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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 SIX MONTH PERIOD ENDED NOVEMBER 30, 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)
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<S> <C>
DELAWARE 95-4558331
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
organization)
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<TABLE>
<S> <C>
1434 W. 11TH STREET, LOS ANGELES, CA 90015
(Address of principal executive offices) (Zip Code)
</TABLE>
(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 January 14, 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
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<CAPTION>
PAGE NO.
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of November 30, 1999(unaudited) and May 1999......... 3
Consolidated Statements of Operations for the three month period ended
November 30, 1999 and 1998 (unaudited).............................................. 4
Consolidated Statements of Operations for the six month period ended
November 30, 1999 and 1998 (unaudited).............................................. 4
Consolidated Statements of Cash Flows for the six month period ended
November 30, 1999 and 1998 (unaudited).............................................. 5
Notes to Consolidated Financial Statements for the six month period ended
November 30, 1999 and 1998.......................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................................... 17
Item 2. Changes in Securities..................................................................... 17
Item 3. Default Upon Senior Securities............................................................. 18
Item 4. Submission of Matters to a Vote of Security Holders....................................... 18
Item 5. Other Information......................................................................... 18
Item 6. Exhibits and Reports on Form 8-K.......................................................... 18
SIGNATURES........................................................................................... 19
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2
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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<CAPTION>
CASH TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
NOVEMBER 30 MAY 31
1999 1999
--------------- ---------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 769,945 $ 1,028,586
Cash Restricted - 44,610
Accounts Receivable 321,673 136,277
Inventories 85,939 201,555
Marketable Securities 323,438 -
Prepaid expenses and other current assets 13,527 9,256
--------------- --------------
Total Current Assets 1,514,521 1,420,284
COINBANK MACHINES HELD FOR SALE 1,364,164 1,577,065
PROPERTY AND EQUIPMENT (net) 1,255,222 1,393,689
Capitalized Software Costs 437,438 -
OTHER ASSETS 228,406 56,682
--------------- --------------
TOTAL ASSETS 4,799,751 4,447,720
=============== ==============
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Current maturities of Notes Payable 1,229,597 1,172,732
Current maturities of Capital Lease Obligations 25,761 42,563
Accounts Payable 566,029 208,620
Accrued expenses & other current liabilities 685,853 388,588
--------------- --------------
Total Current Liabilities 2,507,240 1,812,503
Notes Payable less current maturities 2,435,313 2,564,723
COMMITMENTS AND CONTINGENCIES (Note 2)
STOCKHOLDERS EQUITY (DEFICIENCY):
Common Stock 34,887 34,887
Redeemable Preferred Stock 1,114,706 -
Additional Paid In Capital 12,359,523 11,323,780
Accumulated Deficit (13,651,918) (11,288,173)
--------------- --------------
Total stockholders' equity (deficiency) (142,802) 70,494
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER EQUITY (DEFICIENCY) $ 4,799,751 $ 4,447,720
=============== ==============
</TABLE>
See notes to condensed consolidated financial statements
3
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CASH TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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<CAPTION>
THREE MONTHS SIX MONTHS
ENDED NOVEMBER 30 ENDED NOVEMBER 30
1999 1998 1999 1998
------------ ---------------- ------------- ---------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
GROSS REVENUES* $10,830,398 $11,799,969 $21,648,663 $25,678,723
============ ================ ============= ===============
NET REVENUES $ 468,682 242,738 $ 764,535 492,169
COST OF REVENUES 419,824 163,928 745,890 330,500
------------ ---------------- ------------- ---------------
GROSS PROFIT 48,858 78,810 18,645 161,669
SELLING, GENERAL, & ADMIN EXP. 1,173,721 1,161,504 2,563,432 2,096,719
DEPRECIATION & AMORTIZATION EXP. 15,278 57,272 32,949 114,221
------------ ---------------- ------------- ---------------
OPERATING LOSS (1,140,141) (1,139,966) (2,577,736) (2,049,271)
OTHER INCOME 923,438 - 923,438 -
INTEREST EXPENSE 100,631 110,329 200,925 321,303
------------ ---------------- ------------- ---------------
LOSS BEFORE INCOME TAXES (317,335) (1,250,295) (1,855,223) (2,370,574)
INCOME TAXES 5,055 - 7,669 -
------------ ---------------- ------------- ---------------
NET LOSS (322,390) (1,250,295) (1,862,892) (2,370,574)
============ ================ ============= ===============
Deemed Dividends to preferred Shareholders 405,302 - 485,871 -
Net income (loss) Allocable to common
shareholders (727,692) (1,250,295) (2,348,763) (2,370,574)
Basic and diluted net loss per share $ (0.21) $ (0.36) $ (0.67) $ (0.68)
Basic and diluted weighted average
shares of common stock outstanding 3,488,665 3,488,665 3,488,665 3,488,665
============ ================ ============= ===============
</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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<TABLE>
<CAPTION>
CASH TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR SIX MONTHS ENDED NOVEMBER 30
1999 1998
---------- ---------
(Unaudited) (Unaudited)
OPERATING ACTIVITIES:
<S> <C> <C>
Net Loss (1,862,892) (2,370,574)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 117,311 114,221
Impairment of CoinBank Machines held for Sale 8,540 -
Changes in operating assets and liabilities:
Accrued interest - 29,325
Account receivable (185,396) (11,310)
Inventories Coin/Currency 115,616 (174,049)
Inventories CoinBank Machines 183,574 -
Prepaid expenses and other current assets (327,708) 29,293
Other assets (475,162) 215,569
Accounts payable 357,409 (364,092)
Accrued expenses and other current liabilities 282,284 (127,529)
----------- -----------
Net cash (used) by operating activities (1,786,425) (2,659,145)
----------- -----------
INVESTING ACTIVITIES:
Property and Equipment 41,942 (348,259)
Restricted Cash 44,610 (1,427)
----------- -----------
Net cash provided (used) by investing activities 86,552 (349,686)
----------- -----------
FINANCING ACTIVITIES:
Deferred financing cost (134,000) (134,000)
Payments on capital lease obligation (16,802) (32,525)
Repayments on long-term debt (572,545) (1,874,387)
Deferred compensation expense 190,856 -
Net proceeds from issuance of common stock - 9,478,603
Net proceeds from issuance of preferred stock 1,114,706 -
Long Term- Note Payable(Note 4) 500,000 -
Compensation expense for warrants issued 359,017 -
----------- -----------
Net cash provided by financing activities 1,441,232 7,437,691
----------- -----------
CHANGE IN CASH AND CASH EQUIVALENTS (258,641) 4,428,860
Cash, Beginning of period 1,028,586 210,723
----------- -----------
Cash, End of period 769,945 4,639,583
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes 7,669 -
Cash paid for interest 200,925 291,978
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTION
Reclasssification of depreciation from fixed assets-CoinBank machines 357,470 -
See notes to condensed consolidated financial statements
</TABLE>
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 November 30, 1999, and the results of operation and cash flows
for the six months ended November 30, 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 and six-month
period ended November 30, 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 (''Geld''). Pursuant to that agreement Geld
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 Geld, subject to successive one-year renewal
periods. Pursuant to that agreement Geld 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 Geld and the Company (the
"Territory"), except to certain financial institutions in Austria, provided
that the Company purchases a minimum number of cash processing machines from
Geld over a specified period during the initial three-year term of the April
1997 agreement.
6
<PAGE>
As previously disclosed, in March 1999, the Company entered into a letter of
intent to acquire 51% of the capital stock of the Geld (the "Acquisition") and
at that time the parties were 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 Geld have recently been in a dispute regarding the 1998
Distribution Agreement. The dispute involves primarily the quantity of machines
to be produced by Geld 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 Geld are in dispute over certain matters
related to the license and manufacturing agreement. In September 1999, the
Company initiated a suit against Geld regarding certain rights under the
licensing agreement and the acquisition. There can be no assurance that the
dispute can be resolved. The proposed acquisition of Geld may not occur or may
be delayed until resolution of these disputes is accomplished.
The Company has negotiated an agreement with Tecwings Industrialisierung und
Electronickproduktion GmbH for the continued manufacturing of CoinBank
machines.
As previously disclosed, in December 1997, Vindex USA, Inc. filed a complaint
against CoinBank Automated Systems, Inc.("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 the development of the
Company's E-Commerce Message Management Architecture (EMMA) system, 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 did not engage any broker
dealer as placement agent and the Company's officers and directors directed the
selling efforts. In the event that the Company had been assisted by selling
agents it intended to pay commissions of 10% to those eligible to receive them.
The Company was 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 were 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.
As of November 30, 1999, the Company completed this offering and received
gross proceeds of $1,122,188. The Company recorded a liability of $7,482 in
September 1999. The Company also paid sales commission of $69,825 in January of
2000. The Company has issued or will issue (i) 118,125 shares of Series A 8%
Cumulative Convertible Redeemable Preferred Stock and (ii) 53,809 Series A
Common Stock Purchase Warrants (exercisable at $12.00 per share).
7
<PAGE>
In order to raise funds for working capital and the development of EMMA, on
December 31, 1999, the company commenced a private offering pursuant to Section
4(2) of the Securities Act of 1933 and Regulation D. The Company engaged Gunn
Allen Financial, Inc. as placement agent and paid commissions of 10% and
reimbursement of expenses. Pursuant to this offering up to 60 Units were
offered. Each Unit consists of (i) a Secured Convertible Promissory Note in the
principal amount of $50,000 convertible into Common Stock at a conversion price
of $9.50 per share and (ii) Series B Redeemable Warrants to purchase an
aggregate of 5,000 Warrant Shares at an exercise price of $13.00 per share. The
securities in the private offering memorandum were 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.
The Company completed the offering on January 5, 2000 and raised approximately
$3,350,000 in gross proceeds. The Company incurred approximately $400,000 in
offering expenses, consisting of legal costs, sales commissions and other
related costs.
The Company recorded Deemed Dividends of $485,871 for both the Preferred Stock
and Common Stock Purchase Warrants issued for the period. This amount was based
on (i) 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, valued using the Black Scholes model.
The Company issued one hundred thousand (100,000) Stock Purchase Warrants to
Starr Securities at $10.375 each for consulting services including advice
related to future merger, acquisition, financing and other capital transactions.
These options have been valued at $190,856 using the Black Scholes model and are
recorded as deferred offering costs.
The Company issued Gunn Allen Securities twenty five thousand (25,000) Stock
Purchase Warrants at $10.375 for services related to assisting the Company with
future capital transactions in late August of 1999. These options were not
recorded in the first quarter of 1999 and were subsequently recorded in the
second quarter of 1999. These options have been valued at $47,714 and expensed
using the Black Scholes model.
The Company also issued Gunn Allen Securities one hundred thousand (100,000)
Stock Purchase Warrants at $11.3125 for services related to assisting the
Company with future capital transactions in September of 1999. These options
have been valued at $208,099 and expensed using the Black Scholes model.
The Company also issued WAB Capital twenty five thousand (25,000) Stock
Purchase Warrants at $12.9375 for consulting and research services in November
of 1999. These options have been valued at $51,291 and expensed using the Black
Scholes model.
The Company also issued Howard Brand thirty thousand (30,000) Stock Purchase
Warrants at $11.3125. These options have been valued at $62,431 using Black
Scholes model.
NOTE 4: RELATED PARTY TRANSACTION
The Company obtained a long-term loan for $500,000 from Gunn Allen Securities.
The loan was due either (i) December 31, 2000 or (ii) the date that the company
completes any debt or equity financing.
8
<PAGE>
The sum of $500,000 was repaid from the proceeds of the December 31, 1999
private offering, together with interest from the date thereof at the rate of
ten percent (10%) per annum, computed on the basis of a 365-day year and actual
days elapsed.
NOTE 5: 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 not include any adjustments that might result from the outcome of any
uncertainty.
NOTE 6: OTHER INCOME
On October 1, 1999, the Company and Coinstar, Inc. agreed to settle all
outstanding litigation between them. Under the terms of the settlement, the
Company received payment from Coinstar of $600,000 in cash and 30,000 shares of
common stock of Coinstar, for a total of $923,438.
NOTE 7: MARKETABLE SECURITIES
Marketable securities are considered as "Available for Sale Securities" FASB
115 and any changes in the market value would be an adjustment to
Stockholder's Equity.
9
<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 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 incurred a net loss of $322,390 and $1,862,892 for
the three month and the six-month periods ended November 30, 1999, respectively.
At the present time, 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/]
10
<PAGE>
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, pre-paid phone cards and the
dispensing of event tickets and other functions on automated teller machines
(ATMs), CoinBank machines and other similar devices. Various internet based
transactions can also be facilitated by EMMA, including automated account
activation, ATM-card purchasing and other financial services.
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.
Revenues generated from the sale of CoinBank machines were approximately 45%
of net revenues compared to fee income from "free placement" machines, which
accounted for approximately 13% of net revenues for the six months ended
November 30, 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.
11
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 30, 1999, COMPARED TO THREE MONTHS ENDED NOVEMBER
30, 1998.
Gross revenues include the value of the coins and currency processed, CoinBank
machine sales and fee income for the three months ended November 30, 1999,
amounted to $10,830,398 compared to $11,799,969 for the comparable 1998 period.
The decrease in gross revenue was primarily attributable to the normal periodic
fluctuation in the value of currency processed for LACMTA during the three month
period and Company's planned reduction of certain pilot "free placement"
CoinBank machine customers during the fourth quarter of fiscal 1999. As a result
of the sale of CoinBank machines and the elimination of "free placement"
CoinBank machines, net revenues for the 1999 period increased to $468,682, or
4.33% of gross revenues, compared to $242,738, or 2.06% of gross revenues for
1998 period.
Cost of revenues for the three months ended November 30,1999, was $419,824
compared to $163,928 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 and the cost of CoinBank machines sold
during the period.
Gross profit for the three months ended November 30, 1999, was $48,858
compared to $78,810 for the three months ended November 30, 1998. Gross profit
was impacted by the reclassification of SG&A expenses referred to in Cost of
Revenues. The reclassification and increased cost 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 "free
placement" CoinBank machine customers referred to in Gross Revenues.
Selling, General and Administrative expenses for the three months ended
November 30, 1999, increased to $1,173,721 compared to $1,161,504 for the three
months ended November 30, 1998. These expenses consist primarily of wages (and
wage related costs), outside contractor expenses, travel/promotional expenses,
professional services and facilities/office related expenses. During this period
$437,438 of software development expenses were capitalized, the result of
portions of the Company's transaction processing platform that have reached
commercial viability.
Depreciation and amortization expenses for the three months ended November 30,
1999, and 1998, were $15,278 and $57,272. The decrease in depreciation was the
result of reclassifying depreciation into Cost of Revenues. Interest expense for
the three months ended November 30, 1999, and 1998, was $100,631 and $110,329.
Other Income for the three months ended November 30, 1999 was $923,438
compared to $0 for the same period in 1998. This income was the result of the
settlement of a lawsuit with Coinstar, Inc. The Company received payment from
Coinstar of $600,000 in cash and 30,000 shares of common stock of Coinstar for a
total value of $923,438.
As a result of the foregoing, net loss for the three months ended November 30,
1999, and 1998, was $322,390 and $1,250,295, respectively.
SIX MONTHS ENDED NOVEMBER 30, 1999, COMPARED TO SIX MONTHS ENDED NOVEMBER 30,
1998.
Gross revenues include the value of the coins and currency processed, and
CoinBank machine sales and fee income for the six months ended November 30,
1999, amounted to $21,648,663 compared to
12
<PAGE>
$25,678,723 for the comparable 1998 period. The decrease in gross revenue was
primarily attributable to the normal periodic fluctuation in the value of
currency processed for LACMTA during the six month period and Company's planned
reduction of "free placement" CoinBank machine customers during the fourth
quarter of fiscal 1999. As a result of the sale of CoinBank machines, the
elimination of "free placement" CoinBank machines, net revenues for the 1999
period increased to $764,535 or 3.53% of gross revenues, compared to $492,169,
or 1.92% of gross revenues for 1998 period.
Cost of revenues for the six months ended November 30,1999, was $745,890
compared to $330,500 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 and the cost of CoinBank machines sold
during the period.
Gross profit for the six months ended November 30, 1999, was $18,645 compared
to $161,669 for the six months ended November 30, 1998. Gross profit was
impacted by the reclassification of SG&A expenses referred to in Cost of
Revenues. The reclassification and increased cost 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 "free
placement" CoinBank machine customers referred to in Gross Revenues.
Selling, General and Administrative expenses for the six months ended November
30, 1999, increased to $2,563,432 compared to $2,096,719 for the six months
ended November 30, 1998. These expenses consist primarily of wages (and wage
related costs), outside contractor expenses, travel/promotional expenses,
professional services and facilities/office related expenses. During this period
$437,438 of software development expenses were capitalized, the result of
portions of the Company's transaction processing platform having reached
commercial viability.
Depreciation and amortization expenses for the six months ended November 30,
1999, and 1998, were $32,949 and $114,221. The decrease in depreciation was the
result of reclassifying depreciation into Cost of Revenues. Interest expense
for the six months ended November 30, 1999, and 1998, was $200,925 and $321,303.
The decrease in interest expense was due to reduced debt early in fiscal 1999.
Other Income for the six months ended November 30, 1999 was $923,438 compared
to $0 for the same period in 1998. This income was the result of the settlement
of a lawsuit with Coinstar, Inc. The Company received payment from Coinstar of
$600,000 in cash and 30,000 shares of common stock of Coinstar for a total value
of $923,438.
As a result of the foregoing, net losses for the six months ended November 30,
1999, and 1998, were $1,862,892 and $2,370,574, respectively.
13
<PAGE>
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 November 30, 1999, the Company had a working capital deficit of
$992,719 and unrestricted cash and cash equivalents of $769,945 compared to
working capital of $3,439,773 and unrestricted cash and cash equivalents of
$4,639,583 at November 30, 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, and various borrowings.
Net cash used in operating activities was $1,786,425 for the six months ended
November 30, 1999, as compared to net cash used in operating activities of
$2,659,145 for the six months ended November 30, 1998. The decrease in net cash
used in operating activities during the 1999 period was primarily the result of
increases in: accounts payable, $357,409, and accrued expenses and other current
liabilities, $282,284 and the decreases in: other current assets, $327,708
(Coinstar Inc. marketable securities), and other assets, $475,162 (deferred cost
and software capitalization).
Net cash provided by investing activities was $86,552 for the six months ended
November 30, 1999, as compared to net cash used by investing activities of
$349,686 for the six months ended November 30, 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 provided by financing activities for the quarter ended November 30,
1999, was $1,441,232, as compared to net cash provided by financing activities
of $7,437,691 for the six months ended November 30, 1998. The $1,441,232
primarily consist of financing costs and debt repayment offset by proceeds from
the private offering outlined below and a loan for $500,000. 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 the development of the
Company's E-Commerce Message Management Architecture (EMMA) system, 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 did not engage any broker
dealer as placement agent and the Company's officers and directors directed the
selling efforts. In the event that the Company had been assisted by selling
agents it intended to pay commissions of 10% to those eligible to receive them.
The Company was 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 were 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.
As of November 30, 1999, the Company completed this offering and received
gross proceeds of $1,122,188. The Company recorded a liability of $7,482 in
September 1999. The Company also paid sales commission of $69,825 in January of
2000. The Company has issued or will issue (I) 118,125 shares of Series A 8%
Cumulative Convertible Redeemable Preferred Stock and (II) 53,809 Series A
Common Stock Purchase Warrants (at $12.00 each).
14
<PAGE>
On October 1, 1999, the Company and Coinstar, Inc. agreed to settle all
outstanding litigation between them. Under the terms of the settlement, the
Company received payment from Coinstar of $600,000 in cash and 30,000 shares of
common stock of Coinstar. 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 order to raise funds for working capital and the development of EMMA, on
December 31, 1999, the company commenced a private offering pursuant to Section
4(2) of the Securities Act of 1933 and Regulation D. The Company engaged Gunn
Allen Financial, Inc. as placement agent and paid commissions of 10% and
reimbursement of expenses. Pursuant to this offering up to 60 Units were
offered. Each Unit consists of (i) a Secured Convertible Promissory Note in the
principal amount of $50,000 convertible into Common Stock at a conversion price
of $9.50 per share and (ii) Series B Redeemable Warrants to purchase an
aggregate of 5,000 Warrant Shares at an exercise price of $13.00 per share. The
securities in the private offering memorandum were 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.
The Company completed the offering on January 5, 2000 and raised approximately
$3,350,000 in gross proceeds. The Company incurred approximately $400,000 in
offering expenses, consisting of legal costs, sales commissions and other
related costs.
Based on the Company's current proposed plans and assumptions, the Company
anticipates that the net proceeds of its private offering will be sufficient to
satisfy its contemplated cash requirements for approximately three to four
months. In the event that the Company's plans change or its assumptions prove to
be inaccurate (due to unanticipated expenses, increased competition, unfavorable
general economic conditions, decreased demand for its services or otherwise),
the Company could be required to seek additional financing sooner than currently
anticipated. The Company has no current arrangements with respect to 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 previously disclosed, the Company continues to be engaged in discussions
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
November 30, 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.
15
<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.
As of January 15, 2000, management is not aware of any problems that have
affected the company, its hardware, software or its operations as a result of
any year 2000 issues.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 1, 1999, the Company and Coinstar, Inc. agreed to settle all
outstanding litigation between them. Under the terms of the settlement, the
Company received payment from Coinstar of $600,000 in cash and 30,000 shares of
common stock of Coinstar. 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 the development of the
Company's E-Commerce Message Management Architecture (EMMA) system, 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 did not engage any broker
dealer as placement agent and the Company's officers and directors directed the
selling efforts. In the event that the Company had been assisted by selling
agents it intended to pay commissions of 10% to those eligible to receive them.
The Company was 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 were 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.
As of November 30, 1999, the Company completed this offering and received
gross proceeds of $1,122,188. The Company recorded a liability of $7,482 in
September 1999. The Company also paid sales commission of $69,825 in January of
2000. The Company has issued or will issue (I) 118,125 shares of Series A 8%
Cumulative Convertible Redeemable Preferred Stock and (II) 53,809 Series A
Common Stock Purchase Warrants (at $12.00 each).
In order to raise funds for working capital and the development of EMMA, on
December 31, 1999, the company commenced a private offering pursuant to Section
4(2) of the Securities Act of 1933 and Regulation D. The Company engaged Gunn
Allen Financial, Inc. as placement agent and paid commissions of 10% and
reimbursement of expenses. Pursuant to this offering up to 60 Units were
offered. Each Unit consists of (i) a Secured Convertible Promissory Note in the
principal amount of $50,000 convertible into Common Stock at a conversion price
of $9.50 per share and (ii) Series B Redeemable Warrants to purchase an
aggregate of 5,000 Warrant Shares at an exercise price of $13.00 per share. The
securities in the private offering memorandum were sold in reliance upon the
availability
17
<PAGE>
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.
The Company completed the offering on January 5, 2000 and raised approximately
$3,350,000 in gross proceeds. The Company incurred approximately $400,000 in
offering expenses, consisting of legal costs, sales commissions and other
related costs.
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
Effective January 12, 2000, Howard Brand has replaced Robert M. Gielow as Chief
Financial Officer of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
- ----------- -----------
27 Article 5 of Regulation S-X
4.3 Form of Series B Redeemable Warrant
(b) Reports on Form 8-K
None
18
<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 November 30, 1999, to be signed on its behalf by the
undersigned, thereunto duly authorized the 14th day of January 2000.
CASH TECHNOLOGIES, INC.
By: /S/ Bruce Korman
________________________________________
Bruce Korman
President and Chief Executive Officer
By: /S/ Jeff "Aftab" Zahed
________________________________________
Jeff Zahed
Controller
(Principal Accounting Officer)
19
<PAGE>
EXHIBIT 4.3
No._____________________________
________________________________
Name of Offeree
CONFIDENTIAL PRIVATE OFFERING MEMORANDUM
CASH TECHNOLOGIES, INC.
Total Offering
$3,000,000 - 60 Unit Maximum
Up to 60 Units, each Unit consisting of (i) a Secured Convertible
Promissory Note in the principal amount of $50,000, bearing interest
at the rate of 10% per annum; and (ii) Series B Redeemable Warrants to purchase
5,000 shares of common stock at an exercise price of $13.00 per share
Offering Price: $50,000 per Unit
THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE AND INVOLVE A HIGH DEGREE
OF RISK AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF
THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" INCLUDED IN THIS MEMORANDUM
THE SECURITIES ARE BEING OFFERED WITHOUT REGISTRATION IN RELIANCE ON SECTION
4(2) OF THE SECURITIES ACT OF 1933 AND/OR REGULATION D PROMULGATED THEREUNDER.
THIS MEMORANDUM HAS NOT BEEN REVIEWED, APPROVED OR DISAPPROVED, NOR HAS THE
ACCURACY OR ADEQUACY OF THE INFORMATION SET FORTH HEREIN BEEN PASSED UPON, BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Placement Agent:
GunnAllen Financial, Inc.
THE DATE OF THIS MEMORANDUM IS DECEMBER 23, 1999
<PAGE>
CASH TECHNOLOGIES, INC.
Up to 60 Units, each Unit consisting of (i) a Secured Convertible Promissory
Note in the principal amount of $50,000, bearing interest at the rate of 10% per
annum; and (ii) Series B Redeemable Warrants to purchase 5,000 shares of Common
Stock at an exercise price of $13.00 per share
Our company, Cash Technologies, Inc., is offering for sale to accredited
investors (as defined in Regulation D promulgated by the Securities and Exchange
Commission ("SEC")) up to 60 units (the "Units"), each Unit consisting of (i) a
Secured Convertible Promissory Note in the principal amount of $50,000, due and
payable on July 31, 2001 (the "Maturity Date") and (ii) Series B Redeemable
Warrants to purchase 5,000 shares of common stock at an exercise price of $13.00
per share which shall be exercisable until August, 2002. GunnAllen Financial,
Inc. (the "Placement Agent") has agreed to act as exclusive placement agent for
the sale of the Units. Each Unit will be offered at a price of $50,000.
Partial Units may be offered and sold at the discretion of the Placement Agent.
The offering price, terms of the Offering and exercise price of the warrants
have been determined by negotiation between our company and the Placement Agent
and do not necessarily bear any relationship to the assets, book value or
potential earnings of our company or any other recognized criteria of value.
Our company reserves the right, in its sole and absolute discretion, to reduce
or reject any subscription.
The Company's Common Stock is listed on the SmallCap market of the Nasdaq
Stock Market and traded over the counter under the symbol "CHNG", and on
December 20, 1999, the bid and ask prices of the Common Stock were $14 1/16 and
$14 7/16, respectively. The closing price was $14 1/4.
The Units are being offered on a "best efforts-any or all" basis by the
Placement Agent. All proceeds received from subscribers will be forwarded by
the Placement Agent to our company which shall deposit the proceeds in a
segregated bank account. There is no minimum number of Units required to be
accepted before a closing may occur and our company and the Placement Agent may
close on subscriptions as they are tendered and accepted and upon receipt of
good funds. Prospective investors will not know whether all or a portion of the
Units offered hereby are subscribed for. This offering shall terminate upon the
earlier of (i) the sale of all of the Units or (ii) February 1, 2000 (unless
extended by us and Placement Agent for an additional 30 days).
THE UNITS ARE BEING OFFERED WITHOUT REGISTRATION UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT"), IN RELIANCE UPON THE EXEMPTION FROM
REGISTRATION AFFORDED BY SECTION 4(2) AND/OR 3(b) OF THE SECURITIES ACT AND
REGULATION D PROMULGATED THEREUNDER. THIS MEMORANDUM HAS NOT BEEN REVIEWED,
APPROVED OR DISAPPROVED, NOR HAS THE ACCURACY OR ADEQUACY OF THE INFORMATION SET
FORTH HEREIN BEEN PASSED UPON, BY THE SECURITIES AND EXCHANGE COMMISSION (THE
"SEC") OR ANY STATE SECURITIES ADMINISTRATOR. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=======================================================================================================================
Placement Agent Proceeds to Company(2)
Price to Investors Fee(1)
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
Per Unit $ 50,000 $ 5,000 $ 45,000
- -----------------------------------------------------------------------------------------------------------------------
Maximum Offering(3) $3,000,000 $300,000 $2,700,000
=======================================================================================================================
</TABLE>
________________________
footnotes on next page
ii
<PAGE>
(1) GunnAllen Financial, Inc. has agreed to act as placement agent for our
company, for a placement agent fee in the amount of $5,000 (10%) per Unit.
In addition, our company has agreed to reimburse the Placement Agent for its
expenses incurred in connection with this offering. Our company has also
agreed to indemnify the Placement Agent against certain liabilities,
including liabilities under the Securities Act.
(2) Before deducting expenses of this offering, estimated at approximately
$45,000 (not including sales commissions).
(3) Assumes the sale of all 60 Units offered hereby.
CERTAIN OF THE INFORMATION CONTAINED IN THIS MEMORANDUM IS CONFIDENTIAL AND
PROPRIETARY TO OUR COMPANY AND IS BEING SUBMITTED TO PROSPECTIVE ACCREDITED
INVESTORS SOLELY FOR SUCH INVESTORS' CONFIDENTIAL USE WITH THE EXPRESS
UNDERSTANDING THAT, WITHOUT PRIOR EXPRESS PERMISSION OF OUR COMPANY, SUCH
PERSONS WILL NOT RELEASE THIS DOCUMENT OR DISCUSS THE INFORMATION CONTAINED
HEREIN OR MAKE REPRODUCTIONS OF OR USE THIS MEMORANDUM FOR ANY PURPOSE OTHER
THAN EVALUATING A POTENTIAL INVESTMENT IN THE UNITS. THIS MEMORANDUM MAY NOT BE
REPRODUCED, IN WHOLE OR IN PART, AND IT IS ACCEPTED WITH THE UNDERSTANDING THAT
IT WILL BE RETURNED IF THE RECIPIENT DOES NOT PURCHASE THE SECURITIES OFFERED
HEREBY.
THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE AND INVOLVE A HIGH
DEGREE OF RISK AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE
LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS."
THIS OFFERING IS SUBJECT TO WITHDRAWAL, CANCELLATION OR MODIFICATION BY OUR
COMPANY WITHOUT NOTICE. OUR COMPANY AND THE PLACEMENT AGENT RESERVE THE RIGHT,
IN THEIR SOLE DISCRETION, TO REJECT ANY SUBSCRIPTION IN WHOLE OR IN PART FOR ANY
REASON OR TO ALLOT TO ANY SUBSCRIBER LESS THAN THE NUMBER OF UNITS SUBSCRIBED
FOR.
THIS MEMORANDUM SHOULD BE READ IN CONJUNCTION WITH THE EXHIBITS ATTACHED
HERETO.
OFFICERS, DIRECTORS AND STOCKHOLDERS OF OUR COMPANY AND THE PLACEMENT
AGENT AND THEIR AFFILIATES MAY PURCHASE UNITS PURSUANT TO THIS OFFERING.
EACH PROSPECTIVE INVESTOR MAY MAKE INQUIRIES OF OUR COMPANY WITH RESPECT TO
OUR COMPANY'S BUSINESS OR ANY OTHER MATTERS RELATING TO OUR COMPANY AND AN
INVESTMENT IN THE SECURITIES THEREOF, AND MAY OBTAIN ANY ADDITIONAL INFORMATION
WHICH SUCH PROSPECTIVE INVESTOR DEEMS TO BE NECESSARY IN CONNECTION WITH MAKING
AN INVESTMENT DECISION IN ORDER TO VERIFY THE ACCURACY OF THE INFORMATION
CONTAINED IN THIS MEMORANDUM (TO THE EXTENT THAT OUR COMPANY POSSESSES SUCH
INFORMATION OR CAN ACQUIRE IT WITHOUT UNREASONABLE EFFORT OR EXPENSE). IN
CONNECTION WITH SUCH INQUIRY, ANY DOCUMENTS WHICH ANY PROSPECTIVE INVESTOR
WISHES TO REVIEW WILL BE MADE AVAILABLE FOR INSPECTION AND COPYING OR PROVIDED,
UPON REQUEST, SUBJECT TO THE PROSPECTIVE INVESTOR'S AGREEMENT TO MAINTAIN SUCH
INFORMATION IN CONFIDENCE AND TO RETURN THE SAME TO OUR COMPANY IF THE RECIPIENT
DOES NOT PURCHASE THE SECURITIES OFFERED HEREUNDER. ANY SUCH INQUIRIES OR
REQUESTS FOR ADDITIONAL INFORMATION OR DOCUMENTS SHOULD BE MADE IN WRITING TO
OUR COMPANY, ADDRESSED AS FOLLOWS: CASH TECHNOLOGIES, INC., 1434 WEST 11TH
STREET, LOS ANGELES, CA 90015, ATTN: BRUCE KORMAN, CHAIRMAN & CHIEF EXECUTIVE
OFFICER.
NO PERSON, OTHER THAN AS PROVIDED FOR HEREIN, HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS MEMORANDUM IN CONNECTION WITH THE OFFER BEING MADE HEREBY, AND IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY OUR COMPANY.
THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF
AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES BY
III
<PAGE>
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO.
THE PLACEMENT AGENT HAS CONDUCTED ONLY A LIMITED INVESTIGATION WITH RESPECT
TO THE INFORMATION CONTAINED IN THIS MEMORANDUM. THE PLACEMENT AGENT MAKES NO
REPRESENTATIONS OR WARRANTIES AS TO THE ACCURACY OR COMPLETENESS OF THE
INFORMATION CONTAINED IN THIS MEMORANDUM.
THIS OFFERING IS MADE, AND SALES OF UNITS WILL BE MADE, ONLY TO PURCHASERS
WHO QUALIFY AS "ACCREDITED INVESTORS" UNDER REGULATION D PROMULGATED UNDER THE
SECURITIES ACT.
PROSPECTIVE INVESTORS ARE NOT TO CONSTRUE THE CONTENTS OF THIS MEMORANDUM
AS LEGAL, INVESTMENT OR TAX ADVICE. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR
ADVISORS AS TO LEGAL, INVESTMENT, TAX AND RELATED MATTERS CONCERNING AN
INVESTMENT BY SUCH PROSPECTIVE INVESTORS IN OUR COMPANY.
THE STATEMENTS CONTAINED HEREIN ARE BASED ON INFORMATION BELIEVED BY OUR
COMPANY TO BE RELIABLE. NO WARRANTY CAN BE MADE AS TO THE ACCURACY OF SUCH
INFORMATION OR THAT CIRCUMSTANCES HAVE NOT CHANGED SINCE THE DATE SUCH
INFORMATION WAS SUPPLIED. THIS MEMORANDUM CONTAINS SUMMARIES OF CERTAIN
PROVISIONS OF DOCUMENTS RELATING TO THE PURCHASE OF UNITS, AS WELL AS SUMMARIES
OF VARIOUS PROVISIONS OF RELEVANT STATUTES AND REGULATIONS. SUCH SUMMARIES DO
NOT PURPORT TO BE COMPLETE AND ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO
THE TEXTS OF THE ORIGINAL DOCUMENTS, STATUTES AND REGULATIONS, WHICH ARE
AVAILABLE UPON REQUEST.
IT IS THE RESPONSIBILITY OF PROSPECTIVE INVESTORS WISHING TO PURCHASE THE
UNITS TO SATISFY THEMSELVES AS TO THE FULL OBSERVANCE OF THE LAWS OF ANY
RELEVANT TERRITORY OUTSIDE THE UNITED STATES IN CONNECTION WITH ANY SUCH
PURCHASE, INCLUDING OBTAINING ANY REQUIRED GOVERNMENTAL OR OTHER CONSENTS OR
OBSERVING ANY OTHER APPLICABLE FORMALITIES.
IV
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This memorandum includes "forward-looking statements" within the meaning of
various provisions of the Securities Act and the Securities Exchange Act of 1934
(the "Exchange Act"). All statements, other than statements of historical
facts, included in this memorandum that address future activities, events, or
developments, including such things as future revenues, potential market,
product and technology development, market acceptance, responses from
competitors, capital expenditures (including the amount and nature thereof),
business strategy and measures to implement strategy, competitive strengths,
goals, expansion and growth of our company's business and operations, plans,
references to future success and other such matters, are forward-looking
statements. These statements are based on certain assumptions and analyses made
by our company in light of its experience and its assessment of historical
trends, current conditions and expected future developments as well as other
factors it believes are appropriate in the circumstances. However, whether
actual results will conform to our company's expectations and predictions is
subject to a number of risks and uncertainties that may cause actual results to
differ materially, including the risks and uncertainties discussed in this
memorandum; general economic, market or business conditions; the opportunities
(or lack thereof) that may be presented to and pursued by our company;
competitive actions by other companies; litigation affecting our company and its
industry; changes in laws or government regulations; and other factors, many of
which are beyond the control of our company. Consequently, all of the forward-
looking statements made in this memorandum are qualified by these cautionary
statements and there can be no assurance that the actual results anticipated by
our company will be realized or, even if substantially realized, that they will
have the expected consequences to or effects on our company or its business or
operations.
Our company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934 as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the Securities and
Exchange Commission (the "SEC" or the "Commission") under SEC File No. 000-
24569. Reports, proxy and information statements and other information filed by
our company with the Commission pursuant to the informational requirements of
the Exchange Act may be inspected and copies at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549
and at the following Regional Offices of the Commission: New York Regional
Office, 7 World Trade Center, 13th Floor, New York, New York 10048; and Chicago
Regional Office, Everett McKinley Dirkson Building, 210 South Dearborn Street,
Room 1204, Chicago, Illinois 60604.
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PRIVATE PLACEMENT PROCEDURES
Our company has retained GunnAllen Financial, Inc. to act as its exclusive
placement agent in connection with arranging the private placement of the Units
offered hereby. GunnAllen Financial, Inc. has agreed, as agent for our company,
to offer the Units on a "best efforts, any or all" basis. The Units are being
offered only to accredited investors. Our company reserves the right to approve
or disapprove each investor. See "Plan of Distribution" and "Investor
Suitability Requirements."
Our company undertakes to make available to every investor, during the
course of this offering, and prior to sale, the opportunity to ask questions of
and receive answers from our company concerning the terms and conditions of this
offering and to obtain any appropriate additional information (i) necessary to
verify the accuracy of the information contained in this memorandum or any other
document given, or to any statement made by our company or any person acting on
its behalf, to any prospective investor or (ii) for any other purpose relevant
to a prospective investment in the Units offered hereby, to the extent our
company possesses such information or can acquire it without unreasonable effort
or expense.
All communications or inquiries relating to this offering should be
directed to:
<TABLE>
<CAPTION>
GunnAllen Financial, Inc.
1715 North Westshore Blvd.
Suite 700
Tampa, FL 33607
<S> <C> <C>
Attn: Howard Davis or Attn: Rick Frueh
Telephone: (818) 226-3986 Telephone: (800) 713-3740
Fax: (818) 713-0431 Fax: (813) 282-1275
</TABLE>
VI
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
SUMMARY TERM SHEET 1
RISK FACTORS 8
DESCRIPTION OF SECURITIES 15
SUMMARY FINANCIAL DATA 19
THE COMPANY 20
PLAN OF DISTRIBUTION 23
INVESTOR SUITABILITY REQUIREMENTS 25
ACCESS TO INFORMATION 26
</TABLE>
REPORTS TO SHAREHOLDERS
25
EXHIBIT A - FORM 10KSB FOR THE FISCAL YEAR ENDED MAY 31, 1999 AND FORM 10QSB
FOR THE FISCAL QUARTER ENDED AUGUST 31, 1999.
EXHIBIT B - FORM OF SUBSCRIPTION AGREEMENT AND CONFIDENTIAL PURCHASER
QUESTIONNAIRE
EXHIBIT C - FORM OF SECURED PROMISSORY NOTE
EXHIBIT D - FORM OF SERIES B REDEEMABLE WARRANT
EXHIBIT E - FORM OF REGISTRATION RIGHTS AGREEMENT
EXHIBIT F - FORM OF SECURITY AGREEMENT
VII
<PAGE>
SUMMARY TERM SHEET
The following information is qualified in its entirety by reference to the more
detailed information appearing elsewhere in this memorandum, including in the
exhibits attached hereto. Each prospective investor is urged to read this
memorandum in its entirety. In particular, you should consider the disclosures
concerning our company, and the risks associated with investment in our company,
described in the Form 10KSB for the fiscal year ended May 31, 1999 and Form
10QSB for the quarter ended August 31, 1999 ( together sometimes referred to as
the "SEC Reports") as filed with the SEC included as Exhibit A to this
memorandum as well as other reports filed by our company with the SEC from time
to time.
Business of the Company
Cash Technologies, Inc., was incorporated in Delaware in
1995 and operates through its wholly-owned subsidiaries,
National Cash Processors, Inc., a Delaware corporation,
incorporated in May, 1994, which became a subsidiary of
the Company in January, 1996, CoinBank Automated Systems,
Inc., a Delaware corporation, incorporated in November,
1995, and CoinBank Automation Handels GmbH, Salzburg,
Austria. While the Company has, in recent years, expanded
its operations into other technologies, it began and
continues to do business as a cash and coin processor
through its National Cash Processors, Inc. subsidiary.
In 1996, the Company began its development of an enhanced
version of an automated teller machine which was
designated the ATM-X. The ATM-X was designed to provide
a range of services not typically offered by ATM
machines, such as electronic bill payment, instant
activated phone cards, event ticketing and others. In
December of 1997, the Company filed a patent application
describing its transaction processing and networking
technologies. The technology, which was later named EMMA
(E-commerce Message Management Architecture), allows for
the seamless integration of conventional ATM and credit
card (point-of-sale) networks with non-bank networks on
the Internet.
Securities Being Offered
Up to 60 Units, each Unit consisting of (i) a secured
convertible promissory note in the principal amount of
$50,000 (each, a "Note"); (ii) Series B Redeemable
Warrants (the "Warrants") to purchase 5,000 shares of
common stock (the "Warrant Shares" and together with the
Notes and Warrants, the "Securities"). Forms of the Note
and the Warrants are attached to this memorandum as
Exhibits D and E.
Purchase Price
$50,000 per Unit. Partial Units may be offered and sold
at the discretion of the Placement Agent.
Security
The Notes will be secured by a security interest in all
of the assets of Cash Technologies and its subsidiaries.
A form of the security agreement is attached to this
memorandum as Exhibit G.
Notes:
Interest
10% per annum. The interest rate is subject to
adjustment in the event of a payment default, as
described below. Interest is payable quarterly commencing
March 31, 2000.
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Maturity
The Notes mature on July 31, 2001.
Conversion Rights
The Notes are convertible at anytime after the date of
issue by the holder into shares of Common Stock of our
company at the conversion price of $9.50 per share. The
number of shares to be received is determined by dividing
the principal amount of the Note by $9.50.
Registration Rights
Our company has agreed to grant to the purchasers of the
Units certain "piggyback" and "demand" registration
rights relating to the Note Shares. See the form of
registration rights agreement attached to this memorandum
as Exhibit F.
Prepayment
The Notes are subject to prepayment, in whole or in part,
at the option of our company, at any time without premium
or penalty.
Default Provisions
In the event the Notes are not paid in full when due,
interest shall accrue on the unpaid amount from the
initial date of nonpayment to the date of payment at the
lesser of 18% per annum or the maximum rate permitted by
applicable law.
Note Holders'
Agent
Each purchaser of the Units will be deemed to have
designated GunnAllen Financial, Inc. as agent of the
holders of the Notes with exclusive authority to exercise
any of the rights and powers granted to the holders of
the Notes under the Security Agreement.
Series B Redeemable Warrants:
Exercise
The Series B Redeemable Warrants will be exercisable
until August 2002 at a price of $13.00 per Warrant Share.
Registration Rights
Redemption
Our company has agreed to grant to the purchasers of the
Units certain "piggyback" and "demand" registration
rights relating to the Warrant Shares. See the form of
registration rights agreement attached to this memorandum
as Exhibit F.
In the event there is an effective registration statement
covering the resale of the Warrant Shares, our company
may, on not less than 20 days prior written notice,
redeem the Warrants at a price of $.01 per Warrant
provided that the last sale price of our company's common
stock as reported by the principal
2
<PAGE>
securities exchange on which the common stock is listed
or admitted to trading has averaged at least $18.00 per
share for the 20 consecutive trading days ending at least
five days prior to the date on which notice is given.
3
<PAGE>
Common Stock Outstanding Upon Completion of this Offering
The authorized capitalization of our company is 20,000,000 shares of common
stock par value $.01 per share, of which 3,448,650 are issued and outstanding
and 1,000,000 shares of preferred stock, par value $.01 per share, of which
525,000 shares have been designated Series A 8% Cumulative Convertible Preferred
Stock and 118,125 are issued and outstanding. Assuming that the maximum number
of Units offered hereby are sold, upon completion of this offering, our
company's issued and outstanding common stock and preferred stock will not
change. If all of the Notes are converted into Common Stock at the conversion
price of $9.50, there will be issued and aggregate of 315,789 shares of Common
Stock. In addition, if all of the Warranties are exercised, there will be issued
an additional 300,000 shares of Common Stock.
Use of Proceeds
If the maximum number of Units offered hereby are sold, our company will receive
net proceeds of approximately $2,660,000, after deduction of Placement Agent
fees and all other estimated fees and expenses of this offering. Our company
intends to use the net proceeds primarily for further development and marketing
of the EMMA and ATM-X technology, repayment of $500,000 of debt owed to the
Placement Agent and the balance for working capital and general corporate
purposes. In the event that less than all of the Units offered hereby are sold,
our company will have less resources available for the purpose described above.
4
<PAGE>
Placement Agent
GunnAllen Financial, Inc. is acting as Placement Agent in connection with this
offering and will receive a commission of 10% of the gross proceeds from the
sale of the Units offered hereby, as well as reimbursement of its expenses
relating to this offering.
Investor
Representative
GunnAllen Financial, Inc. shall be designated as the representative of the
purchasers in this offering and shall serve as their attorney in fact and
representative in respect of any matters relating to this offering, including
the waiver of any requirement or amendment of any provision of the documents
relating to this offering, whether pursuant to the requirements of a securities
exchange or otherwise.
5
<PAGE>
Restrictions on Transferability
Neither the Notes offered hereunder nor the Warrants or Warrant Shares have been
registered under the Securities Act or any state securities laws and these
securities may not be offered for sale or resold or otherwise transferred unless
they are registered under the Securities Act or an applicable exemption from
registration is available.
6
<PAGE>
Sales to Investors
The offering of the Units has not been registered under the Securities Act. The
Units are being offered in reliance upon the exemption under Sections 4(2)
and/or 3(b) of the Securities Act and/or the provisions of Regulation D
promulgated thereunder. Sales of the Units will be made only to "accredited
investors" as such term is defined in Rule 501 (a) of Regulation D under the
Securities Act. See "Investor Suitability Requirements."
Risk Factors
The securities offered hereby are highly speculative and involve a high degree
of risk and, therefore, should not be purchased by investors who cannot afford
the loss of their entire investment. Prospective investors should carefully
review and consider the factors set forth under "Risk Factors," as well as the
other information contained in this memorandum, including the SEC Reports
included as Exhibit A to this memorandum, before subscribing for any of the
Units.
7
<PAGE>
RISK FACTORS
The securities offered hereby are highly speculative and involve a high
degree of risk and therefore should not be purchased by anyone who cannot afford
a loss of his entire investment. Prior to making an investment in our company,
prospective investors should carefully review and consider the following risks
and the risks described in the SEC Reports included as Exhibit A to this
memorandum. Certain cross references stated below are to the SEC Reports and
occur, among other places, in the sections headed "Summary Financial Data," "Use
of Proceeds," "Selected Financial Data" and "Business."
Continuing Need for Additional Financing. Our capital requirements have
been and will continue to be significant. The net proceeds of the sale of the
Units in this offering, together with our available cash, are expected to
continue to fund our projected operations through March, 2000. This offering is
being made on an "any or all" basis, which provides us with the sole discretion
to close on and take control of any amount of subscription proceeds then present
in our account established for such purpose. We cannot assure you that we will
be able to raise the maximum net proceeds of this offering. In that case, we
may close on and accept subscription proceeds which are, in the aggregate, less
than the maximum aggregate proceeds being sought. These proceeds may be
insufficient to fund our operations through March, 2000, requiring us to seek
additional financing. If we are unable to attain positive cash flow thereafter,
we will be required to seek additional debt or equity financing to fund the
costs of our operations. We cannot assure you that additional financing will be
available to us when needed, on commercially reasonable terms, or at all. If we
are unable to obtain additional financing when needed, we may be required to
curtail our marketing and production plans and possibly cease operations.
Historical Losses; Significant Capital Requirements; Accountants' Going
Concern Opinion. At The Company has incurred losses since its inception. For
the years ended May 31 1999, 1998 and 1997 the Company sustained net losses of
$5,711,964, $2,727,145 and $1,547,805, respectively. At May 31, 1999 we had
stockholders' equity of $435,494 and an accumulated deficit of $11,288,173. In
its report accompanying our audited financial statements for the fiscal year
ended May 31, 1999, our independent auditors included an explanatory paragraph
regarding our ability to continue as a going concern. At August 30, 1999 the
Company reported a loss of approximately $1,540,501 for the three months ended
August 30, 1999. The Company's capital requirements have been and will continue
to be significant, and its cash requirements have exceeded cash flow from
operations since inception. As a result, the Company has been substantially
dependent on loans from stockholders, short-term borrowings, the initial public
offering in July 1998, and private placements of its debt and equity securities
to satisfy its working capital requirements. The Company will be dependent upon
the proceeds of this offering to fund development of the ATM-X machines and Emma
technology, a portion of its short-term working capital requirements, to fund
certain marketing activities and to continue implementing its expansion
strategy, including potential acquisitions. Although the Company believes, based
on currently proposed plans and assumptions relating to its operations, that the
net proceeds of this Offering, together with anticipated revenues from
operations, will be sufficient to fund the Company's operations and working
capital requirements for only 3-4 months, the Company could be required to seek
additional financing sooner than currently anticipated. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Financial Statements." Need for Substantial Additional Financing; No
Assurance of Additional Personal Guarantees of Corporate Debt by Officers. In
the event that the Company's plans or assumptions relating to its operations
change or prove to be inaccurate, or if the net proceeds of this Offering
together with revenues generated from operations otherwise prove to be
insufficient (due to, among other things, unanticipated expenses, increased
competition, unfavorable general economic conditions, decreased demand for coin
processing services, inability to successfully market CoinBank(R) machines or
the ATM-XTM, or other unforeseen circumstances), the Company could be required
to seek additional financing sooner than currently anticipated. The Company has
no current arrangements with respect to, or sources of, additional financing.
There can be no assurance that additional financing from any source will be
available to the Company when needed, on commercially reasonable terms, or at
all. To the extent that the Company obtains additional financing through the
issuance of additional equity securities, any such issuance may involve
substantial dilution to the Company's then-existing stockholders, including
subscribers in this Offering. Additionally, to the extent that the Company
incurs indebtedness or issues debt securities, the Company will be subject to
all of the risks associated with incurring substantial indebtedness, including
the risks that interest rates may fluctuate and cash flow may be insufficient to
pay principal and interest on any such indebtedness. Any inability to obtain
additional financing when needed will have a material adverse effect on the
Company that could require the Company to significantly curtail or possibly
cease its operations. In addition, any additional equity financing may involve
substantial dilution to the interests of the Company's then-existing
stockholders. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Certain Transactions" and "Financial
Statements."
8
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Uncertainty of Market Acceptance. In marketing its services, the Company
is attempting to change the traditional methods, such as in-house processing or
bank processing, by which holders dispose of large quantities of loose coin and
currency. Demand for and market acceptance of CoinBank(R) and ATM-X machines are
subject to a high level of uncertainty. To date the Company has installed only a
limited numbers of CoinBank(R) machines. To date, no ATM-X machines have been
installed for public use and are not yet commercially available. There can be no
assurance that the results of the use of CoinBank(R) and ATM-X machines when
deployed will be well-received or that prior results will be indicative of
future market acceptance of the Company's products or services. Commercial
establishments and individuals may elect to utilize other methods which they
believe to be less costly or possess other advantages over CoinBank(R) and ATM-X
machines. Achieving market acceptance for CoinBank(R) and ATM-X machines will
require substantial marketing efforts and the expenditure of a significant
amount of funds to inform both banks and retail locations which may serve as
installation sites for CoinBank(R) and ATM-X machines and their account holders
and patrons of the perceived benefits and cost advantages of CoinBank(R) and
ATM-X machines.
Demand for and market acceptance of the Company's coin and currency
processing services are also subject to a high level of uncertainty. Commercial
establishments and individuals may elect to utilize other methods which they
believe to be less costly or possess other advantages over the Company's coin
processing services, including establishing their own coin counting and
processing operations, or otherwise refraining from seeking to dispose of excess
coin. Achieving market acceptance for the Company's coin processing services
will also require the expenditure of significant funds to inform businesses of
the perceived benefits and cost advantages of the Company's coin processing
services over traditional coin processing methods. See ''Business--Market
Overview" and "Business--CoinBank(R) Machines."
Limited Marketing Capabilities. Since inception, the Company has
conducted only limited marketing activities and currently has limited marketing
and technical experience and limited financial, personnel and other resources to
independently undertake extensive marketing activities. The Company will utilize
a portion of the proceeds of this Offering to expand marketing and promotion of
ATM-X and CoinBank(R) machines and the Company's coin and currency processing
services. The Company's marketing plans may be subject to change as a result of
a number of factors, including changes in market conditions, the nature of the
marketing requested or provided by the establishments where ATM-X and
CoinBank(R) machines are installed in the future and other factors. There can be
no assurance that the Company's efforts will result in significant initial or
continued market acceptance, that emerging markets for ATM-X and CoinBank(R)
machines and the Company's coin and currency processing services will not be
limited, or that the Company will succeed in positioning ATM-X and CoinBank(R)
machines and the Company's services as a preferred method of disposing of large
amounts of coin and currency. See "Business--Marketing."
Security Risks; Potential Uninsured Losses. The Company's coin-processing
operations are substantially dependent upon maintaining the security of the
inventories of coin and currency transported to the Company's coin processing
facility and held on the Company's premises. Although the Company believes that
it has in place adequate security systems and procedures to safeguard the coin
and currency processed at its coin processing facility, there can be no
assurance that the Company's systems and procedures will be sufficient to ensure
against theft, embezzlement or other losses. The Company has recently obtained
insurance for off-site theft of coin from and damages to its CoinBank(R)
machines. The Company maintains insurance against losses, including those due to
theft or embezzlement by independent contractors or the Company's employees, up
to an aggregate amount of $5,000,000. However, there can be no assurance that
such insurance will provide the Company with an adequate level of coverage in
the event of any loss, or that it can be renewed or increased in the future as
needed, on commercially reasonable terms or at all. Moreover, the Company may
experience an unanticipated loss not covered by such insurance. Partially or
completely uninsured losses, if of sufficient magnitude, could have a material
adverse effect on the Company's business and results of operations. See
"Business--Security."
Technological Factors; Uncertainty of Product Development. As of November
30, 1999, the Company had installed a limited number of CoinBank(R) machines at
locations in California, New England and Europe. Although the CoinBank(R)
machines have performed reliably to date at their current installations, there
can be no assurance that, upon widespread commercial use, CoinBank(R) machines
will satisfactorily perform all of the intended functions or that it will prove
reliable in extensive utilization. Software and other technologies that are
incorporated into CoinBank(R) machines are complex and may contain errors which
will only become apparent subsequent to widespread commercial use. Remedying
such errors could require the expenditure of a substantial amount of money and
could also result in significant delays in installing additional CoinBank(R)
machines or result in periods in which previously installed CoinBank(R) machines
are inoperative, any of which could have a material adverse effect on the
Company. The Company anticipates that it will continue to seek to upgrade and
enhance both the hardware and software components of CoinBank(R) machines. Such
upgrading and enhancement efforts remain subject to the risks inherent in new
product development, including
9
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unanticipated technical or other problems which could result in material delays
in product commercialization or significantly increased costs. There can be no
assurance that development of enhanced CoinBank(R) machines, if necessary, will
be completed successfully, that unanticipated technical or other problems will
not occur that would result in increased costs or material delays in development
or commercialization of CoinBank(R) machines, or that CoinBank(R) machines will
achieve widespread commercial acceptance. There can also be no assurance that
the Company's ATM-XTM machines will perform satisfactorily all of its intended
functions or will prove to be reliable in extensive utilization. See "Business--
Proposed Products."
Dependence on Independent Contractors. The Company has been and will
continue to be substantially dependent on arrangements with one or more
independent contractors for the installation and servicing of CoinBank(R)
machines and the collection and delivery of collected coins from CoinBank(R)
machines to the Company's processing facility. The Company currently utilizes
independent contractors to handle servicing and collections from CoinBank(R)
machines. The Company is substantially dependent on the ability of the
independent contractors it hires to dedicate sufficient personnel to service the
Company. There can be no assurance that any contractor that the Company utilizes
or may utilize will have sufficient capacity to satisfy the Company's
CoinBank(R) machine servicing requirements during any period of sustained
demand. The loss of services of independent contractors could disrupt the
Company's business. Moreover, failure or delays by independent contractors in
collecting from and servicing CoinBank(R) machines could have a material adverse
effect on the Company. See "Business--CoinBank(R) Machines."
Dependence on Third-Party Manufacturers and Third-Party Technology. The
Company assembles CoinBank(R) machines using components supplied by third-party
manufacturers. Similarly, the ATM-X machines will be assembled using third
party supplied components. As a result, the Company is dependent on these
manufacturers for the production of these components. The Company currently
purchases most of its requirements of specially designed or modified components
from single source suppliers. Although the Company believes that alternative
sources for these components are available, failure or delay by any manufacturer
in providing components to the Company could result in interruptions in the
Company's ability to continue to assemble and install CoinBank(R) machines and
have a material adverse effect on the Company's operations. Geld manufactures
certain coin counting equipment used in CoinBank(R) machines. Pursuant to
licensing and manufacturing services and distribution agreements with Geld, the
Company has the exclusive world-wide right (except for sales to certain Austrian
financial institutions) to use the technology which is incorporated in the
equipment manufactured by this supplier. The present agreements require the
Company to make certain minimum purchases of the equipment. Failure to satisfy
such minimum purchase requirements could result in the termination of the
Company's agreement with such manufacturer, which would likely lead to the
termination of the Company's exclusivity with respect to such technology, which
would have a material adverse effect on the Company. As discussed elsewhere in
this Memorandum, the Company has entered into a letter of intent to acquire
Geld. See "Business--Assembly and Supply of CoinBank(R) Machines." See
"Management Discussion and Analysis of Financial Conditions and Results of
Operations."
Limited Customer Base. The Company continues to sell most of the coin and
currency it processes to a limited number of entities. The Company generally
does not enter into long-term written agreements with any customers with respect
to the processing, acquisition or sale of coin and currency and does not
anticipate entering into written contracts for coin purchases or sales with
future customers. The loss of present or any future significant customers, for
any reason, in the absence of significant additional customers or contracts,
could have a material adverse effect on the Company's financial condition and
results of operations. There can be no assurance that the Company will be able
to lessen its dependence on a limited number of customers for a substantial
portion of its revenue. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Uncertainty of Proposed Expansion. To date, the Company has generally
been dependent on processing coins and currency purchased directly from third
parties (other than through CoinBank(R) machines) to generate substantially all
of its revenues. The Company intends to increase its current level of
operations, with an emphasis on marketing ATM-X and CoinBank(R) machines. The
Company has achieved limited growth to date, and there can be no assurance that
the Company will be able to successfully expand its operations. Expansion of the
Company's operations will be largely dependent upon the Company's ability to
successfully assemble and install ATM-X machines; hire and retain skilled
technical, marketing and other personnel; establish and maintain satisfactory
relationships with banks and retail businesses; and achieve significant market
acceptance for the use of ATM-X machines and the Company's coin processing
services. There can be no assurance that the Company will be able to
successfully implement its business plan or that unanticipated expenses,
problems or technical difficulties will not occur which would result in material
delays in its implementation. The Company's prospects could be adversely
affected by a decline in the economic prospects of particular individual or
commercial customers or segments of coin-intensive markets, which could result
in reduction or deferral of requirements
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for coin processing services or the use of ATM-X machines by prospective
customers. There can be no assurance that the Company will be able to achieve
significant market acceptance of ATM-X machines or the Company's coin processing
services, achieve significant penetration in new geographic markets or
successfully expand its operations. See "Business--CoinBank(R) Machines."
Competition; Technological Obsolescence. The coin processing industry is
characterized by intense competition and the Company competes primarily with
banks (which typically utilize the services of armored car carriers for their
coin and currency processing), most of which possess substantially greater
financial, personnel, marketing and other resources than the Company. With
respect to CoinBank(R) machines, the Company is aware of one other company that
offers self-service coin counting and processing services through the use of
coin counting machines. To the Company's knowledge, unlike the Company, which
has recently focused its efforts on selling CoinBank(R) machines, this
competitor focuses its marketing efforts on installing its machines in
supermarkets on a free placement basis. This competitor has installed a number
of its machines in the Los Angeles area as well as in other areas of the United
States, and, in some cases, such installations are near where the Company has
installed or may seek to install and/or sell CoinBank(R) machines. There can be
no assurance that potential users of CoinBank(R) machines will not prefer to
utilize this competitor's machines, whether because of preference or perceived
convenience of location or hours of service or otherwise, or that this
competitor will not seek to sell its machines. Moreover, there can be no
assurance that other companies are not developing or will not seek to develop
functionally equivalent products or services for the disposal of large amounts
of coins in the future. In addition, the Company's recently developed ATM-XTM
will compete with existing automated teller machines and services offered by
financial institutions and other companies that provide services similar to
those offered by the ATM-XTM. Certain of the current competitors of the Company
as well as potential competitors may have substantially greater financial,
personnel, marketing and other resources than the Company. In addition, there
are many companies in the coin processing industry that have the expertise and
resources that may encourage them to develop and market products or services
that compete with the Company or that could render the Company's products and
services obsolete or less marketable. Moreover, with respect to the marketing of
Coinbank(R) machines, potential customers may elect to establish their own
facilities for counting and processing coins or utilize other methods which they
believe to be less costly or possess other advantages over CoinBank(R) machines
and the Company's coin processing services. There can be no assurance that the
Company will be able to compete successfully. See "Business--Competition."
Potential Adverse Effect of Changing Industry Trends. Alternatives to the
use of coin and currency, such as checks, credit cards and wire transfer, debit
cards, "smart" cards and other forms of electronic currency are increasing.
Increasing use of these alternative forms of payment could reduce the frequency
of circulation of coin and currency, resulting in decreased need for CoinBank(R)
machines and the Company's coin processing services. The market for alternative
forms of money transfer is characterized by frequent introduction of new
products and services and is subject to changing consumer preferences and
economic trends. There can be no assurance that the demand for methods of
disposing of coin and currency will not decrease significantly or that other
factors, over which the Company will have no control, will not have a material
adverse effect on the Company's business and results of operations. See
"Business--Competition."
Geographic Concentration of Business; Changes in Economy. To date, the
Company's operations have been concentrated primarily in the Southern California
area. The Company's growth prospects will be largely dependent on its ability to
achieve greater penetration in this market as well as significant penetration in
new geographic markets. Although the Company intends to focus its efforts on
expanding its operations for the foreseeable future, a substantial portion of
the Company's revenues will be derived from its Southern California operations.
Such geographic concentration increases the potential impact on the Company's
results of operations of any regional economic downturn or catastrophic events.
The Company's prospects could be adversely affected by unfavorable general
economic conditions, including any downturns in the California or national
economies, which could result in an unwillingness by consumers to pay cash
processing fees or an increased interest in developing alternative methods of
counting and sorting coins, including creating in-house processing facilities.
See "Business."
Risks Relating to International Installations and Sales. The Company is
seeking to install additional CoinBank(R) machines outside of the United States.
In addition, the Company is currently negotiating letters of intent and other
arrangements to sell CoinBank(R) machines and related equipment to purchasers in
various other countries, including several with developing or emerging
economies. To the extent that the Company is able to expand its operations and
sales outside of the United States, of which there can be no assurance, it will
become subject to the risks associated with international operations and sales,
including economic and political instability, currency fluctuations, credit
risks, shipping delays, customs duties, export quotas, foreign government
regulations and other trade restrictions, any of which could have a significant
impact on the Company's ability to operate CoinBank(R) machines effectively
outside of the United States or to
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deliver CoinBank(R) machines overseas to purchasers on a competitive and timely
basis. See "Business--Possible International Sales of CoinBank(R) Machines."
Uncertainty of Patent and Trademark Protection. Although the Company has
recently filed applications with the U.S. Patent Office to obtain a patent on
its CoinBank(R) counting and dispensing machine and with respect to its ATM-XTM,
there can be no assurance that any patent will be granted, or that if granted,
it will afford the Company any meaningful protection. The Company does not
currently hold any patents with respect to any software or hardware used in its
operations. The Company intends to rely primarily on a combination of trade
secrets, technical measures, copyright protection and nondisclosure agreements
with its employees to establish and protect the ideas, concepts and
documentation of certain software developed by it and used primarily in its coin
processing operations (the "Developed Software"). Such methods may not afford
complete protection, and there can be no assurance that third parties will not
independently develop such technology or obtain access to the Developed
Software. Although the Company believes that its use of the Developed Software
and other software used in its operations does not infringe upon the rights of
others, there can be no assurance that the Company's use of the Developed
Software or such other software does not and will not infringe upon the patents
or intellectual property rights of others. In the event of infringement, the
Company could, under certain circumstances, be required to obtain a license or
modify aspects of the Developed Software or such other software or refrain from
using such software. There can be no assurance that the Company will have the
necessary financial resources to defend any infringement claim made against it
or to successfully terminate any infringement in a timely manner, upon
acceptable terms and conditions or at all. Failure to do any of the foregoing
could have a material adverse effect on the Company. Moreover, if the Developed
Software or any other software or hardware used in the Company's business is
deemed to infringe upon the rights of others, the Company could, under certain
circumstances, become liable for damages, which could have a material adverse
effect on the Company. The Company received United States trademark registration
for the "CoinBank(R)" name in September 1997. Although the Company is not
aware of any claims of infringement or other challenges to the Company's rights
to use this trademark, there can be no assurance that the Company's marks do not
or will not infringe upon the proprietary rights of others or that the Company's
marks would be upheld if challenged. See "Business--Proprietary Information."
Potential Damage to CoinBank(R) Machines. During the test marketing of
CoinBank(R) machines, customers have placed objects other than coins in
CoinBank(R) machines, resulting in malfunctions or damage to CoinBank(R)
machines. Although the Company has developed methods intended to reduce damage
to CoinBank(R) machines, and although CoinBank(R) machines have experienced
limited inoperability to date, there can be no assurance that activities of
customers will not result in periods of inoperability, causing a material
adverse effect on or significant fluctuations in the Company's operating
results. See "Business--CoinBank(R) Machines."
Dependence on Key Personnel; Need for Qualified Management Personnel. The
success of the Company will be dependent on the efforts of certain key personnel
of the Company, including Mr. Korman, its President and Chief Executive Officer.
The Company has entered into a three-year employment agreement with Mr. Korman
which will require Mr. Korman to devote not less than 40 hours per week of his
business time to the business of the Company and provides for an initial annual
base salary of $120,000 and base salaries of $150,000 and $180,000 in the second
and third years, respectively. The loss of the services of Mr. Korman could have
a material adverse effect on the Company's business and prospects. Mr. Korman
also participates in other business endeavors which require a portion of his
business time. Although Mr. Korman has advised the Company that his
participation in outside business matters should not interfere with his
performance of his duties as President and Chief Executive Officer of the
Company, there can be no assurance that a conflict of interest will not arise
with respect to the allocation of Mr. Korman's time or that such conflict would
be resolved in favor of the Company. The success of the Company is also
dependent upon its ability to hire and retain additional qualified management,
marketing, technical, financial and other personnel. Competition for qualified
personnel is intense, and there can be no assurance that the Company will be
able to hire or retain additional qualified personnel. Any inability to attract
and retain qualified management and other personnel would have a material
adverse effect on the Company. See ''Management.''
Control by Management. Mr. Korman and Mr. Miller, and their respective
affiliates, beneficially own, in the aggregate, approximately 29.6% of the
outstanding Common Stock, as a result, they are and will be in a position to act
together to effectively control the Company, elect the Company's directors,
cause an increase in the authorized capital or the dissolution, merger or sale
of the assets of the Company, and generally direct the affairs of the Company.
Additionally, except in certain limited circumstances, the holders of the Series
A Preferred Stock have no voting rights. See "Management" and "Principal
Stockholders."
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Limitations of Liability of Directors and Officers. The Company's
Certificate of Incorporation includes provisions to limit, to the full extent
permitted by Delaware law, the personal liability of directors of the Company
for monetary damages arising from a breach of their fiduciary duties as
directors. In addition, the Company's By-Laws require the Company to indemnify
any director, officer, employee or agent of the Company to the full extent
permitted by Delaware law. As a result of such provisions in the Certificate of
Incorporation and the By-Laws of the Company, stockholders may be unable to
recover damages against the directors and officers of the Company for actions
taken by them which constitute negligence, gross negligence or a violation of
their fiduciary duties, which may reduce the likelihood of stockholders
instituting derivative litigation against directors and officers and may
discourage or deter stockholders from suing directors, officers, employees and
agents of the Company for breaches of their duty of care, even though such an
action, if successful, might otherwise benefit the Company and its stockholders.
See "Management--Limitations of Liability and Indemnification."
Shares Eligible for Future Sale. As of December 17, 1999, the Company had
3,488,665 shares of Common Stock outstanding, of which 1,707,750 shares of
Common Stock are freely tradeable without restriction or further registration
under the Securities Act of 1933, as amended (the "Securities Act"). All of
the remaining 1,780,750 shares of Common Stock outstanding are "restricted
securities," as that term is defined under Rule 144 promulgated under the
Securities Act. Pursuant to the provisions of Rule 144, all 1,780,750 of such
shares are eligible for sale, pursuant to Rule 144. The holders of the 1,780,750
outstanding shares of Common Stock have, however, agreed not to sell such shares
until July 9, 2000 without the prior written consent of the underwriters in the
Company's initial public offering. The Company has granted certain demand and
"piggy-back" registration rights to the holders of 450,000 shares of Common
Stock and an option and warrants to acquire approximately an additional 425,000
additional shares of Common Stock and to the underwriters with respect to the
securities issuable upon exercise of the underwriters' warrants. Additionally,
the investors in our recently completed placement of Series A Preferred Stock
and Series A Warrants have also been granted registration rights requiring us to
register for resale the shares of Common Stock underlying the Series A Preferred
Stock and Series A Warrants within the next approximately 145 days. No
prediction can be made as to the effect, if any, that sales of shares of Common
Stock or even the availability of such shares for sale will have on the market
prices prevailing from time to time. The possibility that substantial amounts of
Common Stock may be sold in the public market may adversely affect the
prevailing market price for the Common Stock and could impair the Company's
ability to raise capital through the sale of its equity securities.
Limited Transferability of Units; Lack of Public Trading Market. There is
no public market for the Warrants or Notes. Accordingly, the right of any
purchaser to sell, transfer, pledge or otherwise dispose of any of the
securities offered hereby will be limited by the Securities Act and applicable
state securities laws and the regulations promulgated thereunder. Moreover, the
Notes are non-negotiable and, as such, are non-transferable, regardless of
whether they are subsequently registered under the Securities Act. We cannot
assure you that any registration statement covering the Warrant Shares will
become effective. Purchasers of the Units must be aware of the long-term nature
of their investment and be prepared to bear the economic risks of their
investment for an indefinite period of time, since the securities cannot be sold
unless they are subsequently registered or an exemption from registration is
available.
Investor Tax Liability Related to the Units. For Federal income tax
purposes, the $50,000 purchase price of each Unit is required to be allocated
between the Note and the Securities included therein in accordance with their
relative fair market values. Our company has estimated that the amount
allocable to each $50,000 Note will be approximately $49,000. Our company's
allocation of the purchase price will be binding upon each purchaser of the
Units, unless the purchaser explicitly discloses on a form attached to the
purchaser's federal income tax return that its allocation is different from our
company's allocation. We cannot assure you that the Internal Revenue Service
will agree with our company's allocation. The excess (estimated by our company
to be $1,000) of the principal amount payable upon maturity of the Note over the
amount of the purchase price allocated to the Note for federal income tax
purposes will be treated as "Original Issue Discount," under the Internal
Revenue Code of 1986. Generally, investors must report the Original Issue
Discount in their gross incomes ratably over the period of time that their Notes
are held. Potential investors are strongly urged to consult with their own tax
advisors prior to purchasing a Unit for the specific tax treatment applicable to
them in connection with the purchase of a Unit.
Arbitrary Offering Price of Units. The offering price of a Unit, the
number of Securities included therein, the exercise price of the Warrants and
the interest payable on, and principal amount of, the Note included therein have
all been determined by negotiation between our company and the Placement Agent
and are arbitrary in that they do not necessarily bear any relationship to the
assets, book value or potential earnings of our company or any other recognized
criteria of value.
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Possible Delisting of Securities from Nasdaq Stock Market; Risks Relating
to Low Priced "Penny" Stocks. The Company's Common Stock is listed on Nasdaq
SmallCap Market (Symbol "CHNG"). In order to continue to be listed on Nasdaq,
however, the Company must, in addition to other requirements, maintain
$2,000,000 in net tangible assets or market capitalization of $35,000,000.
Nasdaq also receives the right to delist an entity in its discretion. The
failure to meet these maintenance criteria in the future may result in the
delisting of the Company's Common Stock from Nasdaq, and trading, if any, in the
Company's securities would thereafter be conducted in the non-Nasdaq over-the-
counter market. As a result of such delisting, an investor could find it more
difficult to dispose of, or to obtain accurate quotations as to the market value
of, the Company's securities.
Although the Company anticipates that the Common Stock will be continue to
be listed for trading on Nasdaq, if the Common Stock were to become delisted
from trading on Nasdaq and the trading price of the Common Stock were to fall
below $5.00 per share on the date the Common Stock was delisted, trading in such
securities would also be subject to the requirements of certain rules
promulgated under the Exchange Act, which require additional disclosure by
broker-dealers in connection with any trades involving a stock defined as a
penny stock (generally, any non-Nasdaq equity security that has a market price
of less than $5.00 per share, subject to certain exceptions). Such rules require
the delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith, and impose
various sales practice requirements on broker-dealers who sell penny stocks to
persons other than established customers and accredited investors (generally
institutions). For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. The additional
burdens imposed upon broker-dealers by such requirements may discourage broker-
dealers from effecting transactions in the Company's securities, which could
severely limit the market price and liquidity of such securities and the ability
of purchasers to sell their securities of the Company in the secondary market.
Authorization and Discretionary Issuance of Preferred Stock. The
Company's Certificate of Incorporation authorizes the Company's Board of
Directors to issue up to 1,000,000 shares of Preferred Stock, from time to time,
in one or more series. The Board of Directors is authorized, without further
approval of the stockholders, to fix the dividend rights and terms, conversion
rights, voting rights, redemption rights and terms, liquidation preferences, and
any other rights, preferences, privileges and restrictions applicable to each
new series of Preferred Stock. The establishment of a class of preferred stock
other than the Series A Preferred Stock may adversely impact the rights of
holders of the Series A Preferred Stock. The issuance of such stock could
adversely affect the voting power of the holders of Common Stock and, under
certain circumstances, make it more difficult for a third party to gain control
of the Company, discourage bids for the Common Stock at a premium, or otherwise
adversely affect the market price of the Common Stock. The Company has agreed
not to issue any shares of Preferred Stock without the prior consent of the
underwriters in its July 198 initial public offering until July, 2000 and for
one year thereafter without the unanimous approval of the Board of Directors of
the Company. See "Description of Securities."
No Minimum Prior to Release of Funds. Pending the completion of this
Offering, all funds delivered in connection with subscriptions for Units will be
held in a non-interest bearing escrow account until a closing is scheduled with
the Placement Agent or the termination of the offering period on February 1,
2000, subject to extension for an additional 30 days by the Company. There is
no minimum amount of Units which must be sold prior to release of funds to us.
Therefore, we may not receive a significant amount of investors funds prior to
release of funds to us and the amount of funds so released may not satisfy our
captital requirements. See "PLAN OF DISTRIBUTION."
Arbitrary Determination of Offering Price. The composition of the Units,
and the terms of the Notes and Warrants, was arbitrarily determined by the
Company and may not bear any relationship to the assets, earnings or book value
of the Company, the market value of the Company's Common Stock, or any other
recognized criteria of value. See "Plan of Distribution."
No Investors' Counsel. The Company has not retained any independent
professionals to review or comment on this offering or otherwise protect the
interests of the investors hereunder. Although the Company has retained its
own counsel, neither such firm nor any other firm has made, on behalf of the
investors, any independent examination of any factual matters represented by
management herein, and purchasers of the securities offered hereby should not
rely on the firm so retained with respect to any matters herein described.
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DESCRIPTION OF SECURITIES
Our company is offering pursuant to this memorandum up to 60 Units, with
each Unit consisting of (i) a Secured Convertible Promissory Note in the
principal amount of $50,000 convertible into Common Stock at a conversion price
of $9.50 per share and (ii) Series B Redeemable Warrants to purchase an
aggregate of 5,000 Warrant Shares at an exercise price of $13.00 per share. The
principal terms and conditions pertaining to the Units, and to the Securities
included in the Units, are summarized above under "Term Sheet." In addition,
the terms of our company's Common Stock and other outstanding securities are
summarized below. Such summaries, and other descriptions herein of such terms
and conditions, do not purport to be complete and are qualified by reference to
(a) the form of Subscription Agreement and Questionnaire relating to this
offering, a copy of which is attached hereto as Exhibit B, (b) the form of Note,
a copy of which is attached hereto as Exhibit C, and the form of Security
Agreement, a copy of which is attached hereto as Exhibit F, (c) the form of
Warrant, a copy of which is attached hereto as Exhibit D, (d) the form of
Registration Rights Agreement, a copy of which is attached hereto as Exhibit E,
and (e) the certificate of incorporation and by-laws of our company, copies of
which may be obtained from our company.
Common Stock
Each share of Common Stock entitles its holder to one non-cumulative vote
per share and, subject to the preferential rights of the Preferred Stockholders,
the holders of more than fifty percent (50%) of the shares voting for the
election of directors can elect all the directors if they choose to do so, and
in such event the holders of the remaining shares will not be able to elect a
single director. Holders of shares of Common Stock are entitled to receive such
dividends as the Board of Directors may, from time to time, declare out of
Company funds legally available for the payment of dividends. Upon any
liquidation, dissolution or winding up of the Company, holders of shares of
Common Stock are entitled to receive pro rata all of the assets of the Company
available for distribution to shareholders after the satisfaction of the
liquidation preference of the Preferred Stockholders.
Shareholders do not have any pre-emptive rights to subscribe for or
purchase any stock, warrants or other securities of the Company. The Common
Stock is not convertible or redeemable. Neither the Company's Certificate of
Incorporation nor its By-Laws provide for pre-emotive rights.
Preferred Stock
The Preferred Stock may be issued in one or more series, to be determined
and to bear such title or designation as may be fixed by resolution of the Board
of Directors prior to the issuance of any shares thereof. Each series of the
Preferred Stock will have such voting powers (including, if determined by the
Board of Directors, no voting rights), preferences, and other rights as
determined by the Board of Directors, with such qualifications, limitations or
restrictions as may be stated in the resolutions of the Board of Directors
adopted prior to the issuance of any shares of such series of Preferred Stock.
Because the terms of each series of Preferred Stock may be fixed by the
Company's Board of Directors without shareholder action, the Preferred Stock
could be issued with terms calculated to defeat a proposed takeover of the
Company, or to make the removal of the Company's management more difficult.
Under certain circumstances, this could have the effect of decreasing the market
price of the Common Stock. Management of the Company is not aware of any such
threatened transaction to obtain control of the Company.
Series A Preferred Stock
We completed a private offering of Series A Preferred Stock and Series A
Warranties on November 30, 1999. See "Recent Events". In connection with the
prior offering, we designated 525,000 shares of Preferred Stock as "Series A 8%
Cumulative Convertible Redeemable Preferred Stock" ("Series A Preferred Stock").
There are 118,125 shares of Series A Preferred Stock issued and outstanding.
The following is a summary of the rights, preferences and privileges of the
Series A Preferred Stock and is qualified in its entirety by the provisions of
our Certificate of Incorporation and the Certificate of Designation.
Dividends. Subject to the limitations described below, holders of shares
of the Series A Preferred Stock will be entitled to receive, when, as and if
declared by the Board out of funds of the Company legally available for payment,
dividends in cash or Series A Preferred Stock, at the sole option of the
Company, at an annual rate of $.76 per share, payable annually on June 30th,
except that if any such date is a Saturday, Sunday or legal holiday then such
dividend shall be payable on the next day that is not a Saturday, Sunday or
legal holiday. Dividends will be cumulative from the date of
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original issuance of the Series A Preferred Stock and will be payable to holders
of record as they appear on the stock books of the Company on the tenth business
day prior to the dividend payment. If the Company utilizes Dividend Warrants to
pay any dividend, the value of the Dividend Warrants will be deemed to be $12.00
per Warrant.
The Series A Preferred Stock will be junior to dividends to any series or
class of the Company's stock hereafter issued which ranks senior as to dividends
to the Series A Preferred Stock ("senior dividend stock"), and if at any time
any dividend on senior dividend stock is in default, the Company may not pay any
dividend on the Series A Preferred Stock until all accrued and unpaid dividends
on the senior dividend stock for all prior periods and the current period are
paid or declared and set aside for payment. No such senior dividend stock shall
be issued without the approval of holders of a majority of the Series A
Preferred Stock. See "Voting Rights." The Series A Preferred Stock will have
priority as to dividends over the Common Stock and any other series or class of
the Company's stock hereafter issued 'which ranks junior as to dividends to the
Series A Preferred Stock ("junior dividend stock"), and no dividend (other than
dividends payable solely in junior dividend stock) may be paid on, and no
purchase, redemption or other acquisition may be made by the Company of, any
junior dividend stock unless all accrued and unpaid dividends on the Series A
Preferred Stock for all prior periods and the current period have been paid or
declared and set apart for payment. The Company may not pay dividends on any
class or series of the Company's stock having parity with the Series A Preferred
Stock as to dividends ("parity dividend stock"), unless it has paid or declared
and set apart for payment or contemporaneously pays or declares and sets apart
for payment all accrued and unpaid dividends for all prior periods on the Series
A Preferred Stock and may not pay dividends on the Series A Preferred Stock
unless it has paid or declared and set apart for payment or contemporaneously
pays or declares and sets apart for payment all accrued and unpaid dividends for
all prior periods on the parity dividend stock. Whenever all accrued dividends
are not paid in full on the Series A Preferred Stock or any parity dividend
stock, all dividends declared on the Series A Preferred Stock and such parity
dividend stock will be declared or made pro raga so that the amount of dividends
declared per share on the Series A Preferred Stock and such parity dividends
stock will bear the same ratio that accrued and unpaid dividends per share on
the Series A Preferred Stock and such parity dividend stock bear to each other.
The amount of dividends payable for the initial dividend period and for any
period shorter than a full year dividend period will be computed on the basis of
a 360-day year of twelve 30-day months. No interest will be payable in respect
of any dividend payment on the Series A Preferred Stock which may be in arrears.
See "Redemption" below for information regarding restrictions on the
Company's ability to redeem the Series A Preferred Stock when dividends on the
Series A Preferred Stock are in arrears.
Liquidation Rights. In case of the voluntary or involuntary liquidation.
dissolution or winding up of the Company, holders of shares of Series A
Preferred Stock are entitled to receive the liquidation price of $9.50 per
share, plus an amount equal to any accrued and unpaid dividends to the payment
date, before any payment or distribution is made to the holders of the Common
Stock or any other series or class of the Company's stock hereafter issued which
ranks junior as to liquidation rights to the Series A Preferred Stock. The
holders of the shares of the Series A Preferred will not be entitled to receive
the liquidation price of such shares until the liquidation price of any other
series or class of the Company's stock hereafter issued which ranks senior as to
the liquidation rights to the Series A Preferred Stock ("senior liquidation
stock") has been paid in full. No such senior liquidation stock shall be issued
without the approval of holders of a majority of the Series A Preferred Stock.
See "Voting Rights." The holders of Series A Preferred Stock and all series or
classes of the Company's stock hereafter issued 'which rank on a parity as to
liquidation rights with the Series A Preferred Stock ("parity liquidation
stock") are entitled to share ratably, in accordance with the respective
preferential amounts payable on such stock, in any distribution (after payment
of the liquidation price of the senior liquidation stock) which is not
sufficient to pay in full the aggregate of the amounts payable thereon. After
payment in full of the liquidation price of the shares of the Series A Preferred
Stock. the holders of such shares will not be entitled to any further
participation in any distribution of assets by the Company. Neither a
consolidation or merger of the Company with another corporation, nor a sale or
transfer of all or part of the Company's assets for cash, securities or other
property will be considered a liquidation, dissolution or winding up of the
Company.
Voting Rights. The holders of the Series A Preferred Stock will be
entitled to no voting rights except with respect to (i) the establishment of
another class of preferred stock with rights senior to the Series A Preferred
Stock, (ii) any proposed changes in the rights of the Series A Preferred
holders, or (iii) as required by Delaware law.
Redemption at Option of Company. The Series A Preferred Stock is
redeemable for cash, in whole or in part at any time at the option of the
Company, at $9.50 per share, plus accrued and unpaid dividends to the redemption
date.
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If less than all of the outstanding shares of Series A Preferred Stock are
to be redeemed, the Company will select those to be redeemed pro rata or by lot
or in such other manner as the Board of Directors may determine. There is no
mandatory redemption or sinking fund obligation with respect to the Series A
Preferred Stock. 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 semi-annual
dividend have been paid in full.
Notice of redemption will be mailed 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. 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). 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 unless used to pay dividends on the then
outstanding Series A Preferred Stock.
Conversion Rights. The holders of Series A Preferred Stock will be
entitled at any time to convert their shares of Series A Preferred Stock into
one share of Common Stock (the "Conversion Shares"), except that, with respect
to shares of Series A Preferred Stock which the Company has called for
redemption, conversion rights will expire after the close of business on the
redemption date. No payment or adjustment will be made in respect of dividends
Series A Preferred Stock that may be accrued or unpaid or in arrears upon
conversion of shares of Series A Preferred Stock. No fractional shares will be
issued and, in lieu of any fractional share, cash in an amount based on the then
current market price, determined as provided in the Certificate of Designation,
of the Common Stock will be paid.
The conversion rate of the Series A Preferred Stock is subject to
adjustment in certain circumstances, including the payment of a stock dividend
on shares of the Common Stock, combinations and subdivisions of the Common
Stock, certain reclassifications of the Common Stock, and certain cash dividends
and distributions of evidences of indebtedness or assets to holders of certain
of the Company's capital stock. No adjustment in the conversion rate is required
unless it would result in at least a 1% increase of decrease in the conversion
rate; however any adjustment not made is carried forward. No adjustment need be
made in the conversion rate in any of the foregoing cases if the holders of the
Series A Preferred Stock participate in the distribution or transaction on a
basis and with notice that the Board of Directors determines to be fair to the
holders of the Series A Preferred Stock.
In case of any consolidation or merger of the Company with any other
corporation (other than a wholly owned subsidiary), or in case of sale or
transfer of all or substantially all of the assets of the Company, or in the
case of any share exchange whereby the Common Stock is converted into other
securities or property, the Company will be required to make appropriate
provision so that the holder of each share of Series A Preferred Stock then
outstanding will have the right thereafter to convert such share of Series A
Preferred Stock into the kind and amount of shares of stock and other securities
and property receivable upon such consolidation, merger, sale, transfer or share
exchange by a holder of the number of shares of Common Stock into which such
share of Series A Preferred Stock might have been converted immediately prior to
such consolidation, merger, sale, transfer or share exchange.
No Sinking Fund. The Company is not required to provide for the retirement
or redemption of the Series A Preferred Stock through the operation of a sinking
fund.
Other Provisions. The shares of Series A Preferred Stock, when issued, will
be duly and validly issued, fully paid and nonassessable. The holders of the
shares of the Series A Preferred Stock have no preemptive rights with respect to
any shares of capital stock of the Company or any other securities of the
Company convertible into or carrying rights or options to purchase any such
shares.
Series A Common Stock Purchase Warrants
Terms. Each Series A Warrant entitles the holder to purchase one share of
Common Stock during an exercise period commencing on the date of issuance and
terminating three years thereafter, at an exercise price equal to $12.00 per
share, subject to certain adjustments. The Series A Warrants may be exercised
in whole or in part. There are 53,809 Series A Warrants outstanding.
Expiration Date. The Series A Warrants expire in November 2002.
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<PAGE>
Registration Rights granted in November 30, 1999 Completed Offering.
We agreed to use our best efforts to cause a registration statement under
the Act covering the conversion shares and warrant shares to be filed within six
months of the closing of the prior offering (May 30, 2000) and to cause the
registration statement to become effective, and to remain current and effective,
to permit the public sale of the until the earlier of (i) the date that all of
the securities so registered have been sold pursuant to the registration
statement, (ii) the date the holders thereof receive an opinion of counsel that
the registered securities may be sold under the provisions of Rule 144(k) or
(iii) the third anniversary of the effective date of the registration statement.
The subscribers agreed, however, not to sell, pledge, transfer or assign any
warrant shares until 12 months from the closing.
18
<PAGE>
SUMMARY FINANCIAL DATA
The following table sets forth certain selected historical financial data
of the Company as of and for the dates indicated. The summary history financial
data as of May 31, 1999 and for each of the years ended May 31, 1999 and 1998
have been derived form the consolidated financial statements set forth elsewhere
in this prospectus that have been audited by BDO Seidman LLP, independent
auditors (whose report thereon includes an explanatory paragraph relating to the
substantial doubt about the ability of the Company to continue as a going
concern). The selected financial data as of August 30, 1999 and for the three
months ended August 30, 1999 and 1998 are derived from the Company's unaudited
financial statements for such period set forth elsewhere in this Prospectus,
which management believes reflect all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the results for such
period. The financial data set forth below is qualified by reference to and
should be read in conjunction with the Company's consolidated financial
statements, related notes and other financial information contained in the SEC
Reports, as well as "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The results of operations for the three months
ended August 30, 1999 are not necessary indicative of the results to be expected
for the full fiscal year ending May 31, 2000 or future periods.
Statement of Operations Data:
<TABLE>
<CAPTION>
Year Ended May 31, Three Months Ended August 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Gross Revenues (1)/1/ $46,381,668 $55,529,842 $10,818,265 $13,878,754
=========== =========== =========== ===========
Net Revenues 899,836 878,852 295,853 249,431
Gross profit (loss) 134,616 369,409 (30,213) 82,859
Loss from operations (5,192,332) (2,224,291) (1,437,593) (909,282)
Interest expense, net 516,948 499,840 100,294 210,974
Net loss (5,711,964) (2,327,145) (1,540,501) (1,120,256)
Basic and dilutive net loss per share (2) (1.74) (1.60) (0.44) (0.43)
Weighted average number of shares 3,288,871 1,700,000 3,488,665 2,620,782
outstanding (2)
Balance Sheet Data:
August 31, 1999 May 31, 1999
Working capital (deficit) $(1,887,885) $ (392,219)
Total assets 3,621,490 4,447,720
Total liabilities 4,802,405 4,377,226
Stockholders' deficiency $(1,180,915) $ 70,494
</TABLE>
- ---------------------------
/1/ Gross revenues include the value of coin and currency processed and does not
present revenues under generally accepted accounting principals.
19
<PAGE>
THE COMPANY
Introduction
Cash Technologies, Inc., was incorporated in Delaware in 1995. Unless the
context otherwise requires, references herein to the Company refers to Cash
Technologies, Inc., and its wholly-owned subsidiaries, National Cash Processors,
Inc., a Delaware corporation, incorporated in May, 1994, which became a
subsidiary of the Company in January, 1996, CoinBank Automated Systems, Inc., a
Delaware corporation, incorporated in November, 1995, and CoinBank Automation
Handels GmbH, Salzburg, Austria.
On July 9, 1998 the Company completed its initial public offering of
1,485,000 shares of Common Stock and received net proceeds of $8,467,880 after
deducting commissions and expenses of $1,927,120. The offering price of the
shares was $7.00 per share. At the same time the company issued 130,915 shares
of its common stock and certain officers and stockholders exchanged 161,830
shares owned by them in exchange for $1,412,106 of indebtedness owed by the
Company to them. Prior to July 9, 1998, the Company was not a reporting company
under the Securities and Exchange Act of 1934 and did not file reports with the
SEC.
On August 18, 1998, the underwriters in the Company's public offering
exercised the over allotment option and purchased an additional 172,750 shares
of the Company. Net proceeds to the Company from the over allotment exercise
were $1,010,446 after deducting commissions and expense of $198,804.
Through February 28, 1999 the Company has used approximately $2.7 million
for the repayment of notes and loans. Approximately $725,000 has been used for
marketing and advertising. Approximately $480,000 has been used to purchase
CoinBank and miscellaneous equipment. Approximately $550,000 has been spent on
research and development, networks and related equipment. The remainder of the
funds have been used for working capital and operational expenses. The Company
had approximately $1,070,000 remaining as of May 31, 1999.
Business
While the Company has, in recent years, expanded its operations into other
technologies, it began and continues to do business as a cash and coin processor
through its National Cash Processors, Inc. subsidiary. Typically, currency is
purchased in bulk at a discount of between 1% and 2% from face value. After
counting, sorting and/or wrapping, the Company either promptly resells the
processed coin and currency at face value plus a small fee (typically $1.50 to
$3.00 per box of 50 rolls of coins and $.50 to $1.50 per $1,000 worth of bills
sorted) to a variety of customers, including armored car companies, or deposits
it at face value at the Federal Reserve Bank for credit to the Company's
account.
In 1995, the Company began its development of CoinBank self-service coin
counting and processing machines, distributed through its CoinBank Automated
Systems, Inc. subsidiary. The machines accept and count loose coin, then
generate a receipt redeemable for the amount counted less a service fee of
typically 7-9%. This receipt can then be exchanged for currency. The machines
provide individuals and small businesses with a convenient method for the
disposing of their accumulated loose coin without the need for pre-sorting or
wrapping. The Company has performed extensive field tests with these machines in
Southern California, New England and Europe, and can be readily configured to
count coin denominations from most countries in the world. An important feature
of the machines, for which the Company filed for patent protection in 1997, is
their ability to reject extraneous materials such as foreign objects and slugs,
minimizing down time and repairs.
The Company is marketing the machines to OEM customers (manufacturers of
cash handling equipment), companies with existing equipment distribution and
service channels and directly to retailers and financial institutions.
In 1996, the Company began its development of an enhanced version of an
automated teller machine which was designated the ATM-X. The ATM-X was designed
to provide a range of services not typically offered by ATM machines, such as
electronic bill payment, instant activated phone cards, event ticketing and
others. As development efforts proceeded, the Company discovered a significant
market demand for such a product and the need to create a robust transaction
processing system that could link the new ATMs with the worldwide financial
networks in order to provide these new services to ATMs, kiosks and PCS.
20
<PAGE>
In December of 1997, the Company filed a patent application describing its
transaction processing and networking technologies. The technology, which was
later named EMMA (E-commerce Message Management Architecture), allows for the
seamless integration of conventional ATM and credit card (point-of-sale)
networks with non-bank networks and the Internet. The explosion of Internet e-
commerce has created a demand for EMMA's unique capabilities to provide e-
commerce access from ATMs, as well as increased security for financial
transactions conducted over the public Internet.
Focus on the rapid deployment of ATM-X and EMMA has resulted in increases
in the size of the Company's technical staff. In recent months, the Company has
announced strategic relationships with e-commerce industry leaders for various
aspects of the ATM-X / EMMA effort, including: Quest Telecom, Inc., to provide
state-of-the-art real time activated prepaid phone card services; Concord EFS
for ATM and credit card gateway services; Tidel Engineering, Inc., for
manufacturing of ATM-X machines; CheckFree Holdings, Inc., for electronic bill
payment processing services; Sensar, Inc. for high accuracy personal
identification products.
The relationship with Quest Telecom provides the Company with what it
believes is the most sophisticated real time activated phone cards (i.e.
activated at the time the card is sold) in the industry, permitting both plastic
cards and receipt-based cards to be issued in any amount and without incurring
prepaid inventory costs.
The Concord relationship gives EMMA access to every major ATM and POS
network and card issuer in the world. Concord's ATM network is one of the
largest in the U.S. and they are one of the largest transaction processors in
the nation.
CheckFree is the largest electronic payment processor in the nation, with
more than seventy-five percent of the bill payment market. The Company's
relationship with CheckFree provides EMMA with immediate access to thousands of
billers, covering the vast majority of billers in the U.S., and will represent
the first implementation of CheckFree's payment processing system on an ATM or
kiosk.
The Company's technical development agreement with Sensar, Inc. is expected
to result in the ability to bring new e-commerce technologies into commercial
use. By coupling Sensar's identification technology (based on the unique
patterns of the human iris) with EMMA, millions of consumers could be able to
use their ATM cards to make secure purchases on the Internet. Previously, the
fear that hackers would decipher PIN numbers had prevented the use of ATM cards
on the WorldWide Web. This system, in development, uses a small video camera
which photographs the eye from several feet away, making a positive
identification of the person with accuracy greater than that of DNA typing.
The system offers significant advantages for online banking and trading
operations as well as merchants who will be able to expand their customer base
to those without credit cards and consumers who are afraid to send credit card
information over the Internet.
EMMA's capabilities, with interfaces to the Company's various e-commerce
partners, will allow it to seamlessly interface financial networks, particularly
the four main channels through which trillions of dollars are transacted each
year: (1) the ATM network; (2) the credit card (POS) network; (3) the Automated
Clearing House (ACH) network; and (4) cash, by utilizing currency acceptors on
the ATM-X thus allowing individuals with no ATM card or credit card to access
the services offered. The EMMA system is now undergoing certification through
the financial networks. Once certification is completed, ATM-X/EMMA pilot
installations are expected to begin in 1999.
21
<PAGE>
Recent Events
Recently Completed Private Offering
In order to raise funds for working capital and development of E-Commerce
Message Management Architecture (EMMA), on July 27, 1999, we commenced a private
offering pursuant to Section 4(2) of the Securities Act of 1933 and Regulation
D. The offering terminated on November 30, 1999. We did not engage any broker
dealer as placement agent and our officers and directors directed the selling
efforts. We offered units, each unit comprised of (a) 10 shares of Series A 8%
Cumulative Convertible Redeemable Preferred Stock and (b) 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.
At November 30, 1999 we had received gross proceeds from this completed
offering of approximately $1,120,000. As a result of this offering we has issued
(i) 118,125 shares of Series A 8% Cumulative Convertible Redeemable Preferred
Stock and (ii) 53,809 Series A Common Stock Purchase Warrants.
We recorded deemed dividends of $80,569 for both the Series A Preferred
Stock and Series A Warrants issued for the period ended August 30, 1999. This
amount was based on (1) the difference between the closing market price and the
offering price of the Series A Preferred Stock plus (ii) the value of the Series
A Warrants associated with the Series A Preferred Stock, value using the Black
Scholes model.
Geld Lawsuit/Acquisition.
We have instituted a lawsuit against Geld Bearbeitungs Systeme GES.M.B.H.,
an Austrian entity ("Geld") which had been manufacturing certain of our Coinbank
machines. As described in our SEC Reports, we have a five year licensing and
manufacturing services agreement with Geld. We had previously entered into a
letter of intent to acquire Geld and certain disputes have arisen regarding the
acquisition and licensing agreements between the parties. We instituted the
suit to enforce certain licensing rights under our agreements and to enforce the
acquisition letter of intent. Although we believe, based upon advice of our
Austrian counsel, that we have a meritorious and strong claim, there can be no
assurance that we will be successful in our suit.
22
<PAGE>
PLAN OF DISTRIBUTION
General
GunnAllen Financial, Inc., the Placement Agent, has agreed, subject to the
terms and conditions contained in the Placement Agreement between our company
and the Placement Agent, to act as placement agent for the sale by our company
of up to 60 Units on a "best efforts-any or all" basis. The Units are being
offered in minimum subscriptions of $50,000. Partial Units may be offered and
sold at the discretion of the Placement Agent.
The Placement Agent will receive a commission equal to 10% of the aggregate
purchase price of the Units sold ($300,000 if the maximum amount of Units is
sold). In addition, our company shall pay the Placement Agent an accountable
expense reimbursement.
All proceeds received from subscribers will be forwarded by the Placement
Agent to our company which shall deposit the proceeds in a segregated bank
account. There is no minimum number of Units required to be accepted before a
closing may occur and our company and the Placement Agent may close on
subscriptions as they are tendered and accepted and upon receipt of good funds.
Prospective investors will not know whether all or a portion of the Units
offered hereby are subscribed for. This offering shall commence on the date
hereof and terminate upon the earlier of (i) the sale of all of the Units or
(ii) February 1, 2000 (unless extended by our company and Placement Agent for an
additional 30 days).
Subject to certain conditions, our company will indemnify the Placement
Agent against certain civil liabilities, including liabilities under the
Securities Act. In the opinion of the Securities and Exchange Commission,
indemnification for liabilities arising under the Securities Act is contrary to
public policy and therefore unenforceable.
On November 30, 1999 GunnAllen loaned us the principal sum of $500,000
bearing interest at 10% per annum, which we intend to pay from the proceeds of
this offering. GunnAllen has a security interest in all our assets similar to
the security interest being granted to investors. Once the loan to GunnAllen
has been repaid, their security interest will cease. Additionally, GunnAllen
holds warrants to purchase Common Stock of the company which it received in
connection with its underwriting activities of our initial public offering
completed in July 1998. The warrants are exercisable at $$11.55 per share and
are exercisable until July 2003.
Additionally, GunnAllen has entered into a financial consulting agreement
with us whereby we have agreed to pay GunnAllen a $2,500 monthly retainer fee to
assist us in financial planning, mergers, acquisitions, strategic alliances and
obtaining financing. GunnAllen has also received 100,000 warrants exercisable
at $11 5/16 per share.
Summary of Subscription Procedures
Enclosed for prospective investors are certain documents for use in
subscribing for the Units. In order to subscribe for the Units, a prospective
investor must complete, execute and deliver to GunnAllen Financial, Inc., the
following items:
1. The Subscription Agreement and Questionnaire completed and executed;
and
2. a) A check made payable to "Cash Technologies Special Account" in the
amount of $50,000 multiplied by the number of Units subscribed
for; or
b) A wire transfer in accordance with the instructions of GunnAllen
Financial, Inc.
Qualifications of Purchasers; Method of Purchase
An investment in the securities offered hereby involves a high degree of
risk and is suitable only for persons of substantial financial means that have
no need for liquidity in their investments. Accordingly, this offering is being
made only to a limited number of "accredited investors" as defined in Rule
501(a) under the Securities Act.
23
<PAGE>
Each purchaser of the Units must execute the Subscription Agreement, a copy
of which has been provided to each prospective purchaser. By executing the
Subscription Agreement, each purchaser of the Units will, among other things,
(i) agree not to sell or transfer any of the Units at any time or to any person
if such sale or transfer would violate applicable federal or state securities
laws; (ii) represent that such person is an accredited investor; (iii) represent
that such person can bear the economic risk of the purchase of the Units
including the total loss of such person's investment; (iv) represent that such
person has sufficient knowledge and experience in business and financial matters
as to be capable of evaluating the merits and risks of an investment in the
Units, or that such person is being advised by others with such knowledge and
experience so that such person and they together are capable of making such
evaluation; and (v) represent that such person is purchasing the Units for such
person's own account without a view to public distribution or resale.
Each investor must subscribe for a minimum of $50,000 of Units, except that
smaller investments may be accepted at the discretion of the Placement Agent.
Our company has the right to accept or reject any subscription in whole or in
part. If accepted in part, the rejected portion of the investor's subscription
payment will be refunded to the investor without interest. Subject only to
certain mandatory provisions of certain state securities laws, a subscription
may not be terminated by the investor once accepted by our company.
Restrictions on Transfer of the Units, Notes, Warrants and Warrant Shares
The Units, the Notes, the Warrants and the Warrant Shares will not be
registered under the Securities Act or the securities laws of any state and are
being offered and sold in reliance on exemptions from the registration
requirements of such laws. There will be restrictions imposed by the applicable
federal and state securities laws upon the resale or transfer of the Units, the
Notes, the Warrants and the Warrant Shares. The Units, the Notes, the Warrants
and the Warrant Shares will be "restricted securities" as defined in Rule 144
promulgated by the Securities and Exchange Commission and must be held
indefinitely unless they are subsequently registered under the Securities Act
and any applicable state securities laws or unless they may be sold in a
transaction that is exempt from the registration requirements of such laws.
Our company has agreed to grant to the purchasers of the Units certain
"piggyback" registration rights relating to the Warrant Shares. See the form
of registration rights agreement attached to this memorandum as Exhibit E.
24
<PAGE>
INVESTOR SUITABILITY REQUIREMENTS
The Units offered hereby have not been registered under the Securities Act
and they are being offered in reliance upon exemptions provided by Section 4(2)
of the Securities Act and the provisions of Regulation D promulgated thereunder.
This offering is made, and sale of the Units will be made, only to purchasers
qualifying as "accredited investors" under Rule 501(a) of Regulation D.
The term "accredited investor" refers to any person or entity who comes
within any of the following categories, or who our company reasonably believes
comes within any of the following categories, at the time of the sale of the
Units to such person or entity:
1. Any bank as defined in Section 3(a)(2) of the Securities Act, or any
savings and loan association or other institution as defined in Section
3(a)(5)(A) of the Securities Act whether acting in its individual or fiduciary
capacity; any broker or dealer registered pursuant to Section 15 of the Exchange
Act; any insurance company as defined in section 2(13) of the Securities Act;
any investment company registered under the Investment Company Act of 1940 or a
business development company as defined in section 2(a)(48) of that act; any
Small Business Investment Company licensed by the U.S. Small Business
Administration under Section 301(c) or (d) of the Small Business Investment Act
of 1958; any plan established and maintained by a state, its political
subdivisions, or any agency or instrumentality of a state or its political
subdivisions, for the benefit of its employees, if such plan has total assets in
excess of $5,000,000; any employee benefit plan within the meaning of the
Employee Retirement Income Security Act of 1974 if the investment decision is
made by a plan fiduciary, as defined in Section 3(21) of such act, which is
either a bank, savings and loan association, insurance company, or registered
investment adviser, or if the employee benefit plan has total assets in excess
of $5,000,000 or, if a self-directed plan, with investment decisions made solely
by persons that are accredited investors;
2. Any private business development company as defined in Section 202(a)22
of the Investment Advisers Act of 1940;
3. Any organization described in Section 501(c)3 of the Internal Revenue
Code, corporation, Massachusetts or similar business trust, or partnership, not
formed for the specific purpose of acquiring the securities offered, with total
assets in excess of $5,000,000;
4. Any director, executive officer, or general partner of the issuer of
the securities being offered or sold, or any director, executive officer, or
general partner of a general partner of that issuer;
5. Any natural person whose individual net worth, or joint net worth with
that person's spouse, at the time of his purchase exceeds $1,000,000;
6. Any natural person who had an individual income in excess of $200,000
in each of the two most recent years or joint income with that person's spouse
in excess of $300,000 in each of those years and has a reasonable expectation of
reaching the same income level in the current year;
7. Any trust, with total assets in excess of $5,000,000, not formed for
the specific purpose of acquiring the securities offered, whose purchase is
directed by a sophisticated person as described in Rule 506(b)(2)(ii); and
8. Any entity in which all of the equity owners are accredited investors.
ACCESS TO INFORMATION
The Company has agreed to afford each prospective investor, his
representative, attorneys, and accountants the opportunity to ask questions of,
and receive answers from, the management of the Company concerning the terms of
this Private Offering or any other matter whatsoever relating to the Company and
its business, and to obtain any additional information (to the extent that the
Company possesses such information or can acquire it without
25
<PAGE>
unreasonable effort or expense) necessary to verify the accuracy of the
information set forth in this Offering Memorandum or in any of the reports or
other documents furnished herewith.
Prospective investors and their representatives are invited to communicate
with Bruce Korman, Chairman of the Board and Chief Executive Officer of the
Company, at the following address:
Cash Technologies, Inc.
1434 West 11th Street
Los Angeles, CA 90015
(213) 745-2000
REPORTS TO SHAREHOLDERS
The Company distributes annual reports to its stockholders, including
financial statements examined and reported on by independent public accountants,
and will provide such other reports as management may deem necessary or
appropriate to keep stockholders informed of the Company's operations.
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> MAY-31-2000 MAY-31-1999
<PERIOD-START> JUN-01-1999 JUN-01-1998
<PERIOD-END> NOV-30-1999 NOV-30-1998
<CASH> 769,945 1,073,196
<SECURITIES> 323,438 0
<RECEIVABLES> 321,673 136,277
<ALLOWANCES> 0 0
<INVENTORY> 85,939 201,555
<CURRENT-ASSETS> 1,514,521 1,420,284
<PP&E> 1,255,222 1,393,689
<DEPRECIATION> 32,949 114,221
<TOTAL-ASSETS> 4,799,751 4,447,720
<CURRENT-LIABILITIES> 2,507,240 1,812,503
<BONDS> 0 0
0 0
1,114,706 0
<COMMON> 3,488,665 3,488,665
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 4,799,751 4,447,720
<SALES> 764,535 492,169
<TOTAL-REVENUES> 21,648,663 25,678,723
<CGS> 745,890 330,500
<TOTAL-COSTS> 21,630,018 25,517,054
<OTHER-EXPENSES> 2,563,432 2,096,719
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 200,925 321,303
<INCOME-PRETAX> (1,855,223) (2,370,574)
<INCOME-TAX> 7,669 0
<INCOME-CONTINUING> (1,862,892) (2,370,574)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,862,892) (2,370,574)
<EPS-BASIC> (0.67) (0.68)
<EPS-DILUTED> 0 0
</TABLE>
