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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
FOR THREE MONTH PERIOD ENDED AUGUST 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-24569
------------------------
CASH TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4558331
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
organization)
1434 W. 11THSTREET, LOS ANGELES, CA 90015
(Address of principal executive offices) (Zip Code)
(213) 745-2000
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter 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 [_].
------------------------
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
On October 1, 1999, there were 3,488,665 shares of common stock, $ .01 par
value, issued and outstanding.
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CASH TECHNOLOGIES, INC.
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
PAGE NO.
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of August 31, 1999, and 1998 (unaudited)................ 3
Consolidated Statements of Operations for the three month period ended
Aug 31, 1999, and 1998 (unaudited)..................................................... 4
Consolidated Statements of Cash Flows for the three month period ended
August 31, 1999, and 1998 (unaudited).................................................. 5
Notes to Consolidated Financial Statements for the three month period ended
August 31, 1999, and 1998.............................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................. 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................ 16
Item 2. Changes in Securities ....................................................................... 16
Item 3. Default Upon Senior Securities ............................................................ 17
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 17
Item 5. Other Information............................................................................ 17
Item 6. Exhibits and Reports on Form 8-K............................................................. 17
SIGNATURES.............................................................................................. 18
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASH TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AUGUST 31 MAY 31
1999 1999
---------------- ----------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 258,739 $ 1,028,586
Cash Restricted - 44,610
Accounts Receivable 233,970 136,277
Inventories 150,932 201,555
Prepaid expenses and other current assets 26,681 9,256
---------------- ----------------
Total Current Assets 670,323 1,420,284
COINBANK MACHINES HELD FOR SALE 1,559,287 1,577,065
PROPERTY AND EQUIPMENT (net) 1,310,129 1,393,689
OTHER ASSETS 252,159 56,682
---------------- ----------------
TOTAL ASSETS 3,791,898 4,447,720
================ ================
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Current maturities of Notes Payable 1,210,370 1,172,732
Current maturities of Capital Lease Obligations 30,355 42,563
Accounts Payable 726,120 208,620
Accrued expenses & other current liabilities 591,362 388,588
---------------- ----------------
Total Current Liabilities 2,558,208 1,812,503
Notes Payable less current maturities 2,244,197 2,564,723
Capital lease obligations less current maturities - -
COMMITMENTS AND CONTINGENCIES (Note 2)
STOCKHOLDERS EQUITY (DEFICIENCY):
Common Stock 34,887 34,887
Redeemable Preferred Stock 269,325 -
Additional Paid In Capital 11,540,125 11,323,780
Accumulated Deficit (12,854,844) (11,288,173)
---------------- ----------------
Total stockholders' equity (deficiency) (1,010,507) 70,494
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDER EQUITY (DEFICIENCY) $ 3,791,898 $ 4,447,720
================ ================
</TABLE>
See notes to condensed consolidated financial statements
3
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASH TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THREE MONTHS ENDED AUGUST 31
1999 1998
-------------------- ---------------------
(Unaudited) (Unaudited)
<S> <C> <C>
GROSS REVENUES* $ 10,818,265 $ 13,878,754
=================== ====================
NET REVENUES $ 295,853 249,431
COST OF REVENUES 326,066 166,572
------------------- --------------------
GROSS PROFIT (30,213) 82,859
SELLING, GENERAL, & ADMIN EXP. 1,389,709 935,192
DEPRECIATION & AMORTIZATION EXP. 17,671 56,949
------------------- --------------------
OPERATING LOSS (1,437,593) (909,282)
INTEREST EXPENSE 100,294 210,974
------------------- --------------------
LOSS BEFORE INCOME TAXES (1,537,887) (1,120,256)
INCOME TAXES 2,614 -
------------------- --------------------
NET LOSS (1,540,501) (1,120,256)
=================== ====================
Deemed Dividends to preferred Shareholders 80,569 -
Net income (loss) Allocable to common
shareholders (1,621,070) (1,120,256)
Basic and diluted net loss per share $ (0.46) $ (0.43)
Basic and diluted weighted average
shares of common stock outstanding 3,488,665 2,620,782
=================== =====================
</TABLE>
*Gross revenues include the value of coin and currency processed
and does not present revenue under generally accepted accounting principles
See notes to condensed consolidated financial statements
4
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASH TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THREE MONTHS ENDED AUGUST 31
1999 1998
------------------- -------------------
(Unaudited) (Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Loss $ (1,540,501) $ (1,120,256)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 53,642 56,949
Impairment of CoinBank Machines held for Sale 4,697 -
Changes in operating assets and liabilities:
Accrued interest - 29,325
Account receivable (97,693) 25,399
Inventories Coin/Currency 50,623 (101,041)
Inventories CoinBank Machines 42,998 0
Prepaid expenses and other current assets (17,426) (929)
Other assets 129,378 302,431
Accounts payable 517,500 (179,821)
Accrued expenses and other current liabilities 172,172 50,690
----------------- -----------------
Net cash provided (used) by operating activities (684,610) (937,253)
----------------- -----------------
INVESTING ACTIVITIES:
Property and Equipment - (111,673)
Restricted Cash 44,610 -
----------------- -----------------
Net cash provided (used) by investing activities 44,610 (111,673)
----------------- -----------------
FINANCING ACTIVITIES:
Deferred financing cost (134,000) (134,000)
Payments on capital lease obligation (12,208) (18,900)
Repayments on long-term debt (282,888) (1,610,866)
Net proceeds from issuance of common stock - 9,478,603
Net proceeds from issuance of preferred stock 299,250 -
----------------- -----------------
Net cash provided (used) by financing activities (129,846) 7,714,837
----------------- -----------------
CHANGE IN CASH AND CASH EQUIVALENTS
(769,846) 6,665,910
Cash, Beginning of period 1,028,586 210,723
----------------- ------------------
Cash, End of period $ 258,739 $ 6,876,633
================= ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes $ 2,614 $ -
Cash paid for interest $ 100,294 $ 185,575
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTION
Reclasssification of depreciation from
fixed assets-CoinBank machines $ 357,470 $ -
</TABLE>
See notes to condensed consolidated financial statements
5
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CASH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: GENERAL
PRESENTATION OF INTERIM INFORMATION:
- -----------------------------------
In the opinion of the management of Cash Technologies, Inc. (the
"Company"), the accompanying unaudited condensed consolidated financial
statements include all normal adjustments considered necessary to present fairly
the financial position as of August 31, 1999, and the results of operation and
cash flows for the three months ended August 31, 1999, and 1998. Interim results
are not necessarily indicative of results to be expected for any subsequent
quarter or for the entire fiscal year.
The condensed consolidated financial statements and notes are presented as
permitted by Form 10-QSB. These condensed financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission (the "SEC"). Certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been omitted pursuant to
such SEC rules and regulations. These financial statements should be read in
conjunction with the Company's audited financial statements and the accompanying
notes included in the Company's Form 10-KSB for the year ended May 31, 1999,
filed with the SEC. The results of operations for the three-month period ended
August 31, 1999, are not necessarily indicative of the results to be expected
for any subsequent quarter or for the entire fiscal year.
BASIS OF PRESENTATION:
- ---------------------
The unaudited condensed consolidated financial statements of Cash
Technologies, Inc. and its subsidiaries National Cash Processors Inc., CoinBank
Automated Systems, Inc. and CoinBank Automation Handels GmbH, Salzburg, Austria
(collectively, the "Company") included herein, reflect all adjustments,
consisting only of normal recurring adjustments which, in the opinion of
management are necessary to present fairly the Company's financial position,
results of operations and cash flows, for the periods presented.
NOTE 2. COMMITMENTS AND CONTINGENCIES
As previously disclosed, 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.
As previously disclosed, in August 1998, the Company entered into a three-
year distribution agreement with GBS, subject to successive one-year renewal
periods. Pursuant to that agreement 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
6
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number of cash processing machines from GBS over a specified period during the
initial three-year term of the April 1997, agreement.
As previously disclosed, in March 1999, the Company entered into a letter
of intent to acquire 51% of the capital stock of the GBS (the "Acquisition").
The parties are currently completing their due diligence and financial
statements while continuing to negotiate the terms of a definitive purchase
agreement, as well as side agreements such as the terms of the employment
agreements for key employees.
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. Additionally the Company and GBS are in dispute over certain matters
related to the license and manufacturing 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.
As previously disclosed, 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 U.S. 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.
As previously disclosed, 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.
On October 1, 1999, the Company and Coinstar agreed to settle all
outstanding litigation between them. Under the terms of the settlement, the
Company received payment of $600,000 and 30,000 shares of common stock of
Coinstar Inc. The Company granted Coinstar a non-exclusive license to certain
technology related to bulk coin processing and certain other rights. The parties
agreed to dismiss all claims in the suit with prejudice.
As previously disclosed, 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.
NOTE 3: STOCKHOLDERS EQUITY
In order to raise funds for working capital and development of E-
Commerce Message Management Architecture (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
7
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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 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 of 1933 or an exemption
therefrom. There are no assurances that the foregoing transaction will be
completed.
As of September 30, 1999 the Company has received gross proceeds from this
offering of approximately $725,000. The Company has issued or will issue (I)
76,125 shares of Series A 8% Cumulative Convertible Redeemable Preferred Stock
and (II) 32,809 Series A Common Stock Purchase Warrants (at $12.00 each).
The Company recorded Deemed Dividends of $80,569 for both the Preferred
Stock and Common Stock Purchase Warrants issued for the period. This amount was
based on (1) the difference between the closing market price and the offering
price of the Preferred Stock plus (ii) the value of the Warrants associated with
the Preferred Stock, value using the Black Scholes model.
The Company issued one hundred thousand (100,000) Stock Purchase Warrants
to Starr Securities at $10.375 each for services related to assisting the
Company with future capital transactions. These options have been valued at
$190,856 using the Black Scholes model and are recorded as deferred offering
costs.
NOTE 4: GOING CONCERN
The Company has prepared the financial statements included herewith
assuming that the Company will continue as a going concern. Although the Company
raised additional capital in 1998 and in 1999, it has not generated sufficient
revenue-producing activity to sustain its operations. Accordingly, the Company
must realize a satisfactory level of profitability from its current and future
operation in order to remain a viable entity. The Company's auditors have
included an explanatory paragraph in their report for the year ended May 31,1999
indicating there is substantial doubt regarding the Company's ability to
continue as a going concern. The accompanying consolidated financial statements
do no include any adjustments that might result from the outcome of any
uncertainty.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR STATEMENT
In addition to historical information, the information included in this Form 10-
QSB 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 "believe", "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.
DESCRIPTION OF BUSINESS
Cash Technologies, Inc., a Delaware Corporation, was incorporated in
August, 1995, however its coin processing operations were commenced by its now
wholly-owned subsidiary, National Cash Processors, Inc. ("NCP"), a Delaware
corporation which was incorporated in May, 1994. NCP became a subsidiary of the
Company in January 1996. The U.S. CoinBank operations are conducted through the
Company's wholly-owned subsidiary, CoinBank Automated Systems, Inc.("CAS"), a
Delaware corporation, incorporated in November 1995. The European CoinBank
operations are conducted through the Company's wholly-owned subsidiary CoinBank
Automation Handels GmbH, incorporated in Austria in February 1998. Unless the
context otherwise requires, references herein to the Company refer to Cash
Technologies, Inc. and its wholly-owned subsidiaries.
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 from CoinBank machine sales and the fees from the operation
of "free placement" self-service CoinBank Machines. The Company's expenses have
exceeded net revenues since inception. For the fiscal year ended May 31, 1997,
1998, and 1999, the Company sustained net losses of $1,547,805, $2,727,145 and
$5,711,964, respectively. The Company also incurred a net loss of $1,540,501 for
the quarter ended August 31, 1999.
9
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The Company is primarily focused on the development of its E-Commerce
Message Management Architecture (EMMA(TM)) transaction processing software and
its ATM-X(TM) enhanced ATM. This e-commerce system will provide transaction
processing for Internet and non-Internet based transactions such as electronic
bill payment, check cashing, the issuance of money orders, the issuance of pre-
paid phone cards and the dispensing of event tickets on automated teller
machines (ATMs), CoinBank machines and other similar devices. In addition to
this added functionality, an increased level of security will be added to
commercial Internet activities generated from personal computers.
The Company has also begun to market CoinBank machines for sale to retail
stores and is exploring distribution relationships with existing equipment
distribution leaders for the sale of the machines.
Because of its e-commerce systems development effort and CoinBank marketing
efforts, the Company will continue to be required to make certain up-front
expenditures. 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. The Company also records as revenue
the service fee charged to persons using CoinBank machines and revenues from the
sale of CoinBank machines. Gross revenues include the value of coin and currency
processed and do not represent revenue under generally accepted accounting
principles.
As previously stated the Company intends to concentrate 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 "free placement". Revenues generated from the
sale of CoinBank machines were approximately 22% of net revenues compared to fee
income from "free placement" which accounted for approximately 15% of net
revenues, for the three months ended August 31, 1999. The Company anticipates
that the revenues generated from the sale of CoinBank machines will continue to
be an increasing source of future revenues, while transaction and licensing fees
derived from the EMMA transaction processing system will eventually become the
largest source of the Company's future revenues.
The Company was awarded a contract to count, process and purchase currency
for the Los Angeles County Metropolitan Transportation Authority ("LACMTA") for
a fee of approximately 1% of all currency processed commencing on April 1, 1997,
and with subsequent renewals, ending on March 31, 2000. The Company expects to
purchase and process between $35 and $40 million dollars of currency on this
contract during fiscal 2000. The Company records as revenue the service fee
charged for the processing of currency. 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 1999 COMPARED TO THREE MONTHS ENDED AUGUST 31,
1998
Gross revenues include the value of the coins and currency processed as
well as CoinBank machine sales for the three months ended August 31, 1999, which
amounted to $10,818,265 compared to $13,878,754 for the comparable 1998 period.
The decrease in gross revenue was primarily attributable to the Company's
planned reduction of certain low margin commercial coin processing customers
during the second quarter of fiscal 1999 (September-November 1998). As a result
of the elimination of these commercial coin processing customers and the sale of
CoinBank machines, net revenues, for the 1999
10
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period, increased to $295,853, or 2.7% of gross revenues, compared to $249,431,
or 1.8% of gross revenues for 1998 period.
Cost of revenues for the three months ended August 31, 1999, was $326,066
compared to $166,572 during the comparable 1998 period. The increase in direct
costs was primarily the result of the reclassification of direct labor,
telephone and depreciation expenses into the Cost of Revenues from Selling,
General and Administrative Expenses; increased servicing costs associated with
the operation of CoinBank Automated Systems and the cost of CoinBank machines
sold during the period.
Gross profit (loss) for the three months ended August 31, 1999, was
$(30,213) compared to $82,859 for the three months ended August 31, 1998. Gross
profit was negatively impacted by the reclassification of SG&A expenses and
increased cost of CoinBank operations referred to in Cost of Revenues. This
decrease was partially offset by a positive contribution from CoinBank machine
sales as well as reductions in direct labor and supply costs associated with the
elimination of low margin commercial coin processing customers referred to in
Gross Revenues.
Selling, General and Administrative expenses for the three months ended
August 31, 1999, increased to $1,389,709 compared to $950,795 for the three
months ended August 31, 1998. These expenses consist 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 during the period were primarily
attributable to approximately $250,000 increased systems development costs
associated with development of the EMMA transaction processing system and
increased spending for professional services and indirect labor.
Depreciation and amortization expenses for the three months ended August
31, 1999, and 1998, were $17,671 and $56,85. The decrease in depreciation was
the result of reclassifying depreciation into Cost of Revenues. Interest expense
for the three months ended August 31, 1999, and 1998, were $100,294 and
$195,140. The decrease in interest expense was due to reduced debt early in
fiscal 1999.
As a result of the foregoing, net losses for the three months ended August
31, 1999, and 1998, were $1,540,501 and $1,120,25.
THREE MONTHS ENDED AUGUST 31, 1998 COMPARED TO THREE MONTHS ENDED AUGUST 31,
1997
The gross revenues include the value of the coins and currency processed
for the three months ended August 31, 1998, amounted to $13,878,754, compared to
$14,550,545, for the comparable 1997 period. The decrease in coin and currency
processed was primarily attributable to the Company's reduction in low profit
transactions for certain vending companies and normal periodic fluctuations in
the value of currency processed for the LACMTA during the three month period. As
a result of the foregoing, net revenues for the three months ended August 31,
1998, decreased to $249,431 compared to $251,785, for the comparable 1997
period.
Cost of revenues for the three months ended August 31, 1998, was $166,572,
compared to $185,223, in the comparable 1997 period, reflecting primarily an
increase in margins on currency processing
Gross profit for the three months ended August 31, 1998, was $ 82,859
compared to the gross profit of $66,562 in the comparable 1996 period. The
increase in gross profit was due to increases in profit margin on currency
processing.
11
<PAGE>
Selling, general and administrative expenses for the three months ended
August 31, 1998, increased to $950,795, compared to expenses of $442,668, for
the three months ended August 31, 1997. Such expenses consisted of facility
costs, 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 expanded its operations and customer base.
Depreciation and amortization expenses for the three months ended August
31, 1998, and 1997, were $56,852 and $67,163. Interest expense, net, for the
three months ended August 31, 1998, and 1997, were $195,140 and $103,044,
respectively. The increase in interest expense was due to a higher level of
outstanding indebtedness associated with equipment acquired during the 1998
period.
As a result of the foregoing, net losses for the three months ended August
31, 1998, and 1997, were $1,120,256 and $546,312, respectively.
12
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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 August 31, 1999, the Company had a working capital deficit of
$1,887,885 and unrestricted cash and cash equivalents of $258,739 compared to
working capital of $5,248,148 and unrestricted cash and cash equivalents of
$6,876,633 at August 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 $684,610 for the quarter ended
August 31, 1999, as compared to net cash used in operating activities of
$937,253 for the quarter ended August 31, 1998. The decrease in net cash used in
operating activities during the 1999 period was primarily the result of
increases in: accounts receivable $97,693, accounts payable $517,500 and accrued
expenses and other current Liabilities $172,172.
Net cash provided by investing activities was $44,610 for the quarter ended
August 31, 1999, as compared to net cash used by investing activities of
$111,673 for the quarter ended August 31, 1998. The increase in net cash
provided in investing activities was attributable to no additional purchases of
equipment and release of restricted cash.
Net cash used in financing activities for the quarter ended August 31,
1999, was $129,846, as compared to net cash provided by financing activities of
$7,714,737 for the quarter ended August 31, 1998. The $129,846 was primarily a
result of financing cost and debt repayment offset by proceeds from the private
offering outlined below. The increase in net cash provided by financing
activities for the 1998 period was primarily attributable to the Company's
Initial Public Offering plus the exercise of the over allotment option, which
netted approximately $9.5 million.
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 a 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 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 6
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
13
<PAGE>
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 an additional
financing will become available to the Company when needed, on commercially
reasonable terms, or at all.
As of September 30, 1999, the Company has received gross proceeds from this
offering of approximately $725,000. The Company has issued or will issue (I)
76,125 shares of Series A 8% Cumulative Convertible Redeemable Preferred Stock
and (II) 32,809 Series A Common Stock Purchased Warrants (at $12.00 each).
On October 1, 1999, the Company and Coinstar agreed to settle all
outstanding litigation between them. Under the terms of the settlement, the
Company received payment of $600,000 and 30,000 shares of common stock of
Coinstar Inc. The Company granted Coinstar a non-exclusive license to certain
technology related to bulk coin processing and certain other rights. The parties
agreed to dismiss all claims in the suit with prejudice.
As previously disclosed the Company continues to be 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.
The Company continues to suffer recurring losses from operations as of
August 31, 1999, and has not generated sufficient revenue producing activity to
sustain its operations. The Company's independent certified public accountants
have included a modification to their opinion, which indicated there is
substantial doubt about the Company's ability to continue as a going concern.
The Company is attempting to raise additional capital to meet future working
capital requirement and launch new products, but may not be able to do so.
Should the Company not be able to raise additional capital, it may have to
curtail operations.
14
<PAGE>
YEAR 2000 EFFECT
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 its 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 such, 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
such, and the Company does not intend to prepare such plans.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed, 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 U.S. Patent No. 5,564,546. 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.
As previously disclosed, 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 [Adenied 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 then filed a
motion for summary judgment of invalidity and non-infringement of the 767
patent.
On October 1, 1999, the Company and Coinstar agreed to settle all
outstanding litigation between them. Under the terms of the settlement, the
Company received payment of $600,000 and 30,000 shares of common stock of
Coinstar Inc. The Company granted Coinstar a non-exclusive license to certain
technology related to bulk coin processing and certain other rights. The parties
agreed to dismiss all claims in the suit with prejudice.
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.
ITEM 2. CHANGE IN 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 a 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 in reliance upon the availability of an exemption from
16
<PAGE>
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. As of September 30, 1999, the Company has
received gross proceeds from this offering of approximately $725,000. The
Company has issued or will issue (I) 76,125 shares of Series A 8% Cumulative
Convertible Redeemable Preferred Stock and (II) 32,809 Series A Common Stock
Purchased Warrants (at $12.00 each).
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
- ----------- -----------
3.1 (a) Certificate of Designation for Series A 8% Cumulative
Convertible Preferred Stock.
4.3 Form of Series A Redeemable Warrants
27 Article 5 of Regulation S-X
(b) Reports on Form 8-K
None
17
<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 on Form 10QSB for the
fiscal quarter ended August 31, 1999, to be signed on its behalf by the
undersigned, thereunto duly authorized the 15th day of October 1999.
CASH TECHNOLOGIES, INC.
By: /S/ Bruce Korman
- ----------------------------------------
Bruce Korman
President and Chief Executive Officer
By: /S/ Robert M. Gielow
- ----------------------------------------
Robert M. Gielow
Chief Financial Officer
18
<PAGE>
CASH TECHNOLOGIES, INC.
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1 (a) Certificate of Designation for Series A 8% Cumulative
Convertible Preferred Stock.
4.3 Form of Series A Redeemable Warrants
27 Article 5 of Regulation S-X
<PAGE>
Exhibit 3.1 (a)
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON
EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR (ii) UPON THE DELIVERY BY THE
HOLDER TO THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO
COUNSEL FOR THE COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH
ACT IS AVAILABLE.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME, ____________, 2002
No. Series A ___ ______ Warrants
CASH TECHNOLOGIES, INC.
SERIES A REDEEMABLE COMMON STOCK PURCHASE WARRANT
This warrant certificate (the "Warrant Certificate") certifies that
______________ or registered assigns, is the registered holder of warrants to
purchase up to _____ fully-paid and non-assessable shares, subject to adjustment
in accordance with Article 6 hereof (the "Warrant Shares"), of the common stock
(the "Common Stock"), par value $.01 per share, of CASH TECHNOLOGIES, INC., a
Delaware corporation (the "Company"), subject to the terms and conditions set
forth herein. The warrants represented by this Warrant Certificate and any
warrants resulting from a transfer or subdivision of the warrants represented by
this Warrant Certificate shall sometimes hereinafter be referred to,
individually, as a "Warrant" and, collectively, as the "Warrants." This Warrant
Certificate is one of a series of Series A Warrant Certificates being issued as
part of a private offering (the "Offering") pursuant to the Company's
Confidential Private Offering Memorandum, dated July 27, 1999.
<PAGE>
1. Exercise Period; Exercise Price; Exercise of Warrants.
-----------------------------------------------------
1.1. Exercise Period. Each Warrant is exercisable at any time
---------------
commencing on the date hereof (the "Exercise Date") until 5:00 P.M. New York
City time on ______, 2002 [3 years from the issue date] (the "Expiration Date").
1.2. Initial and Adjusted Exercise Price. Each Warrant is initially
-----------------------------------
exercisable to purchase one Warrant Share at an initial exercise price equal to
$12.00 per share, subject to adjustment to prevent dilution. The adjusted
exercise price shall be the price which shall result from time to time from any
and all adjustments of the initial exercise price in accordance with the
provisions of Section 6 hereof. The term "Exercise Price" herein shall mean the
initial exercise price or the adjusted exercise price, depending upon the
context.
1.3. Method of Exercise. The rights represented by this Warrant are
------------------
exercisable upon the terms and conditions set forth herein at the option of the
Holder in whole at any time and in part from time to time. The Exercise Price
shall be payable in cash, by wire transfer or by certified check to the order of
the Company, or any combination of cash, wire transfer or certified check. Upon
surrender of this Warrant Certificate with the annexed Form of Election to
Purchase duly executed, together with payment of the Exercise Price (as
hereinafter defined) for the Warrant Shares purchased, at the Company's
principal offices (presently located at 1434 West 11th Street, Los Angeles, CA
90015) the registered holder of the Warrant Certificate ("Holder" or "Holders")
shall be entitled to receive a certificate or certificates for the Warrant
Shares so purchased. The purchase rights represented by this Warrant Certificate
are exercisable at the option of the Holder hereof, in whole or in part (but not
as to fractional shares of Common Stock). In the case of the purchase of less
than all the Warrant Shares purchasable under this Warrant Certificate, the
Company shall cancel this Warrant Certificate upon the surrender thereof and
shall execute and deliver a new Warrant Certificate of like tenor for the
balance of the Warrant Shares purchasable hereunder.
2. Issuance of Certificates. Upon the exercise of the Warrants, the
------------------------
issuance of certificates for the Warrant Shares purchased pursuant to such
exercise shall be made forthwith (and in any event within ten business days
thereafter) without charge to the Holder thereof including, without limitation,
any tax which may be payable in respect of the initial issuance thereof, and
such certificates shall (subject to the provisions of Article 3 hereof) be
issued in the name of, or in such names as may be directed by, the Holder
thereof; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the issuance and
delivery of any such certificates in a name other than that of the Holder and
the Company shall not be required to issue or deliver such certificates unless
or until the person or persons requesting the issuance thereof shall have paid
to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid and shall have
established to the satisfaction of the Company that such transfer is in
compliance with all applicable securities laws.
<PAGE>
The Warrant Certificates and, upon exercise of the Warrants, the
certificates representing the Warrant Shares shall be executed on behalf of the
Company by the manual or facsimile signature of those officers required to sign
such certificates under applicable law.
3. Restriction on Transfer of Warrants.
-----------------------------------
3.1. Agreement that Warrant Acquired for Investment. The Holder of
----------------------------------------------
this Warrant Certificate, by its acceptance thereof, covenants and agrees that
the Warrants and the Warrant Shares issuable upon exercise of the Warrants are
being acquired as an investment and not with a view to the distribution thereof.
The Holder also understands that neither the Warrants nor the Warrant Shares
have been registered under the Securities Act of 1933, as amended (the "Act").
Neither this Warrant nor any Warrant Share may be offered for sale or
sold, or otherwise transferred or disposed of in any transaction which would
constitute a sale thereof within the meaning of the Securities Act of 1933, as
amended (the "Act"), unless (i) such security has been registered for sale under
the Act and registered or qualified under applicable state securities laws
relating to the offer and sale of securities, or (ii) exemptions from the
registration requirements of the Act and the registration or qualification
requirements of all such state securities laws are available and the Company
shall have received an opinion of counsel satisfactory to the Company that the
proposed sale or other disposition of such securities may be effected without
registration under the Act and would not result in any violation of any
applicable state securities laws, such counsel and such opinion to be reasonably
satisfactory to the Company.
3.2. Legend Requirement. This Warrant Certificate and, upon exercise
------------------
of the Warrants, in part or in whole, certificates representing the Warrant
Shares shall bear a legend substantially similar to the following:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended ("Act"),
and may not be offered or sold except (i) pursuant to an
effective registration statement under the Act or (ii) upon the
delivery by the holder to the Company of an opinion of counsel,
reasonably satisfactory to counsel to the Company, stating that
an exemption from registration under such Act is available."
2
<PAGE>
4. Registration Rights.
-------------------
4.1. Automatic Registration;Holding Period. The Company shall use its
-------------------------------------
best efforts to file with the Securities and Exchange Commission a registration
statement within 180 days of the final closing of the Offering to allow the
resale by the holder of this Warrant of the Warrant Shares. The Company shall
give written notice by mail, at least 30 days prior to the filing of the
registration statement to each Holder of the Warrants and/or the Warrant Shares
of its intention to do so file the registration statement.
Notwithstanding the provisions of this Section 4, each Holder agrees
--------------------------------------------------------------------
that although a registration statement for the resale of the Warrant Shares may
- -------------------------------------------------------------------------------
have been declared effective by the Securities and Exchange Commission, he shall
- --------------------------------------------------------------------------------
not sell, transfer, pledge or assign any Warrant Shares prior to a date which is
- --------------------------------------------------------------------------------
365 days from the final closing of the Offering without the prior written
- -------------------------------------------------------------------------
consent of the Company.
- ----------------------
4.3. Covenants of the Company With Respect to Registration. In
-----------------------------------------------------
connection with any registration under Section 4 hereof, the Company covenants
and agrees as follows:
(a) The Company shall use its best efforts to have any registration
statements filed with the SEC including the Warrant Shares declared effective at
the earliest possible time, and shall furnish each Holder desiring to sell
Warrant Shares such number of prospectuses as shall reasonably be requested. The
Company shall keep effective any registration or qualification contemplated by
this Section 4 and shall from time to time amend or supplement each applicable
registration statement, preliminary prospectus, final prospectus, application,
document and communication for a period of time equal to the earlier of (i) the
date that all of the Warrant Shares have been sold pursuant to the registration
statement or (ii) the date the Holders receive an opinion of counsel that the
Warrant Shares may be sold under Rule 144(k) or (iii) the third anniversary of
the effective date of the registration statement.
(b) The Company shall pay all costs (excluding fees and expenses of
Holder(s) counsel, accounting and any underwriting or selling commissions), fees
and expenses in connection with all registration statements filed pursuant to
Sections 4 hereof including, without limitation, the Company's legal and
accounting fees, printing expenses, blue sky fees and expenses; provided that
the Company shall not be responsible for transfer taxes, fees and disbursement
of accountants and counsel for Holders, and other related selling expenses
incurred by Holders.
(c) The Company will use reasonable efforts to qualify the Warrant
Shares included in a registration statement for offering and sale under the
securities or blue sky laws of such states as reasonably are requested by the
Holder(s), provided that the Company shall not be obligated to execute or file
any general consent to service of process or to qualify as a foreign corporation
to do business under the laws of any such jurisdiction or to subject itself to
taxation in any such jurisdiction.
(d) (i) Subject to the conditions set forth below, the Company agrees
to indemnify and hold harmless the Holder, any holder of any of the Warrant
Shares, their officers, directors, partners, employees, agents and counsel, and
each person, if any, who controls any such person within the meaning of Section
15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as
amended
3
<PAGE>
(the "Exchange Act"), from and against any and all loss, liability, charge,
claim, damage and expense whatsoever (which shall include, for all purposes of
this paragraph 4(d), but not be limited to, reasonable attorneys' fees and any
and all expense whatsoever reasonably incurred, and any and all amounts paid in
settlement of any claim or litigation), as and when incurred, arising out of,
based upon, or in connection with (A) any untrue statement or alleged untrue
statement of a material fact contained (Y) in any registration statement, final
prospectus, or any amendment or supplement thereto, or (Z) in any application or
other document or communication (in this paragraph 4(d) collectively called an
"application") executed by or on behalf of the Company filed in any jurisdiction
in order to register or qualify any of the Warrant Shares under the securities
or blue sky laws thereof; or any omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, unless such statement or omission was made in reliance
upon and in conformity with written information furnished to the Company with
respect to the Holder or any holder of any of the Warrant Shares by or on behalf
of such Holder or such other holder expressly for inclusion in any such
registration or final prospectus, or any amendment or supplement thereto, or in
any application, as the case may be, or (B) any breach of any representation,
warranty, covenant or agreement of the Company contained in this Warrant.
(ii) Promptly after receipt by any person in respect of which
indemnity may be sought pursuant to this Section 4 (an "Indemnified Party") of
notice of any claim or the commencement of any action, the Indemnified Party
shall, if a claim in respect thereof is to be made against the person against
whom such indemnity may be sought (an "Indemnifying Party") notify the
Indemnifying Party in writing of the claim or the commencement of such action;
provided that the failure to notify the Indemnifying Party shall not relieve it
from any liability which it may have to an Indemnified Party otherwise than
under this Section 4(d) except to the extent of any actual prejudice resulting
therefore. If any such claim or action shall be brought against an Indemnified
Party and it shall notify the Indemnifying Party thereof, the Indemnifying Party
shall be entitled to participate therein, and, to the extent that it wishes,
jointly with any other similarly notified Indemnifying Party, to assume the
defense thereof with counsel reasonably satisfactory to the Indemnified Party.
After notice from the Indemnifying Party to the Indemnified Party of its
election to assume the defense of such claim or action, the Indemnifying Party
shall not be liable to the Indemnified Party for any legal or other expenses
subsequently incurred by the Indemnified Party in connection with the defense
thereof other than reasonable costs of investigation; provided that the
Indemnified Party shall have the right to employ separate counsel to represent
the Indemnified Party in connection with any claim in respect of which indemnity
may be sought by the Indemnified Party against the Indemnifying Party, but the
fees and expenses of such counsel shall be for the account of such Indemnified
Party unless (A) the Indemnifying Party and the Indemnified Party shall have
mutually agreed in writing to the retention of such counsel or (B) the
Indemnifying Party shall not have assumed the defense thereof with counsel
reasonably satisfactory to the Indemnified Party or (C) in the opinion of
counsel to such Indemnified Party, representation of both parties by the same
counsel would be inappropriate due to actual or
4
<PAGE>
potential conflicts of interest between them, it being understood however, that
the Indemnifying Party shall not, in connection with any one such claim or
action or separate but substantially similar or related claims or actions In the
same jurisdiction arising out of the same allegations or circumstances, be
liable for the fees and expenses of mote than one separate firm of attorneys
(together with local counsel) at any time for all Indemnified Parties. No
Indemnifying Party shall, without the prior written consent of the Indemnified
Party, effect any settlement of any claim or pending or threatened proceeding in
respect of which the Indemnified Party is or could have been a party and
indemnity could have been sought hereunder by such Indemnified Party and such
settlement includes an unconditional release of such Indemnified Party from all
liability arising out of such claim or proceeding. Whether or not the defense of
any claim or action is assumed by the Indemnifying Party, such Indemnifying
Party will not be subject to any liability for any settlement made without its
consent, which consent will not be unreasonably withheld.
(iii) The Holder and any other holder of Warrant Shares agrees
to indemnify and hold harmless the Company, its officers, directors, employees,
accountants, agents or counsel and each other person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, to the same extent as the foregoing indemnity from the Company to
the Holder and such other holder in paragraph 4(d), but only with respect to
statements or omissions, if any, made in any registration statement, preliminary
prospectus, or final prospectus (as from time to time amended and supplemented),
or any amendment or supplement thereto, or in any application, in reliance upon
and in conformity with written information furnished to the Company with respect
to the Holder or such other holder or their plan of distribution, by or on
behalf of the Holder or such other holder expressly for inclusion in any such
registration statement, preliminary prospectus, or final prospectus, or any
amendment or supplement thereto, or in any application, as the case may be. If
any action shall be brought against the Company or any other person so
indemnified based on any such registration statement, preliminary prospectus, or
final prospectus, or any amendment or supplement thereto, or in any application,
and in respect of which indemnity may be sought against the Holder pursuant to
this paragraph 4(d) (iii), the Holder and such other holder shall have the
rights and duties given to the Company, and the Company and each other person so
indemnified shall have the rights and duties given to the indemnified parties,
by the provisions of paragraph 4(d)(i).
(e) Nothing contained in this Agreement shall be construed as requiring
the Holder(s) to exercise their Warrants prior to the initial filing of any
registration statement or the effectiveness thereof.
(f) The Company as soon as practicable, but in any event not later than
45 days after the end of the 12-month period beginning on the day after the end
of the fiscal quarter of the Company during which the effective date of the
registration statement occurs (90 days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year), shall make generally available
to its security holders, in the manner specified in Rule 158(b) of the Rules and
Regulations, and to the Holder, an earnings statement which will be in the
detail required by, and will otherwise comply with, the
5
<PAGE>
provisions of Section 11(a) of the Act and Rule 158(a) of the Rules and
Regulations, which statement need not be audited unless required by the Act,
covering a period of at least 12 consecutive months after the effective date of
the Registration Statement.
(g) In connection with the registration of the Warrant Shares, the
Holders shall have the following obligations:
(i) It shall be a condition precedent to the
obligations of the Company to complete the registration
pursuant to this Agreement with respect to the Warrant shares
of a particular Holder that such Holder shall furnish to the
Company such information in writing regarding itself, the
Warrant Shares held by it, and the intended method of
disposition of the Warrant Shares held by it, as shall be
reasonably required to effect the registration of such Warrant
Shares, including without limitation a statement as to the
number of Warrant Shares proposed to be sold and the intended
method(s) of distribution and a statement of the firm intent
of such Holder to offer Warrant Shares for sale. In addition,
each Holder shall execute such other documents in connection
with such registration as the Company may reasonably request.
At least five (5) days prior to the first anticipated filing
date of the Registration Statement, the Company shall notify
each Holder of the information the Company requires from each
such Holder (the "Requested Information"). If at least 5
business days prior to the effective date of the registration
statement the Company has not received the Requested
Information from a Holder (a "Non-Responsive Holder"), then
the Company may request effectiveness of the Registration
Statement without including securities of such Non-Responsive
Holder;
(ii) Each Holder, by such Holder's acceptance of the
Warrant Shares, agrees to cooperate with the Company as
reasonably requested by the Company in connection with the
preparation and filing of the Registration Statement
hereunder; and
(iii) Each Holder agrees that, upon receipt of any
notice from the Company of (A) the happening of any event as a
result of which the prospectus included in the registration
statement, as then in effect, includes an untrue statement of
a material fact or omits to state a material fact required to
be stated therein or necessary to make the statements therein
in light of the circumstances under which they were made, not
misleading; or (B) the issuance by the SEC of any stop order
or other suspension of the effectiveness of the registration
statement, such Holder will immediately discontinue
disposition of Warrant Shares pursuant to the Registration
Statement covering such Warrant Shares until such Holder's
receipt of the copies of a supplemented or amended Prospectus
in the case of all event described in clause (A) above, or a
notice of the removal of any suspension in the case of an
event described in clause (B) above. If so directed by the
Company, such Holder shall deliver to the Company or destroy
(and deliver to the Company a certificate of destruction) all
copies in such Holder's
6
<PAGE>
possession of the prospectus covering such Warrant Shares at
the time of receipt of such notice.
5. Redemption of Warrants. The Company may, subject to the
----------------------
conditions set forth herein, redeem all, but not less than all, the Warrants
then outstanding upon not less than thirty (30) days nor more than sixty (60)
days prior written notice to the Warrant Holders at any time commencing 180
days from the Exercise Date, provided: (i) the closing bid price of the
Company's Common Stock for twenty (20) consecutive trading days ending within
ten (l0) days of the date of the notice of redemption is at least $20.00 per
share and (ii) all of the Warrant Shares have been registered for resale and
continue to be covered by an effective and current registration statement with
the Securities and Exchange Commission. Notice will be effective upon mailing
and the time of mailing is the "Effective Date of the Notice". The Notice will
state a redemption date not less than thirty (30) days nor more than sixty (60)
days from the Effective Date of the Notice (the "Redemption Date"). No Notice
shall be mailed unless all funds necessary to pay for redemption of all Warrants
then outstanding shall have first been set aside by the Company in trust with an
independent third party for the benefit of all Warrant Holders so as to be and
continue to be available therefor. The redemption price to be paid to the
Warrant Holders will be $.01 for each share of Common Stock of the Company to
which the Warrant Holder would then be entitled upon exercise of the Warrant
being redeemed, as adjusted from time to time as provided herein (the
"Redemption Price"). The Warrant Holders may exercise their Warrants between the
Effective Date of the Notice and 5:00 pm on the Redemption Date, such exercise
being effective if done in accordance with Section 1 hereof, and if the Warrant
Certificate, with form of election to purchase duly executed and the Warrant
Price, as applicable for such Warrant subject to redemption for each share of
Common Stock to be purchased is actually received by the Company at its
principal offices prior to 5:00 p.m. eastern standard time on the Redemption
Date.
If any Warrant Holder does not wish to exercise any Warrant
being redeemed, he should mail such Warrant to the Company at its principal
offices after receiving the Notice of Redemption required by this Section 5. If
such Notice of Redemption shall have been so mailed, and if on or before the
Effective Date of the Notice all funds necessary to pay for redemption of all
Warrants then outstanding shall have been set aside by the Company for the
benefit of all Warrant Holders so as to be and continue to be available
therefor, then, on and after said Redemption Date, notwithstanding that any
Warrant subject to redemption shall not have been surrendered for redemption,
the obligation evidenced by all Warrants not surrendered for redemption or
effectively exercised shall be deemed no longer outstanding, and all rights with
respect thereto shall forthwith cease and terminate, except only the right of
the holder of each Warrant subject to redemption to receive the Redemption Price
for each share of Common Stock to which he would be entitled if he exercised the
Warrant upon receiving notice of redemption of the Warrant subject to redemption
held by him.
6. Adjustments of Exercise Price and Number of Warrant Shares.
----------------------------------------------------------
6.1. Dividends and Distributions. In case the Company shall at any
---------------------------
time after the date hereof pay a dividend in Common Stock or make a distribution
in Common Stock, then upon such
7
<PAGE>
dividend or distribution, the Exercise Price in effect immediately prior to such
dividend or distribution shall be reduced to a price determined by dividing an
amount equal to the total number of shares of Common Stock outstanding
immediately prior to such dividend or distribution multiplied by the Exercise
Price in effect immediately prior to such dividend or distribution, by the total
number of shares of Common Stock outstanding immediately after such issuance or
sale. No adjustments shall be made for any cash dividends on shares issuable
upon exercise of the Warrants. For purposes of any computation to be made in
accordance with the provisions of this Section 6.1, the shares of Common Stock
issuable by way of dividend or distribution shall be deemed to have been issued
immediately after the opening of business on the date following the date fixed
for determination of stockholders entitled to receive such dividend or
distribution.
6.2. Subdivision and Combination. In case the Company shall at any
---------------------------
time subdivide or combine the outstanding Common Stock, the Exercise Price shall
forthwith be proportionately decreased on the effective date of any subdivision
or increased on the effective date of any combination.
6.3. Reclassification, Consolidation, Merger. etc. In case of any
--------------------------------------------
reclassification or change of the outstanding Common Stock (other than a change
in par value to no par value, or from no par value to par value, or as a result
of a subdivision or combination), or in the case of any consolidation of the
Company with, or merger of the Company into, another corporation (other than a
consolidation or merger in which the Company is the surviving corporation and
which does not result in any reclassification or change of the outstanding
Common Stock, except a change as a result of a subdivision or combination of
such shares or a change in nominal value, as aforesaid), or in the case of a
sale or conveyance to another corporation of the property of the Company as an
entirety, the Holder shall thereafter have the right to purchase the kind and
number of shares of stock and other securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance as if the
Holder were the owner of the Warrant Shares issuable upon exercise of the
Warrants immediately prior to any such events at a price equal to the product of
(x) the number of Warrant Shares issuable upon exercise of the Warrants and (y)
the Exercise Price in effect immediately prior to the record date for such
reclassification, change, consolidation, merger, sale or conveyance as if such
Holder had exercised the Warrants.
6.4. Determination of Outstanding Shares. The number of the shares
-----------------------------------
of Common Stock at any one time outstanding shall include the aggregate number
of shares issued or issuable upon the exercise of outstanding options, rights,
warrants and upon the conversion or exchange of outstanding convertible or
exchangeable securities.
7. Exchange and Replacement of Warrant Certificates. This Warrant
------------------------------------------------
Certificate is exchangeable without expense, upon the surrender hereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Shares in such denominations as
shall be designated by the Holder thereof at the time of such surrender.
8
<PAGE>
Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this Warrant
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
the Warrants, if mutilated, the Company will make and deliver a new Warrant of
like tenor, in lieu thereof and any such lost, stolen, destroyed or mutilated
warrant shall thereupon become void.
8. Elimination of Fractional Interests. The Company shall not be
-----------------------------------
required to issue certificates representing fractions of the shares of Common
Stock and shall not be required to issue scrip or pay cash in lieu of fractional
interests, it being the intent of the parties that all fractional interests
shall be eliminated by rounding any fraction up or down to the nearest whole
number of shares of Common Stock.
9. Reservation of Shares. The Company covenants and agrees that
---------------------
it will at all times reserve and keep available out of its authorized share
capital, solely for the purpose of issuance upon the exercise of the Warrants,
such number of shares of Common Stock as shall be equal to the number of Warrant
Shares issuable upon the exercise of the then outstanding Warrants, for issuance
upon such exercise, and that, upon exercise of the Warrants and payment of the
Exercise Price therefor, all Warrant Shares issuable upon issuance in accordance
with the terms hereof shall be duly and validly issued, fully paid,
nonassessable and not subject to the preemptive rights of any stockholder.
10. Rights of Warrant Holders. Nothing contained in this Agreement
-------------------------
shall be construed as conferring upon the Holder any rights whatsoever as a
stockholder of the Company, either at law or in equity, including without
limitation, or Holders the right to vote or to consent or to receive notice as a
stockholder in respect of any meetings of stockholders for the election of
directors the right to receive dividends or any other matter. Notwithstanding
the foregoing, if at any time prior to the expiration of the Warrants and their
exercise, any of the following events shall occur:
(a) The Company shall take a record of the holders of its
Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or distribution
payable otherwise than out of current or retained earnings, as indicated by the
accounting treatment of such dividend or distribution on the books of the
Company; or
(b) The Company shall offer to all the holders of its Common
Stock any additional Common Stock or other shares of capital stock of the
Company or securities convertible into or exchangeable for Common Stock or other
shares of capital stock of the Company, or any option, right or warrant to
subscribe therefor; or
(c) A dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety shall be
proposed; or
(d) Reclassification or change of the outstanding Common Stock
(other than a change in par value to no par value, or from no par value to par
value, or as a result of a subdivision or combination), consolidation of the
Company with, or merger of the Company into, another corporation
9
<PAGE>
(other than a consolidation or merger in which the Company is the surviving
corporation and which does not result in any reclassification or change of the
outstanding Common Stock, except a change as a result of a subdivision or
combination of such shares or a change in par value, as aforesaid), or a sale or
conveyance to another corporation of the property of the Company as an entirety
is proposed; or
(e) The Company or an affiliate of the Company shall propose
to issue any rights to subscribe for Common Stock or any other securities of the
Company or of such affiliate to all the stockholders of the Company; then, in
any one or more of said events, the Company shall give written notice of such
event at least fifteen (15) days prior to the date fixed as a record date or the
date of closing the transfer books for the determination of the stockholders
entitled to such dividend, distribution, convertible or exchangeable securities
or subscription rights, options or warrants, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall specify
such record date or the date of closing the transfer books, as the case may be.
Failure to give such notice or any defect therein shall not affect the validity
of any action taken in connection with the declaration or payment of any such
dividend or distribution, or the issuance of any convertible or exchangeable
securities or subscription rights, options or warrants, or any proposed
dissolution, liquidation, winding up or sale.
11. Notices. All notices, requests, consents and other
--------
communications hereunder shall be in writing and shall be deemed to have been
duly made when delivered, or mailed by registered or certified mail, return
receipt requested:
(a) If to a registered Holder of the Warrants, to the address
of such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 1
of this Agreement or to such other address as the Company may designate by
notice to the Holders.
12. Successors. All the covenants and provisions of this Agreement
-----------
by or for the benefit of the Company and the Holders inure to the benefit of
their respective successors and assigns hereunder.
13. Governing Law. This Agreement shall be deemed to have been
-------------
made and delivered in the State of Delaware and shall be governed as to
validity, interpretation, construction, effect and in all other respects by the
laws of the State of Delaware.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
duly executed, as of the _______day of _______, 1999.
[SEAL] CASH TECHNOLOGIES, INC.
By:_______________________________
Bruce Korman
President
Attest:
- ------------------
Robert Gielow
Secretary
10
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ________ Warrant Shares and
herewith tenders in payment for such Warrant Shares cash or a check payable to
the order of Cash Technologies, Inc. in the amount of $_________, all in
accordance with the terms hereof. The undersigned requests that a certificate
for such Warrant Shares be registered in the name of ___________________, whose
address is ______________ and that such certificate be delivered to __________,
whose address is _____________________________________________________________.
Dated:___________________________ Signature:______________________
(Signature must conform
in all respects to name
of holder as specified on
the face of the Warrant
Certificate.)
(Insert Social Security or Other
Identifying Number of Holder)
11
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED _____________________ hereby sells, assigns
and transfers unto ________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint , Attorney, to transfer the
within Warrant Certificate on the books of Cash Technologies, Inc., with full
power of substitution.
Dated:____________________________ Signature:___________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate)
(Insert Social Security or Other
Identifying Number of Assignee)
12
<PAGE>
Exhibit 4.3
CASH TECHNOLOGIES, INC.
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND
RIGHTS AND NUMBER OF SHARES OF SERIES A
8% CUMULATIVE CONVERTIBLE PREFERRED STOCK
Pursuant to Section 151 of the
Delaware General Corporation Law
The undersigned President and Secretary, respectively, of CASH
TECHNOLOGIES, INC., a Delaware corporation (the "Corporation") certify that
pursuant to authority granted to and vested in the Board of Directors of the
corporation by the provisions of the Certificate of Incorporation and in
accordance with the provisions of Section 151 of the General Corporation Law of
the State of Delaware, its Board of Directors has duly adopted the following
resolutions creating the Series A 8% Cumulative Convertible Preferred Stock:
RESOLVED, that pursuant to the authority vested in the Board of
Directors of the corporation of the Corporation's Certificate of Incorporation,
a series of preferred stock of the corporation be, and it hereby is, created out
of the 1,000,000 shares of authorized but unissued shares of the preferred
stock, par value $.01 per share, of the Corporation, such series to be
designated Series A 8% Cumulative Convertible Preferred Stock (the "Series A
Preferred Stock"), to consist of 525,000 shares, par value $.01 per share, of
which the preferences and relative and other rights, and the qualifications,
limitations or restrictions thereof, shall be (in addition to those set forth in
the Corporation's Certificate of Incorporation) as follows:
(1) Certain Definitions
-------------------
Unless the context otherwise requires, the terms defined in this
paragraph 1 shall have, for all purposes of this resolution, the meanings herein
specified.
<PAGE>
Common Stock. The term "Common Stock" shall mean all shares now or
------------
hereafter authorized of any class of Common Stock, par value $.001 per share of
the Corporation, and any other stock of the Corporation, howsoever designated,
authorized after the Issue Date, which has the right (subject always to prior
rights of any class or series of preferred stock) to participate in the
distribution of the assets and earnings of the Corporation without limit as to
per share amount.
Conversion Date. The term "Conversion Date" shall have the meaning set
---------------
forth in subparagraph 4(d) below.
Conversion Rate. The term "Conversion Rate" shall mean the rate per
---------------
share of Common Stock used to determine the number of shares of Common Stock
deliverable upon conversion of a share of the Series A Preferred Stock, which
rate shall be one share of Series A Preferred Stock for each share of Common
Stock.
Conversion Shares. The shares of Common Stock issued or issuable to the
-----------------
holders of the Series A Preferred Stock upon conversion thereof in accordance
with the terms hereof.
Dividend Date. The term "Dividend Date" shall mean June 30th of each
-------------
year that any share of the Series A Preferred Stock is outstanding.
Issue Date. The term "Issue Date" shall mean the date that shares of
----------
Series A Preferred Stock are first issued by the Corporation.
Junior Stock. The term "Junior Stock" shall mean any class or series of
------------
capital stock of the Corporation, including the Common Stock, ranking junior to
the Series A Preferred Stock in respect of the right to receive dividends, and
for the purposes of paragraph below, any class or series of capital stock of the
Corporation, including the Common Stock, ranking junior to the Series A
Preferred Stock in respect of the right to receive assets upon the liquidation,
dissolution or winding up of the affairs of the Corporation.
Redemption Date. The term "Redemption Date" shall mean any date set by
---------------
the Corporation for redemption of all or a part of the Series A Preferred Stock
in accordance with Section 6 hereof.
Redemption Price. The term "Redemption Price" shall mean $9.50 per
----------------
share of Series A Preferred Stock.
Senior Stock. The term "Senior Stock" shall mean any class or series of
------------
stock of the Corporation issued after the Issue Date ranking senior to the
Series A Preferred Stock in respect of the right to receive dividends, and, for
the purposes of paragraph 3 below, any class or series of stock of the
Corporation issued after the Issue Date ranking senior to the Series A Preferred
Stock in respect of the right to receive assets upon the liquidation,
dissolution or winding up of the affairs of the Corporation.
Series A Warrants. The term "Series A Warrants" shall mean the Series A
-----------------
Common Stock Purchase Warrants issued by the Corporation on the Issue Date in
connection with the Corporation's offering as described in the Corporation's
Offering Memorandum dated July __, 1999, a form of which Series A Warrant is
annexed to the Offering Memorandum.
Subsidiary. The term "Subsidiary" shall mean any Corporation of which
----------
shares of stock possessing at least a majority of the general voting power in
electing the board of directors are, at the time as of which any determination
is being made, owned by the Corporation, whether directly or indirectly through
one or more Subsidiaries.
2
<PAGE>
(2) Dividends
---------
Each share of Series A Preferred Stock shall be entitled to
cumulative annual dividends of $.76 per share which will accrue from the Issue
Date and be payable when and as declared by the Board of Directors out of funds
legally available therefor, to holders of record on the 10th business day prior
to the Dividend Date each year that any shares of Series A Preferred Stock are
outstanding, in cash, or at the option of the Company, Series A Warrants valued
at $12.00 per Warrant. If any Dividend Date is not a business day, such Dividend
Date shall be the next succeeding business day. Notwithstanding anything to the
contrary set forth herein or in the Series A Warrant, no Series A Warrant shall
be exercisable for less than whole shares of Common Stock. In the event that
pursuant to applicable law or contract the Corporation shall be prohibited or
restricted from paying in cash the full dividends to which holders of the Series
A Preferred Stock shall be entitled, the cash amount available pursuant to
applicable law or contract shall be distributed among the holders of the Series
A Preferred Stock ratably in proportion to the full amounts to which they would
otherwise be entitled and any remaining amount due to holders of the Series A
Preferred Stock shall be payable in Series A Warrants. The amounts to be
distributed pursuant to the preceding sentence shall, in each case, be adjusted
by rounding down to the nearest whole cent.
Dividends on the Series A Preferred Stock shall accrue whether or not
they have been declared and whether or not they have been declared and whether
or not there are profits, surplus or other funds of the Corporation legally
available for the payment of dividends. The Issue Date shall be deemed to be the
date of issuance of the Series A Preferred Stock regardless of the number of
times transfer of such share is made on the stock records maintained by or for
the Corporation and regardless of the number of certificates which may be issued
to evidence such shares.
(3) Distributions Upon Liquidation, Dissolution or Winding Up.
---------------------------------------------------------
In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation, subject to the
prior preferences and other rights of any Senior Stock, but before any
distribution or payment shall be made to the holders of Junior Stock, the
holders of the Series A Preferred Stock shall be entitled to be paid $9.50 per
share, and no more, in cash and/or in property taken at its fair value as
determined by the Board of Directors, at the election of the Board of Directors.
If such payment shall have been made in full to the holders of the Series A
Preferred Stock, and if payment shall have been made in full to the holders of
any Senior Stock of all amounts to which such holders shall be entitled, the
remaining assets and funds of the Corporation shall be distributed among the
holders of Junior Stock, according to their respective shares and priorities.
If, upon any such liquidation, dissolution or other winding up of the affairs of
the Corporation, the net assets of the Corporation distributable among the
holders of all outstanding shares of the Series A Preferred Stock shall be
insufficient to permit the payment in full to such holders of the preferential
amounts to which they are entitled, then the entire net assets of the
Corporation remaining after the distributions to holders of any Senior Stock of
the full amounts to which they may be entitled shall be distributed among the
holders of the Series A Preferred Stock ratably in proportion to the full
amounts to which they would otherwise be respectively entitled. Neither the
consolidation or merger of the Corporation into or with another Corporation,
Corporations, entity or other entities, nor the sale of all or substantially all
of the assets of the Corporation shall be deemed a 1iquidation, dissolution or
winding up of the affairs of the Corporation within the meaning of this
paragraph 3. Notwithstanding anything herein to the contrary, while any shares
of Series A Preferred Stock are outstanding, the Corporation shall not establish
any Senior Stock without the prior affirmative vote of a majority of the shares
of Series A Preferred Stockholders.
(4) Conversion Rights
-----------------
3
<PAGE>
The Series A Preferred Stock shall be convertible into Common
Stock as follows:
(a) Optional Conversion. Subject to and upon compliance with the
-------------------
provisions of this paragraph 4, at any time following the Issue Date, the Series
A Preferred Stock shall be convertible into fully paid and nonassessable shares
of Common Stock, at the Conversion Rate, at the option of the holder of any
shares of Series A Preferred Stock upon the terms hereinafter set forth;
provided, however, the holder's right to convert the shares of Series A
Preferred Stock shall terminate at 5:00 PM (Pacific Standard Time) on the
Redemption Date.
(b) Mechanics of Conversion. The holder of any shares of Series A
-----------------------
Preferred Stock may exercise the conversion right specified in subparagraph 4(a)
by surrendering to the Corporation or any transfer agent of the Corporation the
certificate or certificates for the shares to be converted, accompanied by
written notice specifying the number of shares to be converted; provided that
the Corporation shall not be obligated to issue to any such holder certificates
evidencing the shares of Common Stock issuable upon such conversion unless
certificates evidencing the shares of Series A Preferred Stock are either
delivered to the Corporation or any transfer agent of the Corporation.
Conversion of the shares may be exercised in whole or in part by the holder by
faxing an executed and completed notice of conversion to the Corporation and
delivering the original notice of conversion and the certificate representing
the shares of Series A Preferred Stock being converted to the Corporation by
express courier within three (3) business days of exercise. Conversion shall be
deemed to have been effected on the date when delivery of notice of an election
to convert and certificates for shares to be converted are delivered to the
Corporation and such date is referred to herein as the "Conversion Date".
Subject to the provisions of subparagraph 4(d)(iv), as promptly as practicable
thereafter, the Corporation shall issue and deliver to or upon the written order
of such holder a certificate or certificates for the number of full shares of
Common Stock to which such holder is entitled and a check or cash with respect
to any fractional interest in a share of Common Stock as provided in
subparagraph 4(f). Subject to the provisions of subparagraph 4(d)(iv), the
person in whose name the certificate or certificates for Common Stock are to be
issued shall be deemed to have become a holder of record of such Common Stock on
the applicable Conversion Date. Upon conversion of only a portion of the number
of shares covered by a certificate representing shares of Series A Preferred
Stock surrendered for conversion (in the case of conversion pursuant to
subparagraph 4(a), the Corporation shall issue and deliver to or upon the
written order of the holder of the certificate so surrendered for conversion, at
the expense of the Corporation, a new certificate covering the number of shares
of Series A Preferred Stock representing the unconverted portion of the
certificate so surrendered.
(c) Fractional Shares. No fractional shares of Common Stock or scrip
-----------------
shall be issued upon conversion of shares of Series A Preferred Stock. If more
than one share of Series A Preferred Stock shall be surrendered for conversion
at any one time by the same holder, the number of full shares of Common stock
issuable upon conversion thereof shall be computed on the basis of the aggregate
number of shares of Series A Preferred Stock so surrendered. Instead of any
fractional shares of Common Stock which would otherwise be issuable upon
conversion of any shares of Series A Preferred Stock, the Corporation shall pay
a cash adjustment in respect of such fractional interest in an amount equal to
that fractional interest multiplied by $9.50.
(d) Conversion Rate Adjustments. The Conversion Rate shall be subject
---------------------------
to adjustment from time to time as follows:
(i) Stock Dividends, Subdivisions, Reclassifications or
---------------------------------------------------
Combinations. If the Corporation shall (A) declare a dividend or make a
- ------------
distribution on its Common Stock in shares of its Common Stock, (B) subdivide or
reclassify the outstanding shares of Common Stock into a greater number of
shares, or (C) combine or reclassify the outstanding Common Stock into a smaller
number of
4
<PAGE>
shares, the Conversion Rate in effect at the time of the record date for such
dividend or distribution or the effective date of such subdivision, combination
or reclassification shall be proportionately adjusted so that the holder of any
shares of Series A Preferred Stock surrendered for conversion after such date
shall be entitled to receive the number of shares of Common Stock which he would
have owned or been entitled to receive had such Series A Preferred Stock been
converted immediately prior to such date. Successive adjustments in the
Conversion Rate shall be made whenever any event specified above shall occur.
(ii) Other Distributions. In case the Corporation shall fix a
-------------------
record date for the making of a distribution to all holders of shares of its
Common Stock (A) of shares of any class other than its Common Stock or (B) of
evidence of indebtedness of the Corporation or any Subsidiary or (C) of assets
(excluding cash dividends or distributions, and dividends or distributions
referred to in subparagraph 4(d)(i) above), or (D) of rights or warrants
(excluding those referred to in subparagraph 4(d)(i) above), each holder of a
share of Series A Preferred Stock shall, upon the exercise of his right to
convert after such record date, receive, in addition to the shares of Common
Stock to which he is entitled, the amount of such shares, indebtedness or assets
(or, at the option of the Corporation, the sum equal to the value thereof at the
time of distribution as determined by the Board of Directors in its sole
discretion) that would have been distributed to such holder if he had exercised
his right to convert immediately prior to the record date for such
determination.
(iii) Consolidation, Merger, Sale, Lease or Conveyance. In
------------------------------------------------
case of any consolidation with or merger of the Corporation with or into another
Corporation, or in case of any sale, lease or conveyance to another Corporation
of the assets of the Corporation as an entirety or substantially as an entirety,
each share of Series A Preferred Stock shall after the date of such
consolidation, merger, sale, lease or conveyance be convertible into the number
of shares of stock or other securities or property (including cash) to which the
Common Stock issuable (at the time of such consolidation, merger, sale, lease or
conveyance) upon conversion of such share of Series A Preferred Stock would have
been entitled upon such consolidation, merger, sale, lease or conveyance; and in
any such case, if necessary, the provisions set forth herein with respect to the
rights and interests thereafter of the holders of the shares of Series A
Preferred Stock shall be appropriately adjusted so as to be applicable, as
nearly as may reasonably be, to any shares of stock or other securities or
property thereafter deliverable on the conversion of the shares of Series A
Preferred Stock.
(iv) Timing of Issuance of Additional Common Stock Upon
--------------------------------------------------
Certain Adjustments. In any case in which the provisions of this subparagraph
- -------------------
(d) shall require that any adjustment shall become effective immediately after a
record date for an event, the Corporation may defer until the occurrence of such
event (A) issuing to the holder of any share of Series A Preferred Stock
converted after such record date and before the occurrence of such event the
additional shares of Common Stock issuable upon such conversion by reason of the
adjustment required by such event over and above the shares of Common Stock
issuable upon such conversion before giving effect to such adjustment and (B)
paying to such holder any amount of cash in lieu of a fractional share of Common
Stock pursuant to subparagraph (e) of this paragraph 4, provided that the
Corporation upon request shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to receive such additional
shares, and such cash, upon the occurrence of the event requiring such
adjustment.
(e) Statement Regarding Adjustments. Whenever the Conversion Rate
-------------------------------
shall be adjusted as provided in subparagraph 4(d), the Corporation shall
forthwith file, at the office of any transfer agent for the Series A Preferred
Stock and at the principal office of the Corporation, a statement showing in
detail the facts requiring such adjustment and the Conversion Rate that shall be
in effect after such adjustment, and the Corporation shall also cause a copy of
such statement to be sent by registered or certified mail, return receipt
requested, postage prepaid, to each holder of shares of Series A Preferred Stock
at its address appearing on the Corporation's records. Each such statement shall
be signed by the Corporation's
5
<PAGE>
independent public accountants, if applicable. Where appropriate, such copy may
be given in advance and may be included as part of a notice required to be
mailed under the provisions of subparagraph 4(f).
(f) Notice to Holders. In the event the Corporation shall propose to
-----------------
take any action of the type described in clause (d) (but only if the action
would result in an adjustment in the Conversion Rate), (ii) or (iii) of
subparagraph 4(d), the Corporation shall give notice to each holder of shares of
Series A Preferred Stock, in the manner set forth in subparagraph 4(f), which
notice shall specify the record date, if any, with respect to any such action
and the approximate date on which such action is to take place. Such notice
shall also set forth such facts with respect thereto as shall be reasonably
necessary to indicate the effect of such action (to the extent such effect may
be known at the date of such notice) on the Conversion Price and the number,
kind or class of shares or other securities or property which shall be
deliverable upon conversion of shares of Series A Preferred Stock. In the case
of any action which would require the fixing of a record date, such notice shall
be given at least 10 days prior to the date so fixed, and in case of all other
action, such notice shall be given at least 10 days prior to the taking of such
proposed action. Failure to give such notice, or any defect therein, shall not,
however, affect the legality or validity of any such action.
(g) Costs. The Corporation shall pay all documentary, stamp, transfer
-----
or other transactional taxes attributable to the issuance or delivery of shares
of Common Stock upon conversion of any shares of Series A Preferred Stock;
provided that the Corporation shall not be required to pay any taxes which may
be payable in respect of any transfer involved In the issuance or delivery of
any certificate for such shares in a name other than that of the holder of the
shares of Series A Preferred Stock in respect of which such shares are being
issued.
(h) Reservation of Shares. The Corporation shall reserve at all times
---------------------
so long as any shares of Series A Preferred Stock remain outstanding, free from
preemptive rights, out of its treasury stock (if applicable) or its authorized
but unissued shares of Common Stock, or both, solely for the purpose of
effecting the conversion of the shares of Series A Preferred Stock, sufficient
shares of Common Stock to provide for the conversion of all outstanding shares
of Series A Preferred Stock.
(i) Valid Issuance. All shares of Common Stock which may be issued
--------------
upon conversion of the shares of Series A Preferred Stock will upon issuance by
the Corporation be duly and validly issued, fully paid and nonassessable and
free from all taxes, liens and charges with respect to the issuance thereof, and
the Corporation shall take no action which will cause a contrary result
(including, without limitation, any action which would cause the Conversion
Price to be less than the par value, if any, of the Common Stock).
(5) Voting Rights
-------------
The holders of record of shares of Series A Preferred Stock shall not
be entitled to any voting rights except as follows:
(i) so long as any shares of Series A Preferred Stock shall be
outstanding and unless the consent or approval of a greater number of shares
shall then be required under the Delaware General Corporation Law, without first
obtaining the approval of at least a majority of the then outstanding shares of
Series A Preferred Stock, given in person or by proxy either by written consent
or at a meeting at which the holders of such shares shall be entitled to vote
separately as a class, the Corporation shall not (A) amend, alter or repeal any
provisions of the Series A Preferred Stock, Certificate of Incorporation or
ByLaws so as to materially adversely affect any of the preferences, rights,
powers or privileges of the Series A Preferred Stock or the holders thereof, (B)
create, authorize or issue any other class or series of preferred stock on a
parity with, or having greater or preferential rights than, the Series A
Preferred Stock
6
<PAGE>
with respect to liquidation or dividends, (C) directly or indirectly, redeem,
repurchase or otherwise acquire for value, or set aside for payment or make
available for a sinking fund for the purchase or redemption of, any stock
ranking junior to on a parity with the Series A Preferred Stock, or (D) enter
into any agreement which would prohibit or restrict the Corporation's right to
pay dividends on the Series A Preferred Stock; and
(ii) as otherwise provided by the Delaware General Corporation Law.
(6) Redemption
----------
The shares of Series A Preferred Stock shall be redeemable at any time,
in whole or in part, by the Corporation, at its option, as follows:
(i) The Corporation shall be a Redemption Price of $9.50 per
share of Series A Preferred Stock to be redeemed, payable in immediately
available funds to the order of the record holder of the Series A Preferred
Stock.
(ii) If less than all of the outstanding shares of Series A
Preferred Stock are to be redeemed, the Corporation shall select those to be
redeemed pro rata or by lot or in such other manner as the Board of Directors
may determine in good faith. In the event that the Company has failed to pay
accrued and unpaid dividends on the Series A Preferred Stock, it may not redeem
any of the then outstanding shares of the Series A Preferred Stock, unless all
the then outstanding shares are redeemed, until all such accrued and unpaid
dividends and (except with respect to shares to be redeemed) the then current
annual dividend have been paid in full.
(iii) There shall be no mandatory redemption or sinking fund
obligation with respect to the Series A Preferred Stock.
(iv) Prior to redemption, the Corporation shall deliver to each
record holder of Series A Preferred Stock notice of its intention to redeem all
or part of the shares of Series A Preferred Stock. The notice shall state the
Redemption Date, which date shall be a business day. Notice of redemption shall
be mailed (by United States first class mail) at least 30 days but not more than
60 days before the redemption date to each holder of record of shares of Series
A Preferred Stock to be redeemed at the address shown on the stock books of the
Company. Unless a holder of Series A Preferred Stock elects to convert his
Series A Preferred Stock prior to 5:00 pm (Pacific Standard Time) on the
Redemption Date, he shall return any and all original share certificates
representing Series A Preferred Stock to be redeemed to the Corporation (or such
other place at set forth in the notice of redemption). At 5:00 pm (Pacific
Standard Time) on the Redemption Date, the right of any holder to convert their
shares of Series A Preferred Stock shall terminate. After the Redemption Date,
dividends will cease to accrue on the shares of Series A Preferred Stock called
for redemption, and all rights of the holders of such shares will terminate
except the right to receive the redemption price without interest (unless the
Company defaults in the payment of the redemption price). The Corporation shall
use its best efforts to deliver the Redemption Price within 10 days after
receipt by the Corporation of the original shares of Series A Preferred Stock
returned by the holder to the Corporation. The shares of Series A Preferred
Stock redeemed by the Company will be restored to the status of authorized but
unissued shares of preferred stock, without designation as to series, and may
thereafter be issued, but not as shares of Series A Preferred Stock.
(7) Exclusion of Other Rights
-------------------------
Except as may otherwise be required by law, the shares of Series A
Preferred Stock shall not have any preferences or relative, participating,
optional or other special rights, other than those specifically set
7
<PAGE>
forth in this resolution (as such resolution may be amended from time to time)
and in the Corporation's Certificate of Incorporation.
(8) Headings of Subdivisions
------------------------
The headings of the various subdivisions hereof are for convenience of
reference only and shall not affect the interpretation of any of the provisions
hereof.
(9) Severability of Provisions
--------------------------
If any right, preference or limitation of the Series A Preferred Stock
set forth in this resolution (as such resolution may be amended from time to
time) is invalid, unlawful or incapable of being enforced by reason of any rule
of law or public policy, all other rights, preferences and limitations set forth
in this resolution (as so amended) which can be given effect without the
invalid, unlawful or unenforceable right, preference or limitation shall,
nevertheless, remain in full force and effect, and no right, preference or
limitation herein set forth shall be deemed dependent upon any other such right,
preference or limitation unless so expressed herein.
8
<PAGE>
(10) Status of Reacquired Shares.
---------------------------
Shares of Series A Preferred Stock which have been issued and
reacquired in any manner or converted shall (upon compliance with any applicable
provisions of the laws of the State of Delaware) not be reissued as Series A
Preferred Stock, but shall have the status of authorized and unissued shares of
Preferred Stock issuable in series undesignated as to series and may be
redesignated and reissued.
IN WITNESS WHEREOF, this Certificate has been made under the seal of
the Corporation and the hands of the undersigned on ____________, 1999.
Name: Bruce Korman
Title: President
Attest:
Name: Robert Gielow
Title: Secretary
9
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<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> MAY-31-2000 MAY-31-1999
<PERIOD-START> JUN-01-1999 JUN-01-1998
<PERIOD-END> AUG-31-1999 AUG-31-1998
<CASH> 258,739 1,073,196
<SECURITIES> 0 0
<RECEIVABLES> 233,970 136,277
<ALLOWANCES> 0 0
<INVENTORY> 150,932 201,555
<CURRENT-ASSETS> 670,323 1,420,284
<PP&E> 1,310,129 1,393,689
<DEPRECIATION> 17,671 56,949
<TOTAL-ASSETS> 3,791,898 4,447,720
<CURRENT-LIABILITIES> 2,558,208 1,812,503
<BONDS> 0 0
0 0
269,325 0
<COMMON> 3,488,665 2,620,782
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 3,791,898 4,447,720
<SALES> 295,853 249,431
<TOTAL-REVENUES> 10,818,265 13,878,754
<CGS> 326,066 166,572
<TOTAL-COSTS> 10,848,478 13,795,895
<OTHER-EXPENSES> 1,389,709 935,192
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 100,294 210,974
<INCOME-PRETAX> (1,537,887) (1,120,256)
<INCOME-TAX> 2,614 0
<INCOME-CONTINUING> (1,540,501) (1,120,256)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,540,501) (1,120,256)
<EPS-BASIC> (0.46) (0.43)
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