Issues then the Company may experience
business interruptions, and in a worst case scenario the inability to engage in
the normal course of business. The effect of such related difficulties could
have a materially adverse impact on the financial condition of the Company. The
Company does not believe that any material expenditure will be required to
complete its internal assessment regarding this issue.
The Company does recognize the need for Year 2000 contingency plans because of
the uncertainty associated with this global issue. The Company will replace any
personal computer or network related software or hardware if this issue impacts
them. The cost of such replacements is not expected to have a material impact.
Furthermore the Company believes that it will not be able to require the third
parties or governmental agencies with which it conducts business to resolve all
Year 2000 issues. The Company has not developed comprehensive contingency plans
that will assure that it will not be adversely impacted by the effect of the
Year 2000 Issue. The Company does not intend to prepare such plans.
32
<PAGE>
New Accounting Standards
Statements of Financial Accounting Standards No. 130, ''Reporting
Comprehensive Income'' (SFAS No. 130) issued by the FASB is effective for
financial statements with fiscal years beginning after December 15, 1997.
Earlier application is permitted. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. There was no effect on the Company's
financial position or results of operations from the adoption of this statement.
Statements of Financial Accounting Standards No. 131, ''Disclosure about
Segments of an Enterprise and Related Information'' (SFAS No. 131) issued by the
FASB is effective for financial statements beginning after December 15, 1997.
The new standard requires that public business enterprises report certain
information about operation segments in complete sets of financial statements of
the enterprise and in condense financial statements of interim periods issued to
shareholders. It also requires that public business enterprises report certain
information about their products and services, the geographic areas in which
they operate and their major customers. The adoption of SFAS No. 131 had no
material effect, on the Company's results of operations.
Statement of Financial Standards No. 133 ''Accounting for Derivative
Instruments and Hedging Activities'' (SFAS No. 133) issued by the FASB is
effective for financial statements with fiscal quarters of fiscal years
beginning after June 15, 1999. The new standard provides for standardized
accounting and reporting for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. The
guidance applies to all entities. SFAS 133 requires companies to recognize all
derivative contracts as either assets or liabilities in the balance sheet and to
measure them at fair value. Fair value measurements are based on the guidance
contained in SFAS 107, Disclosures about Fair Value of Financial Instruments.
The Company does not expect adoption of SFAS No. 133 to have a material effect
on its results of operations.
33
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
- ----------------------------
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
Cash Technologies, Inc.
Los Angeles, California:
We have audited the accompanying consolidated balance sheets of Cash
Technologies, Inc. and subsidiaries (The "Company") as of May 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity
(deficiency), and cash flows for the years then ended. 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 generally accepted auditing
standards. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at May 31, 1999 and
1998, and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1(a) to
the financial statements, the Company has suffered significant recurring losses
from operations and at May 31, 1999, had an accumulated deficit that raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1(a). The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ BDO Seidman, LLP
Los Angeles, California
September 1, 1999
34
<PAGE>
CASH TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31,
--------------------------
1998 1999
------------ ------------
ASSETS (NOTE 4)
- ----------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 1 (g)).............................. $ 210,723 $ 1,028,586
Cash--restricted (Note 1 (h))....................................... 41,973 44,610461
Accounts receivable (Note 1(r))..................................... 40,398 136,277
Coin and currency inventories (Note 1 (i)).......................... 79,785 201,555
Prepaid expenses and other current assets........................... 58,298 9,256
--------- ----------
Total current assets............................................. 431,177 1,420,284
COINBANK MACHINES HELD FOR SALE (Note 1 (j)).......................... -- 1,577,065
PROPERTY AND EQUIPMENT, Net (Notes 1 ( j, k), 1 (l), 1 (p, 2 and 3)... 2,639,630 1,393,689
OTHER ASSETS.......................................................... 260,441 56,682
--------- ----------
$ 3,331,248 $ 4,447,720
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
- ------------------------------------------------------
CURRENT LIABILITIES:
Current maturity of notes payable (Note 3)......................... $ 1,273,629 $ 1,172,732
Current maturity of capitalized lease obligations (Note 7).......... 86,041 42,563
Current maturity of due to stockholders (Note 4).................... 2,349,205 --
Accounts payable (Note 1(q))........................................ 559,811 208,620
Accrued expenses and other current liabilities...................... 233,406 388,588
--------- ----------
Total current liabilities........................................ 4,502,092 1,812,503
NOTES PAYABLE, Less current maturity (Note 3)......................... 3,859,567 2,564,723
CAPITALIZED LEASE OBLIGATIONS, Less current maturity (Note 7)......... 19,238 --
DUE TO STOCKHOLDERS, Less current maturity (Note 4)............... 58,325 --
COMMITMENTS AND CONTINGENCIES (Notes 4 and 7).........................
STOCKHOLDERS' EQUITY (DEFICIENCY) (Note 6, 8, and 9):
Preferred stock, $.01 par value; 1,000,000 shares authorized; none
outstanding....................................................... -- --
Common stock, $.01 par value; 20,000,000 shares authorized;
1,700,000 and 3,488,665 shares issued and outstanding............. 17,000 34,8787
Additional paid-in capital.......................................... 451,235 11,323,780
Accumulated deficit................................................. (5,576,209) (11,288,173)
----------- ----------
Total stockholders' equity (deficiency).......................... (5,107,974) 70,494
----------- ----------
$ 3,331,248 $ 4,447,720
=========== ==========
</TABLE>
See notes to consolidated financial statements.
35
<PAGE>
CASH TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended May 31,
----------------------------
1998 1999
----------- ------------
<S> <C> <C>
Gross revenues* (Note 1 (e))............................................... $55,529,942 $ 46,381,668
=========== ============
Net revenues (Note 1(c) and 1 (d))......................................... $ 878,852 $ 899,836
Cost of revenues........................................................... 509,443 765,220
----------- ------------
Gross profit............................................................... 369,409 134,616
Selling, general and administrative expenses (Note 1 (j)................... 2,342,610 5,027,693
Depreciation and amortization expenses (Note 1 (k) and) 2)................. 251,090 299,255
----------- ------------
Operating loss............................................................. (2,224,291) (5,192,332)
Interest expense, net (Notes 3 and 4)...................................... (499,840) (516,948)
----------- ------------
Loss before income taxes................................................... (2,724,131) (5,709,280)
Income taxes (Notes 1 (l) and 5)........................................... 3,014 2,61784
----------- ------------
Net loss................................................................... $(2,727,145) (5,711,964)
----------- ------------
Basic and diluted net loss per common share (Note 1 (n))................... $ (l.60) (1.74)
----------- ------------
Weighted averages shares outstanding (Note 1 (n)).......................... 1,700,000 3,288,871
=========== ============
</TABLE>
- --------------
* Gross revenues include the value of coin and currency processed and does not
represent revenue under generally accepted accounting principles. (Note 1 (e))
See notes to consolidated financial statements
36
<PAGE>
CASH TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Years ended May 31, 1998 and 1999
<TABLE>
<CAPTION>
Additional Total
-------------- --------------------
Paid-in Accumulated Stockholder's
-------------- --------------- --------------------
Common Stock Capital Deficit Equity (Deficiency)
--------------------- -------------- --------------- --------------------
Shares Amount
---------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, June 1, 1997 ................. 1,700,000 17,000 451,235 $ (2,849,064) $ (2,380,829)
Net loss ......................... -- -- -- (2,727,145) (2,727,145)
--------- ------- -------------- --------------- --------------
BALANCE, MAY 31, 1998 ................. 1,700,000 17,000 451,235 (5,576,209) $ (5,107,974)
IPO Common Stock and Warrants Issued
(Note 9) .................... 1,788,665 17,887 10,872,545 -- 10,890,432
Net loss ......................... -- -- -- (5,711,964) (5,711,964)
--------- ------- -------------- --------------- --------------
BALANCE, MAY 31, 1999 ................. 3,488,665 $34,887 $11,323,780 $ 11,288,173) $ 70,494
========= ======= ============== =============== ==============
</TABLE>
See notes to consolidated financial statements
37
<PAGE>
CASH TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Increase(Decrease) in Cash and Cash Equivalent Years Ended May 31,
---------------------------
1998 1999
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................................................... $(2,727,145) $ (15,711,964)
Reconciliation of net loss to net cash used in operating activities:
Depreciation and amortization............................................. 251,090 299,255
Accrued interest on stockholders loans.................................... 160,272 --
Impairment of CoinBank Machines held for sale................... -- 155,017
Gain on sale of asset............................................ -- (511)
Changes in operating assets (liabilities):
Accounts receivable....................................................... 360,834 (95,879)
Inventories............................................................... 87,716 (121,770)
Prepaid expenses and other current assets................................. 4,407 49,042
Other assets.............................................................. -- 337,759
Accounts payable................................................. 239,476 (351,191)
Accrued expenses and other current liabilities............................ 169,607 155,182
----------- --------------
Net cash used in operating activities.................................. (1,453,743) (5,285,060)
----------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................................... (1,669,818) (784,885)
Cash--restricted (Note 1 (h))................................................ (1,601) (2,637)
----------- --------------
Net cash used in investing activities.................................. (1,671,419) (787,522)
----------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable.................................................. 3,735,000 --
Payments on notes payable.................................................... (574,507) (250,000)
Borrowings from stockholders................................................. -- --
Payments on borrowings from stockholders..................................... (54,167) (995,424)
Payment on capitalized lease obligations................................ (79,809) (62,716)
Repayment on long-term debt............................................. -- (1,145,741)
Deferred financing costs..................................................... (154,237) (134,000)
Issuance of common stock and warrants........................................ -- 9,487,326
----------- --------------
Net cash provided by financing activities.............................. 2,872,280 6,890,445
----------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........................... (252,882) 817,863
CASH AND CASH EQUIVALENTS:
Beginning of period.......................................................... 463,605 210,723
----------- --------------
End of period (Note 1 (g))................................................... $ 210,723 $ 1,028,586
=========== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION--
Cash paid for:
Income taxes................................................................. $ 14,611 $ 16,968
Interest..................................................................... $ 314,240 $ 516,948
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTION--
The Company issued shares of common stock as consideration for loans
due to stockholders......................................................... $ -- $ 1,412,106
The Company transferred certain assets from Property and Equipment to
CoinBank machine held for sale........................................... $ -- $ 1,557,065
</TABLE>
See notes to consolidated financial statements.
38
<PAGE>
CASH TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, ORGANIZATION AND BASIS OF
PRESENTATION
(a) "Going Concern"--The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern.
The Company has incurred significant losses from operations and has used
significant amounts of cash for operations during the last three years. As of
May 31, 1999, the Company has both a working capital deficiency and accumulated
deficit. Operating losses and cash flow deficiencies have continued throughout
1999.
In view of the above, there is significant doubt about the
Company's ability to continue as a going concern. The recoverability of recorded
assets and satisfaction of the liabilities is dependent on the continued
operations of the Company, which is in turn dependent upon the Company's ability
to meet its financing requirements on a continuing basis as well as to succeed
in its future operations. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded assets
or liabilities.
Management is taking certain steps to obtain additional equity financing to
finace its operations and will continue to monitor its short term cash flow
needs. See Item 6. Liquidity and Capital Resources (private offering).
Management estimates that the the proceeds contemplated by a future
private placement, which is currently in process, will be sufficient to fund the
Company's operations through the third Quarter of fiscal 2000. The Company also
plans to increase revenues through transaction processing, sales of Coinbank
machines and reduce costs as deemed necessary in order to improve overall cash
flow. However, an additional capital infusion or additional sources of financing
may still be required for the Company to meet its obligations. While the Company
believes that its plan will be successful, no assurances can be given that the
Company will be success successful and that the Company will continue as a going
concern.
(b) Basis of Consolidation--The accompanying consolidated financial
statements include the accounts of Cash Technologies, Inc. ("CTI"), a Delaware
corporation, and its wholly owned subsidiaries, National Cash Processors, Inc.
("NCP"), and CoinBank Automated Systems ("CAS") together the "Company."
CoinBank Automation Handles GmbH, Salzburg, Austria ("CoinBank Europe" or "CBE")
was treated as a division of CoinBank Automated Systems during this period and
was consolidated into CoinBank Automated Systems. All significant inter-company
transactions and accounts have been eliminated in consolidation. CTI was
incorporated in August 1995. In January 1996, certain affiliates of the Company
exchanged their stock in NCP as part of a combination of entities under common
control. CAS was incorporated in November 1995.
(c) Business--The principal business activity of each entity is as follows:
CTI is a holding company; NCP is a full-service coin-processing entity providing
sorting, counting and wrapping functions to coin-intensive businesses; CAS
offers self-service coin-counting machines. CBE functions as a European sales
office for the Company.
Approximately 75% of the Company's net revenue was derived from one customer
for the year ended May 31, 1999, and 65% of the Company's net revenue was
derived from one customer for the year ended May 31, 1998.
(d) Revenue Recognition--The Company recognizes service fee income when coins
and currency are processed. In certain instances, customers will remit funds to
the Company in advance of the coin shipments to them. In certain instances,
coins are deposited by customers before payment is made by the Company. Included
in
39
<PAGE>
accounts payable are $66,102 and $179,679 at May 31, 1999 and 1998, representing
funds received in advance of coin shipment and deposits/collection of coins
received before payment was made to the customer.
(e) Gross Revenues--Include the value of coin and currency processed and does
not represent revenue under generally accepted accounting principles.
(f) Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenue and expense during the
reporting period. Actual results could differ from those estimates.
(g) Cash Equivalents--The Company considers all investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
does not consider restricted cash as, cash and cash equivalents.
(h) Cash-Restricted--The Company maintains a cash deposit as security toward
the daily purchase of currency. The Company does not consider restricted cash
as, cash and cash equivalents.
(i) Inventories--Inventory consists of coins and currency stated at face
value.
(j) CoinBank Machines Held for Sale--The Company has designated certain of its
CoinBank machines as being held for sale. CoinBank machines held for sale are
recorded at the lower of the cost or estimated fair value, which includes an
estimate of the costs to sell these assets. The estimated fair value is based on
information including recent sales of CoinBank machines and estimated present
value techniques. Included in Selling, General & Administrative Expense is a
$155,017 impairment adjustment for CoinBank machines held for sale.
(k) Property and Equipment--Property and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful life of the related asset, which ranges from 3
to 7 years. Amortization of leasehold improvements is computed using the
straight-line method over the lesser of the estimated life of the asset or the
remaining term of the lease.
(l) Impairment of Long-Lived Assets--The Company evaluates long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. If the estimated future cash
flows (undiscounted and without interest changes) from the use of an asset are
less than the carrying value, a write-down would be recorded to reduce the
related asset to its estimated fair value.
(m) Income Taxes--The Company files a consolidated federal income tax return
and a combined California franchise tax return. Deferred income taxes have been
recognized for temporary differences between the financial reporting and income
tax bases of assets and liabilities, which are based on the enacted tax rates
expected to be in effect when such amounts are expected to be realized or
settled. A valuation allowance is established when necessary, to reduce deferred
income tax assets to the amount expected to be realized. Income tax expense is
the tax payable or refundable for the year plus or minus the change during the
year in deferred income taxes.
(n) Employee Stock Option--The Company adopted statement of financial
accounting standard No. 123, "Accounting Based Compensation"(SFAS No. 123), as
of June 1, 1998, which establishes a fair value method of accounting for stock-
based compensation plans. In accordance with SFAS No. 123, the Company has
chosen to continue to account for stock-based compensation utilizing the
intrinsic value method prescribed in APB 25. Accordingly, compensation cost for
stock option is measured as the excess, if any, of the fair market price of the
company's stock at the date of grant over the amount an employee must pay to
acquire the stock.
Also, in accordance with SFAS No. 123, the Company has provided footnote
disclosure with respect to stock-based employee compensation. The cost of stock-
based employee compensation is measured at the grant date on
40
<PAGE>
the value of the award and is recognized over the service period. The value of
the stock-based ward is determined using a pricing model whereby compensation
cost in excess of the fair value of the stock as determined by the model at the
grant date or other measurement date over the amount an employee must pay to
acquire the stock.
(o) Basic and Diluted Net Loss per Common Share--Basic and diluted net loss
per common share is based on the weighted average number of common shares
outstanding during the respective periods. Statement of Financial Accounting
Standards No. 128, "Earnings per Share" issued by the FASB is effective for
financial statements with fiscal years and interim periods ending after December
15, 1997. SFAS 128 provides for the calculation of Basic and Diluted earnings
per share. Basic earnings per share includes no dilution and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding during the periods presented. Diluted earnings per
share reflect the potential dilution of securities that could share in the
earnings, such as stock options, warrants or convertible debentures. Stock
options and warrants outstanding during the periods presented were not included
in diluted earnings per share since their effect would be anti-diluted. The
Company had 1,322,330 options and warrants outstanding at May 31, 1999.
(p) Fair Value of Financial Instruments--Financial instruments consist of
accounts receivable and payable, which have a book value approximating the fair
value due to their short-term nature; interest rates on long-term debt
approximate current interest rates, accordingly the book value approximates fair
value and amounts due to stockholders have a fair value that cannot be
determined due to the related-party nature of the transactions.
(q) Concentration of Suppliers--The Company is dependent on third-party
manufacturers for the production of the components incorporated into CoinBank
machines and currently purchases substantially all of its requirements of
specially designed or modified components from single source suppliers. The
Company purchases certain of these components pursuant to open purchase orders
placed from time to time in the ordinary course of business. Although the
Company currently believes that alternative sources for these components are
readily available, failure or delay by any manufacturer in providing components
to the Company on commercially reasonable terms, or at all, in the absence of
readily available alternative sources, could result in interruptions in the
Company's ability to continue its assembly and installations of CoinBank
machines and have a material adverse effect on the Company's operations.
(r) Concentration of Credit Risk--Financial instruments that potentially
subject the Company to a concentration of credit risk consists primarily of
accounts receivable. The receivables are unsecured, and the Company performs
ongoing credit evaluations of its customers. At May 31, 1999, the receivable
from a major customer was $56,606.
(s) Research and Development--Approximately $770,000 of cost were incurred in
the research and development of new software products and enhancements to
existing software products which were expensed as incurred (and recorded in the
consolidated statement of operation) until technological feasibility has been
established. Technological feasibility is established upon completion of a
detailed program design or working model. Once technological feasibility is
established all software production cost will be capitalized and reported at the
lower of unamortized cost or net realizable value until the product is available
for general release to customers. Capitalized software cost will be amortized
based on current and future expected revenue for each product subject to an
annual minimum based on straight-line amortization over the remaining estimated
life of the product, not to exceed 5 years. The Company will evaluate the
recoverability of all capitalized software cost on a quarterly basis by
comparing the net realizable value, determined pursuant to management's
estimates of future product cash flows, with the unamortized capitalized
software cost balance.
(t) New Accounting Pronouncements--Statements of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130) issued by
FASB is effective for financial statements with fiscal years beginning after
December 15, 1997. Earlier application is permitted. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. The adoption of this
statement had no effect on the financial position or results of operations.
41
<PAGE>
Statements of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" (SFAS No. 131) issued by the
FASB is effective for financial statements beginning after December 15, 1997.
The new standard requires that public business enterprises report certain
information about operating segments in complete sets of financial statements of
the enterprise and in condensed financial statements of interim periods issued
to shareholders. It also requires that public business enterprises report
certain information about their products and services, the geographic areas in
which they operate and their major customers. The adoption of SFAS No. 131 did
not have an effect, on its results of operations.
Statement of Financial Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133) issued by the FASB is
effective for financial statements with fiscal quarters of fiscal years
beginning after June 15, 1999. The new standard provides for standardized
accounting and reporting for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. The
guidance applies to all entities. SFAS 133 requires companies to recognize all
derivative contracts as either assets or liabilities in the balance sheet and to
measure them at fair value. Fair value measurements are based on the guidance
contained in SFAS 107, Disclosures about Fair Value of Financial Instruments.
The Company does not expect adoption of SFAS No. 133 to have a material effect,
if any, on its results of operations.
Statement of Financial Accounting Standards No. 134, " Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale By a Mortgage Banking Enterprise," ("SFAS 134") is effective for
financial statements with fiscal year beginning after December 15, 1998. SFAS
134 amends SFAS No. 65. "Accounting for Certain Mortgage Banking Activities"
which establishes accounting and reporting standards for certain activities of
mortgage banking enterprises and other enterprises that conduct operations which
are substantially similar to the primary operations of a mortgage banking
enterprise. The Company does not expect adoption of SFAS 134 to have material
effect, if any, on its consolidated financial position or results of operations.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1998 1999
------------ -----------
<S> <C> <C>
Machinery and equipment.............................................. $2,609,383 $1,562,643
Security systems..................................................... 7,523 7,523
Furniture and fixtures............................................... 15,911 22,519
Vehicles............................................................. 14,415 14,415
Computer equipment................................................... 63,031 148,561
Leasehold improvements............................................... 110,892 117,989
Equipment under capital Lease........................................ 289,716 289,716
---------- ----------
Total Property and Equipment....................................... $3,110,871 $2,163,366
Less accumulated depreciation...................................... 471,241 769,677
---------- ----------
$2,639,630 $1,393,689
========== ==========
</TABLE>
Included in property and equipment are the following assets held under capital
leases:
<TABLE>
<CAPTION>
1998 1999
------------ -----------
<S> <C> <C>
Machinery and equipment........................................... $206,959 $206,970
Security systems.................................................. 35,264 35,264
Computer equipment................................................ 47,482 47,482
-------- --------
289,705 289,716
Less accumulated depreciation at May 31, 1998 and 1999............ 171,473 215,573
-------- --------
$118,232 $ 74,143
======== ========
</TABLE>
Depreciation expense for the years ended May 31, 1998 and 1999 on assets held
under capital leases was $44,100 and $44,100.
42
<PAGE>
CASH TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. NOTES PAYABLE
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Equipment loans were secured by the personal guarantees of the two
Principal Stockholders of the Company and the Company's equipment. The
guarantors were released 90 days after the Company's initial public
offering. Interest rates range from 3.88% to 9.25%, with the loans
maturing through 2002. Pursuant to a loan and security agreement and
related note, as revised (collectively the "Agreement"), with a
finance company, the Company borrowed $5,500,000. The Company is
required to make monthly payments of principal and interest which is
currently approx. $120,000.............................................. $4,883,196 $3,737,455
Subordinated Note payable to a company with interest payable at 9% per
Annum, repaid during 1999................................................ 250,000 --
---------- ----------
5,133,196 3,737,455
Less current portion.................................................. 1,273,629 1,172,732
Long term maturity....................................................... $3,859,567 $2,564,723
========== ==========
</TABLE>
Maturity of Notes Payable are as follows at May 31, 1999
<TABLE>
Year Ending May 31,
- -------------------
<S> <C>
2000........................................ $1,172,732
2001........................................ 1,175,512
2002........................................ 1,389,211
----------
$3,737,455
==========
</TABLE>
43
<PAGE>
CASH TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. DUE TO STOCKHOLDERS
Notes and loans payable to stockholders repaid in 1999, consist of the
following:
<TABLE>
<CAPTION>
1998
-----------
<S> <C>
Note payable to a partnership, whose principal partner is a stockholder of the
Company.......................................................................... $ 530,614
Notes payable secured by the assets of the Company............................... 255,000
Note payable to a stockholder.................................................... 258,400
Note payable to lender whose owner is a stockholder of the Company............... 142,102
Note payable to a stockholder.................................................... 55,487
Note payable to a stockholder.................................................... 37,252
Note payable to a stockholder.................................................... 23,992
Note payable to a stockholder.................................................... 12,242
Note payable to a stockholder.................................................... 59,341
Note payable to a stockholder.................................................... 222,312
Note payable to a stockholder.................................................... 12,342
Notes payable to stockholders.................................................... 748,446
In November 1996, the Company entered into an agreement with a major
Stockholder to purchase all the rights under a software licensing agreement...... 50,000
-----------
2,407,530
Less current maturity............................................................ 2,349,205
-----------
Long-term maturity............................................................... $ 58,325
===========
</TABLE>
An officer of the Company, who is an affiliate of a partnership that is a
principal stockholder of the Company, borrowed funds amounting to $475,000 (this
amount is included in note payable to a partnership of $533,201 at May 31, 1998)
in his own name from a bank and loaned it to the Company and had also personally
guaranteed $142,772 of capital lease obligations assumed by the Company (Note
7). The loans from stockholders included accrued interest of $368,483 at May
31, 1998. See Note 9--IPO and Related Events regarding repayments and
conversions to equity.
44
<PAGE>
CASH TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. INCOME TAXES
As of May 31, 1999, the Company has available federal net operating loss
("NOL") carry-forwards that approximate $10,800,000 and may be applied against
future taxable income through 2019. State NOL carry-forward are approximately
50% of federal amounts and expire through 2004. Since management can not
determine if it is more likely than not that the deferred tax asset will be
realized, a 100% valuation reserve has been set up to entirely offset the
deferred tax asset of $4,200,000. The utilization of NOLs may be subject to
limitations imposed by the Internal Revenue Code. Temporary differences other
than the NOL are not material. The current tax expense is due to payment of
state minimum taxes.
6. STOCK OPTION PLAN AND WARRANTS
The Company adopted a 1996 stock option plan (the "Option Plan"). A total
of 775,887 shares of the Company's common stock have been reserved for issuance
under the Option Plan. The Option Plan is administered by the Board of
Directors, or a committee appointed by the Board of Directors, which determine
the recipients and term of the awards granted.
In addition to the above mentioned stock options, in July 1998, in
conjunction with the Company's initial public offering certain debt holders were
granted options/warrants in exchange for note repayments.
The Company has granted the following options to purchase common stock as
of May 31, 1999.
<TABLE>
<CAPTION>
Number of Weighted Average
Options Price $/Sh
--------------------------------------
<S> <C> <C>
Options Outstanding - June 1, 1997 285,887 $ 3.50
Employee Stock Options
- ----------------------
Granted - -
Exercised - -
Shareholder Warrants and Options
- --------------------------------
Granted - -
Exercised - -
Option Outstanding - June 1, 1998 285,887 $ 3.50
Employee Stock Options
- ----------------------
Granted 383,143 $ 7.06
Exercised - -
Shareholder Warrants and Options
- --------------------------------
Granted 653,300 $ 7.46
Exercised - -
--------------------------------------
Options Outstanding - May 31, 1999 1,322,330 $ 6.49
--------------------------------------
</TABLE>
Stock Based Compensation
All stock options issued to employees have an exercise price not less than
the fair market value of the company's Common Stock on the date of grant, and in
accounting for such options utilizing the intrinsic value method there is no
related compensation expense recorded in the Company's financial statements. If
the compensation had been determined based on the fair market value of the stock
option on their dates of grant in accordance with SFAS 123, the Company's net
loss and loss per share for the years ended May 31, 1999 would have been
decreased to the pro forma amounts present below:
45
<PAGE>
<TABLE>
<CAPTION>
Net Loss 1999
- -------- ------------
<S> <C>
As Reported...................................................... $(5,711,964)
Pro Forma........................................................ $(7,806,292)
Basic and Diluted Loss Per Common Share
- ---------------------------------------
As Reported...................................................... $ (1.64)
Pro Forma........................................................ $ (2.24)
</TABLE>
The fair value of option grants is estimated on the date of grant utilizing
the Black-Scholes option-pricing model with the weighted average assumption for
options granted during 1997-1999, expected life of the option is 5 years,
expected volatility of 51%, risk free interest rate of 6% and a 0% dividend
yield. The weighted average fair value at the grant date for such options is
$6.49 per option.
<TABLE>
<CAPTION>
Outstanding Exercisable
Weighted Average Weighted Average
--------------------------------- ------------------------
Life Exercise Exercise
Exercise Price Per share Shares (Years) Price Shares Price
- ---------------------------------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
$ 3.50 290,000 4.00 $ 3.50 193,258 $ 3.50
$ 6.00 94,300 4.50 $ 6.00 6,000 $ 6.00
$ 6.30 50,000 4.50 $ 6.30 16,667 $ 6.30
$ 7.00 476,830 4.50 $ 7.00 329,259 $ 7.00
$ 8.00 350,000 4.50 $ 8.00 350,000 $ 8.00
$ 8.50 100 4.50 $ 8.50 - $ 8.50
$ 8.56 50,000 4.50 $ 8.56 - $ 8.56
$ 10.50 3,000 4.50 $ 10.50 - $ 10.50
$ 10.75 8,100 4.75 $ 10.75 - $ 10.75
--------------------------------------------------------------------------------
Total option outstanding 1,322,330 $ 6.49 895,184 $ 6.62
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</TABLE>
No employee stock options were exercised as of the fiscal year end May 31,
1999.
No Shareholders warrants/options were exercised as of the fiscal year end May
31, 1999.
Life (year) is the estimated remainder term of options/warrants.
46
<PAGE>
7. COMMITMENTS AND CONTINGENCIES
Operating Agreement and Disputes
In January 1997, the Company entered into a five-year licensing and
manufacturing services agreement with Geld Bearbeitungs Systeme GES.M.B.H., an
Austrian corporation ("GBS"), pursuant to which GBS granted the Company the
exclusive, perpetual right to use certain technology incorporated in CoinBank
machines in North and South America and Asia, provided that the Company
purchases a minimum quantity of coin-counting components used in CoinBank
machines over the term of the agreement. Failure to satisfy such minimum
purchase requirement could result in the termination of the Company's agreement
with such manufacturer, which is likely to lead to the termination of the
Company's exclusivity with respect to such technology, which could have a
material adverse effect on the Company. The agreement also requires GBS to
provide information regarding the software, hardware and manufacturing
techniques used in the manufacturing of its money processing equipment to the
Company in exchange for certain payments. The agreement is subject to early
termination in the case of bankruptcy or breach by either party, provided that
if the Company has purchased the minimum number of components from GBS, it will
continue to be entitled to use, sell and distribute CoinBank machines containing
GBS technology. Although the Company believes that alternative sources for
components similar to the components to be supplied by GBS are available,
failure or delay by GBS to provide components to the Company could result in
interruptions in the Company's ability to continue to assemble and install
CoinBank machines and have a material adverse effect on the Company's
operations.
In August 1998, the Company entered into a three-year distribution agreement
with GBS, subject to successive one-year renewal periods, pursuant to which GBS
granted the Company the exclusive right to distribute and sell cash processing
equipment in all areas of the world not covered by the January 1997 agreement
between GBS and the Company (the "Territory"), except to certain financial
institutions in Austria, provided that the Company purchases a minimum number of
cash processing machines from GBS over a specified period during the initial
three-year term of the April 1997 agreement upon the schedule provided in the
agreement. The agreement provides that failure to satisfy such minimum purchase
requirement will result in the Company having only a non-exclusive right to
distribute the equipment in the Territory. Though the Company believes that the
minimum purchase requirement is reasonable and achievable, there can be no
assurance that the Company will be able to satisfy such purchase requirements.
In March 1999, the Company entered into a letter of intent to acquire 51% of
the capital stock of the Austrian based manufacturer of coin counting components
of the Company's CoinBank machines, Geld Bearbeitungs Systems GES.M.B.H. ("GBS")
(the "Acquisition"). GBS is the largest manufacturer of coin processing
equipment in Austria. The Company and GBS are currently parties to a License
and Manufacturing Services Agreement whereby GBS manufactures the Company's
CoinBank machines. The Company is the single largest customer of GBS.
Pursuant to the terms of the Letter of Intent, the Company will acquire 51% of
GBS' capital stock from the existing shareholders for a combination of cash and
Common Stock of the Company. The Letter of Intent states that the principal
owners of GBS have agreed to have key employees of GBS enter into employment and
non-competition agreement with the Company as a condition to closing of the
acquisition. The parties are currently completing their due diligence and
financial statements while negotiating the terms of a definitive purchase
agreement, as well as side agreements such as the terms of the employment
agreements for the key employees. Additionally the Company and GBS are in
dispute over certain matters related to the license and manufacturing agreement
that has delayed negotiation of the acquisition. There can be no assurance that
the transaction will be completed or that the terms of the definitive agreement
will be as described above.
The Company and GBS have recently been in a dispute regarding the 1998
Distribution Agreement. The dispute involves primarily the quantity of machines
to be produced by GBS for the European market. The dispute does not affect the
Company's North American rights pursuant to the January, 1997 Licensing
Agreement. Although the Company believes that these matters will be resolved
amicably, there can be no assurance that the
47
<PAGE>
dispute can be resolved. The proposed acquisition of GBS may not occur or may be
delayed until resolution of these disputes is accomplished.
In June 1997, Coinstar, Inc. ("Coinstar"), a competitor of the Company, filed
a complaint against CAS, a subsidiary of the Company, in the U.S. District Court
for the Northern District of California alleging infringement of US Patent No.
5,564,546 ("the 546 patent"). In June 1997, CAS filed an answer denying the
claims of Coinstar and interposed a counterclaim seeking declaratory judgment as
to the invalidity and unenforceability of Coinstar's patent and instituted a
third-party complaint against ScanCoin AB for breach of warranty. Although the
Company believes that Coinstar's complaint is without merit, there can be no
assurance that the Coinstar litigation will either be settled on terms
acceptable to the Company or decided in favor of the Company. An adverse ruling
could have a material adverse effect on the Company.
In January 1998, the district court granted CAS's motion for summary judgment
of noninfringement of the CBIII CoinBank models having a solid input tray. The
Court granted in part and denied in part CAS's motion for summary judgment of
noninfringement concerning the earlier CBII model. The Court also denied
CoinStar's motion for summary judgment. In October 1998 Coinstar amended its
complaint to allege infringement by CAS of newly issued U.S. Patent No.
5,799,767 ("the 767 patent"). CAS has filed a motion for summary judgment of
invalidity and non-infringement of the 767 patent. That motion is currently set
to be heard on September 29,1999. Although the company believes that Coinstar's
amended complaint is without merit, there can be no assurance that the Coinstar
litigation will either be settled on terms acceptable to the Company or decided
in favor of the Company. The Company believes that the final outcome of this
action will not have a material adverse effect on its financial statements.
In December 1997, Vindex USA, Inc. filed a complaint against CAS, a subsidiary
of the Company, in the Superior Court of California, Los Angeles County seeking
to recover $40,000, an unspecified amount of commissions and interest accrued
thereon allegedly due it under the terms of a consulting agreement it alleges
was breached by the Company. The Company believes that the complaint is without
merit and is defending this lawsuit.
Lease Agreements
On September 12, 1997, the Company entered into a commercial single tenant
lease agreement with a related party. The new lease became effective on
September 13, 1997 and will expire on September 13, 2002. The annual rent is
$67,416. Rent expense is recognized using the effective rent method over the
life of the lease. The lease contains rent escalations and certain rent
abatements. There is a provision for a 60-month renewal option. The lease
requires the payment of costs such as insurance and other operating costs in
addition to minimum rentals.
The Company is committed under non-cancelable facility lease agreements and
equipment operating and capital leases as follows:
<TABLE>
<CAPTION>
Years Ending
------------
May 31 Capital Operating
------ -------- ---------
<S> <C> <C>
2000.................................................. $42,783 $ 89,616
2001.................................................. 493 84,916
2002.................................................. -- 70,316
2003.................................................. -- 16,854
--------------------
$43,276 $261,702
--------------------
Less interest......................................... 714 --
Less current maturity................................. 42,076 --
--------------------
$ 486 $261,702
======== ========
</TABLE>
Rent expense was $71,971 and $77,224 for the years ended May 31, 1999 and
1998.
Rent expense includes branch offices in Austria and Germany. Obligations
are in local currency.
48
<PAGE>
Stock Options
Subsequent to May 31, 1999 the Company Committed 30,000 stock options to its
four Directors.
Employment Agreements
The Company has entered into a three (3) year employment agreement with Mr.
Korman effective July 1998 which provides for an initial annual base salary of
$120,000, base salaries of $150,000 and $180,000 in the second and third years,
respectively, and payment of such bonuses as the Board of Directors determines.
Any such bonus will be voted on by the entire Board, including Mr. Korman,
unless Mr. Korman or another director chooses to abstain from voting on the
matter. Mr. Korman also receives the use of a company automobile. The
agreement includes Mr. Korman's covenant not to compete with the Company's
business during the term of the Agreement and for a period of one year
thereafter. The agreement requires Mr. Korman to devote not less than 40 hours
per week of his business time to the business of the Company. Mr. Korman also
participates in other business endeavors which require a portion of his business
time. Although Mr. Korman has advised the Company that his participation in
outside business matters should not interfere with his performance of his duties
as President and Chief Executive Officer of the Company, there can be no
assurance that a conflict of interest will not arise with respect to the
allocation of Mr. Korman's time or that such conflict would be resolved in the
Company's favor. The loss of the services of Mr. Korman could have a material
adverse effect on the Company's business and prospects.
Effective January 11, 1999, the Company entered into an employment agreement
with Robert M. Gielow, pursuant to which the Company retained Mr. Gielow as its
Chief Financial Officer and Secretary. The agreement provides for an initial
annual base salary of $175,000 with annual increases and bonuses to be
determined by the Board of Directors. Mr. Gielow receives a monthly automobile
allowance of $600 per month. Mr. Gielow also received options to purchase
50,000 shares of Common Stock with an exercise price of $8.56 per share, which
options vest in one-fourth increments commencing in December 1999. The
agreement further provides that Mr. Gielow may receive a severance payment of
$150,000.
The Company has entered into an employment agreement with Christine Dobbings
effective January 1, 1998 whereby Ms. Dobbings is employed as Vice President of
Marketing and Sales. The agreement terminates in January 2003. Pursuant to the
employment agreement, Mrs. Dobbings receives a base salary of $8,533 per month
subject to annual increases of 15% per annum. Ms. Dobbings also receives a
monthly automobile allowance of $500 per month. In addition, Ms. Dobbings
received five-year Common Stock options under the Employee Stock Option Plan to
purchase an aggregate of 50,000 shares with exercise prices ranging between
$3.50 and $7.00 per share. The options vest over a two-year period. The
agreement further provides that Ms. Dobbings may receive a severance payment
equal to the total amount of her previous twelve-month's base salary if she is
terminated without cause.
8. COMMON STOCK
In February 1997, the Company amended its certificate of incorporation to
increase the number of authorized shares of common stock to 20,000,000.
9. INITIAL PUBLIC OFFERING AND RELATED EVENTS
On July 9, 1998 the Company completed an initial public offering of 1,485,000
shares of its common stock and received net proceeds of $8,467,880 after
deducting commissions and expenses of $1,927,120. At the same time, the Company
issued 130,915 shares of its common stock and certain officers and stockholders
exchanged 161,830 shares of the Company's common stock owned by them in exchange
for $1,412,106 of indebtedness to shareholders.
In August 1998, the Company issued 172,750 shares of common stock in
connection with the partial exercise of the over-allotment option. Net proceeds
to the Company were $1,010,446 after deducting $198,804 for commissions and
expenses.
49
<PAGE>
The Company granted 669,030 options with prices ranging from $3.50 to
$10.75 per shareoptions under the Employee Stock Option Plan to purchase common
stock. 227,643 options were granted at $7.00 per share and 285,887 options were
granted at $3.50 per share.
Prior to the initial public offering, the Company had issued various
subordinated promissory notes. These notes were repaid with a portion of the net
proceeds from the initial public offering of the Company's common stock. In
conjunction with liquidation of the notes, the Company issued warrants to
purchase 653,300 shares of Common Stock at prices ranging from of $3.50 to $8.00
per share. (Note 6)
10. SUBSEQUENT EVENT (UN-AUDITED)
The Company is presently engagaed in discussions with two entities
regarding an acquisition of all or part of the Company (including stock and
assets transfers). The Board of Directors has not been requested to consider any
definitive transaction. No letters of intent have been entered into by the
Company. There can be no assurance that any such transactions will be
consummated, or that the terms will be favorable to the Company or its
shareholders.
50
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
On August 6, 1998, the Board of Directors of Cash Technologies, Inc. (the
"Company") determined that it would be in the best interests of the Company to
terminate the services of its independent accountant DeLoitte & Touche LLP,
which acted as its independent accountant with respect to the Company's
financial statements for the fiscal year ended May 31, 1997 which were included
in its Registration Statement for the Company's initial public offering.
The dismissal of DeLoitte & Touche LLP was recommended and approved by the
Board of Directors of the Company and is not the result of any disagreement with
DeLoitte & Touche LLP on any matter of accounting principles or practice,
financial statement disclosure or auditing scope or procedure.
The audit opinion delivered by DeLoitte & Touche LLP which was included in the
Company's financial statements for the period ending May 31, 1997 which were
included in the Company's registration statement for its initial public offering
contained an explanatory paragraph. In addition, during the last two fiscal
years and subsequent periods there were no disagreements with DeLoitte & Touche
LLP regarding accounting principles, or practices, financial statement
disclosure, or auditing scope or procedure.
Effective September 29, 1998, the Board of Directors of Cash Technologies,
Inc. (the "Company") determined that it would be in the best interests of the
Company to retain the services of BDO Seidman, LLP as its independent certified
public accountants. BDO Seidman, LLP served as the Company's auditors for the
fiscal year ending May 31, 1998. BDO Seidman, LLP continues to serve as the
Company outside auditors.
During the previous two fiscal years and subsequent periods the Company did
not consult with BDO Seidman, LLP regarding accounting principles, or practices,
financial statement disclosure, or auditing scope or procedure or accounting
principles applicable to any specific transaction.
51
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
- -----------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
-------------------------------------------------
Name Age Position
- ---- --- --------
Bruce R. Korman 40 President, Chief Executive Officer and
Chairman of the Board
Robert M. Gielow 54 Chief Financial Officer/Secretary
S. Christine Dobbings 49 Vice President Marketing
Richard Miller 47 Director/Assistant Secretary
Robin Richards 43 Director
Robert B. Fagenson 50 Director
Vincent A. Carrino 43 Director
Edward G. Harshfield 62 Director
Bruce Korman has been President, Chief Executive Officer and Chairman of
the Board of Directors of the Company since its inception, and has served in the
same capacities at National Cash Processors, Inc. ("NCP") and CoinBank
Automated Systems, Inc. ("CAS"), the Company's wholly-owned subsidiaries,
since their respective inceptions. Since 1984, Mr. Korman has been a principal
and general partner in a series of real estate limited partnerships engaged in
the development, construction and management of multi-family housing projects in
Southern California.
Robert M. Gielow has been the Company's Chief Financial officer since
January of 1999 and Secretary of the Company since February of 1999. He served
as Vice President and General Manager for the Western Region of ADP's Emerging
Business Services Division from July to December of 1998. From 1991 until July
of 1998, Mr. Gielow served as Vice President of Finance and later as Acting CFO
of Kinko's Inc., which operated approximately 850 domestic and 30 foreign branch
offices. While at Kinko's, Mr. Gielow played a key role in the consolidation of
125 independent operating companies into the a billion dollars Kinko's Inc.
entity. Mr. Gielow started his career at Xerox Corporation, where he spent 15
years in a variety of financial and administrative assignments.
S. Christine Dobbings has been Vice President of Marketing of the Company
and NCP since August 1995 and of CAS since November 1995 and has been the Sales
Manager of NCP since August 1994. From 1992 to 1994, Ms. Dobbings was Senior
Wholesale Account Executive for EFM Mortgage Bankers, and served as Senior Loan
Agent for Home Savings of America from 1989 to 1991. From 1984 to 1988, Ms.
Dobbings was Regional Wholesale Marketing Manager for Western Federal Savings
and Loan and co-founded its wholesale lending division.
Richard Miller was Vice President, Secretary, Chief Financial Officer and a
Director of the Company since its inception and has served in the same
capacities at NCP and as Chief Financial Officer, Secretary and Director at CAS
since their respective inceptions. Effective January 11, 1999, Mr. Miller
resigned as a Vice President and
52
<PAGE>
Chief Financial Officer and Secretary of the Company and it subsidiaries. Since
1985, Mr. Miller has served as President and Chief Executive Officer of Union
Fidelity, a mortgage banking firm which he founded. Mr. Miller is also the
President of Lakeview Enterprises, Ltd., a private real estate limited
partnership.
Robin Richards was appointed to the Company's Board of Directors in March
of 1999. Mr. Richards serves as the President and Chief Operating Officer of
MP3.Com, an Internet music company, positions he has held since January 1999.
Prior to joining MP3.Com, Mr. Richards was a President and Chief Executive
Officer at Lexi International, a teleservices company from October 1985. Mr.
Richards also serves on the Board of Directors of Tickets.Com, Inc. and is the
President of The Chase Foundation.
Robert B. Fagenson has been a director of the Company since August 4, 1998.
Mr. Fagenson has, for more than the last five years, been a director and
President of Fagenson & Co., Inc., a New York Stock Exchange ("NYSE")
specialist firm, and a Vice President and director of Starr Securities, Inc. a
registered broker-dealer and member of the NYSE. Mr. Fagenson is also a
director and Vice Chairman of the NYSE; a director of Rent-Way, Inc., a company
listed on the NYSE; a director of Intrenet, Inc., a company listed on the Nasdaq
SmallCap Market; and a director of Hudson Hotel Corporation, a company listed on
the Nasdaq National Market. Mr. Fagenson serves as the representative of Starr
Securities, Inc., the co-underwriter in the Company's initial public offering.
Edward Harshfield has been a director of the Company since August 4, 1998.
Mr. Harshfield is currently Chairman, Chief Executive Officer and Director of
MFN Financial Corporation, a specialty finance company. Mr. Harshfield was Vice
Chairman and Director of California Federal Bank from 1997 to 1998 and
President, Chief Executive Officer and Director from 1993 until 1997, when the
bank was acquired by its current management. From October 1992 to March 1993,
Mr. Harshfield served as Chief Executive Officer and Director of First City
Texas National Bank and directed its restructure and sale. Mr. Harshfield was
President, Chief Executive Office of Household Financial Services from 1984 to
1987, and from 1988 to 1955 Chairman, Chief Executive Officer and General
Partner of U.S. Thrift Opportunity Partners, a Merrill Lynch sponsored
partnership investing in undercapitalized thrift institutions. Prior to
Household, Mr. Harshfield held management positions at Ford Motor Credit,
Pepsico and Citicorp/Citibank. He also currently serves as Chairman, Financial
Pacific Corp.; Director, California Federal Bank; and Advisory Board Member,
Provender Capital Group and Argonaut Private Equity Management, LLC.
Vincent A. Carrino has been a director of the Company since August 4, 1998.
Mr. Carrino founded Brookhaven Capital Management, Inc., an investment
management company headquartered in Menlo Park, California in 1986 and has been
its President since such time. Mr. Carino serves as a director of Rent Way,
Inc., a company listed on the NYSE.
Pursuant to the terms of the Underwriting Agreement between the Company and
Starr Securities, Inc, and Gunn Allen Financial Corp., the underwriters in its
initial public offering, the underwriters may appoint a designee as either a
member of the Board of Directors or as an advisor to attend all Board Meetings.
Mr. Fagenson serves as the nominee of the underwriters.
Compensation of Directors, Committees of the Board and Board Meetings.
During the fiscal year ended May 31, 1999 the Company did not pay any
consideration to Mr. Korman or Mr. Miller for their services as members of the
Board. Mr. Korman and Mr. Miller were the only members of the Board of Directors
until August 4, 1998 when Messrs. Fagenson, Carrino and Harshfield were
appointed to the Board. Mr. Richard was appointed to the Board of Directors on
March 16, 1999. Prior to August 4, 1998 the Board of Directors had no
committees.
53
<PAGE>
Compensation of Directors
Directors do not receive cash compensation for serving on the Board of
Directors. The Corporation reimburses Directors who are not employees of the
Corporation the costs of attending meetings of the Board of Directors. Directors
employed by the Corporation are not entitled to any additional compensation as
such. All non-employee directors are eligible to participate in the Non-
Executive Director Stock Option Plan which was approved by the Board of
Directors in August 1998 and by the Shareholders in June 1999. Under the Non-
Executive Director Plan each non-employee director would received 30,000 options
upon joining the Board of Directors. The options vest as follows: 10,000 options
vest upon the date of joining the Board; 10,000 options vest on the first
anniversary date; and 10,000 options vest on the director's second anniversary
date. There are no annual grants of options to directors under the Non-Executive
Director Plan. See "Non-Executive Director Stock Option Plan".
Committees of the Board and Board Meeting
The Board of Directors has established two committees. The Audit Committee
is comprised of Robin Richards, Vincent Carrino and Richard Miller. Mr.
Richards serves as the Chairman of the Audit Committee. All of the members of
the Audit Committee are independent directors of the Company. The audit
committees' duties include: (i) reviewing with the Company's independent
auditors, the scope and results of any audits; and (II) reviewing with the
independent auditors and management, the Company's accounting, financial and
operating controls and staff.
In addition, the Board of Directors has established a Compensation
Committee comprised of Messrs. Richards, Harshfield and Fagenson. Mr.
Harshfield serves as Chairman of the Compensation Committee. All of the members
of the Compensation Committee are independent directors of the Company. The
Compensation Committee will administer the Company's Employee Stock Option Plan
and negotiate and approve employment agreements between the Company and
executive officers of the Company.
During the fiscal year ended May 31, 19989, meetings of the Board of
Directors were held on 4 occasions and the directors took action by unanimous
written consent in lieu of a meeting on 3 occasions. Prior to August 1998, Mr.
Korman and Mr. Miller were the only directors of the Corporation and there were
no committees. Each Director of the Corporation attended all meetings of the
Board of Directors held during the period in which he served.
Certain Key Employees
Willi Muhr, 38, has been Vice President of the Company since August 1996,
establishing and managing the Company's European Operations. From June 1993 to
March 1996, Mr. Muhr served as Chief Executive Officer of Adcon Telemetry, an
international wireless data communications company. From August 1986 to February
1993, Mr. Muhr was a principal in a series of real estate limited partnerships
engaged in the development, construction and management of multi-family housing
projects in Southern California.
Darryl J. Bergman, 33, has been Director of Technical Development for the
Company since January 1997. From January 1991 to December 1996, Mr. Bergman
served first as Software Developer and later as Software Project Leader at
Harte-Hanks, a leading media and marketing firm, where he had senior
responsibility for database applications software development for major accounts
including Sony Corporation, Prudential Insurance and Cigna Health Care.
54
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
- --------------------------------
Summary of Cash and Certain Other Compensation
The following table sets forth certain compensation paid by the Company
during the fiscal years ended May 31, 1999 May 31, 1998 and May 31, 1997 to its
President and Chief Executive Officer (the "Named Executives"). No other
officer had compensation in excess of $100,000 in 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Name and All Other
---------
Principal Position Annual Compensation Long Term Compensation Compensation
- ------------------ ------------------- ---------------------- ------------
Year Salary Bonus Securities Options (#)
---- ------ ----- ---------- -----------
Underlying
----------
<S> <C> <C> <C> <C> <C> <C>
Bruce Korman 1999 $ 120,000 119,265
President and 1998 $ 0(1)
Chief Executive Officer 1997 $ 0(1) 80,915 (2)
S. Christine Dobbings 1999 $ 108,700 16,666 $ 6,000 (3)
Vice President Marketing 1998 $ 72,000
1997 $ 67,500
</TABLE>
(1) Mr. Korman waived his salary for the fiscal years ended May 31, 1997 and
May 31, 1998.
(2) Exercise price is $7.00/Share and all of the shares are exercisable.
(3) Amount represents Company paid allowance for Automobile Allowance.
The following table discloses information concerning stock options granted
in the year ended May 31, 1999 to the Named Executive.
Option Grants in Fiscal Year Ended May 31, 1999
Individual Grants in Last Fiscal Year
-------------------------------------
<TABLE>
<CAPTION>
Percent of Total
----------------
Number of Securities Options Granted Exercise Expiration
-------------------- ---------------- -------- ----------
Underlying Options to Employees in Price Date
------------------ --------------- ----- ----
Name Granted Fiscal Year (%) ($/Sh)
- ---- ------- --------------- ------
<S> <C> <C> <C> <C>
Bruce Korman 72,444 10.99 % 3.50 7/9/03
46,821 7.10 % 7.00 7/9/03
Robert M. Gielow 50,000 7.59 % 8.56 1/11/04
Christine Dobbings 22,000 3.34 % 3.50 7/9/03
28,000 4.25 % 7.00 7/9/03
</TABLE>
55
<PAGE>
Aggregated Option Exercises And Fiscal Year-End Option Values
The following table sets forth information concerning the number of options
owned by the Named officers and the value of any in-the-money unexercised stock
options as of May 31, 1999. No options were exercised by any of the named
officers during the fiscal year ended May 31, 1999:
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options at May 31, 1999 May 31, 1999(1)
Name Exercisable Un-exercisable $Exercisable $Un-exercisable
<S> <C> <C> <C> <C>
Bruce Korman 80,915 616,977
72,444 552,386
46,821 193,137
Robert M. Gielow 50,000 128,250
Christine Dobbings 7,333 14,667 55,914 111,836
9,333 18,667 38,499 77,001
</TABLE>
(1) Year-end values for unexercised in-the-money options represent the positive
spread between the exercise price of such options and the fiscal year-end
market value of the Common Stock. An Option is "in-the-money" if the fiscal
year end fair market value of the Common Stock exceeds the option exercise
price.
Employment Agreements
The Company has entered into a three (3) year employment agreement with Mr.
Korman effective July 1998 which provides for an initial annual base salary of
$120,000, base salaries of $150,000 and $180,000 in the second and third years,
respectively, and payment of such bonuses as the Board of Directors determines.
Any such bonus will be voted on by the entire Board, including Mr. Korman,
unless Mr. Korman or another director chooses to abstain from voting on the
matter. Mr. Korman also receives the use of a company automobile. The agreement
includes Mr. Korman's covenant not to compete with the Company's business during
the term of the Agreement and for a period of one year thereafter. The agreement
requires Mr. Korman to devote not less than 40 hours per week of his business
time to the business of the Company. Mr. Korman also participates in other
business endeavors which require a portion of his business time. Although Mr.
Korman has advised the Company that his participation in outside business
matters should not interfere with his performance of his duties as President and
Chief Executive Officer of the Company, there can be no assurance that a
conflict of interest will not arise with respect to the allocation of Mr.
Korman's time or that such conflict would be resolved in the Company's favor.
The loss of the services of Mr. Korman could have a material adverse effect on
the Company's business and prospects.
Effective January 11, 1999, the Company entered into an employment
agreement with Robert M. Gielow, pursuant to which the Company retained Mr.
Gielow as its Chief Financial Officer and Secretary. The agreement provides for
an initial annual base salary of $175,000 with annual increases and bonuses to
be determined by the Board of Directors. Mr. Gielow receives a monthly
automobile allowance of $600 per month. Mr. Gielow also received options to
purchase 50,000 shares of Common Stock with an exercise price of $8.56 per
share, which options vest in one-fourth increments commencing in December 1999.
The agreement further provides that Mr. Gielow may receive a severance payment
of $150,000.
The Company has entered into an employment agreement with Christine
Dobbings effective January 1, 1998 whereby Ms. Dobbings is employed as Vice
President of Marketing and Sales. The agreement terminates in
56
<PAGE>
January 2003. Pursuant to the employment agreement, Mrs. Dobbings receives a
base salary of $8,533 per month subject to annual increases of 15% per annum.
Ms. Dobbings also receives a monthly automobile allowance of $500 per month. In
addition, Ms. Dobbings received five-year Common Stock options under the
Employee Stock Option Plan to purchase an aggregate of 50,000 shares with
exercise prices ranging between $3.50 and $7.00 per share. The options vest over
a two-year period. The agreement further provides that Ms. Dobbings may receive
a severance payment equal to the total amount of her previous twelve-month's
base salary if she is terminated without cause.
Employee Stock Option Plans
In 1996, Company adopted the 1996 Employee Stock Option Plan (the "Employee
Plan"). The purpose of the Employee Plan is to attract and retain qualified
personnel, to provide additional incentives to employees, officers and
consultants of the Company and to promote the success of the Company's business.
A reserve of 775,887 shares of the Company's Common Stock had been established
for issuance under the Employee Plan. The Employee Plan is currently
administered by the Board of Directors. Subject to the Employee Plan, the Board
has complete discretion to determine which eligible individuals are to receive
option grants, the number of shares subject to each such grant, the exercise
price of the option, the status of any granted option as either an incentive
stock option or a non-qualified option, the vesting schedule to be in effect for
the option grant and the maximum term for which any granted option is to remain
outstanding.
Each option granted under the Employee Plan will have a maximum term of ten
years, subject to earlier termination following the optionee's cessation of
service with the Company. All options granted to date have a term of five years.
The exercise price of incentive stock options and non-qualified stock options
granted under the Employee Plan must be at least 100% of the fair market value
of the stock subject to the option on the date of grant, respectively (or 110%
with respect to incentive options granted to holders of more than 10% of the
voting power of the Company's outstanding stock). Such payment may be made in
cash, or at the discretion of the Board, in outstanding shares of Common Stock
held by the participant, through a full recourse promissory note payable in
installments over a period of years or any combination of the foregoing. The
Board is submitting for Shareholder approval a proposal to increase the number
of shares reserved under the 1996 Plan by 200,000 shares.
At the Annual Meeting of Shareholders held on June 21, 1999, the Company's
shareholders approved an amendment to the 1996 Employee Stock Option Plan to
increase the number of shares eligible for issuance by 200,000 shares from
557,887 to 775,887 shares. As of June 21, 1999, there were 669,030 options
granted under the 1996 Employee Stock Option Plan.
Non-Executive Director Stock Option Plan
In August 1998 the Board of Directors approved a stock option plan for Non-
Employee Directors who are not eligible to participate in the 1996 Employee
Plan. The Director Stock Option plan was approved by the Company's shareholders
at the Annual Meeting held in June 1999.
The Director Plan provides each non-executive director with options to
purchase 30,000 options upon joining the Board of Directors. The options vest as
follows: 10,000 options vest upon joining the Board; 10,000 options vest on the
first anniversary date; and 10,000 options vest on the director's second
anniversary date. There are no annual grants of options to directors under the
Director Plan. Only non-employee directors of the Company are eligible to
participate in the Director Plan.
The Director Plan is intended to attract and retain key personnel whose
performance is expected to have a positive effect on the Company's profits and
growth potential by encouraging and assisting those persons to acquire equity in
the Company. The Board believes that by compensating Directors with stock
options the Board will have similar interests to the shareholders of the Company
to promote growth and enhanced shareholder value.
57
<PAGE>
As of May 31, 1999, options to purchase a total of 120,000 shares of the
Company's Common Stock have been issued under the Director Plan. Options may be
granted under the Director Plan until the year 2008 to (I) non-executive
directors as defined and (II) members of any advisory board established by the
Company who are not full time employees of the Company or any of its
subsidiaries.
The exercise price for options granted under the Director Plan shall be
100% of the fair market value of the Common Stock on the date of grant. Until
otherwise provided in the Director Plan the exercise price of options granted
under the Director Plan must be paid at the time of exercise, either in cash, by
delivery of shares of Common Stock of the Company or by a combination of each.
The term of each option commences on the date it is granted and, unless
terminated sooner as provided in the Director Plan, expires five years from the
date of grant. Options granted under the Director Plan are not qualified for
incentive stock option treatment.
Limitations of Liability and Indemnification
The Company's Restated Certificate of Incorporation and by-laws provide that
the Company shall, to the maximum extent permitted from time to time under the
Delaware General Corporation Law (the "DGCL"), indemnify and advance expenses
to any officer, director, employee or agent of the Company in connection with
any threatened, pending or completed action, suit or proceeding. The Restated
Certificate of Incorporation also permits the Company to secure insurance on
behalf of any person who was or is a director, officer, employee or agent of the
Company against any liability incurred by such person in such capacity,
regardless of whether indemnification would be permitted under the applicable
provisions of the DGCL or the Restated Certificate of Incorporation.
Section 102(b)(7) of the DGCL permits a provision in the certificate of
incorporation of each corporation organized thereunder eliminating or limiting,
with certain exceptions, the personal liability of a director to the corporation
or its stockholders for monetary damages for certain breaches of fiduciary duty
as a director.
Section 145 of the DGCL ("Section 145"), in summary, empowers a Delaware
corporation, within certain limitations, to indemnify its officers, directors,
employees and agents against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement, actually and reasonably incurred by them
in connection with any nonderivative suit or proceeding, if they acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to a criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful.
With respect to derivative actions, Section 145 permits a corporation to
indemnify its officers, directors, employees and agents against expenses
(including attorneys' fees) actually and reasonably incurred in connection with
the defense or settlement of such action or suit, provided such person meets the
standard of conduct described in the preceding paragraph, except that no
indemnification is permitted in respect of any claim where such person has been
found liable to the corporation, unless the Court of Chancery or the court in
which such action or suit was brought approves such indemnification and
determines that such person is fairly and reasonably entitled to be indemnified.
58
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of August 31, 1999,
with respect to each Executive Officer and Director, all Directors and Officers
as a group and the persons (including any "group" as that term is used in
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended), known by
the Company to be the beneficial owner of more than five percent of any class of
the Common Stock, the sole class of voting securities.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature Percentage of Shares
Beneficial Owners (1) (2) of Beneficial Owner Beneficially Owned
<S> <C> <C>
Bruce Korman (3) 996,657 25.1%
Richard Miller (4) 716,657 19.4%
Robert B. Fagenson (5) 30,000 *
Vincent A. Carrino (5) 30,000 *
Edward G. Harshfield (5) 30,000 *
Robin Richards (5) 30,000 *
Robert M. Gielow (6) 50,000 1.4%
Christine Dobbings (7) 50,000 1.4%
All directors and executive officers as a 1,933,314 47.3%
group (8 persons) (1)(2)(3)(4)(5)(6)(7)
</TABLE>
*Denotes less than 1%.
Footnotes appear on next page
59
<PAGE>
(1) Unless otherwise indicated, the address for each named individual or group
is in care of Cash Technologies, Inc., 1434 West 11th Street, Los Angeles,
California 90015.
(2) Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them. A person is deemed to be the beneficial
owner of securities that can be acquired by such person within 60 days from May
12, 1999 upon the exercise of options, warrants or convertible securities. Each
beneficial owner's percentage ownership is determined by assuming that options,
warrants or convertible securities that are held by such person (but not those
held by any other person) and which are exercisable within 60 days of the date
of proxy statement.
(3) Includes 516,477 shares owned by First Bancorp L.P. Mr. Korman is a limited
partner of First Bancorp L.P. and the President of the general partner of First
Bancorp L.P. Also includes (i) 280,000 shares of Common Stock issued to
investors in October 1996 who have granted Mr. Korman a three-year right to vote
such shares which expires in October 1999, and (II) 200,180 shares subject to
outstanding exercisable and unexercisable options.
(4) Includes 516,477 shares owned by Lakeview Enterprises, Ltd. Mr. Miller is a
limited partner of Lakeview Enterprises, Ltd. and the President of the general
partner of Lakeview Enterprises, Ltd. Also includes 200,180 shares subject to
outstanding exercisable and unexercisable options.
(5) Messrs. Fagenson, Harshfield and Carrino were elected to the Board of
Directors on August 4, 1998. Mr. Richards was appointed to the Board of
Directors effective March 16, 1999. The Board members each own 30,000 option
under the Non-Executive Director Plan, options vest in annual increments of 1/3
commencing on the date of the grant. The date of the grant is the date that such
Director is elected to the Board of Directors. See Proposal II. Does not include
any shares of Common Stock or other securities owned by Starr Securities, Inc.
of which Mr. Fagenson is an officer and director.
(6) Includes five-year options to purchase an aggregate of 50,000 shares
exercisable at $8.56 per share. The options vest in increments of 1/4 per year
commencing December 1999.
(7) Includes five-year options to purchase an aggregate of 50,000 shares
exercisable at prices between $3.50 and $7.00 per share. The options vest in
annual increments of 1/3 commencing July 1998.
Certain Reports
No person who, during the fiscal year ended May 31, 1999, was a Director,
officer of beneficial owner of more than ten percent of the Corporation's Common
Stock (which is the only class of securities of the Corporation registered under
Section 12 of the Securities Exchange Act of 1934 (the "Act"), (a "Reporting
Person") failed to file on a timely basis, reports required by Section 16 of the
Act during the most recent fiscal year,other than Mr. Robin Richards who failed
to a report on Form 3 for January 1999 upon his appointment to the Board of
Directors. Mr. Richards did not own any securities at the time of his
appointment. The Corporation was not subject to the reporting requirements under
the Act prior to its initial public offering in July 1998.
60
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Certain Transactions
In October 1995, in consideration of certain loans made to the Company by Mr.
Miller and Lakeview, the Company issued a secured promissory note in the amount
of $812,000 to Lakeview, bearing interest at the rate of 10.5% per annum,
secured by a pledge of substantially all of the Company's then existing assets,
which note matured on April 19, 1997. Since 1997, Lakeview sold approximately
$305,000 of this debt to certain third parties. The Company repaid approximately
$146,000 of the loan from the proceeds at its initial public offering. The
Company converted the remaining portion of the loan to approximately 104,500
shares of Common Stock.
Prior to November 1996, the Company licensed certain technology and software
used in its operations from First Bancorp, pursuant to an agreement that
required the Company to pay to First Bancorp monthly royalties in the amount of
the greater of 2.5% of the Company's earnings before interest and taxes or
$3,000. In November 1996, the Company purchased such software and related
intellectual property rights from First Bancorp for $50,000, which is
represented by a non-interest bearing promissory note which was paid following
the Company's initial public offering.
The Company leases approximately 13,000 square feet of space at 1434 West 11th
Street, Los Angeles, CA, which it uses for its executive offices and coin
processing facility from Prime Financial Partners, Ltd., an affiliate of Messrs.
Korman and Miller. The lease agreement expires in September 2002 and provides
for a base monthly rent of $5,600.
In connection with its initial public offering, approximately $1,324,700
amount of outstanding Company indebtedness was converted by certain lenders into
approximately 292,745 shares of Common Stock, of which approximately 161,830 are
beneficially owned by Messrs. Korman and Miller. In connection with this
transaction, the Company issued Messrs. Korman and Miller options to purchase
approximately 161,800 shares of Common Stock at an exercise price of $7.00 per
share.
The Board of Directors of the Company has adopted a policy which requires that
all future transactions with officers, directors or 5% or greater stockholders
must be on terms no less favorable than could be obtained from unaffiliated
third parties and that, following the election of one or more independent
disinterested directors, any such transaction must be approved by a majority of
such directors.
61
<PAGE>
Delaware Anti-takeover Law
The Company is subject to certain anti-takeover provisions under Section 203
of the Delaware General Corporation Law. In general, under Section 203, a
Delaware corporation may not engage in any business combination with any
"interested stockholder" (a person that owns, directly or indirectly, 15% or
more of the outstanding voting stock of a corporation or is an affiliate of a
corporation and was the owner of 15% or more of the outstanding voting stock)
for a period of three years following the date such stockholder became an
interested stockholder, unless (i) prior to such date the board of directors of
the corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder, or (II)
upon consummation of the transaction which resulted in the stockholder becoming
an interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, or (III) on or subsequent to such date, the business combination is
approved by the board of directors and unauthorized at an annual or special
meeting of stockholders by at least 66 2/3% of the outstanding voting stock
which is not owned by the interested stockholder. The restrictions imposed by
Section 203 will not apply to a corporation if the corporation's initial
certificate of incorporation contains a provision expressly electing not to be
governed by this section or the corporation by action of its stockholders
holding a majority of the outstanding stock adopts an amendment to its
certificate of incorporation or by-laws expressly electing not to be governed by
Section 203.
The Company has not elected out of Section 203, and upon consummation of the
Company's initial public offering and the listing of Common Stock on Nasdaq, the
restrictions imposed by Section 203 apply to the Company. Such provision could
have the effect of discouraging, delaying or preventing a takeover of the
Company, which could otherwise be in the best interest of the Company's
stockholders, and have an adverse effect on the market price for the Company's
Common Stock.
62
<PAGE>
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Exhibits
The following Exhibits designated by an asterisk (*) have been previously
filed with the Securities and Exchange Commission and, pursuant to Rule 17
C.F.R. 230.411, are incorporated by reference to the document referenced in
brackets following the descriptions of such exhibits.
*3.1 Restated Certificate of Incorporation of the Company [Exhibit 3.1 to the
Company's Registration Statement on Form SB-2 (File No. 333-6436)]
*3.2 Bylaws of the Company [Exhibit 3.2 to the Company's Registration
Statement on Form SB-2 (File No. 333-6436)]
*4.1 Form of the Company's Common Stock Certificate [Exhibit 4.1 to the
Company's Registration Statement on Form SB-2 (File No. 333-6436)]
*4.2 Form of the Underwriter's Warrant Agreement, including Form of Warrant
Certificate dated as of July 9, 1998 between the Company, Starr
Securities, Inc. and GunnAllen Financial Inc. (the "Underwriters")
[Exhibit 4.1 to the Company's Registration Statement on Form SB-2 (File
No. 333-6436)]
*10.1 Lease for the Company's Facilities at 1422 -34 West 11th Street, Los
Angeles Ca [Exhibit 10.1 to the Company's Registration Statement on Form
SB-2 (File No. 333-6436)]
*10.2 Agreement dated November 22, 1996 between National Cash Processors Inc.
and First Bancorp LP [Exhibit 10.2 to the Company's Registration
Statement on Form SB-2 (File No. 333-6436)]
*10.3 Manufacturing and License Agreement dated January 17, 1997 between the
Company and Geld Bearbeitungs Systeme GES.M.B.H.[Exhibit 10.3 to the
Company's Registration Statement on Form SB-2 (File No. 333-6436)]
*10.4 Form of Employment Agreement between the Company and Bruce Korman
[Exhibit 10.4 to the Company's Registration Statement on Form SB-2 (File
No. 333-6436)]
*10.5 Employee Stock Option Plan [Exhibit 10.5 to the Company's Registration
Statement on Form SB-2 (File No. 333-6436)]
*10.6 Form of Consulting Agreement between the Company and the Underwriters
dated as of July 9, 1998 [Exhibit 10.6 to the Company's Registration
Statement on Form SB-2 (File No. 333-6436)]
*10.7 Stock Purchase Agreement and Plan of Reorganization of the Company
[Exhibit 10.7 to the Company's Registration Statement on Form SB-2 (File
No. 333-6436)]
*10.8 Contract between the Company and Los Angeles County Metropolitan
Transportation Authority [Exhibit 10.8 to the Company's Registration
Statement on Form SB-2 (File No. 333-6436)]
*10.9 Promissory Note issued to G.E. Capital Corp, Security Agreement and
related Guarantees [Exhibit 10.9 to the Company's Registration Statement
on Form SB-2 (File No. 333-6436)]
*10.10 Form of Bridge Notes and Bridge Warrant [Exhibit 10.10 to the Company's
Registration Statement on Form SB-2 (File No. 333-6436)]
*10.11 Non-Executive Director Stock Option Plan [filed as Exhibit A to the
Company's Proxy Statement for its Annual Meeting held on June 21, 1999].
21. Subsidiaries of the Company: National Cash Processors, Inc; CoinBank
Automated Systems, Inc; and CoinBank Automation Handels GmbH, Salzburg,
Austria.
27. Financial Data Schedule
(b) Reports on form 8-K:
None
63
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized the 14th day of
September, 1999.
CASH TECHNOLOGIES, INC.
/s/ Bruce Korman
By:------------------------
Bruce Korman
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
------------------- --------------------- -----------
<S> <C> <C>
/s/ Bruce Korman President, Chief Executive Officer September 14, 1999
and Director (Principal
Bruce Korman Executive Officer)
/s/ Robert M. Gielow Chief Financial Officer and September 14, 1999
Secretary (Principal Financial
Robert M. Gielow Officer)
/s/ Richard Miller Director September 14, 1999
Richard Miller
/s/ Robert Fagenson Director September 14, 1999
Robert Fagenson
/s/ Vincent A. Carrino Director September 14, 1999
Vincent A. Carrino
/s/ Edward G. Harshfield Director September 14, 1999
Edward G. Harshfield
/s/ Robin Richards Director September 14, 1999
Robin Richards
</TABLE>
64
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> MAY-31-1999 MAY-31-1998
<PERIOD-START> JUN-01-1998 JUN-01-1997
<PERIOD-END> MAY-31-1999 MAY-31-1998
<CASH> 1,073,196 252,696
<SECURITIES> 0 0
<RECEIVABLES> 136,277 40,398
<ALLOWANCES> 0 0
<INVENTORY> 201,555 79,785
<CURRENT-ASSETS> 1,420,284 431,177
<PP&E> 2,970,754 2,639,630
<DEPRECIATION> 299,255 251,090
<TOTAL-ASSETS> 4,447,720 3,331,248
<CURRENT-LIABILITIES> 1,812,503 4,502,092
<BONDS> 0 0
0 0
0 0
<COMMON> 3,288,871 1,700,000
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 4,447,720 3,331,248
<SALES> 899,836 878,852
<TOTAL-REVENUES> 46,381,668 55,529,942
<CGS> 765,220 509,443
<TOTAL-COSTS> 46,247,052 55,160,533
<OTHER-EXPENSES> 5,027,693 2,342,610
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 516,948 499,840
<INCOME-PRETAX> (5,709,280) (2,724,131)
<INCOME-TAX> 2,684 3,014
<INCOME-CONTINUING> (5,711,964) (2,727,145)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,711,964) (2,727,145)
<EPS-BASIC> (1.74) (1.60)
<EPS-DILUTED> 0 0
</TABLE>
