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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended June 30, 1998 Commission file number: 33-70882
OR
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 [No Fee Required]
For the transition period from ______ to ______
USA TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2679963
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Plant Avenue, Wayne, PA. 19087
(Address of principal executive offices) (Zip Code)
(610)-989-0340
(Registrant's telephone number, including area code)
NONE
(Securities registered pursuant to Section 12(g) of the Act
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to for such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405, of regulations S-B is not contained herein, and will not be contained to,
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendments to this Form 10-KSB. [ ]
Transitional Small Business Disclosure Format Yes No X
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Registrant's total revenues for its most recent fiscal year..........$1,825,229.
As of August 31, 1998, there were outstanding 40,200,147 shares of Common
Stock, no par value, and 670,966 shares of Series A Convertible Preferred
Stock, no par value.
The Company's voting securities are traded on the Over the Counter (OTC)
Electronic Bulletin Board. The aggregate market value of the Company's voting
securities held by non-affiliates of the Registrant was $7,290,950 on September
23, 1998 based upon the average bid and asked price of the Registrant's Common
Stock and Preferred Stock on that date.
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USA TECHNOLOGIES, INC.
PART I
Item 1. Business
USA Technologies, Inc., a Pennsylvania corporation (the "Company") was
founded in January 1992. The Company is a leading provider and licensor of
automated credit card activated control systems for the copying, debit card and
personal computer industries. The Company's devices make available credit card
payment technology in connection with the sale of a variety of products and
services. The Company generates its revenues from retaining a portion of the
monies generated from all credit card transactions conducted through its control
systems, as well as the direct sale of its control systems and the resale of
configured office products and from monthly administrative fees paid by
locations utilizing its control systems.
The Company has developed an automated, credit card activated
control system to be utilized with photocopying machines, facsimile machines,
computer printers, and debit card purchase/revalue stations. The control
systems allow consumers to use credit cards to pay for use of these products.
The Company has also developed the Public PC(TM), which is an
automated credit card activated control system to be used in connection with
a personal computer, including on-line services, such as the Internet. This
product enables locations to offer the use of personal computers to the public
on an "as needed" basis utilizing credit cards as a method of payment. In
addition the Company introduced to the university library market its Automated
Print Payment System(TM) (APPS). This system enables libraries to charge users
via credit/debit cards for the printed output from computer networks, thus
providing a new source of revenue to cover their increasing costs of
operations.
During the fiscal year ended June 30, 1997, the Company introduced
the Business Express(TM), which is being marketed to the hospitality industry
as an amenity to the business traveler. The Business Express(TM) combines the
Company's existing applications for computers, copiers, and facsimiles into a
kiosk type configuration. All services provided are credit card activated. The
Business Express(TM) continues the Company's move toward the sale of the
Company's proprietary equipment to operators rather than the revenue sharing
arrangements employed in past years. The Company still retains all rights to
software and proprietary technology which it licenses to location operators
for their exclusive use. As of June 30, 1998, 132 Business Express(TM) units
have been installed.
The Company generates its revenues from the direct sale of equipment
utilizing its control systems, from retaining a portion of the revenues
generated from all credit card transactions conducted through its control
systems, and from monthly administrative fees from each location utilizing its
control systems. The Company has entered into a joint marketing agreement with
Minolta Corporation, and has been designated as an authorized equipment reseller
by Hewlett-Packard Company and International Business Machines Corporation. The
Company believes that it benefits from the association of its control systems
with the well-known brands of business equipment manufactured by these
companies.
On September 24, 1997, the Company entered into a Joint Venture
Agreement with Mail Boxes Etc. ("MBE"), the leading franchisor of postal,
business, and communications retail service centers, with approximately 3,000
locations in North America (the "Joint Venture"). The Joint Venture exclusively
sells and markets automated, credit card activated business centers under the
name MBE Business Express(TM) to the hospitality industry, and plans to sell and
market to the travel industry, convention centers, colleges, universities,
supermarkets, banks, military, convenience stores, and mass merchandisers
located in the United States. The gross profits from sales of the MBE Business
Express(TM) are shared by the Company and MBE. In addition, other revenues
resulting from activities relating to the MBE Business Express(TM), such as
electronic commerce, licensing, marketing and advertising, are to be split
equally between MBE and the Company. MBE has agreed not to sell, use, endorse,
approve, or purchase any automated, credit card activated technology or
terminals other than those offered by the Company for use in connection with the
equipment included in the MBE Business Express(TM). The Company and MBE will
agree from time to time on an advertising and marketing budget which would cover
anticipated expenses for trade shows, trade advertising, direct mail,
telemarketing, national account coverage, merchandising, market research and
lead generation. All such expenses would be split equally between the Company
and MBE. The Company is to act as the merchant for all MBE Business Express(TM)
business centers and will receive a monthly service fee of $20.00 for each
terminal. The initial term of the Joint Venture is five years. If certain sales
goals are not met by the Joint Venture, the Company may terminate the
exclusivity provisions of the agreement after the second year.
The MBE Business Express(TM) bundles together the same components as
the Business Express(TM): Public PC(TM), Copy Express(TM), and Fax Express(TM),
but under the MBE brand name. In addition, the MBE Business Express(TM) includes
a dial-through service to a nearby MBE store making available the products and
services of the store. Through June 30, 1998, the MBE Joint Venture has sold and
installed 52 MBE Business Express(TM) business centers.
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In September 1997, MBE ordered 195 TransAct(TM) control boxes from the
Company to be used by MBE franchisees for their in-store computer workstations
(computer and printer) ("ICW Project"). The Company will act as the merchant in
connection with credit card sales and will receive a monthly service fee of
$20.00 for each terminal. During the fiscal year ended June 30, 1998, all 195
control boxes had been shipped to MBE generating gross proceeds of
approximately $140,000. As of June 30, 1998 and to date, only 7 control systems
have been installed by MBE in their franchise locations. In April 1998, MBE
ordered 600 additional terminals from the Company for MBE's ICW Project.
On February 17, 1998, Prime Hospitality Corp. ("Prime") entered into
an agreement with the MBE Joint Venture, pursuant to which Prime would
purchase a minimum of 100 MBE Business Express(TM) units for installation at
Prime's owned and managed hotels. The agreement provided that Prime would
purchase the first six units on a trial basis. If the 90-day trial period was
successful, then Prime would order the remaining 94 units. The agreement
provides for a purchase price of approximately $2.0 million for all 100 units.
On June 19, 1998, the MBE Joint Venture received notification from
Prime that the trial period was successful, and Prime would adopt the MBE
Business Express(TM) as a brand standard at all of its AmeriSuites properties.
Pursuant to the agreement, Prime is obligated to purchase a minimum of 94
additional MBE Business Express(TM) units over the next twelve months.
On March 31, 1998, the MBE Joint Venture signed agreements with
International Business Machines Corporation ("IBM") whereby IBM agreed to be
the executional partner for certain aspects of the MBE Joint Venture's
business, including project management services, asset procurement and
inventory financing, configuration and testing of equipment, site preparation,
installation, maintenance services, and asset management. IBM would also
assist the MBE Joint Venture with marketing and technology exchange.
The Company has entered into corporate agreements which establish
itself as a preferred supplier of business center products to two of the top
hospitality companies in the world: Choice Hotels International (Clarion,
Quality, Comfort, Sleep Inns), and Promus Hotel Corporation (Embassy Suites,
Hampton, Doubletree). In addition, the Company's Business Express(TM) has been
approved and recommended as a solution by Marriott for its hotels.
For the years ended June 30, 1998 and 1997, the Company has spent
approximately $199,000 and $344,000, respectively, for the development of its
proprietary technology. These amounts include the expense of outside
consultants and contractors as well as compensation paid to certain of the
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Company's employees and are reflected in compensation expense in the
accompanying consolidated financial statements.
As of June 30, 1998, the Company had 465 Business Express(TM)
control systems, 45 Copy Express(TM) control systems, 33 Debit Express(TM)
control systems, 11 Fax/Printer Express(TM) control systems, and 62 Public
PC(TM) control systems located at various hotels and libraries throughout the
United States and Canada. Through June 30, 1998, the total gross revenues
received by the Company from these systems has not been sufficient to cover
operating expenses.
The Company has been certified by PNC Merchant Services (a
subsidiary of First Data Corporation), a leading credit card processor in the
United States. PNC Merchant Services has extended to the Company a fixed rate
percentage processing charge in connection with the credit card transactions
conducted through the Company's control systems. This charge is payable by the
Company (not the locations) out of its share of the gross proceeds.
Industry Trends
With trends over the last twenty years indicating an ever increasing
customer reliance on the use of credit cards as a method of payment, the
Company believes the future of purchasing retail products and services is in
credit cards rather than cash. Consumers are constantly searching for ways to
purchase quality products and services in the most convenient manner. Examples
of this trend include the increasing use of unattended Automated Teller
Machines (ATM's) in banking transactions and the use of unattended,
self-service gasoline pumps with credit and debit card payment capabilities.
Consumers are becoming more accustomed to using credit cards in an ever
increasing number of retail and service settings. They increasingly use mail
order, telephone and the Internet to order goods and services and use credit
cards to pay for them. There are over a billion credit cards in the United
States. The Company's products reflect this overall trend and feature
automated credit card control systems. The Company has focused its efforts
towards the personal computer, copier, and debit card industries.
Credit Card Processing
Each of the Company's credit card activated control devices records
and transmits all transaction data to the Company, and the Company then
forwards such data to the credit card processor. After receiving transaction
information from the Company, the credit card processor electronically
transfers the funds (less the credit card processor's charge) to the Company.
The Company then forwards to the location its share of the funds.
The Company and each location have agreed on a percentage split of
the gross proceeds from the Company's device. The credit card processor's fees
and cost to forward the location's share of the gross proceeds are all paid
for out of the Company's portion of the gross revenue.
The Company currently retains a portion of the gross revenues from each
device. If the Company has sold the equipment to the location, the portion
retained is generally 5% of the gross revenues. In cases where the Company
continues to own the equipment, the portion retained can be as high as 90% of
gross revenues. In addition, the Company charges a fixed monthly administrative
fee which is generally $20 per control device.
Product Lines
The Business Express(TM)
The hotel/motel hospitality industry continues to expand, but has
become more competitive as chains increase their efforts to attract the most
dominant and profitable customer: the business traveler. Business travelers
and conference attendees account for the majority of hotel occupancy, stay
longer and spend more per visit than the leisure traveler. For these reasons,
hotels have become very sensitive and responsive to the needs and preferences
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of the business traveler. The Business Express(TM) enables a hotel to address
these needs in a comprehensive and cost effective manner, while simultaneously
generating incremental revenue.
The Business Express(TM) utilizes the Company's existing
applications for computers, copiers, and facsimile equipment, and combines
them into a branded product. The Business Express(TM) bundles the Public
PC(TM) unit, the Copy Express(TM) unit, and the Fax Express(TM) unit, into a
functional kiosk type work station. All devices are credit card activated,
therefore eliminating the need for an attendant normally required to provide
such services.
The MBE Business Express(TM)
The MBE Business Express(TM) bundles together the same components
as the Business Express(TM): Public PC(TM), Copy Express(TM), and Fax
Express(TM), but under the MBE brand name. In addition, the MBE Business
Express(TM) includes a dial-through service to a nearby MBE store making
available the products and services of the store.
On September 24, 1997, the Company entered into a Joint Venture
Agreement with Mail Boxes Etc. ("MBE"), the leading franchisor of postal,
business, and communications retail service centers with approximately 3,000
locations in North America. The Joint Venture exclusively sells and markets
automated, credit card activated business centers under the name MBE Business
Express(TM) to the hospitality industry, with plans to enter other areas such as
the travel industry, convention centers, colleges, universities, supermarkets,
banks, military, convenience stores, and mass merchandisers located in the
United States. Gross profits earned by the Joint Venture from sales on a
National Account level and sales referred to the Joint Venture by MBE
franchisees are split equally by the Company and MBE. Any sales generated by
either of the partners responsible for obligating the customer for the sale
would receive 75% of the gross profit and the other partner would receive 25% of
the gross profit. MBE has agreed not to sell, use, endorse, approve, or purchase
any unattended, credit card activated technology or terminals other than those
offered by the Company for use in connection with the equipment included in the
MBE Business Express(TM). If a customer does not desire to purchase the MBE
Business Express(TM), the Company is permitted to sell to such customer a
private label product under any name other than MBE Business Express(TM). The
initial term of the Joint Venture is five years. If certain sales goals are not
met by the Joint Venture, the Company may terminate the exclusivity provisions
of the agreement after the second year. In this regard, if 2000 business centers
are not sold by September 24, 1999, the exclusivity provisions may be terminated
by the Company. The Joint Venture may also be terminated at any time by either
partner if the other partner has breached any material term or condition of the
agreement; provided, that the terminating partner has allowed the other partner
at least a sixty day period to cure any alleged breach.
The Copy Express(TM)
Traditionally, customers wishing to use a photocopying machine have
either used a prepaid, stored value card or cash. In most instances, this
places a burden on employees of the facility to provide a number of services
unrelated to their primary jobs, such as providing change and
collecting/counting/reloading coins. With the Copy Express(TM), the attendant
no longer needs to interact with the customers for these purposes.
The Copy Express(TM) provides a cashless method to pay for the use
of photocopying machines. The device is attached to the photocopying machine,
computer printer, or microfilm/fiche printer in a similar manner as attaching
a standard coin acceptor. The device can be attached to either existing or new
equipment. The control system enables customers to photocopy documents with
the use of a credit card.
The Debit Express(TM)
Many "closed" environments such as universities or hospitals utilize
a private card known as a debit or "stored value" card, to store cash value.
The system works by encouraging customers (by discounting the price of the
products or services) to transfer lump sum cash values onto a magnetic stripe
or imbedded chip card that can be used to activate equipment within the closed
environment. As the cardholder uses the card to purchase products or services
the cash value is deducted from the total value on the card. Typically, the
cards are purchased from attendants or from machines which accept coins or
dollar bills.
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The Company's Debit Express(TM) enables customers to purchase or
revalue their debit cards with the swipe of a credit card and eliminates the
need for cash or for an attendant to handle cash or provide change. The Debit
Express(TM) eliminates any reliance on cash by allowing customers to use a
valid credit card to purchase or place additional value on a debit card.
The Public PC(TM)
The Company believes that the growing dependence on personal
computers has created an environment where there is a need for access to
personal computers by the general public on an " as needed" basis. To meet
this need, the Company has developed the Public PC(TM). Through June 30, 1998,
the Company has installed 55 units in libraries and retail locations. The
device enables the public to utilize personal computers and/or the services
they offer on an "as-needed" basis. The system is designed so that the
computer cannot be used until a valid credit card is swiped through the
control system. Once the user is authorized to proceed, the system has the
ability to charge for time in use, printed output, and any modem activity.
The Company believes that the personal computer is becoming an
integral part of how people access and utilize the information available to
them. The Company believes that the majority of libraries do not currently
offer general use personal computers to their patrons. The Company will pursue
print shops, cyber cafes, hotels, airports, convention and conference centers,
and various retail outlets as potential customers.
Marketing
The Company is currently marketing its products through its full-time
sales staff consisting of four persons to hotel and retail locations, either
directly or through facility management companies servicing these locations. The
Company believes the agreements with Minolta, MBE, Choice Hotels International,
and Promus Hotel Corporation are an important component of the Company's effort
to market the Business Express(TM) to the hospitality industry because they
provide instant brand name recognition.
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As of September 18, 1998, the MBE Joint Venture has a $1.9 million
backlog of signed orders for the MBE Business Express(TM). Substantially all of
these orders are from Amerisuites locations arising from execution of the $2.0
million contract between the MBE Joint Venture and Prime Hospitality.
Procurement
The Company's control system devices consist of a card reader, printer,
amplifier, circuit board and micro chip in a specially designed housing. The
devices are currently manufactured to the Company's design specification by an
independent contractor, LMC - Autotech Technologies, LP. In May 1998, the
Company on behalf of the MBE Joint Venture contracted for the purchase of 1,500
control devices, for a total purchase price of $779,865. Of the 1500 units, 900
are for the Joint Venture and 600 for MBE's ICW Project, by mutual agreement of
USA and MBE. The Company and the MBE Joint Venture anticipate obtaining its
complete computer systems (other than the Public PC(TM) control system) from
IBM.
Competition
There are currently other businesses offering an unattended, credit
card activated control system for use in connection with copiers, printers,
general use personal computers, facsimile machines, Internet and e-mail
access, and debit card purchase/revalue stations. In addition, the businesses
which have developed unattended, credit card activated control systems
currently in use in connection with gasoline dispensing, public telephones,
prepaid telephone cards, ticket dispensing machines, vending machines, or
facsimile machines, are capable of developing products or utilizing their
existing products in direct competition with the Company. Many of these
businesses are well established, have substantially greater resources than the
Company and have established reputations for success in the development, sale
and service of high quality products. The Company is aware of one business
which has developed an unattended, credit card activated control system to be
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used in connection with vending machines. Any such increased competition may
result in reduced sales and/or lower percentages of gross revenues being
retained by the Company in connection with its licensing arrangements, or
otherwise may reduce potential profits or result in a loss of some or all of
its customer base. The Company is also aware of several businesses which make
available use of the Internet and use of personal computers to hotel guests in
their hotel rooms. Although these services are not credit card activated, such
services would compete with the Company's MBE Business Express(TM), and the
locations may not order the MBE Business Express(TM), or if ordered, the hotel
guest may not use it. Recently, the Company became aware that one potential
competitor has developed a credit card activated personal computer kiosk.
Patents, Trademarks and Proprietary Information
The Company has applied for federal registration of its trademarks
Business Express(TM), Copy Express(TM), C3X(TM), Public PC(TM) and TransAct(TM).
Much of the technology developed or to be developed by the Company is
subject to trade secret protection. To reduce the risk of loss of trade secret
protection through disclosure, the Company has entered into confidentiality
agreements with its key employees. There can be no assurance that the Company
will be successful in maintaining such trade secret protection, that they will
be recognized as trade secrets by a court of law, or that others will not
capitalize on certain of the Company's technology.
The Company has applied for eight United States patents and has
applied for foreign patents in connection therewith. To date, two of these
patents have been approved: Patent Number 5,619,024 entitled "Credit card and
bank issued debit card operated system and method for controlling and
monitoring access of computer and copy equipment," and Patent Number 5,637,845
entitled "Credit and bank issued debit card operated system and method for
controlling a prepaid card encoding/dispensing machine." As of the date
hereof, the remaining six applications are pending and have not been granted.
Employees
As of June 30, 1998, the Company had twenty-one full time employees.
Item 2. Properties
The Company leases its principal executive offices, consisting of
approximately 7,000 square feet, at 200 Plant Avenue, Wayne, Pennsylvania for
a monthly rental of $5,000 plus utilities and operating expenses. The lease
expires on October 15, 1999.
Item 3. Legal Proceedings
In June 1994, a former employee and Director of the Company filed a
complaint against the Company in the Court of Common Pleas of Montgomery
County, Pennsylvania. The complaint alleges that the Company engaged in age
discrimination in violation of the Pennsylvania Human Relations Act, in
connection with his termination of employment. The trial of this matter was
held in July 1998, and on August 28, 1998 the Court entered an Order in favor of
the Company and against the former employee. The Court's decision states that
the former employee failed to prove any age discrimination. On September 14,
1998, the former employee appealed the Court's decision as well as other prior
orders rendered in the matter to the Superior Court of Pennsylvania.
On June 11, 1998, the Company filed a complaint in the District Court
of the Eastern District of Pennsylvania against Alphanet Hospitality Systems,
Inc. ("Alphanet Hospitality") and Alphanet Telecom, Inc. ("Alphanet Telecom")
(collectively "Alphanet"). The complaint alleges that the Defendants engaged in
patent infringement, breach of contract, misappropriation of trade secrets,
unfair competition and tortious interference with prospective business
relations. The Company and Alphanet Hospitality considered entering into a
business relationship. In order to protect the Company's confidential
information and trade secrets, Alphanet Hospitality signed a Non-Disclosure and
Non-Use Agreement as part of the negotiation process. Alphanet terminated the
negotiations and the relationship with the Company. Shortly thereafter, Alphanet
began marketing an unattended business center similar to the Company's Business
Express(TM). The Company believes that Alphanet wrongfully used the confidential
information and trade secrets it became privy to during the negotiations, to
develop its product. The Company is seeking damages and injunctive relief. On
September 14, 1998, Alphanet filed an answer to the Complaint denying any
liability to the Company. Alphanet also filed a counterclaim against the Company
seeking a declaratory judgement that the Company's patents are invalid or, in
the alternative, there is no patent infringement. The counterclaim also seeks
damages against the Company for unfair competition and product disparagement.
On September 3, 1998, MBE commenced a legal action against the Company
in the Superior Court of the State of California, San Diego County. The
complaint alleges that the 195 terminals purchased by MBE were defective, and
seeks a refund of the purchase price in the amount of $141,260 as well as lost
profits claimed to be several hundred thousand dollars. In addition, the
complaint seeks a declaratory judgment that MBE is not obligated to purchase the
600 terminals ordered in April 1998. The complaint states that it does not
relate
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to the MBE Joint Venture but solely to MBE's ICW Project, and MBE is ready,
willing and able to proceed in accordance with the MBE Joint Venture Agreement.
The Company received the Complaint on Saturday, September 12, 1998, and
therefore, has not yet responded thereto. The Company believes the claim to be
without merit and that it will prevail in this action. Accordingly, there has
been no provision recorded for this action in the accompanying consolidated
financial statements.
On September 28, 1998, the Company commenced arbitration proceedings
against MBE as provided for in the MBE Joint Venture Agreement. The Company
alleges that MBE breached the Agreement by among other things negotiating with
and utilizing a competitor of the Company in connection with MBE's in-store
computer workstation project ("ICW Project"). The Company believes that such
action violated the exclusivity provisions of the Agreement which required MBE
to use USA for the ICW Project. The Company also alleges that MBE wrongfully
used and disclosed to the competitor certain proprietary information of the
Company. The Company seeks a declaration that MBE is required to use the Company
in connection with MBE's ICW Project, that MBE accept delivery and pay the
purchase price of $428,000 for the 600 terminals ordered by MBE in April 1998,
and that MBE pay to the Company monetary damages in excess of $5,000,000 for
MBE's breach. The complaint states that the Company has always fully performed
and intends to continue to fully perform its duties and obligations under the
MBE Joint Venture Agreement.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on June 24, 1998.
(b) Election of Directors
Each of the following individuals was elected as a
director at the Annual Meeting:
For Withhold
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George R. Jensen, Jr. 31,301,296 881,643
Stephen P. Herbert 31,456,118 726,821
Peter G. Kapourelos 31,454,318 728,621
William W. Sellers 31,438,930 744,009
Henry B. duPont Smith 31,454,318 728,621
William L. Van Alen, Jr. 31,456,118 726,821
(c) In addition to the election of directors, the following other
matters were also voted on and approved at the Annual Meeting:
(i) A proposal to ratify the appointment of Ernst &
Young LLP as independent public accountants for the
Company for its 1998 fiscal year.
Affirmative Votes - 31,910,139
-----------------
Negative Votes - 155,150
--------------
Abstaining Votes - 117,650
----------------
(ii) A proposal to act upon an amendment to the
Company's Articles of Incorporation increasing the
number of authorized shares of Common Stock from
55,000,000 to 62,000,000.
Affirmative Votes - 28,371,365
-----------------
Negative Votes - 3,411,658
--------------
Abstaining Votes - 399,916
----------------
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Common Stock and Preferred Stock are currently traded on the OTC
Electronic Bulletin Board under the symbols USTT and USTTP, respectively.
The high and low bid prices on the OTC Electronic Bulletin Board for
the Common Stock were as follows:
Fiscal
1997 High Low
- ---- ---- ---
First Quarter (through September 30, 1996) $ .63 $.38
Second Quarter (through December 31, 1996) $ .57 $.29
Third Quarter (through March 31, 1997) $ .43 $.28
Fourth Quarter (through June 30, 1997) $ .50 $.18
1998
- ----
First Quarter (through September 30, 1997) $ .80 $.27
Second Quarter (through December 31, 1997) $ .60 $.22
Third Quarter (through March 31, 1998) $ .49 $.25
Fourth Quarter (through June 30, 1998) $ .46 $.25
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1999
- ----
First quarter (through September 23, 1998) $ .31 $.12
Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
At June 30, 1998, there are 4,201,000 shares of Common Stock issuable
upon exercise of outstanding options, and 152,800 shares of Common Stock
issuable upon exercise of outstanding purchase rights. All of these shares of
Common Stock, if issued on the date hereof, would be "restricted securities"
as defined under Rule 144 under the Act. Of the 4,201,000 options, 150,000 are
exercisable at $.50 per share, 840,000 are exercisable at $.45 per share,
1,315,000 are exercisable at $.25 per share, 75,000 are exercisable at $.20
per share, 1,321,000 are exercisable at $.15 per share, 450,000 are
exercisable at $.10 per share, and 50,000 are exercisable at $.05 per share.
In connection with the above options and outstanding Purchase Rights to
acquire up to 152,800 shares of Common Stock at $1.00 per share, the Company
has filed a registration statement under the Act and applicable state
securities laws covering all of the Common Stock underlying the options. All
of the aforesaid options have been issued by the Company to employees,
Directors, officers and consultants.
As of June 30, 1998, there were 673,000 shares of Common Stock
issuable upon exercise of the outstanding 1995 Warrants, which when and if
issued would be freely tradeable under the Act. As of June 30, 1998, there are
868,000 shares of Common Stock issuable upon exercise of the outstanding 1996
Warrants, which when and if issued would be freely tradeable under the Act. As
of June 30, 1998, there were 40,000 shares of Common Stock issuable upon
exercise of the outstanding 1996-B Warrants, which when and if issued would be
freely tradeable under the Act. As of June 30, 1998, there are 15,000 shares
of Common Stock issuable upon exercise of the outstanding 1997 Warrants, which
when and if issued would be freely tradeable under the Act. As of June 30,
1998, there were 1,100,000 shares of Common Stock issuable upon the exercise
of outstanding Warrants issued to affiliates and/or consultants to GEMA in
connection with the sale of Convertible Securities. As of June 30, 1998, there
were 40,000 shares of Common Stock issuable upon the exercise of the
outstanding 1998-A Warrants, which when and if issued would be freely
tradeable under the Act.
On June 30, 1998 there were 955 record holders of the Common Stock
and 714 record holders of the Preferred Stock.
The holders of the Common Stock are entitled to receive such
dividends as the Board of Directors of the Company may from time to time
declare out of funds legally available for payment of dividends. Through the
date hereof, no cash dividends have been declared on the Company's securities.
No dividend may be paid on the Common Stock until all accumulated and unpaid
dividends on the Preferred Stock have been paid. As of June 30, 1998, such
accumulated unpaid dividends amount to $2,442,650 and an additional $503,420
of dividends accrued on August 1, 1998.
During the fourth quarter of the fiscal year, certain holders of the
Company's Preferred Stock converted 22,800 shares into 228,000 shares of Common
Stock. Certain of these shareholders also converted cumulative preferred
dividends of $103,095 into 103,095 shares of Common Stock.
<PAGE>
Also during the fourth quarter of the fiscal year, 3,710,000 warrants
were exercised, resulting in the issuance of 3,710,000 shares of Common Stock.
Purchase rights amounting to 4,500 were also exercised, resulting in the
issuance of 4,500 shares of Common Stock.
Subsequent to June 30, 1998 and through September 18, 1998, certain
holders of the Company's Preferred Stock converted 4,270 shares into 42,700
shares of Common Stock. Certain of these shareholders also converted
cumulative preferred dividends of $14,460 into 14,460 shares of Common Stock.
During July and August 1998, the Company engaged in a $700,000 private placement
offering of 70 units at a unit price of $10,000 pursuant to Rule 506 of
Regulation D promulgated under the Act. The Company sold 27.8 units at $10,000
each, with each unit consisting of 2,000 shares of Series A Convertible
Preferred Stock and 50,000 1998-B Common Stock Purchase Warrants ("1998-B
Warrants"). The 1998-B Warrants enable the holder to purchase one share of
Common Stock for $.15 per share through January 1, 1999 and $.40 per share
thereafter.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
Since January 1992, the Company has been engaged primarily in research and
development activities focused on designing, developing, and marketing its
credit card activated control systems. During the quarter ended June 30, 1998,
the Company determined that it is no longer designated as a development stage
enterprise as defined in Statement of Financial Accounting Standards No. 7
Development Stage Enterprises. The strategic alliances entered into during the
year ended June 30, 1998 between the Company and MBE and between the MBE Joint
Venture and IBM have provided the Company with the ability to complete its
transition from a development stage enterprise to an enterprise focusing on
marketing its products and its commerical operations. The Company has
9
<PAGE>
incurred operating losses during the years ended June 30, 1998 and 1997 of
$3,568,281 and $3,120,712, respectively, and anticipates incurring operating
losses through at least the first half of fiscal 1999.
The Company's independent auditors have included an explanatory
paragraph in their report on the Company's June 30, 1998 consolidated financial
statements discussing issues which raise substantial doubt about the Company's
ability to continue as a going concern. The Company believes that the funds
available at June 30, 1998 combined with the revenues to be generated during
fiscal year 1999, the potential capital to be raised from private placement
activities and the exercise of Common Stock Purchase Warrants, and the ability
to reduce anticipated expenditures, if required, will provide for the Company to
continue a going concern.
Results of Operations
Fiscal year ended June 30, 1998:
For the fiscal year ended June 30, 1998, the Company had a net loss of
$3,568,281. The overall loss applicable to common shares of $5,322,847 or $(.15)
loss per common share (basic and diluted) was derived by adding the $3,568,281
net loss and the $1,754,566 cumulative preferred dividends and other adjustments
and dividing by the weighted average shares outstanding of 35,320,477.
Revenues for the fiscal year ended June 30, 1998 were $1,825,229, an
increase of $1,217,457 or 200% over the prior year, reflecting the continued
entrance of the Business ExpressTM and the MBE Business ExpressTM into the
marketplace.
Operating expenses for the fiscal year ended June 30, 1998 were
$5,501,650, representing a $1,758,689 or 47% increase over the prior year. The
primary contributors to this increase were cost of sales, general and
administrative expense, and compensation expense, as discussed below.
Cost of sales increased by $736,639 from the prior year, primarily
reflecting the increase in MBE Business Express(TM) business. General and
administrative expenses of $2,213,984 increased by $173,821 or 8.5% which
reflects both a general increase in spending to support the expansion of
operations and other factors as described below. Specifically, the major
contributors to this increase were: reserves of $87,520 established in fiscal
1998 to cover estimated future field service warranty expenses for the Company's
C3X terminals; marketing promotions and trade show expenses increased $64,901 or
59%; and advertising increased by $125,204 or 143%, reflecting the need to
increase product awareness in the marketplace. Certain other increases were
experienced in outside services, telephone, and office supplies. Certain other
expenses decreased as compared to the prior year, primarily professional and
consultant fees, which decreased by $109,916 or 20%.
Compensation expense was $1,909,682, an increase of $829,224 or 76.7%
over the previous year. The increase was primarily due to the non-cash expense
of $554,630 which reflects the compensation charge recorded for the repricing of
the common stock options below fair market value during April 1998. The
remainder of the increase is due to increased personnel requirements in the
operations and sales areas.
10
<PAGE>
Depreciation expense of $116,255 increased by $19,005, which is
attributable to the increased depreciable asset base.
Fiscal year ended June 30, 1997:
For the fiscal year ended June 30, 1997, the Company had a net loss of
$3,120,712. Overall this loss reflects the continuing development stage
activities of the Company. The Company's Preferred Stock provides for an annual
cumulative dividend of $1.50 per share payable to the shareholders of record on
February 1 and August 1 each year. The $4,364,007 loss applicable to common
shares or $.21 loss per common share was derived by adding the $3,120,712 net
loss and the $1,243,295 of cumulative preferred dividends earned for the year
ending June 30, 1997, and dividing by the weighted average shares outstanding,
of 20,984,381.
Revenues for the period were $607,772, which increased $554,793 from
last year, primarily reflecting the sales of the Business Express(TM) product
line.
Operating expenses for the fiscal year ended June 30,1997 were
$3,742,961, representing a $1,212,166 or 47.9% increase over the prior year. The
primary contributors to this increase were cost of sales, general and
administrative expense and compensation, as detailed below.
Cost of sales increased by $525,090 in the prior year, reflecting the
first year of equipment sales. The cost of equipment sales increased $473,529
and the cost of license fee revenues increased $51,561. General and
administrative expense of $2,040,163 increased sharply by $528,882 or 35.0%
which reflects both a general increase in spending to support the expansion of
operations as well as several non-operational factors. Specifically the major
contributors to this increase were: travel and lodging increased by a total of
$66,393, which reflected significant marketing related travel as well as an
increase in travel for the increased numbers of installations. Marketing
promotions, mailings and trade show expenses increased $110,147. Advertising
increased by $26,000, reflecting the need to increase product awareness in the
marketplace. Professional and consultant fees increased by $86,770, reflecting
increased legal, public relations and patent activity. Product development
expense increased $119,852 primarily due to developmental costs for new
customers. The balance of the increase includes temporary services, telephone,
office expense, and postage.
Compensation expense was $1,080,458, an increase of $177,060 or 19.6%
over the previous year. This increase was primarily due to headcount increases
in the sales function and to a lesser extent, operations. The cost of employee
benefits also rose by $34,468.
Depreciation expense of $97,250 increased by $25,234, which is
attributable to the increased depreciable asset base.
Plan of Operations
As of June 30, 1998, the Company had a total of 616 credit card
activated control systems installed in the field as follows: Business
Express(TM) 465, Copy Express(TM) 45, Debit Express(TM) 33, Public PC(TM) 62,
Fax/Printer Express(TM) 11. Through June 30, 1998, total license and
transaction fees earned by the Company was $236,742.
During the past year the Company has continued its direction in product
development. It has focused on products capable of generating new
11
<PAGE>
incremental revenue for equipment operators (i.e. Business Express(TM))
as opposed to in the past simply providing a better method of payment (i.e. Copy
Express(TM)). The new direction is also reflected in the move toward the sale of
the Company's proprietary equipment to operators rather than the revenue sharing
arrangements employed in prior years. The Company still retains all rights to
software and proprietary technology which it licenses to location operators for
their exclusive use. However this shift in market approach reduces the Company's
dependency on transaction processing revenue by providing a built in gross
profit on the sale of the equipment, and simultaneously reduces the Company's
capital asset requirements.
Plans for the coming fiscal year include continued focus on the sales
and/or leasing of its Business Express(TM) and MBE Business Express(TM) business
centers, continued development of strategic partnering relationships, and
continued development of its technology into new areas to include electronic
commerce and advertising.
Liquidity and Capital Resources
During the fiscal year ended June 30, 1998, the Company completed a
number of equity transactions. Net proceeds of $761,510 were realized from
private placement offerings of Series A Preferred Stock and $1,530,639 was
realized from Common Stock transactions, principally the exercise of Common
Stock Purchase Warrants. As of June 30, 1998, the Company had negative working
capital of $5,312, which included cash and cash equivalents of $324,824 and
inventory of $436,971.
During the fiscal year ended June 30, 1998, net cash of $2,578,597 was
used by operating activities, primarily due to the net loss of $3,568,281. The
net cash provided by financing activities of $2,273,878 was principally due to
the net proceeds generated from the issuance of securities described in the
prior paragraph.
The Company's independent auditors have included an explanatory
paragraph in their report on the Company's June 30, 1998 consolidated financial
statements discussing issues which raise substantial doubt about the Company's
ability to continue as a going concern. The Company believes that the funds
available at June 30, 1998 combined with the revenues and earnings to be
generated during fiscal year 1999, the potential capital to be raised from
private placement activities and the exercise of the Common Stock Purchase
Warrants, and the ability to reduce anticipated expenditures, if required, will
provide for the Company to continue as a going concern through at least June 30,
1999.
During July and August 1998, in connection with the July 1998 private
placement offering the Company sold an aggregate of 55,600 shares of Series A
Preferred Stock and 1,390,000 1998-B Warrants for gross proceeds of $278,000.
The Company anticipates that for the year ended June 30, 1999, there
will be a negative cash flow from operations in excess of $1.5 million. The
Company anticipates that the shortfall in cash flow will be supported by
additional equity infusions from private placement activity and the exercise of
the Common Stock Purchase Warrants, and, if needed, the ability to reduce
planned expenditures.
Commitments
The Company leases approximately 7,000 square feet in Wayne,
Pennsylvania for a monthly rental of $5,000 plus utilities and operating
expenses. The lease expires on October 15, 1999.
12
<PAGE>
During May 1998, the Company, on behalf of the MBE Joint Venture,
entered into a commitment to acquire 1,500 control system equipment for
$779,865. Of such control systems, 600 were ordered in connection with MBE's ICW
Project. These amounts are expected to be paid from profits on the sale of the
associated MBE Business Express(TM) sales and from sales directly to MBE. If
these sales fail to materialize, the Company would use available cash plus funds
from private placement activity and/or the exercise of Common Stock Warrants, to
pay for the control system equipment.
Subsequent to June 30, 1998, the Company, made commitments to several
vendors for approximately $40,000 worth of inventory beyond that required by
existing sales commitments. The Company believes that future sales commitments
will be secured to fully utilize this inventory investment.
Year 2000 Compliance
The Company has recently commenced a study of its business in order to
determine whether its computer systems are in compliance with Year 2000 issues.
In this regard, many existing computer programs use only two digits to identify
a year in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not corrected,
many computer applications could fail or create erroneous results by or at the
Year 2000.
In connection with its study, the Company is concentrating on five
areas of its business: (i) its control system terminals; (ii) its office
computers; (iii) its credit card processing systems and related systems; and
(iv) its back-up, off-site recovery system and (v) its non-Information
Technology ("IT") systems. The study should be completed on or before December
31, 1998. Based on the study to date the Company estimates that it could incur
costs of up to $25,000 in order to be Year 2000 compliant. In reference to item
(ii) above, the Company has already found all but two office computers to be
compliant. Such computers will be replaced in fiscal year 1999.
The Company is in the process of obtaining written assurances of
compliance from all material third parties whose products may affect the
Company's operations.
The worst case scenario for the Company would be if the control systems
in the field were all found to contain a Year 2000 problem which caused
defective transmissions into the Company's main processing software. Preliminary
analysis indicates the probability of this scenario actually happening is very
low (The technology of the control units does not involve use or transmission of
two digit year data). If however it did happen, the Company would utilize the
services of IBM Global Services to replace all defective units. The Company
anticipates the cost of such services to be approximately $150,000.
13
<PAGE>
Item 7. Consolidated Financial Statements
Page
Report of Independent Auditors F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statement of Shareholders' Equity F-4
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
14
<PAGE>
Report of Independent Auditors
To the Board of Directors and Shareholders
USA Technologies, Inc.
We have audited the accompanying consolidated balance sheets of USA
Technologies, Inc. as of June 30, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
two years in the period ended June 30, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of USA Technologies, Inc. at June 30, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended June 30, 1998, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming USA
Technologies, Inc. will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, the Company's recurring losses from
operations from its inception and its accumulated deficit through June 30,
1998, raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also
described in Note 2. The financial statements do not include any adjustments
to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
might result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
August 17, 1998
F-1
<PAGE>
USA Technologies, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30
1998 1997
----------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 324,824 $ 630,266
Accounts receivable less allowance
for uncollectible accounts of $23,764 and
$19,345 in 1998 and 1997, respectively 222,743 127,318
Inventory 436,971 378,318
Stock subscriptions receivable 19,875 60,000
Prepaid expenses and deposits 20,515 15,670
---------------------------------
Total current assets 1,024,928 1,211,572
Property and equipment, net 151,906 178,457
Other assets 10,250 20,250
---------------------------------
Total assets $ 1,187,084 $ 1,410,279
=================================
Current liabilities:
Liabilities and Shareholders' equity
Accounts payable $ 576,787 $ 474,646
Accrued expenses 430,643 46,742
Current obligations under capital leases 22,810 18,270
---------------------------------
Total current liabilities 1,030,240 539,658
Obligations under capital leases, less current portion 1,669 24,480
---------------------------------
Total liabilities 1,031,909 564,138
Shareholders' equity:
Preferred Stock, no par value:
Authorized shares - 1,200,000
Series A Convertible issued and outstanding shares - 618,236 and 861,205
at June 30, 1998 and 1997, respectively (liquidation
preference of $8,625,010 at June 30, 1998) 4,538,114 7,024,811
Common Stock, no par value:
Authorized shares - 62,000,000 and 55,000,000 at
June 30, 1998 and 1997, respectively
Issued and outstanding shares - 40,163,837 and
29,969,934 at June 30, 1998 and 1997, respectively 11,223,213 4,355,334
Accumulated deficit (15,606,152) (10,534,004)
---------------------------------
Total shareholders' equity 155,175 846,141
---------------------------------
Total liabilities and shareholders' equity $ 1,187,084 $ 1,410,279
=================================
</TABLE>
See accompanying notes.
F-2
<PAGE>
USA Technologies, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended June 30
1998 1997
---------------------------------
<S> <C> <C>
Revenues:
Equipment sales $ 1,588,487 $ 490,614
License and transaction fees 236,742 117,158
--------------------------------
Total revenues 1,825,229 607,772
Operating expenses:
General and administrative 2,213,984 2,040,163
Compensation 1,909,682 1,080,458
Cost of sales 1,261,729 525,090
Depreciation and amortization 116,255 97,250
--------------------------------
Total operating expenses 5,501,650 3,742,961
--------------------------------
(3,676,421) (3,135,189)
Other income (expense):
Interest income 18,225 26,676
Interest expense (8,443) (12,199)
Joint Venture activities 98,358 --
--------------------------------
Total other income (expense) 108,140 14,477
--------------------------------
Net loss (3,568,281) (3,120,712)
Cumulative preferred dividends and other adjustments (1,754,566) (1,243,295)
--------------------------------
Loss applicable to common shares $ (5,322,847) $ (4,364,007)
================================
Loss per common share (basic and diluted) $ (0.15) $ (0.21)
================================
Weighted average number of common shares
outstanding (basic and diluted) 35,320,477 20,984,381
================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
USA Technologies, Inc.
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Series A
Convertible
Preferred Common Accumulated
Stock Stock Deficit Total
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, June 30, 1996 $ 6,776,132 $ 2,720,201 $ (7,296,143) $ 2,200,190
Issuance of 687,000 shares of Common Stock
in exchange for consulting services - 277,198 - 277,198
Conversion of 24,170 shares of Convertible
Preferred Stock to 273,800 shares of
Common Stock (206,009) 206,009 - -
Conversion of $39,001 of cumulative
preferred dividends into 39,001 shares of
Common Stock at $1.00 per share - 39,001 (39,001) -
Conversion of $78,148 of cumulative
preferred dividends into 94,157 shares of
Common Stock at $ .83 per share - 78,148 (78,148) -
Common Stock warrants exercised - 3,202,000
at $ .20 per warrant, net of offering
costs - 576,108 - 576,108
Issuance of 9,350 shares (9.35 units) of
Convertible Preferred Stock at $10.00 per
share in connection with the 1996B
Private Placement 93,500 - - 93,500
Issuance of 80,000 shares (40 units) of
Convertible Preferred Stock at $5.00 per
share in connection with the 1997 Private
Placement, net of offering costs 361,188 - - 361,188
Exercise of 150,000 Common Stock options at
$ .05 per share - 7,500 - 7,500
Issuance of Common Stock in connection with
convertible security placement
(Note 9), net of offering costs - 451,169 - 451,169
Net loss - - (3,120,712) (3,120,712)
-----------------------------------------------------------------
Balance, June 30, 1997 $ 7,024,811 $ 4,355,334 $ (10,534,004) $ 846,141
</TABLE>
F-4
<PAGE>
USA Technologies, Inc.
Consolidated Statements of Shareholders' Equity (continued)
<TABLE>
<CAPTION>
Series A
Convertible
Preferred Common Accumulated
Stock Stock Deficit Total
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Issuance of 205,000 shares of Common Stock $ - $ 68,096 $ - $ 68,096
in exchange for consulting services
Issuance of 9,500 shares of Common Stock to
employees as compensation - 2,565 - 2,565
Conversion of 392,969 shares of Convertible
Preferred Stock to 4,664,525 shares of
Common Stock (3,188,207) 3,188,207 - -
Conversion of $1,388,772 of cumulative
preferred dividends into 1,674,547 shares
of Common Stock at $ .83 per share - 1,388,772 (1,388,772) -
Conversion of $115,095 of cumulative
preferred dividends into 115,095 shares
of Common Stock at $1.00 per share - 115,095 (115,095) -
Common Stock warrants exercised - 3,710,000
at $ .15 per warrant - 556,500 - 556,500
Common Stock warrants exercised - 2,819,000
at $ .20 per warrant, net of offering
costs - 521,639 - 521,639
Common Stock warrants exercised - 1,871,000
at $ .25 per warrant - 467,750 - 467,750
Exercise of 70,000 Common Stock options -
at $ .05 per share - 3,500 - 3,500
Exercise of 4,500 Common Stock purchase
rights -at $ .25 per share - 1,125 - 1,125
Cancellation of 4,365,000 shares of Common
Stock by the President of the Company - - - -
Issuance of 150,000 shares (75 units) of
Convertible Preferred Stock at $5.00 per
share, in connection with 1997B Private
Placement, net of offering costs 701,510 - - 701,510
Reduction in exercise price below the fair
market value for 1,896,000 Common
Stock options - 554,630 - 554,630
Net loss - - (3,568,281) (3,568,281)
=================================================================
Balance, June 30, 1998 $ 4,538,114 $ 11,223,213 $ (15,606,152) $ 155,175
=================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
USA Technologies, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended June 30
1998 1997
----------------------------------
<S> <C> <C>
Operating activities
Net loss $ (3,568,281) $ (3,120,712)
Adjustments to reconcile net loss to net cash
used in operating activities:
Compensation charges incurred in
connection with the issuance of Common Stock
and repricing of Common Stock options 625,291 277,198
Depreciation and amortization 116,255 97,250
Provision for allowance for uncollectible accounts 10,441 19,345
Changes in operating assets and liabilities:
Accounts receivable (105,866) (146,663)
Inventory (147,634) 48,073
Prepaid expenses, deposits, and other assets 5,155 9,702
Accounts payable 102,141 172,797
Accrued expenses 383,901 (8,332)
----------------------------------
Net cash used in operating activities (2,578,597) (2,651,342)
Investing activities
Purchase of property and equipment (723) (17,855)
----------------------------------
Net cash used in investing activities (723) (17,855)
Financing activities
Net proceeds from issuance of Common Stock and
exercise of Common Stock warrants 1,530,639 1,141,126
Net proceeds from issuance of Convertible
Preferred Stock 761,510 394,688
Repayment of principal on capital lease obligations (18,271) (9,707)
----------------------------------
Net cash provided by financing activities 2,273,878 1,526,107
----------------------------------
Net decrease in cash and cash equivalents (305,442) (1,143,090)
Cash and cash equivalents at beginning of year 630,266 1,773,356
----------------------------------
Cash and cash equivalents at end of year $ 324,824 $ 630,266
==================================
Supplemental disclosures of cash flow information:
Conversion of Convertible Preferred Stock to
Common Stock $ 3,188,207 $ 206,009
==================================
Conversion of Cumulative Preferred Dividends to
Common Stock $ 1,503,867 $ 117,149
==================================
Transfer of inventory to property and equipment $ 88,981 $ -
==================================
Stock subscription receivable $ 19,875 $ 60,000
==================================
Capital lease obligations incurred $ - $ 22,200
==================================
Cash paid during the year for interest $ 18,777 $ 10,549
==================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 1998
1. Business
USA Technologies, Inc., a Pennsylvania corporation (the "Company"), was
incorporated on January 16, 1992. The Company is a provider and licensor of
unattended, credit card activated control systems for the copying, debit card
and personal computer industries. The Company's customers are principally
located in the United States and are comprised of hotels, retail locations,
university libraries, and public libraries. The Company generates its revenues
from the direct sale of equipment utilizing its control systems, from
retaining a percentage of the gross licensing fees generated by the control
systems, and from a monthly administrative service fee.
During September 1996, the Company commenced offering the Business Express(TM)
principally to the hospitality industry, which combined the Company's business
applications for computers, copiers and facsimile machines into a kiosk type
unit. During September 1997, the Company entered into a joint venture
agreement (Joint Venture) with Mail Boxes Etc. ("MBE") and commenced selling
the MBE Business Express(TM) ("MBEX") primarily to hotels located in the
United States (Note 3).
2. Accounting Policies
Basis of Financial Statement Presentation
The consolidated statements of the Company have been prepared assuming the
Company will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business.
Accordingly, the consolidated financial statements do not include any
adjustments that might be necessary should the Company be unable to continue in
existence. The Company has incurred substantial losses of approximately $3.6
million and approximately $3.1 million during the fiscal years ending June 30,
1998 and 1997, respectively, and cumulative losses from its inception through
June 30, 1998 amounting to approximately 12.9 million. Losses have continued
through August 1998. The Company's ability to meet its future obligations is
dependent upon the success of its products in the marketplace and its ability to
raise capital until the Company's products can generate sufficient operating
revenues. These factors raise doubt about the Company's ability to continue as a
going concern. Management believes that actions presently being taken will allow
for the Company to continue as a going concern. Such actions include the
generation of revenues from operations, raising capital from private placements
(Notes 14 and 15), the exercise of Common Stock purchase warrants and options,
and continued efforts to reduce costs.
F-7
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements
2. Accounting Policies (continued)
Development Stage Corporation
During the quarter ended June 30, 1998, the Company determined that it is no
longer designated as a development stage enterprise as defined in Statement of
Financial Accounting Standards No. 7 Development Stage Enterprises. During its
development stage, the Company devoted a substantial portion of its efforts
toward raising capital, research and development, establishing new business
and developing new products and markets. The strategic alliances entered into
during the year ended June 30, 1998 (Note 3) have provided the Company with
the ability to complete its transition from a development stage enterprise to
an enterprise focusing on marketing its products and its commercial
operations.
Consolidation
The consolidated financial statements include the accounts of the Joint
Venture (Note 3). All significant intercompany accounts and transactions have
been eliminated in consolidation.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents represent all highly liquid investments with original
maturities of three months or less. At June 30, 1998, cash equivalents were
comprised of a money market fund and certificates of deposit.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or
market.
F-8
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements
2. Accounting Practices (continued)
Property and Equipment
Property and equipment are recorded at cost. Property and equipment consists
of control systems, which generate monthly transaction fees from usage and are
depreciated using the straight-line method over three years, and furniture and
vehicles, which are depreciated using the straight-line method over seven and
five years, respectively, for financial statement purposes and accelerated
methods for income tax reporting purposes.
Revenue Recognition
Revenue from the sale of equipment is recognized upon installation and
customer acceptance of the related equipment. License and transaction fee
revenue is recognized upon the usage of the Company's credit card activated
control systems.
Research and Development
Research and development costs are charged to operations as incurred. Such
research and development costs amounted to approximately $199,000 and $344,000
for the years ended June 30, 1998 and 1997, respectively. These costs are
reflected in general and administrative and compensation expenses in the
accompanying consolidated financial statements.
Income Taxes
The Company provides for income taxes using the asset and liability approach
whereby deferred tax assets and liabilities are recorded based on the
difference between the tax bases of assets and liabilities and their carrying
amounts for financial reporting purposes. Such differences result from
differences in the timing of recognition by the Company of certain expenses,
and the periods of amortization and depreciation of certain assets.
Accounting for Stock Options
During 1995, the Financial Accounting Standards Board issued Statement No. 123
("SFAS 123"), Accounting for Stock-Based Compensation. SFAS 123 provides
companies with a choice to follow the provisions of SFAS 123 in determination
F-9
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements
2. Accounting Practices (continued)
Accounting for Stock Options (continued)
of stock-based compensation expense or to continue with the provisions of
Accounting Principles Board Opinion No. 25 ("APB 25"). The Company has elected
to follow the provisions of APB 25. Under APB 25, because the exercise price of
the Company's stock options equals or exceeds the market price of the underlying
Common Stock on the date of grant, no compensation expense is recognized. The
effect of applying SFAS 123 to the Company's stock-based awards results in net
loss and net loss per common share that are disclosed on a proforma basis in
Note 11.
Loss Per Common Share
During February 1997, the Financial Accounting Standards Board issued
Statement No. 128 ("SFAS 128"), Earnings per Share, which was adopted by the
Company during the quarter ending December 31, 1997. SFAS 128 replaced the
calculation of primary and fully diluted earnings per share. Basic earnings
per share is calculated by dividing net income (loss) by the weighted average
common shares outstanding for the period. Diluted earnings per share is
calculated by dividing net income (loss) by the weighted average common shares
outstanding for the period plus the dilutive effect of stock options. SFAS 128
had no impact on the calculation of the Company's previously reported primary
and fully diluted loss per common share. No exercise of stock options,
purchase rights, stock purchase warrants, or the conversion of preferred stock
and cumulative preferred dividends was assumed because the assumed exercise of
these securities would be antidilutive.
Impact of Recent Accounting Pronouncements
During June 1997, the Financial Accounting Standards Board issued Statement
No. 130, Reporting Comprehensive Income ("SFAS 130") and Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS
131"). SFAS 130 requires financial statement reporting of all non-owner
related changes in equity for the periods presented. SFAS 131 requires
disclosure about revenue, earnings and other financial information pertaining
to business segments by which a company is managed, as well as factors used by
management to determine segments. Both SFAS 130 and
F-10
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements
2. Accounting Practices (continued)
Impact of Recent Accounting Pronouncements (continued)
SFAS 131 are effective for fiscal years beginning after December 15, 1997. The
Company is in the process of evaluating the disclosure requirements of these
standards and believes the adoption of SFAS 130 and SFAS 131 will have no
material effect on the Company's results of operations or its financial
condition.
3. Joint Venture
During September 1997, the Company entered into a five year 50/50 (unless
otherwise specified) Joint Venture Agreement with Mail Boxes Etc. ("MBE"). The
Joint Venture operates under the name "MBE Express Joint Venture" (hereinafter
referred to as "Joint Venture") and will exclusively sell and market the
Company's Business Express(TM) product under the name MBE Business Express(TM).
Gross profits earned by the Joint Venture from sales on a National Account level
and sales referred to the Joint Venture by MBE franchisees are split equally by
the partners. Any sales generated by either of the partners responsible for
obligating the customer for the sale would receive 75% of the gross profit and
the other partner would receive 25% of the gross profit. The agreement also
allows the Company to have the option to directly sell its Business Express
products. Sharing of the transaction fees earned varies based on the initiator
of the sale of the MBE Business Express(TM). All other revenues and expenses of
the Joint Venture are shared equally by the partners. Reimbursements due from
the Joint Venture partner of $98,358 are recorded against other amounts payable
to MBE at June 30, 1998.
The Joint Venture Agreement specifies that if certain sales goals are not met
by the Joint Venture, the Company may terminate the exclusivity provisions of
the agreement after the second year. In this regard, if 2,000 business centers
are not sold by September 24, 1999, the exclusivity provisions may be
terminated. The Joint Venture may be terminated at any time by either partner
if the other partner has breached any material term or condition of the
agreement; provided that the terminating partner has allowed the other partner
at least a sixty-day period to cure any alleged breach (Note 15).
During the year ended June 30, 1998, the Company delivered to MBE 195 control
boxes to be used by its MBE franchisees. Through June 30, 1998, 7 control
systems were installed in MBE franchise operations. During April 1998, MBE
agreed to accept an additional 600 control boxes which are scheduled to be
shipped at the rate of 100 units per month commencing in September 1998 (See
Note 15).
F-11
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements
3. Joint Venture (continued)
At June 30, 1998, the Joint Venture recorded accounts payable to MBE of
approximately $248,000 which principally represents amounts payable for
inventory and other expenditures paid by MBE on behalf of the Joint Venture.
During February 1998, Prime Hospitality Corp. ("Prime") entered into an
agreement with the Joint Venture whereby Prime would purchase a minimum of 100
MBE Business Express(TM) units for installation at its owned and managed
hotels for a purchase price of approximately $2 million. The agreement
provided for a 90-day trial period on 6 units and if such trial was
successful, Prime would order the remaining 94 units. During June 1998, the
Joint Venture was notified by Prime that the trial period was successful and
accordingly, the remaining 94 units will be purchased by Prime prior to June
1999.
During March 1998, the Joint Venture entered into an agreement with
International Business Machines Corporation ("IBM") whereby IBM agreed to be
the executional partner for certain aspects of the Joint Venture's business,
including project management services, asset procurement and inventory
financing, configuration and testing of equipment, site preparation,
installation, maintenance services, and asset management. Under this
agreement, IBM will also assist the Joint Venture with marketing and
technology exchange. This agreement is expected to commence in the first
quarter of fiscal 1999.
4. Property and Equipment
Property and equipment consist of the following:
June 30
1998 1997
----------------------------------
Control systems $ 357,021 $ 269,590
Furniture and equipment 75,710 73,437
Vehicles 10,259 10,259
----------------------------------
442,990 353,286
Less accumulated depreciation 291,084 174,829
----------------------------------
$ 151,906 $ 178,457
==================================
F-12
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements
5. Accrued Expenses
Accrued expenses consist of the following:
June 30
1998 1997
------------------------------------
Accrued product warranty costs $ 102,520 $ -
Accrued software license and
support costs 84,297 -
Accrued compensation and related
sales commissions 79,147 3,698
Accrued professional fees 76,000 -
Accrued sales tax 44,630 25,559
Accrued other 30,524 7,144
Advanced customer billings 13,525 -
Accrued rent - 10,341
====================================
$ 430,643 $ 46,742
====================================
6. Related Party Transactions
At June 30, 1998 and 1997, approximately $26,000 and $27,000, respectively, of
the Company's accounts payable were due to several shareholders for various
legal and technical services performed. During the years ended June 30, 1998
and 1997, the Company incurred approximately $340,000 and $308,000,
respectively, for these services.
7. Commitments
During November 1997, the Company entered into a new Employment and
Non-Competition Agreement through June 30, 2000 (the Employment Agreement)
with the Company's President, providing for a base annual salary of $100,000.
The Employment Agreement is automatically renewed annually thereafter unless
canceled by either the President or the Company. In connection with the
Employment Agreement, the President canceled an aggregate of 4,365,000 shares
of Common Stock held in escrow in accordance with the terms as described in
Note 12. The Employment Agreement also granted the President in the event of a
"USA Transaction," as defined, irrevocable and fully vested rights equal to
that number of shares of Common Stock that when issued to him equals five
percent of all the then issued and outstanding shares of the Company's Common
Stock. The President is not required to pay any additional consideration for
such shares. The stock rights have no expiration and are not affected by the
President's termination of employment.
F-13
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements
7. Commitments (continued)
The Company conducts its operations from various facilities under operating
leases. Rental expense under such arrangements was approximately $70,000 and
$94,000 during the years ended June 30, 1998 and 1997, respectively.
During the year ended June 30, 1997, the Company entered into agreements to
lease $22,200 of computer equipment which was accounted for as a capital lease.
This computer equipment is included in control systems in the accompanying
consolidated financial statements. Lease amortization of $18,862 and $17,600 is
included in depreciation expense for the years ended June 30, 1998 and 1997,
respectively.
Future minimum lease payments subsequent to June 30, 1998 under capital and
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
---------------------------------
<S> <C> <C>
1999 $ 26,055 $ 79,900
2000 1,717 34,200
2001 - 9,000
------------------------------
Total minimum lease payments 27,772 $ 123,100
==============
Less amount representing interest (25% per annum) 3,293
----------------
Present value of net minimum lease payments 24,479
Less current obligation under capital leases 22,810
----------------
Obligation under capital leases, less current portion $ 1,669
================
</TABLE>
During May 1998, the Company entered into an agreement with a vendor (on
behalf of the Joint Venture) whereby the Company committed to acquire 1,500
control systems for approximately $780,000. The control systems are
anticipated for delivery by the Company through the quarter ending March 31,
1999. As more fully discussed in Note 15, certain of these control systems
have recently become the subject of litigation.
F-14
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements
8. Income Taxes
At June 30, 1998 and 1997, the Company had federal net operating loss
carryforwards of approximately $11,231,000 and $8,181,000, respectively, to
offset future federal taxable income expiring through 2013. Additionally, at
June 30, 1998 and 1997, the Company had state net operating loss carryforwards
of approximately $8,655,000 and $5,753,000, respectively, to offset future state
taxable income expiring through 2008. At June 30, 1998 and 1997, the Company
recorded a deferred tax asset of $4,905,000 and $3,402,000, respectively, which
were reduced by a valuation allowance of the same amount as the realization of
these deferred tax assets are not certain.
The deferred tax assets arose primarily from the use of different accounting
methods for financial statement and income tax reporting purposes as follows:
<TABLE>
<CAPTION>
June 30
1998 1997
----------------------------------
<S> <C> <C>
Deferred tax asset:
Net operating loss carryforwards $ 4,384,000 $ 3,081,000
Compensation expense on stock option re-pricing 222,000 -
Deferred research and development costs 207,000 226,000
Deferred pre-operating costs 18,000 84,000
Other temporary differences 81,000 20,000
----------------------------------
4,912,000 3,411,000
Deferred tax liabilities:
Depreciation (7,000) (9,000)
----------------------------------
Deferred tax asset, net 4,905,000 3,402,000
Valuation allowance (4,905,000) (3,402,000
==================================
$ - $ -
==================================
</TABLE>
The timing and manner in which the Company can utilize operating loss
carryforwards and future tax deductions for capitalized items in any year was
limited by provisions of the Internal Revenue Code regarding changes in
ownership of corporations. The Company believes that such limitation may have an
impact on the ultimate realization of its carryforwards and future tax
deductions.
F-15
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements
9. Preferred Stock
The Preferred Stock authorized may be issued from time to time in one or more
series, each series with such rights, preferences or restrictions as
determined by the Board of Directors. Each share of Series A Preferred Stock
shall have the right to ten votes and is convertible at any time into ten
shares of Common Stock. Each share of Common Stock entitles the holder to one
voting right. During the period from March 24, 1997 to December 31, 1997, each
share of Series A Preferred Stock was convertible into twelve shares of Common
Stock. Series A Convertible Preferred Stock provides for an annual cumulative
dividend of $1.50 per share payable to the shareholders of record on February
1 and August 1 of each year. Cumulative unpaid dividends at June 30, 1998 and
1997 amounted to $2,442,650 and $2,837,086, respectively. Cumulative unpaid
dividends are convertible into common shares at $1.00 per common share at the
option of the shareholder. During the period from March 24, 1997 to December
31, 1997, the cumulative unpaid dividends were convertible into common shares
at $.83 per common share. During the years ended June 30, 1998 and 1997,
certain holders of the Preferred Stock converted 392,969 and 24,170 shares,
respectively, into 4,664,525 and 273,800 shares of Common Stock, respectively.
Certain of these shareholders also converted cumulative preferred dividends of
$1,503,867 and $117,149, respectively, into 1,789,642 and 133,158 shares of
Common Stock at June 30, 1998 and 1997, respectively. The Series A Preferred
Stock may be called for redemption at the option of the Board of Directors at
any time on and after January 1, 1998 for a price of $11.00 per share plus
payment of all accrued and unpaid dividends. No such redemption has occurred
as of June 30, 1998. In the event of any liquidation, the holders of shares of
Series A Preferred Stock issued shall be entitled to receive $10.00 for each
outstanding share plus all cumulative unpaid dividends. If funds are
insufficient for this distribution, the assets available will be distributed
ratably among the preferred shareholders.
10. Common Stock Transactions
During June 1998, the Company's shareholders approved an increase in the
number of the Company's authorized common stock shares from 55,000,000 to
62,000,000.
During January 1998, the Company's Board of Directors authorized a $750,000
private placement offering of 75 units at a unit price of $10,000. Each unit
included 2,000 shares of Convertible Preferred Stock and 50,000 1998-A Common
Stock purchase warrants at an exercise price of $.15 through June 30, 1998 and
$.40 thereafter through March 5, 2003. The Company terminated this offering
during February 1998 selling all 75 units and
F-16
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements
10. Common Stock Transactions (continued)
generating net proceeds of $701,510 ($750,000 less offering costs of $48,490).
Through June 30, 1998, 3,710,000 1998-A warrants were exercised at $.15 per
warrant generating gross proceeds of $556,500. At June 30, 1998, there were
40,000 1998-A Common Stock purchase warrants outstanding.
On June 23, 1997, the Company closed on a private placement offering of
Convertible Debentures (the Placement) resulting in net proceeds to the Company
of $451,169 ($500,000 less offering costs of $48,831). The Placement was issued
pursuant to Regulation S of the Securities Act of 1933 to five qualified
purchasers, as defined, (Purchasers). The Placement was convertible by the
Purchasers into Common Stock at any time after 45 days from issuance (August 7,
1997) and through the Placement's maturity of June 1, 2002 at the option of the
Purchaser. The Company had the right to redeem the unconverted portion of the
Placement at any time after June 23, 1998 through June 1, 2002. The conversion
or redemption rate (hereinafter referred to as conversion rate) was equal to the
lesser of 100% of the average closing bid price of the Common Stock for the five
trading days immediately preceding June 23, 1997, or 65% of the average closing
bid price of the Common Stock for the five trading days immediately preceding
the date prior to the conversion or redemption date. Upon maturity (unless
converted or redeemed prior thereto), the Placement would be automatically
converted into shares of Common Stock at the conversion rate. As the terms and
intent of the Placement were to raise equity for the Company through the
issuance of Common Stock, and the terms of the Placement do not provide for the
repayment of principal in cash, the substance of the Placement is that of an
equity transaction and, accordingly, the net proceeds have been reflected as
Common Stock in the accompanying consolidated financial statements.
As a requirement to the closure of the Placement, the Company placed an
aggregate of 2,500,000 shares of Common Stock in escrow to ensure such shares
would be available upon conversion of the Placement by the Purchasers. As the
2,500,000 shares held in escrow were legally issued and outstanding at June
30, 1997, such shares were included in the common shares issued and
outstanding in the June 30, 1997 balance sheet. During fiscal year 1998, the
entire Placement was converted (at varying prices) into 1,915,736 of common
shares. Accordingly, the Placement and escrow shares were canceled and the
appropriate number of shares of Common Stock were issued to the Purchasers.
F-17
<PAGE>
10. Common Stock Transactions (continued)
Certain affiliates of the placement agent were issued non-detachable Common
Stock purchase warrants, exercisable immediately, to purchase up to 2,000,000
shares of the Company's Common Stock at $.20 per warrant at any time through
June 22, 2002. As of June 30, 1998, 900,000 of these warrants were exercised
generating gross proceeds of $180,000.
During March 1997, the Company's Board of Directors authorized a $1,100,000
private placement offering of 110 units at a unit price of $10,000. Each unit
included 2,000 shares of Convertible Preferred Stock and 40,000 1997 Common
Stock purchase warrants at an exercise price of $.20 through October 31, 1997
(extended from the original date of August 31, 1997) and $.40 thereafter through
February 28, 2002. During June 1997, the Company's Board of Directors authorized
the reduction of this offering to a maximum of 40 units at an aggregate sales
price of $400,000. As of June 30, 1997, 40 units were sold, generating net
proceeds of $361,189 ($400,000 less offering costs of $38,811). The stock
subscriptions receivable of $60,000 as of June 30, 1997, recorded in connection
with this offering were collected in August 1997. The Company terminated this
offering on July 3, 1997. During the year ended June 30, 1998, 1,585,000
warrants were exercised at $.20 per warrant generating gross proceeds of
$317,000. At June 30, 1998 and 1997, 15,000 and 1,600,000, respectively, of 1997
Common Stock purchase warrants were outstanding.
During November 1996, the Company's Board of Directors authorized a $200,000
private placement offering of 20 units at a unit price of $10,000. Each unit
included 1,000 shares of Series A Convertible Preferred Stock and 40,000
1996-B Common Stock purchase warrants at an exercise price of $.20 per share
through October 31, 1997 (extended from original date of August 31, 1997) and
$.30 per share through February 28, 2002. The offering closed during February
1997 resulting in the sale of 93.5 units generating gross proceeds of $93,500.
During the year ended June 30, 1998, 334,000 warrants were exercised at $.20
per warrant generating gross proceeds of $66,800. At June 30, 1998 and 1997,
40,000 and 374,000, respectively, of 1996-B Common Stock purchase warrants
were outstanding.
During 1996, the Company issued Common Stock purchase warrants (the 1996
warrants) which are exercisable at any time on or before May 31, 2001, unless
such date is extended by the Company. Each 1996 warrant entitles the holder to
purchase one share of Common Stock for $.40 through December 31, 1996 and for
$.50 at any time thereafter. The exercise price of the 1996 warrants may be
reduced by the Company at any time.
F-18
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements
10. Common Stock Transactions (continued)
During November 1996, the Company's Board of Directors reduced the exercise
price of the 1996 warrants from $.40 to $.20 during the period November 1,
1996 through February 28, 1997, after which the exercise price returned to
$.50. During September 1997, the Company's Board of Directors reduced the
exercise price of the 1996 Common Stock purchase warrants from $.50 to $.25
through October 31, 1997. Thereafter the exercise price returned to $.50.
During the years ended June 30, 1998 and 1997, 1,130,000 and 3,202,000
warrants were exercised generating gross proceeds of $282,500 and $640,400,
respectively. At June 30, 1998 and 1997, respectively, there were 868,000 and
1,998,000 1996 Common Stock purchase warrants outstanding.
During 1995, the Company issued Common Stock purchase warrants (the 1995
warrants) which are exercisable at any time on or before January 31, 2001,
unless such date is extended by the Company. Each 1995 warrant entitles the
holder to purchase one share of Common Stock for $.50. The exercise price of
the 1995 warrants may be reduced by the Company at any time. During September
1997, the Company's Board of Directors reduced the 1995 Common Stock purchase
warrants from $.50 to $.25 through October 31, 1997. During the year ended
June 30, 1998, 741,000 warrants were exercised at $.25 generating gross
proceeds of $185,250. At June 30, 1998 and 1997, respectively, the Company had
673,000 and 1,414,000, 1995 Common Stock purchase warrants outstanding.
At June 30, 1998 and 1997, the Company had outstanding 152,800
and 157,300 Common Stock purchase rights, respectively. These Common Stock
purchase rights, issued in 1993, allow the holder to purchase shares of the
Company's Common Stock at $1.00 per share and are exercisable through June 30,
2000. During April 1998, the Company's Board of Directors authorized a
reduction in the exercise price of the purchase rights to $.25 per share
through June 30, 1998.
At June 30, 1998, stock subscriptions receivable of $19,875 were collected
during July 1998.
F-19
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements
11. Stock Options
The Company's Board of Directors has granted options to employees and
consultants to purchase shares of Common Stock at or above fair market value.
All options granted have 5 year terms and vest and become fully exercisable on
the schedule established by the contract which granted the option. During
fiscal year 1997, the Company's Board of Directors authorized the reduction in
the exercise price of 650,000 options from $.65 to $.45 per share. These
options were previously issued during the periods March 1996 through November
1996 and represented all options previously granted at $.65. The new exercise
price of these options was equal to or greater than the fair market value of
the Common Stock on the date of such reduction. During April 1998, the
Company's Board of Directors authorized the reduction in the exercise price of
1,896,000 options from $.25-$.45 per share to $.05-$.20 per share. As the new
exercise prices were below the fair market value of the Company's Common Stock
on the date of repricing, the Company recorded a non-cash charge to
compensation expense of approximately $555,000 during fiscal year 1998.
The following table summarizes all stock option activity:
Common Shares
Under Exercise
Options Price
Granted Per Share
-----------------------------
Balance at June 30, 1996 3,335,000 $ .05-$.65
Granted 815,000 $ .25-$.65
Exercised (150,000) $ .05
Canceled (29,000) $ .45
-----------------------------
Balance at June 30, 1997 3,971,000 $ .05-$.50
Granted 300,000 $ .45-$.50
Exercised (70,000) $ .05
-----------------------------
Balance at June 30, 1998 4,201,000 $ .05-$.50
=============================
F-20
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements
11. Stock Options (continued)
The price range of the outstanding and exercisable common stock options at
June 30, 1998 is as follows:
<TABLE>
<CAPTION>
Weighted
Average Weighted
Remaining Average
Option Exercise Options Contract Life Weighted Exercise Options Exercise
Prices Outstanding (Yrs.) Price Exercisable Price
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.05 50,000 3.03 $ 0.05 50,000 $ 0.05
$ 0.10 450,000 2.23 $ 0.10 450,000 $ 0.10
$ 0.15 1,321,000 2.36 $ 0.15 1,283,500 $ 0.15
$ 0.20 75,000 0.33 $ 0.20 75,000 $ 0.20
$ 0.25 1,315,000 1.46 $ 0.25 1,315,000 $ 0.25
$ 0.45 840,000 3.58 $ 0.45 490,000 $ 0.45
$ 0.50 150,000 3.56 $ 0.50 150,000 $ 0.50
--------- ---------- ---------
4,201,000 $ 0.25 3,813,500
========= ========== =========
</TABLE>
Pro forma information regarding net loss and net loss per common share
determined as if the Company is accounting for stock options granted under the
fair value method of SFAS 123 is as follows:
<TABLE>
<CAPTION>
June 30
1998 1997
--------------------------------------
<S> <C> <C>
Net loss applicable to common shares as
reported under APB 25: $ (5,322,847) $ (4,364,007)
Stock option expense per SFAS 123 (391,704) (137,013)
--------------------------------------
Pro forma net loss $ (5,714,551) $ (4,501,020
Pro forma net loss per common share $ (.16) $ (.21)
Loss per common share as reported $ (.15) $ (.21)
</TABLE>
The fair value for the Company's stock options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for fiscal years 1998 and 1997; risk-free
interest rate of 5.5%; an expected life of 2 years; no expected cash dividend
payments on common stock and volatility factors of the expected market price
of the Company's common stock, based on historical volatility of 0.793 and
0.765, respectively.
F-21
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements
11. Stock Options (continued)
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. As noted above, the Company's stock options are vested
over an extended period. In addition, option models require the input of
highly subjective assumptions including future stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective assumptions can
materially affect the fair value estimates, in management's opinion, the
Black-Scholes model does not necessarily provide a reliable measure of the
fair value of the Company's stock options. The Company's pro forma information
reflects the impact of the reduction in price of certain stock options.
12. Escrow and Cancellation Arrangements
At the request of the Pennsylvania Securities Commission, all of the executive
officers and directors of the Company serving at the commencement of the
initial public offering of the Company agreed to place in escrow 8,395,000
shares, as adjusted, beneficially owned by them until December 29, 1996. Under
certain circumstances as outlined by the Pennsylvania Securities Commission,
the President's shares were to be held in escrow for an additional period of
time, but not later than June 30, 1998. Additionally, the President of the
Company agreed that his 4,365,000 escrowed common shares would be canceled by
the Company and would no longer be issued and outstanding unless certain
performance measures as specified by the Commission were achieved by June 30,
1998. During November 1997, in connection with a new Employment and
Non-competition Agreement entered into by the Company with the President, the
President canceled his 4,365,000 escrowed common shares.
13. Retirement Plan
During September 1998, the Company adopted a Savings and Retirement Plan (the
Plan) which allows employees who have attained the age of 21 and have
completed one year of service to make voluntary contributions up to a maximum
of 15% of their annual compensation, as defined in the Plan. The Plan does not
provide for any matching contribution by the Company, however, the Board of
Directors may authorize, at its sole discretion, Company contributions to the
Plan. During fiscal year 1998, there were no contributions made to the Plan by
the Company.
F-22
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements
14. Subsequent Event
During July 1998, the Company's Board of Directors authorized a $700,000 private
placement offering of 70 units at a unit price of $10,000. Each unit includes
2,000 shares of Convertible Preferred Stock and 50,000 1998-B Common Stock
purchase warrants at an exercise price of $.15 through January 1, 1999 and $.40
thereafter for five years after the termination of the offering. The Company
terminated the offering on August 17, 1998. As of August 17, 1998, 27.8 units
were sold generating gross proceeds of $278,000.
15. Events (Unaudited) Subsequent to the Date of the Auditors' Report
During July 1998, the Company's Board of Directors reduced the exercise price
of the 1995 Common Stock purchase warrants and the 1996 Common Stock purchase
warrants from $.50 to $.25 through September 30, 1998. Thereafter, the
exercise price will return to $.50.
During August 1998, the Company notified MBE that MBE breached the Joint
Venture Agreement (Note 3). Specifically, the Company indicated that MBE
entered into an arrangement with another vendor which was a violation of the
Joint Venture Agreement which obligates MBE to solely use the Company's
control boxes. On September 3, 1998, MBE commenced a legal action against the
Company in the Superior Court of the State of California alleging that the 195
control boxes purchased by MBE were defective and seeks a refund of the
purchase price in the amount of $141,260, plus lost profits claimed to be
several hundred thousand dollars. Additionally, the complaint seeks a
declaratory judgment that MBE is not obligated to purchase the control boxes
ordered in April 1998 (none of which have been delivered as of September 24,
1998). The complaint filed does not relate to the Joint Venture Agreement but
solely to MBE's In-Center Workstation (ICW) program and states that MBE is
willing to proceed in accordance with the Joint Venture Agreement. The Company
believes the claim to be without merit and that it will prevail in this
action. Accordingly, there has been no provision for this action in the
accompanying consolidated financial statements.
During September 1998, the Company's Board of Directors authorized a
$2,000,000 private placement offering (the "Offering") of 200 units at a unit
price of $10,000. Each unit of the Offering shall consist of a 12%
Senior Note in the principal amount of $10,000, 15,000 1998-C Common Stock
purchase warrants and 1,000 shares of Series B Equity Participating Preferred
Stock. Each 1998-C Common Stock purchase warrant entitles the holder to
purchase 1 share of common stock for $.10 at any time through
F-23
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements
15. Events (Unaudited) Subsequent to the Date of the Auditors' Report
(continued)
December 31, 2001. Each share of Series B Preferred Stock is automatically
convertible into 40 shares of Common Stock at the time of a "USA Transaction,"
as defined. In connection with this Offering, the Board of Directors also
authorized the creation of 200,000 shares of a new Series B Equity Participating
Preferred Stock. The offering is scheduled to commence on September 28, 1998.
F-24
<PAGE>
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
PART III
Item 9. Directors and Executive Officers of the Registrant
MANAGEMENT
Directors and Executive Officers
The Directors and executive officers of the Company, together with
their ages and business backgrounds are as follows.
Name Age Position(s) Held
---- --- ----------------
George R. Jensen, Jr. 49 President, Chief Executive
Officer, Chairman of the
Board of Directors
Stephen P. Herbert 35 Executive Vice President - Sales
and Marketing, Director
Haven Brock Kolls, Jr. 33 Vice President - Research and
Development
Leland P. Maxwell 51 Senior Vice President, Chief
Financial Officer, Treasurer
Peter G. Kapourelos 78 Director
William W. Sellers 76 Director
Henry B. duPont Smith 37 Director
William L. Van Alen, Jr. 64 Director
Each Director holds office until the next Annual Meeting of
Shareholders and until his successor has been elected and qualified.
George R. Jensen, Jr., has been the President, Chief Executive
Officer, and Director of the Company since January 1992. Mr. Jensen is the
founder, and was Chairman, Director, and Chief Executive Officer of American
Film Technologies, Inc. ("AFT") from 1985 until 1992. AFT was in the business
of creating color imaged versions of black-and-white films. From 1979 to 1985,
Mr. Jensen was Chief Executive Officer and President of International Film
Productions, Inc. Mr. Jensen was the Executive Producer of the twelve hour
miniseries, "A.D.", a $35 million dollar production filmed in Tunisia. Procter
and Gamble, Inc., the primary source of funds, co-produced and sponsored the
epic, which aired in March 1985 for five consecutive nights on the NBC
network. Mr. Jensen was also the Executive Producer for the 1983 special for
public television, " A Tribute to Princess Grace". From 1971 to 1978, Mr.
Jensen was a securities broker, primarily for the firm of Smith Barney, Harris
Upham. Mr. Jensen was chosen 1989 Entrepreneur of the Year in the high
technology category for the Philadelphia, Pennsylvania area by Ernst & Young
LLP and Inc. Magazine. Mr. Jensen received his Bachelor of Science Degree from
the University of Tennessee and is a graduate of the Advanced Management
Program at the Wharton School of the University of Pennsylvania.
Stephen P. Herbert was elected a Director of the Company in April
1996, and joined the Company on a full-time basis on May 6, 1996. Prior to
joining the Company and since 1986, Mr. Herbert had been employed by
Pepsi-Cola, the beverage division of PepsiCo, Inc. From 1994 to April 1996,
Mr. Herbert was a Manager of Market Strategy. In such position he was
responsible for directing development of market strategy for the vending
15
<PAGE>
channel and subsequently the supermarket channel for Pepsi-Cola in North
America. Prior thereto, Mr. Herbert held various sales and management
positions with Pepsi-Cola. Mr. Herbert graduated with a Bachelor of Science
degree from Louisiana State University.
Haven Brock Kolls, Jr., joined the Company on a full-time basis in
May 1994 and was elected an executive officer in August 1994. From January
1992 to April 1994, Mr. Kolls was Director of Engineering for International
Trade Agency, Inc., an engineering firm specializing in the development of
control systems and management software packages for use in the vending
machine industry. Mr. Kolls was an electrical engineer for Plateau Inc. from
1988 to December 1992. His responsibilities included mechanical and electrical
computer-aided engineering, digital electronic hardware design, circuit board
design and layout, fabrication of system prototypes and software development.
Mr. Kolls is a graduate of the University of Tennessee with a Bachelor of
Science Degree in Engineering.
Leland P. Maxwell joined the Company on a full-time basis on February
24, 1997 as Chief Financial Officer, Senior Vice President and Treasurer.
Prior to joining the Company, Mr. Maxwell was the corporate controller for
Klearfold, Inc., a privately-held manufacturer of specialty consumer
packaging. From 1992 to 1996, Mr. Maxwell was the regional controller for
Jefferson Smurfit/Container Corporation of America, a plastic packaging
manufacturer, and from 1986 to 1992 was the divisional accounting manager.
Prior thereto, he held financial positions with Safeguard Business Systems and
Smithkline-Beecham. Mr. Maxwell received a Bachelor of Arts degree in History
from Williams College and a Master of Business Administration-Finance from The
Wharton School of the University of Pennsylvania. Mr. Maxwell is a Certified
Public Accountant.
Peter G. Kapourelos joined the Board of Directors of the Company in
May 1993. Mr. Kapourelos has been a branch manager of Advantage Capital
Corporation, a subsidiary of Primerica Corporation, since 1972. He has been a
member of the Millionaire Production Club since 1972. Mr. Kapourelos is
currently the Vice President for American Capital High Yield Bond Fund and of
the American Capital Equity Income Fund, which are publicly traded mutual
funds.
William W. Sellers joined the Board of Directors of the Company in
May 1993. Mr. Sellers founded The Sellers Company in 1949 which has been
nationally recognized as the leader in the design and manufacture of
state-of-the-art equipment for the paving industry. Mr. Sellers has been
awarded five United States patents and several Canadian patents pertaining to
this equipment. The Sellers Company was sold to Mechtron International in
1985. Mr. Sellers is Chairman of the Board of Sellers Process Equipment
Company which sells products and systems to the food and other industries. Mr.
Sellers is actively involved in his community. Mr. Sellers received his
undergraduate degree from the University of Pennsylvania.
Henry B. duPont Smith joined the Board of Directors of the Company in
May 1994. Since January 1992, Mr. Smith has been a Vice President of The
Rittenhouse Trust Company and since September 1991 has been a Vice President
of Rittenhouse Financial Services, Inc. From September 1991 to December 1992,
he was a registered representative of Rittenhouse Financial Securities, Inc.
Mr. Smith was an Assistant Vice President of Mellon Bank, N.A. from March 1988
to July 1991, and an investment officer of Provident National Bank from March
1985 to March 1988. Mr. Smith received a Bachelor of Arts degree in Accounting
in 1984 from Franklin & Marshall College.
William L. Van Alen, Jr., joined the Board of Directors of the
Company in May 1993. Mr. Van Alen is President of Cornerstone Entertainment,
Inc., an organization engaged in the production of feature films of which he
was a founder in 1985. Since 1996, Mr. Van Alen has been President and a
Director of The Noah Fund, a publicly traded mutual fund. Prior to 1985, Mr.
Van Alen practiced law in Pennsylvania for twenty-two years. Mr. Van Alen
received his undergraduate degree in Economics from the University of
Pennsylvania and his law degree from Villanova Law School.
16
<PAGE>
Item 10. Executive Compensation
The following table sets forth certain information with respect to
compensation paid or accrued by the Company during the fiscal years ended June
30, 1996, June 30, 1997 and June 30, 1998 to the individual acting in the
capacity of Chief Executive Officer of the Company. No individual who was
serving as an executive officer of the Company at the end of the fiscal years
ended June 30, 1996, June 30, 1997 or June 30, 1998 received salary and bonus
in excess of $100,000 in any such fiscal year.
Summary Compensation Table
Fiscal
Name and Principal Position Year Annual Compensation
- --------------------------- ------ -------------------------
Salary Bonus
------ -----
George R. Jensen, Jr., 1998 $100,000 $0
Chief Executive Officer, 1997 $100,000 $0
President 1996 $90,000 $0
Executive Employment Agreements
The Company has entered into an employment agreement with Mr. Jensen
which expires June 30, 2000. The Agreement is automatically renewed from year
to year unless canceled by Mr. Jensen or the Company. The agreement provides
for an annual base salary of $100,000 per year. Mr. Jensen is entitled to
receive such bonus or bonuses as may be awarded to him by the Board of
Directors. In determining whether to pay such a bonus, the Board would use its
subjective discretion. The Agreement requires Mr. Jensen to devote his full
time and attention to the business and affairs of the Company, and obligates
him not to engage in any investments or activities which would compete with
the Company during the term of the Agreement and for a period of one year
thereafter.
As part of the Agreement, Mr. Jensen canceled an aggregate of
4,365,000 shares of Common Stock of the Company which had been beneficially
owned by him and which had been held in escrow pursuant to the Escrow
Agreement dated December 29, 1993 by and between the Company, Mr. Jensen and
certain other parties. In January 1994, and at the request of the Pennsylvania
Securities Commission, Mr. Jensen placed all of the shares of Common Stock
beneficially owned by him into escrow as a condition of the Company's initial
public offering being declared effective in Pennsylvania. The shares of Common
Stock canceled by Mr. Jensen had been subject to cancellation if certain
performance goals were not met by the Company on or before June 30, 1998.
The agreement also grants to Mr. Jensen in the event a "USA
Transaction" (as defined below) occurs after the date thereof that number of
shares of Common Stock as shall when issued to him equal five percent of all
the then issued and outstanding shares of Common Stock (the "Rights"). Mr.
Jensen is not required to pay any additional consideration for such shares. At
the time of any USA Transaction, all of the shares of Common Stock underlying
the Rights are automatically deemed to be issued and outstanding immediately
prior to any USA Transaction, and are entitled to be treated as any other
issued and outstanding shares of Common Stock in connection with such USA
Transaction.
The term USA Transaction is defined as (i) the acquisition of
fifty-one percent or more of the then outstanding voting securities entitled
to vote generally in the election of Directors of the Company by any person,
entity or group, or (ii) the approval by the shareholders of the Company of a
reorganization, merger, consolidation, liquidation, or dissolution of the
Company, or the sale, transfer, lease or other disposition of all or
substantially all of the assets of the Company.
17
<PAGE>
The Rights are irrevocable and fully vested, have no expiration date,
and will not be affected by the termination of Mr. Jensen's employment with
the Company for any reason whatsoever. If a USA Transaction shall occur at a
time when there not a sufficient number of authorized but unissued shares of
Common Stock, then the Company shall as a condition of such USA Transaction
promptly take any and all appropriate action to make available a sufficient
number of shares of Common Stock. In the alternative, the Company may
structure the USA Transactions so that Mr. Jensen would receive the same
amount and type of consideration in connection with the USA Transaction as any
other holder of Common Stock.
The Company has entered into a one-year employment agreement with Mr.
Herbert which expires on April 30, 1999. The agreement is automatically
renewed from year to year thereafter unless canceled by Mr. Herbert or the
Company. The Agreement provides for an annual base salary of $90,000 per year,
provided, that Mr. Herbert's base salary shall never be less than ninety
percent of that of the Chief Executive Officer of the Company. Mr. Herbert is
entitled to receive such bonus or bonuses as the Board of Directors may award
to him. The Agreement requires Mr. Herbert to devote his full time and
attention to the business and affairs of the Company and obligates him not to
engage in any investments or activities which would compete with the Company
during the term of the agreement and for a period of one year thereafter.
Mr. Kolls has entered into a one-year employment agreement with the
Company which expires on April 30, 1999, and is automatically renewed from
year to year thereafter unless canceled by Mr. Kolls or the Company. The
agreement provides for an annual base salary of $90,000 per year. Mr. Kolls is
also entitled to receive such bonus or bonuses as may be awarded to him by the
Board of Directors. The Agreement requires Mr. Kolls to devote his full time
and attention to the business and affairs of the Company, and obligates him
not to engage in any investments or activities which would compete with the
Company during the term of his agreement and for a period of one year
thereafter.
Mr. Maxwell has entered into a one-year employment agreement with the
Company which expires on February 28, 1999, and is automatically renewed from
year to year thereafter unless cancelled by Mr. Maxwell or the Company. The
agreement provides for an annual base salary of $90,000 per year, provided,
that Mr. Maxwell's base salary shall never be less than eighty-five percent of
that of the Chief Executive Officer of the Company. Mr. Maxwell is also
entitled to receive such bonus or bonuses as the Board of Directors may award
to him. The Agreement requires Mr. Maxwell to devote his full time and
attention to the business and affairs of the Company, and obligates him not to
engage in any investments or activities which would compete with the Company
during the term of the agreement and for a period of one year thereafter.
Director Compensation and Stock Options
Members of the Board of Directors do not currently receive any cash
compensation for serving on the Board of Directors.
In April 1993, Messrs. Kapourelos and Sellers each purchased 100,000
shares of Common Stock from the Company at a purchase price of $.001 per
share. In June 1993, Mr. Van Alen purchased 100,000 shares of Common Stock
from the Company at a purchase price of $.001 per share.
In July 1993, the Company issued to each of Messrs. Kapourelos,
Sellers, and Van Alen fully vested options to purchase 100,000 shares of Common
Stock at an exercise price of $.25 per share. In March 1998, the expiration date
of these options was extended from June 30, 1998 to June 30, 2000 and in April
1998, the exercise price was reduced from $.25 to $.15.
In March 1995, the Company issued to Mr. Smith fully vested options
to purchase 100,000 shares of Common Stock, to Mr. Sellers fully vested
options to purchase 55,000 shares of Common Stock, to Mr. Kapourelos fully
vested options to purchase 70,000 shares of Common Stock, and to Mr. Van Alen
fully vested options to purchase 25,000 shares of Common Stock. The exercise
18
<PAGE>
price of these options is $.25 per share and they must be exercised on or
before February 29, 2000. In April 1998, the exercise price of these options
was reduced from $.25 to $.15.
The Company paid to William W. Sellers the amount of $76,600 for
consulting services rendered by Mr. Sellers to the Company during the fiscal
year ended June 30, 1996.
The Company paid to Peter G. Kapourelos the amount of $22,000 for
consulting services rendered by Mr. Kapourelos to the Company during the
fiscal year ended June 30, 1996.
In March 1998, the Company extended the expiration date of the
following options to purchase shares of Common Stock from June 30, 1998 to the
close of business on June 30, 2000, to the following Directors of the Company:
Peter G. Kapourelos - 100,000 options; William W. Sellers - 100,000 options;
Keith L. Sterling - 100,000 options; and William L. Van Alen, Jr. - 100,000
options.
In April 1998, the Company reduced from $.25 to $.15 the exercise
price of the following options to purchase Common Stock issued to the
following Directors of the Company: Peter G. Kapourelos - 170,000 options;
William W. Sellers - 155,000 options; William L. Van Alen, Jr. - 125,000
options; and Henry B. duPont Smith - 100,000 options.
In April 1998, all of the Common Stock underlying the above options
was registered by the Company under the Act, for resale by the holder thereof.
Such registration was at the Company's cost and expense.
The Board of Directors is responsible for awarding stock options. Such
awards are made in the subjective discretion of the Board. Other than the
repricing of the options by the Company in April 1998, the exercise price of all
the above options represents on the date of issuance of such options an amount
equal to or in excess of the market value of the Common Stock issuable upon the
exercise of the Options. In connection with the April 1998 of stock options
repriced, the exercise prices of all these options were below the fair market
value on the date or repricing, therefore, the Company recorded a charge to
compensation expense during in fiscal year 1998.
All of the foregoing options are non-qualified stock options and not
part of a qualified stock option plan and do not constitute incentive stock
options as such term is defined under Section 422 of the Internal Revenue
Code, as amended, and are not part of an employee stock purchase plan as
described in Section 423 thereunder.
Executive Stock Options
In July 1993, the Company issued to Keith L. Sterling and Edward J.
Sullivan, former officers of the Company, options to purchase shares of Common
Stock at an exercise price of $.25 per share. The options must be exercised
within five years of the vesting thereof. Mr. Sterling received options to
acquire 200,000 shares of Common Stock, 100,000 of which vested on June 30,
1994, and 100,000 of which vested on June 30, 1995. Mr. Sullivan was granted
options to acquire 100,000 shares of Common Stock, 50,000 of which vested on
June 30, 1994, and 50,000 of which vested on June 30, 1995.
In August 1994, the Company issued to Mr. Kolls options to acquire
50,000 shares of Common Stock at an exercise price of $.25 per share, 25,000
of which vested on April 30, 1995, and 25,000 of which vested on April 30,
1996.
In August 1994, the Company issued to Mr. Barry Slawter, a former
officer of the Company, options to acquire 200,000 shares of Common Stock at
an exercise price of $.25 per share, 50,000 of which vested on February 1,
1995, 50,000 of which vested on May 1, 1995, 50,000 of which vested on August
1, 1995, and 50,000 of which vested on November 1, 1995. The options must be
exercised within five years after vesting.
19
<PAGE>
In March 1995, the Company issued to Mr. Sterling fully vested
options to acquire 100,000 shares of Common Stock at $.25 per share
exercisable on or before February 29, 2000.
In March 1995, the Company issued to Mr. Kolls options to acquire
150,000 shares of Common Stock, at an exercise price of $.25 per share, 75,000
of which vested on April 30, 1995, and 75,000 of which vested on April 30,
1996. These options must be exercised within five years after vesting.
In June 1995, the Company issued to Mr. Slawter. a former officer,
fully vested options to acquire 10,000 shares of Common Stock at an exercise
price of $.25 per share. Such options must be exercised within five years.
In March 1996, the Company issued to Mr. Kolls options to acquire up
to 50,000 shares of Common Stock at an exercise price of $.65 per share, all
of which will vest if he is employed on April 30, 1997. In November 1996, the
exercise price of the options was reduced to $.45. The options must be
exercised within five years of vesting.
In April 1996, the Company issued to Mr. Herbert options to acquire
up to 400,000 shares of Common Stock at an exercise price of $.65 per share.
In November 1996, the exercise price of the options was reduced to $.45.
Subject to Mr. Herbert's continued employment with the Company, the options
will become vested over a three year period, 200,000 during the first year,
and 100,000 during each year thereafter, in quarterly intervals. The options
must be exercised within five years of vesting.
In May 1996, the Company issued to Mr. Sterling options to acquire
up to 50,000 shares of Common Stock at an exercise price of $.65 per share,
all of which vested on June 30, 1997. In November 1996, the exercise price of
the options was reduced to $.45. The options must be exercised within five
years of vesting.
In May 1996, the Company issued to Mr. Sullivan, a former officer of
the Company, options to acquire up to 50,000 shares of Common Stock at an
exercise price of $.65 per share, all of which were to vest if he was employed
by the Company on June 30, 1997. In December 1996, in conjunction with Mr.
Sullivan's separation of employment with the Company, the Company agreed that
21,000 of these options became vested at such time and the remainder would be
cancelled. See "Management - Officer Terminations." The options must be
exercised within five years of vesting.
In February 1997, the Company issued to Mr. Maxwell options to
acquire up to 200,000 shares of Common Stock at an exercise price of $.45 per
share. Subject to Mr. Maxwell's continued employment with the Company, the
options will become vested over a two year period at the rate of 25,000
options per quarter. The options must be exercised within five years of
vesting.
In June 1997, the Company issued to Mr. Kolls options to acquire up
to 100,000 shares of Common Stock at an exercise price of $.45 per share.
Subject to Mr. Kolls' continued employment with the Company, the options will
become vested over a one year period at the rate of 25,000 options per
quarter.
In June 1997, the Company issued to Mr. Sterling options to acquire
up to 100,000 shares of Common Stock at an exercise price of $.45 per share.
Subject to Mr. Sterling's continued employment with the Company, the options
will become vested over a one year period at the rate of 25,000 options per
quarter.
In June 1997, the Company issued to Mr. Herbert options to acquire up
to 100,000 shares of Common Stock at an exercise price of $.45 per share.
Subject to Mr. Herbert's continued employment with the Company, the options
will become vested over a one year period at the rate of 25,000 options per
quarter.
20
<PAGE>
In April 1998, the Company issued to each of Messrs. Herbert, Kolls
and Maxwell options to purchase up to 50,000 shares of Common Stock at $.45
per share. The options become vested over a one-year period at the rate of
12,500 per quarter and must be exercised within five years of vesting.
In April 1998, the Company reduced the exercise price of the following
options to purchase Common Stock issued to the following executives: Haven Brock
Kolls, Jr. - 100,000 options from $.25 to $.15; Stephen P. Herbert - 100,000
options from $.45 to $.15; and Leland P. Maxwell - 100,000 options from $.45 to
$.15.
The Board of Directors is responsible for awarding stock options. Such
awards are made in the subjective discretion of the Board. Other than the
repricing of the options by the Company in April 1998, the exercise price of all
the above options represents on the date of issuance of such options an amount
equal to or in excess of the fair market value of the Common Stock issuable upon
the exercise of the options. In connection with the April 1998 of stock options
repriced, the exercise prices of all these options were below the fair market
value on the date of the repricing, therefore the Company recorded a charge to
compensation expense during fiscal year 1998.
All of the foregoing options are non-qualified stock options and not
part of a qualified stock option plan and do not constitute incentive stock
options as such term is defined under Section 422 of the Internal Revenue
Code, as amended, and are not part of an employee stock purchase plan as
described in Section 423 thereunder.
Officer and/or Director Terminations
Keith L. Sterling resigned as the Executive Vice President-Systems,
Chief Information Officer, Secretary and Director of the Company effective April
1998 for personal reasons. Mr. Sterling agreed to act as a consultant through
June 30, 1998. The Company agreed to permanently reduce the exercise price of
Mr. Sterling's options to purchase 450,000 shares of Common Stock to $.10 per
share from $.25 per share and $.45 per share, and accelerated the vesting of
25,000 options to April 3, 1998.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Common Stock
The following table sets forth, as of June 30, 1998, the beneficial
ownership of the Common Stock of each of the Company's directors and executive
officers, as well as by the Company's directors and executive officers as a
group. Except as set forth below, the Company is not aware of any beneficial
owner of more than five percent of the Common Stock. Except as otherwise
indicated, the Company believes that the beneficial owners of the Common Stock
listed below, based on information furnished by such owners, have sole
investment and voting power with respect to such shares, subject to community
property laws where applicable.
Number of Shares
Name and Address of Common Stock Percent
of Beneficial Owner Beneficially Owned(1) of Class(2)
------------------- --------------------- -----------
George R. Jensen, Jr. 3,228,000 shares(3) 5.8%
3 Sugar Knoll Road
Devon, Pennsylvania 19333
Stephen P. Herbert 438,000 shares(4) *
536 West Beach Tree Lane
Strafford, Pennsylvania 19087
Haven Brock Kolls, Jr. 381,000 shares(5) *
52 Norwood House Road
Downingtown, PA 19335
Leland P. Maxwell 163,000 shares(6) *
129 Windham Drive
Langhorne, Pennsylvania 19047
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<PAGE>
Number of Shares
Name and Address of Common Stock Percent
of Beneficial Owner Beneficially Owned(1) of Class(2)
------------------- --------------------- -----------
Peter G. Kapourelos 313,000 shares(7) *
1515 Richard Drive
West Chester, Pennsylvania 19380
William W. Sellers 1,140,750 shares(8) 2.0%
394 East Church Road
King of Prussia, Pennsylvania 19406
Henry B. duPont Smith 400,000 shares(9) *
350 Mill Bank Road
Bryn Mawr, Pennsylvania 19010
William L. Van Alen, Jr. 225,000 shares(10) *
Cornerstone Entertainment, Inc.
P.O. Box 727
Edgemont, Pennsylvania 19028
All Directors and Executive Officers
As a Group (8 persons) 6,288,750 shares(11) 11.3%
- ---------
*Less than one percent (1%)
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and derives from either voting or
investment power with respect to securities. Shares of Common Stock issuable
upon conversion of the Preferred Stock, or shares of Common Stock issuable
upon exercise of options currently exercisable, or exercisable within 60 days
of June 30, 1998, are deemed to be beneficially owned for purposes hereof.
(2) On June 30,1998 there were 40,163,837 shares of Common Stock and 618,236
shares of Series A Preferred Stock issued and outstanding. For purposes of
computing the percentages under this table, it is assumed that all shares of
issued and outstanding Preferred Stock have been converted into 6,182,360
shares of Common Stock, that all of the options or purchase rights to acquire
Common Stock which have been issued and are fully vested as of June 30, 1998
(or within 60-days of June 30, 1998) have been converted into 4,353,800 shares
of Common Stock. Of the 4,353,800 options or purchase rights to acquire Common
Stock issued as of June 30, 1998, only 237,500 of such options do not become
vested within 60-days thereof, and such options are excluded from this table.
For purposes of computing such percentages it has also been assumed that all
of the remaining 1995 Warrants have been exercised for 673,000 shares of
Common Stock, all of the remaining 1996 Warrants have been exercised for
868,000 shares of Common Stock, that all of the 1996-B Warrants have been
exercised for 40,000 shares of Common Stock, that all of the 1997 Warrants
have been exercised for 15,000 shares of Common Stock, that all of the
Warrants issued to affiliates and/or consultants to GEM Advisors, Inc. have
been exercised for 1,100,000 shares of Common Stock, that all of the 1998-A
Warrants have been exercised for 40,000 shares of Common Stock and all of the
accrued and unpaid dividends on the Preferred Stock as of June 30, 1998 have
been converted, into 2,442,650 shares of Common Stock. Therefore, for purposes
of computing the percentages under this table, there are 55,641,147 shares of
Common Stock issued and outstanding.
(3) Includes 3,000,000 shares of Common Stock held by Mr. Jensen with his
minor children as joint tenants with right of survivorship. Does not include
the right granted to Mr. Jensen under his Employment Agreement to receive five
percent (5%) of the issued and outstanding Common Stock upon the occurrence of
a USA Transaction (as defined herein). See "Executive Employment Agreements".
(4) Includes 437,500 shares of Common Stock issuable to Mr. Herbert upon the
exercise of options. Does not include 112,500 shares of Common Stock issuable
pursuant to options not presently exercisable and not exercisable within 60
days of June 30, 1998.
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<PAGE>
(5) Includes 362,500 shares of Common Stock issuable to Mr. Kolls upon
exercise of options. Includes 16,500 shares acquired through the escrow
agreement. Does not include 37,500 shares of Common Stock issuable pursuant to
options not presently exercisable and not exercisable within 60-days of June
30, 1998.
(6) Includes 162,500 shares of Common Stock issuable to Mr. Maxwell upon the
exercise of options. Does not include 87,500 shares of Common Stock issuable
pursuant to options not presently exercisable and not exercisable within 60
days of June 30, 1998.
(7) Includes 10,000 shares of Common Stock issuable upon the conversion of
1,000 shares of Preferred Stock beneficially owned by Mr. Kapourelos. Includes
30,000 shares of Common Stock held on the date hereof by Mr. Kapourelos with
his spouse as joint tenants with right of survivorship. Includes 170,000
shares of Common Stock issuable upon exercise of options. Does not include any
shares of Common Stock issuable upon conversion of any accrued and unpaid
dividends in the Series A Preferred Stock.
(8) Includes 172,458 shares of Common Stock owned by the Sellers Pension Plan
of which Mr. Sellers is a trustee, 46,518 shares of Common Stock owned by
Sellers Process Equipment Company of which he is a Director, and 99,299 shares
of Common Stock owned by Mr. Seller's wife. Includes 155,000 shares of Common
Stock issuable upon exercise of options.
(9) Includes 120,000 shares of Common Stock issuable upon conversion of the
12,000 shares of Preferred Stock beneficially owned by Mr. Smith. Includes
100,000 shares of Common Stock issuable upon exercise of options. Includes
80,000 shares of Common Stock issuable upon conversion of the 1996 Warrants
held by trusts for the benefit of Mr. Smith's children of which he is a
trustee. Does not include any shares of Common Stock issuable upon conversion
of any accrued and unpaid dividends on the Series A Preferred Stock.
(10) Includes 125,000 shares of Common Stock issuable to Mr. Van Alen upon
exercise of options.
(11) Includes all shares of Common Stock described in footnotes (2) through
(10) above.
Preferred Stock
The following table sets forth, as of June 30, 1998 the beneficial
ownership of the Preferred Stock by the Company's directors and executive
officers, as well as by the Company's directors and executive officers as a
group. Except as set forth below, the Company is not aware of any beneficial
owner of more than five percent of the Preferred Stock. Except as otherwise
indicated, the Company believes that the beneficial owners of the Preferred
Stock listed below, based on information furnished by such owners, have sole
investment and voting power with respect to such shares, subject to community
property laws where applicable.
Number of Shares
Name and Address of of Preferred Stock Percent
Beneficial Owner Beneficially Owned of Class(l)
- ------------------- ------------------ -----------
Peter G. Kapourelos
1515 Richard Drive
West Chester, Pennsylvania 19380 1,000 *
Henry B. duPont Smith
350 Mill Bank Road
Bryn Mawr, Pennsylvania 19010 12,000(2) 1.9%
All Directors and
Executive Officers
As a Group (8 persons) (3) 13,000 2.1%
- --------------
*Less than one percent (1%)
23
<PAGE>
(1) There were 618,236 shares of Preferred Stock issued and outstanding as of
June 30, 1998.
(2) Includes 2,000 shares of Preferred Stock held by trusts for the benefit of
Mr. Smith's children of which he is a trustee.
(3) As of June 30, 1998, Messrs. Herbert, Jensen, Kolls, Maxwell, Sellers and
Van Alen did not beneficially own any shares of Preferred Stock.
Item 12. Certain Relationships and Related Transactions
At June 30, 1998 and 1997, approximately $26,000 and $27,000
respectively, of the Company's accounts payable are due to several shareholders
for various legal and technical services performed. For the years ended June 30,
1998 and June 30, 1997, the Company incurred approximately $340,000 and
$308,000 respectively for these services.
In September 1996, the Company issued to Joseph Donahue, a Vice
President of the Company, options to purchase up to 50,000 Shares of Common
Stock at $.45 per share.
In November 1996, the Company issued to Michael Feeney, a Vice
President of the Company, options to purchase up to 10,000 Shares of Common
Stock at $.50 per share.
In November 1996, the Company reduced the exercise price of the
50,000 options issued to Mr. Kolls in March 1996, the 400,000 options issued
to Mr. Herbert in April 1996 and the 50,000 issued to Mr. Sterling in May 1996
from $.65 to $.45.
In December 1996, in conjunction with the cancellation of Mr.
Sullivan's employment agreement, the Company agreed that 21,000 of the 50,000
options granted to Mr. Sullivan during May 1996 became vested as of December
1, 1996 and the balance thereof were cancelled.
In February 1997, the Company issued to Mr. Maxwell options to
purchase up to 200,000 shares of Common Stock at $.45 per share.
In June 1997, the Company issued to Mr. Kolls options to acquire up
to 100,000 shares of Common Stock at $.45 per share, to Mr. Sterling options
to acquire up to 100,000 shares of Common Stock at $.45 per share, and to Mr.
Herbert options to acquire up to 100,000 shares of Common Stock at $.45 per
share.
In November 1997, Mr. Jensen canceled 4,365,000 shares of Common
Stock owned by him and which had been held in escrow.
In December 1997, the Company issued to each of Joseph Donahue and
Phillip Harvey, Vice Presidents of the Company, options to acquire up to
50,000 shares of Common Stock at $.45 per share. The options vest at the rate
of 12,500 per quarter.
In December 1997, Adele Hepburn, a Director of Public Relations of
the Company, loaned the Company the sum of $50,000 for working capital. The
loan was repaid on March 31, 1998 including interest at the rate of six
percent (6%) per annum.
In March 1998, the Company extended the expiration date of the
following options to purchase shares of Common Stock from June 30, 1998 to the
close of business on June 30, 2000: Adele Hepburn - 50,000 options; Peter G.
Kapourelos - 100,000 options; William W. Sellers - 100,000 options; William L.
Van Alen, Jr. - 100,000 options; and Keith L. Sterling - 100,000 options.
In March 1998, the Company extended the expiration date of all the
purchase rights to acquire 157,300 shares of Common Stock at $1.00 per share
from June 30, 1998 to the close of business June 30, 2000. As a result, 4,500
purchase rights were exercised.
24
<PAGE>
In April 1998, the Company reduced from $.25 to $15 the exercise
price of the following options to purchase Common Stock issued to the
following Directors and/or executive officers of the Company: Peter G.
Kapourelos - 170,000 options; William W. Sellers - 155,000 options; William L.
Van Alen, Jr. - 125,000 options; Henry B. duPont Smith - 100,000 options; and
Haven Brock Kolls, Jr. - 100,000 options.
In April 1998, the Company reduced the exercise price of 50,000 of
the 100,000 options to purchase shares of Common Stock of the Company owned by
Michael Lawlor, an officer of the Company, from $.45 per share to $.05 per share
and the exercise price of the remaining 50,000 options was permanently reduced
from $.45 to $.15 per share. The reduced exercise price of the 100,000 options
is less than the fair market value of the Common Stock on the effective date of
the reduction, and therefore, a charge against earnings has been recorded in
the Statement of Operations at June 30, 1998.
In April 1998, the Company reduced from $.45 to $.15 the exercise price
of the following options to purchase shares of Common Stock issued to the
following Directors and/or executive officers of the Company: Leland P. Maxwell
- - 100,000 options; Haven Brock Knolls, Jr. - 100,000 options; and Stephen
Herbert - 100,000 options.
In April 1998, the Company authorized the reduction in the
exercise price of the options to purchase 200,000 shares of Common Stock of
the Company owned by Adele Hepburn, an employee of the company, from $.25 to
$.15.
In April 1998, the Company authorized a reduction in the exercise
price of 157,300 purchase rights from $1.00 per share to $.25 per share
through June 30, 1998. At that time the price reverted back to $1.00 per
share.
In April 1998, the Company authorized a temporary reduction in the
exercise price of all of the options to purchase up to 121,000 shares of
Common Stock of the Company owned by Edward J. Sullivan, a former officer and
employee of the Company, to $.15 per share through October 31, 1998.
Thereafter, the exercise price shall revert back to the current exercise price
In April 1998 the Company authorized a permanent reduction from $.45 to
$.15 in the exercise price of 100,000 options to purchase shares of Common Stock
owned by Joseph Donahue. Also in April 1998 the Company authorized a permanent
reduction from $.45 to $.20 in the exercise price of 75,000 options to purchase
shares of Common Stock owned by Phillip Harvey.
All of the above reductions to the exercise price of $.05, $.10,
$.15, $.20 or $.25 per share were to a price which was less than the fair
market value of the Common Stock as of the date of the reductions and
therefore, a charge against earnings was recorded during fiscal year 1998.
PART IV
Item 13. Exhibits, Consolidated Financial Statement Schedules and
Reports on Form 8-K
a. Consolidated Financial Statements filed herewith at Item 7 hereof
include balance sheets at June 30, 1998 and 1997 and statements of
operations, shareholders' equity, and cash flows, for the years
ended June 30, 1998 and 1997. All other schedules for which
provision is made in regulation S-B of the Commission are not
required under the related instruction or are not applicable and
therefore have been omitted.
b. A report on Form 8-K was filed by the Company on June 23, 1998
reporting a material event under Item 5. Other Events.
c. The Exhibits filed as part of, or incorporated by reference into
this Form 10-KSB are listed below.
25
<PAGE>
Exhibit
Number Description
-------------------------------------------------------
3.1 Articles of Incorporation of Company filed on January
16, 1992 (Incorporated by reference to Exhibit 3.1 to
Form SB-2 Registration Statement No. 33-70992).
3.1.1 First Amendment to Articles of Incorporation of the
Company filed on July 17, 1992 (Incorporated by
reference to Exhibit 3.1.1 to Form SB-2 Registration
Statement No. 33-70992).
3.1.2 Second Amendment to Articles of Incorporation of the
Company filed on July 27, 1992 (Incorporated by
reference to Exhibit 3.1.2 to Form SB-2 Registration
Statement No. 33-70992).
3.1.3 Third Amendment to Articles of Incorporation of the
Company filed on October 5, 1992 (Incorporated by
reference to Exhibit 3.1.3 to Form SB-2 Registration
Statement No. 33-70992).
3.1.4 Fourth Amendment to Articles of Incorporation of the
Company filed on October 18, 1993 (Incorporated by
reference to Exhibit 3.1.4 to Form SB-2 Registration
Statement No. 33-70992).
3.1.5 Fifth Amendment to Articles of Incorporation of the
Company filed on June 7, 1995(Incorporated by reference
to Exhibit 3.1 to Form SB-2 Registration Statement No.
33-98808).
3.1.6 Sixth Amendment to Articles of Incorporation of the
Company filed on May 1, 1996 (Incorporated by reference
to Exhibit 3.1.6 to Form SB-2 Registration Statement
No. 333-09465).
3.1.7 Seventh Amendment to Articles of Incorporation of the
Company filed on March 24, 1997 (Incorporated by
reference to Exhibit 3.1.7 to Form SB-2 Registration
Statement No. 333-30853).
**3.1.8 Eighth Amendment to Articles of Incorporation of the
Company filed on July 5, 1998.
3.2 By-Laws of the Company (Incorporated by reference to
Exhibit 3.2 to Form SB-2 Registration Statement No.
33-70992).
4.1 Warrant Agreement dated as of June 21, 1995 between the
company and American Stock Transfer and Trust Company
(Incorporated by reference to Exhibit 4.1 to Form SB-2
Registration Statement N. 33-98808, filed October 31,
1995).
4.2 Form of Warrant Certificate (Incorporated by reference to
Exhibit 4.2 to Form SB-2 Registration Statement, No.
33-98808, filed October 31, 1995).
4.3 1996 Warrant Agreement dated as of May 1, 1996 between
the Company and American Stock Transfer and Trust
Company.
4.4 Form of 1996 Warrant Certificate.
4.5 Form of 1997 Warrant (Incorporated by reference to
Exhibit 4.1 to Form SB-2 Registration Statement No.
333-38593, filed February 4, 1998).
26
<PAGE>
10.1 Employment and Non-Competition Agreement between the
Company and Adele Hepburn dated as of January 1, 1993
(Incorporated by reference to Exhibit 10.7 to Form SB-2
Registration Statement No. 33-70992).
10.2 Robert L. Bartlett common Stock Options dated as of July
1, 1993 (incorporated by reference to Exhibit 10.9 to
Form SB-2 Registration Statement No. 33-70992).
10.3 Edward J. Sullivan Common Stock Options dated as of July
1, 1993 (Incorporated by reference to Exhibit 10.10 to
Form SB-2 Registration Statement No. 33-70992).
10.4 Keith L. Sterling Common Stock Options dated July 1,
1993 (Incorporated by reference to Exhibit 10.11 to
Form SB-2 Registration Statement No. 33-70992).
10.5 Adele Hepburn Common Stock Options dated as of July 1,
1993 (Incorporated by reference to Exhibit 10.12 to
Form SB-2 Registration Statement No. 33-70992).
10.6 Gregory C. Rollins Common Stock Options dates as of
August 23, 1993 (Incorporated by reference to Exhibit
10.13 to Form SB-2 Registration Statement No. 33-70992).
10.7 Certificate of Appointment of American Stock Transfer &
Trust Company as Transfer Agent and Registrar dated
October 8, 1993 (Incorporated by reference to Exhibit
10.23 to Form SB-2 Registration Statement No.
33-70992).
27
<PAGE>
10.8 Employment and Non-Competition Agreement between the
Company and H. Brock Kolls dated as of May 1, 1994
(Incorporated by reference to Exhibit 10.32 to Form
SB-2 Registration Statement No. 33-70992).
10.8.1 First Amendment to Employment and Non-Competition
Agreement between the Company and H. Brock Kolls dated
as of May 1, 1994 (Incorporated by reference to Exhibit
10.13.1 to Form SB-2 Registration Statement No.
333-09465).
10.9 Agreement of Lease dated March 16,1994, by and between
the Company and G.F. Florida Operating Alpha, Inc.
(Incorporated by reference to Exhibit 10.33 to Form
SB-2 Registration Statement No. 33-70992).
10.10 Megan N. Cherney Common Stock Options dated as of April
1, 1994 (Incorporated by reference to Exhibit 10.41 to
Form SB-2 Registration Statement No. 33-70992).
10.11 H. Brock Kolls Common Stock Options dated as of May 1,
1994 (Incorporated by reference to Exhibit 10.42 to
Form SB-2 Registration Statement No. 33-70992).
10.11.1 H. Brock Kolls Common Stock Options dated as of March
20, 1996 (Incorporated by reference to Exhibit 10.19 to
Form SB-2 Registration Statement No. 33-70992)
10.12 Barry Slawter Common Stock Options dated as of August
25, 1994 (Incorporated by reference to Exhibit 10.43 to
Form SB-2 Registration Statement No. 33-70992).
10.13 Employment and Non-Competition Agreement between the
Company and Michael Lawlor dated June 7, 1996
(Incorporated by reference to Exhibit 10.28 to Form
SB-2 Registration Statement No. 333-09465).
28
<PAGE>
10.14 Michael Lawlor Common Stock Option Certificate dated as
of June 7, 1996 (Incorporated by reference to Exhibit
10.29 to Form SB-2 Registration Statement
No.333-09465).
10.15 Employment and Non-Competition Agreement between the
Company and Stephen P. Herbert dated April 4, 1996
(Incorporated by reference to Exhibit 10.30 to Form
SB-2 Registration Statement No. 333-09465).
10.16 Stephen P. Herbert Common Stock Option Certificate
dated April 4, 1996 (Incorporated by reference to
Exhibit 10.31 to Form SB-2 Registration Statement No.
333-09465).
10.17 RAM Group Common Stock Option Certificate dated as of
August 22, 1996 (Incorporated by reference to Exhibit
10.34 to Form SB-2 Registration No. 33-98808).
10.18 RAM Group Common Stock Option Certificate dated as of
November 1, 1996 (Incorporated by reference to Exhibit
10.35 to Form SB-2 Registration No. 33-98808).
10.19 Philip A. Harvey Common Stock Option Certificate dated
as of November 1, 1996 (Incorporated by reference to
Exhibit 10.36 to Form SB-2 Registration No. 33-98808).
10.20 Joseph Donahue Common Stock Option Certificate dated as
of September 2, 1996 (Incorporated by reference to
Exhibit 10.37 to Form SB-2 Registration No. 33-98808).
10.21 Employment and Non-Competition Agreement between the
Company and Leland P. Maxwell dated February 24, 1997
(Incorporated by reference to Exhibit 10.39 to Form
SB-2 Registration No. 33-98808)
10.21.1 First Amendment to Employment and Non-competition
Agreement between the Company and Leland P. Maxwell dated
February 24, 1998.
10.22 Leland P. Maxwell Common Stock Option Certificate dated
February 24, 1997 (Incorporated by reference to Exhibit
10.40 to Form SB-2 Registration No. 33-98808).
10.23 Letter between the Company and GEM Advisers, Inc.
signed May 15, 1997 (Incorporated by reference to
Exhibit 10.1 to Form 8-K filed on May 22, 1997).
10.24 Business Express Agreement between the Company and
1217909 Ontario Inc. dated May 20, 1997 (Incorporated
by reference to Exhibit 10.42 to Form 8-K filed on May
22, 1997).
10.25 H. Brock Kolls Common Stock Option Certificate dated as
of June 9, 1997 (Incorporated by reference to Exhibit
10.43 to Form SB-2 Registration Statement No.
333-30853).
29
<PAGE>
10.26 Stephen Herbert Common Stock Option Certificate dated
as of June 9, 1997 (Incorporated by reference to
Exhibit 10.44 to Form SB-2 Registration Statement No.
333-30853).
10.27 Keith Sterling Common Stock Option Certificate dated as
of June 9, 1997 (Incorporated by reference to Exhibit
10.45 to Form SB-2 Registration Statement No.
333-30853).
10.28 Michael Feeney Common Stock Option Certificate dated as
of June 9, 1997 (Incorporated by reference to Exhibit
10.46 to Form SB-2 Registration Statement No.
333-30853).
10.29 Joint Venture Agreement dated September 24, 1997 between
the Company and Mail Boxes Etc. (Incorporated by
reference to Exhibit 10.47 to Form 10-KSB filed on
September 26, 1997).
10.30 Employment and Non-competition Agreement between the
Company and George R. Jensen, Jr. dated November 20, 1997
(Incorporated by reference to Exhibit 10.1 to Form 8-K
filed on November 26, 1997).
10.31 Agreement between the Compapny and Promus Hotels, Inc.
dated May 8, 1997 (incorporated by reference to Exhibit
10.49 to Form SB-2 Registration Statement No. 333-38593,
filed on February 4, 1998).
10.32 Agreement between the Company and Choice Hotels
International, Inc. dated April 24, 1997 (Incorporated by
reference to Exhibit 10.50 to Form SB-2 Registration
Statement No. 333-38593, filed on February 4, 1998).
10.33 Agreement between the Company and PNC Merchant Services
dated July 18, 1997 (Incorporated by reference to Exhibit
10.51 to Form SB-2 Registration Statement No. 333-38593,
filed on February 4, 1998).
10.34 Separation Agreement between the Company and Keith L.
Sterling dated April 8, 1998 (Incorporated by reference
to Exhibit to Exhibit 10.1 to Form 10-QSB filed May 12,
1998).
** 27.1 Financial Data Schedule (Electronic Filing Only)
--------------------------------------------------------------------
** -- Filed herewith.
30
<PAGE>
d. Schedules filed herewith include: Financial Data Schedule
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
USA TECHNOLOGIES, INC.
By: /s/ George R. Jensen, Jr.
--------------------------------------
George R. Jensen, Jr., President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ George R. Jensen, Jr. Chairman of the Board of Directors, September 28, 1998
- -------------------------- President and Chief Executive Officer
George R. Jensen, Jr. (Principal Executive Officer)
/s/ Leland P. Maxwell Vice President and Chief Financial September 28, 1998
- -------------------------- Officer (Principal Accounting Officer)
Leland P. Maxwell
/s/ William W. Sellers Director September 28, 1998
- --------------------------
William W. Sellers
/s/ Peter G. Kapourelos Director September 28, 1998
- --------------------------
Peter G. Kapourelos
/s/ Henry B. duPont Smith Director September 28, 1998
- --------------------------
Henry B. duPont Smith
/s/ William L. Van Alen, Jr. Director September 28, 1998
- --------------------------
William L. Van Alen, Jr.
/s/ Stephen P. Herbert Director September 28, 1998
- --------------------------
Stephen P. Herbert
</TABLE>
32
<PAGE>
Microfilm Number Filed with the Department of State on Jul 06 1998
----------- -----------
Entity Number 2072587 xxxxxxxxxxxx xxxxx
----------------- --------------------------------------------
Security of the Commonwealth
ARTICLES OF AMENDMENT-DOMESTIC BUSINESS CORPORATION
DSCB:15-1915 (Rev 90)
In compliance with the requirements of 15 Pa.C.S. S 1915 (relating to
articles of amendment), the undersigned business corporation, desiring to amend
its Articles, hereby states that:
1. The name of the corporation is: USA Technologies, Inc.
------------------------------------------
- -------------------------------------------------------------------------------
2. The (a) address of this corporation's current registered office in this
Commonwealth or (b) name of its commercial registered office provider and
the county of venue is (the Department is hereby authorized to correct the
following information to conform to the records of the Department):
(a)
-----------------------------------------------------------------------
Number and Street City State Zip County
(b) c/o Corporation Service Company Chester
-----------------------------------------------------------------------
Name of Commercial Registered Office Provider County
For a corporation represented by a commercial registered office provider, the
county in (b) shall be deemed the county in which the corporation is located for
venue and official publication purposes.
3. The statute by or under which it was incorporated is:
Business Corporation Law of 1988
- -------------------------------------------------------------------------------
4. The date of its incorporation is: January 16, 1992
- -------------------------------------------------------------------------------
5. (Check, and if appropriate complete, one of the following):
X The amendment shall be effective upon filing these Articles of Amendment in
- --- Department of State.
- --- The amendment shall be effective on: ________________ at __________________
Date Hour
6. (Check one of the following):
X The amendment was adopted by the shareholders (or members) pursuant to 15
- --- Pa.C.S. S 1914(a) and (b).
- --- The amendment was adopted by the board of directors pursuant to 15 Pa.C.S.
S 1914(c).
7. (Check, and if appropriate complete, one of the following):
- --- The amendment adopted by the corporation, set forth in full, is as follows:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
X The amendment adopted by the corporation is set forth in full in Exhibit A
- --- attached hereto and made a part hereof.
<PAGE>
DSCB:15-1915 (Rev 90)-2
8. (Check if the amendment restates the Articles):
The restated Articles of Incorporation supersede the orginal Articles and
- --- all amendments thereto.
IN TESTIMONY WHEREOF, the undersigned corporation has caused these Articles of
Amendment to be signed by a duly authorized officer thereof this 26 day of
June, 1998.
USA Technologies, Inc.
---------------------------------------
(Name of Corporation)
By: /s/ George R. Jensen, Jr.
-----------------------------------
George R. Jensen, Jr.
Title: President and CEO
--------------------------------
<PAGE>
EXHIBIT A
Paragraph (A) Classes of Stock of Article 4 of the Articles of Incorporation of
the Company shall be amended and restated to read in full as follows:
(A) Classes of Stock. The aggregate number of shares which the
corporation shall have authority to issue is 63,200,000 shares,
consisting of 62,000,000 shares of Common Stock, without par
value, and 1,200,000 shares of Series Preferred Stock, without
par value.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000896429
<NAME> USA TECHNOLOGIES, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1.000
<CASH> 324,824
<SECURITIES> 0
<RECEIVABLES> 266,382
<ALLOWANCES> (23,764)
<INVENTORY> 436,971
<CURRENT-ASSETS> 1,024,928
<PP&E> 442,990
<DEPRECIATION> 291,084
<TOTAL-ASSETS> 1,187,084
<CURRENT-LIABILITIES> 1,030,240
<BONDS> 0
0
4,538,114
<COMMON> 11,223,213
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,187,084
<SALES> 1,588,487
<TOTAL-REVENUES> 1,825,229
<CGS> 1,261,729
<TOTAL-COSTS> 5,501,650
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,443
<INCOME-PRETAX> (3,568,281)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,568,281)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,568,281)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
