<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1O-QSB
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
---------------------------------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to _____________________
Commission file number 33-70992
USA Technologies, Inc.
----------------------
(Exact name of small business issuer as specified in its charter)
Pennsylvania 23-2679963
- ------------ ----------
(State or other jurisdiction of (I.R.S. employer Identification No.)
incorporation or organization)
200 Plant Avenue, Wayne, Pennsylvania 19087
- ------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, area code first. (610)-989-0340
--------------
Check whether the Registrant has (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of May 12, 1998, there were 36,504,492 shares of Common Stock, no par
value, and 637,536 shares of Series A Convertible Preferred Stock, no par
value, outstanding.
<PAGE>
USA TECHNOLOGIES, INC.
INDEX
PAGE NO.
Part I - Financial Information
Item 1. Financial Statements
Balance Sheets - March 31, 1998 and June 30, 1997 1
Statements of Operations - Three and nine months ended 2
March 31, 1998 and 1997
Statement of Shareholders' Equity - March 31, 1998 3
Statements of Cash Flows - Nine months ended 5
March 31, 1998 and 1997
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II - Other Information 12
Item 2. Changes in Securities 12
Item 5. Other Information 12
Item 6. Exhibits amd Reports on Form 8-K 13
<PAGE>
USA Technologies, Inc.
(A Development Stage Corporation)
Balance Sheets
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
ASSETS: ------------ ------------
<S> <C> <C>
Current Assets: (Unaudited)
Cash and cash equivalents ............................ $ 421,899 630,266
Accounts receivable less allowance for uncollectible
accounts of $22,609 at March 31, 1998 (unaudited)
and $19,345 at June 30, 1997 ...................... 404,988 127,318
Inventory ............................................ 596,330 378,318
Stock subscriptions receivable ....................... -- 60,000
Prepaid expenses and deposits ........................ 20,419 15,670
------------ ------------
Total current assets ....................................... 1,443,636 1,211,572
Property and equipment, at cost, net of accumulated
depreciation of $251,320 at March 31, 1998
(unaudited) and $174,829 at June 30, 1997 ............ 102,689 178,457
Other assets ............................................... 23,950 20,250
------------ ------------
Total assets ............................................... $ 1,570,275 1,410,279
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................... $ 745,919 474,646
Accrued expenses ..................................... 214,369 46,742
Current obligations under capital leases ............. 21,579 18,270
------------ ------------
Total current liabilities .................................. 981,867 539,658
Obligations under capital leases,less current portion 7,855 24,480
------------ ------------
Total liabilities .......................................... 989,722 564,138
Shareholders' equity:
Preferred stock,no par value:
Authorized shares -1,200,000
Series A Convertible issued and outstanding shares -
641,036 at March 31,1998 (unaudited) and 861,205 at
June 30, 1997 (Liquidation preference of $8,950,669 at
March 31, 1998 - unaudited) .......................... 4,723,683 7,024,811
Common stock, no par value:
Authorized shares - 55,000,000
Issued and outstanding shares - 36,135,242 at March
31, 1998 (unaudited) and 29,969,934 at June 30,1997 .. 9,836,666 4,355,334
Deficit accumulated during the development stage ........... (13,979,796) (10,534,004)
------------ ------------
Total shareholders' equity ................................ 580,553 846,141
------------ ------------
Total liabilities and shareholders' equity ................. $ 1,570,275 1,410,279
============ ============
</TABLE>
(See accompanying notes)
1
<PAGE>
USA Technologies, Inc.
(A Development Stage Corporation)
Statements of Operations
<TABLE>
<CAPTION>
Three months ended Nine months ended Date of Inception Through
March 31, March 31, ----------------------------
---------------------------- ---------------------------- March 31, June 30,
1998 1997 1998 1997 1998 1997
------------ ------------ ------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Equipment sales ................. $ 477,239 $ 102,347 $ 1,096,961 $ 189,514 $ 1,587,575 $ 490,614
License fees .................... 70,969 32,332 173,709 77,441 354,525 180,816
Other ........................... 0 9,857 9,342 14,039 9,342 0
------------ ------------ ------------ ------------ ------------ ------------
Total revenues ..................... 548,208 144,536 1,280,012 280,994 1,951,442 671,430
------------ ------------ ------------ ------------ ------------ ------------
Expenses:
Cost of sales ................... 380,473 93,923 929,610 158,867 1,454,700 525,090
General and administrative ...... 468,044 395,328 1,359,962 1,566,858 6,618,650 5,258,688
Compensation .................... 320,723 240,802 968,798 732,621 4,515,032 3,546,234
Depreciation and amortization ... 25,497 28,297 76,491 74,819 272,135 195,644
Provision for losses on equipment -- 10,440 -- 46,541 400,715 400,715
Costs incurred in connection with
abandoned private placement ..... -- -- -- -- 50,000 50,000
Interest expense (income) ....... (3,212) 2,760 (8,036) 14,780 50,694 58,730
------------ ------------ ------------ ------------ ------------ ------------
Total expenses ..................... 1,191,525 771,550 3,326,825 2,594,486 13,361,926 10,035,101
------------ ------------ ------------ ------------ ------------ ------------
Net loss ........................... (643,317) (627,014) (2,046,813) (2,313,492) (11,410,484) (9,363,671)
------------ ------------ ------------ ------------ ============ ============
Cumulative preferred dividends ..... (464,277) (577,301) (1,109,431) (1,169,452)
Other adjustments .................. (58,715) -- (645,135) --
------------ ------------ ------------ ------------
Loss applicable to common shares ... ($ 1,166,309) ($ 1,204,315) ($ 3,801,379) ($ 3,482,944)
============ ============ ============ ============
Loss per common share .............. ($ 0.03) ($ 0.05) ($ 0.11) ($ 0.17)
============ ============ ============ ============
Weighted average number of
common shares outstanding ....... 36,094,736 21,960,852 34,160,761 20,114,083
============ ============ ============ ============
</TABLE>
(See accompanying notes)
2
<PAGE>
USA Technologies, Inc.
(A Development Stage Corporation)
Statement of Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Deficit
Series A Accumulated
Convertible During the
Preferred Common Development
Stock Stock Stage Total
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, June 30, 1997 $7,024,811 $4,355,334 ($10,534,004) $846,141
July 1997-issuance of 40,000 shares
of Common Stock in exchange for
consulting services ....................... 14,355 14,355
July 1997-conversion of 1,000 shares of
Convertible Preferred Stock to 12,000
shares of Common Stock .................... (8,157) 8,157 --
July 1997-conversion of $1,500 of
cumulative preferred dividends into 1,807
shares of Common Stock at $.83 per share .. 1,500 (1,500) --
July 1997- Common Stock warrants
exercised-21,200 at $.20 per warrant ...... 4,240 4,240
August 1997- Common Stock warrants
exercised-986,000 at $.20 per warrant,
net of offering costs ..................... 185,617 185,617
August 1997-conversion of 49,465 shares
of Convertible Preferred Stock to 593,580
shares of Common Stock .................... (403,480) 403,480 --
August 1997-conversion of $220,485 of
cumulative preferred dividends into 266,903
shares of Common Stock at $.83 per share .. 220,485 (220,485) --
September 1997- Common Stock warrants
exercised-40,000 at $.25 per warrant ...... 10,000 10,000
September 1997- Common Stock warrants
exercised-746,000 at $.20 per warrant, net
of offering costs ......................... 118,622 118,622
September 1997-Common Stock options exercised-
70,000 at $.05 ............................ 3,500 3,500
September 1997-conversion of 80,755 shares
of Convertible Preferred Stock to 969,060
shares of Common Stock .................... (658,711) 658,711 --
September 1997-conversion of $306,022 of
cumulative preferred dividends into 368,700
shares of Common Stock at $.83 per share .. 306,022 (306,022) --
October 1997- Common Stock warrants
exercised-1,814,000 at $.25 per warrant ... 453,500 453,500
October 1997- Common Stock warrants
exercised-1,099,800 at $.20 per warrant ... 219,960 219,960
October 1997-issuance of 5,333 shares
of Common Stock in exchange for
consulting services ....................... 2,754 2,754
October 1997-conversion of 17,280 shares
of Convertible Preferred Stock to 207,360
shares of Common Stock .................... (141,004) 141,004 --
October 1997-conversion of $65,353 of
cumulative preferred dividends into 78,739
shares of Common Stock at $.83 per share .. 65,353 (65,353) --
</TABLE>
3
<PAGE>
USA Technologies, Inc.
(A Development Stage Corporation)
Statement of Shareholders' Equity (Continued)
(Unaudited)
<TABLE>
<CAPTION>
Deficit
Series A Accumulated
Convertible During the
Preferred Common Development
Stock Stock Stage Total
--------------------------------------------------------------
<S> <C> <C> <C> <C>
November 1997-cancellation of 4,365,000 shares
of Common Stock by the President of the
Company ................................... -- -- -- --
November 1997-issuance of 10,667 shares
of Common Stock in exchange for
consulting services ....................... 4,462 4,462
November 1997-conversion of 9,390 shares
of Convertible Preferred Stock to 112,680
shares of Common Stock ....................... (76,622) 76,622 --
November 1997-conversion of $43,132 of
cumulative preferred dividends into 51,966
shares of Common Stock at $.83 per share ..... 43,132 (43,132) --
December 1997-issuance of 64,000 shares
of Common Stock in exchange for
consulting services .......................... 18,307 18,307
December 1997-conversion of 147,443 shares
of Convertible Preferred Stock to 1,769,316
shares of Common Stock ....................... (1,203,134) 1,203,134 --
December 1997-conversion of $522,952 of
cumulative preferred dividends into 630,062
shares of Common Stock at $.83 per share ..... 522,952 (522,952) --
December 1997-issuance of 9,500 shares
of Common Stock to employees as compensation . 2,565 2,565
January 1998-issuance of 124,000 shares of
Convertible Preferred Stock at $5.00 per share
less offering costs of $28,830 ............... 591,170 591,170
January 1998-issuance of 40,000 shares
of Common Stock in exchange for
consulting services .......................... 11,576 11,576
January 1998-conversion of 60,836 shares
of Convertible Preferred Stock to 730,529
shares of Common Stock ....................... (492,505) 492,505 --
January 1998-conversion of $223,785 of
cumulative preferred dividends into 271,852
shares of Common Stock at $.83 per share ..... 223,785 (223,785) --
February 1998-issuance of 26,000 shares of
Convertible Preferred Stock at $5.00 per share
less offering costs of $6,045 ................ 123,955 123,955
February 1998-issuance of 40,000 shares
of Common Stock in exchange for
consulting services .......................... 14,871 14,871
February 1998-conversion of 3,000 shares
of Convertible Preferred Stock to 32,000
shares of Common Stock ....................... (24,480) 24,480 --
February 1998-conversion of $12,750 of
cumulative preferred dividends into 13,518
shares of Common Stock at $.83/$1.00 per share 12,750 (12,750) --
March 1998-issuance of 5,000 shares
of Common Stock in exchange for
consulting services .......................... 1,771 1,771
March 1998-conversion of 1,000 shares
of Convertible Preferred Stock to 10,000
shares of Common Stock ....................... (8,160) 8,160 --
March 1998-conversion of $3,000 of
cumulative preferred dividends into 3,000
shares of Common Stock at $1.00 per share .... 3,000 (3,000) --
Net loss ........................................ (2,046,813) (2,046,813)
------------ ------------ ------------ ------------
Balance, March 31, 1998 ............................. $ 4,723,683 $ 9,836,666 ($13,979,796) $ 580,553
============ ============ ============ ============
</TABLE>
(See accompanying notes)
4
<PAGE>
USA Technologies, Inc.
(A Development Stage Corporation)
Statements of Cash Flows
<TABLE>
<CAPTION>
Nine months ended
March 31,
---------------------------
1998 1997
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ....................................... ($2,046,813) ($2,313,492)
Adjustments to reconcile net
loss to net cash used in
operating activities
Depreciation/amortization ...................... 76,491 74,819
Compensation charges incurred
in connection with the issuance
of Common Stock ................. 70,661 182,700
Changes in operating assets and liabilities
Accounts receivable ............. (277,670) (135,443)
Inventory ....................... (218,012) 5,631
Prepaid expenses and deposits ... (8,449) 32,048
Accounts payable ................ 271,273 (49,216)
Accrued expenses ................ 167,627 59,703
----------- -----------
Net cash used in operating activities .......... (1,964,892) (2,143,250)
INVESTING ACTIVITIES
Purchase of property and equipment ............. (723) (17,856)
----------- -----------
Net cash used in investing activities .......... (723) (17,856)
FINANCING ACTIVITIES
Net proceeds from issuance of
common stock .................... 1,055,439 682,456
Net proceeds from issuance of
convertible preferred stock ..... 715,125 93,500
Repayment of capital lease obligations ......... (13,316) (6,272)
----------- -----------
Net cash provided by financing activities ...... 1,757,248 769,684
----------- -----------
Net decrease in cash and cash equivalents ...... (208,367) (1,391,422)
Cash and cash equivalents at beginning of period 630,266 1,773,356
----------- -----------
Cash and cash equivalents at end of period ..... $ 421,899 $ 381,934
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASHFLOW INFORMATION:
Capital lease obligations ...................... $ -- $ 32,762
=========== ===========
</TABLE>
5
<PAGE>
USA TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(A Development Stage Corporation)
1. Business
USA Technologies, Inc., a Pennsylvania corporation (the "Company")
was founded in January 1992. Substantially all of the Company's activities to
date have been devoted to raising capital, developing markets, and starting up
operations which commenced during July 1994. The Company is in the development
stage and intends to become a leading provider and licensor of unattended,
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.
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 ("MBE Joint Venture")
exclusively sells and markets unattended, credit card activated business
centers under the name MBE Business Express(TM) to the hospitality industry,
travel industry, convention centers, colleges, universities, supermarkets,
banks, military, convenience stores, and mass merchandisers located in the
United States.
As of March 31, 1998, the Company had a total of 514 control systems
in the field, distributed as follows: 331 Business Express(TM) control
systems, 43 Copy Express(TM) control systems, 36 Debit Express(TM) control
systems, 22 Fax/Printer Express(TM) control systems, and 81 Public PC(TM)
control systems located at various hotels and libraries throughout the United
States and Canada.
2. Accounting Policies
Interim Financial Information
The financial statements and disclosures included herein for the
three and nine months ended March 31, 1998 and 1997 and from the date of
inception through March 31, 1998 are unaudited. These financial statements and
disclosures have been prepared by the Company in accordance with generally
accepted accounting principles and reflect all adjustments consisting of
adjustments of a normal and recurring nature which, in the opinion of
management, are necessary for a fair presentation of the Company's financial
position and the results of its operations and cash flows.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method)
or market.
6
<PAGE>
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed
using the straight-line method over three to seven years 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 fee revenue is
recognized upon the usage of the Company's credit card activated control
systems.
Loss per Common Share
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which was adopted by the Company during
the quarter ended December 31, 1997. The loss per common share is calculated
based on the weighted average number of common shares outstanding during the
periods. In calculating basic and diluted earnings(loss) per 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 exercise or conversion of these securities would be antidilutive,
in both calculations.
3. Stock Options, Warrants and Purchase Rights
As of March 31, 1998, there was a total of 157,300 Common Stock
purchase rights outstanding at a price of $1.00 per share. As of March 31,
1998, there was a total of 4,051,000 options outstanding to purchase Common
Stock at exercise prices ranging from $.25 to $.50 per share, of which
3,676,000 were vested. As of March 31, 1998, all of the options and purchase
rights granted were issued at or above fair market value on the date of grant.
There are also 3,750,000 shares of Common Stock issuable upon
exercise of the 1998 warrants issued in January and February 1998; 1,100,000
shares of Common Stock issuable upon exercise of warrants issued to affiliates
and/or consultants of GEM Advisors, Inc. in June 1997; 15,000 shares of Common
Stock issuable upon exercise of the 1997 warrants issued in 1997; 6,000 shares
of Common Stock issuable upon exercise of the 1996-B warrants issued in
January and February 1997; 864,000 shares of Common Stock issuable upon
exercise of the 1996 warrants issued in 1996; and 694,000 shares of Common
Stock issuable upon exercise of the 1995 warrants issued in 1995.
On April 13, 1998, the Board of Directors authorized reductions in
the exercise price of stock options and purchase rights held by certain
shareholders. A total of 1,500,000 stock options which were granted at prices
from $.25 to $.45 were reduced to prices from $.10 to $.15, and a total of
157,300 purchase rights granted at $1.00 were reduced to $.25.
7
<PAGE>
4. Escrow and Cancellation Arrangements
As of June 30, 1997, at the request of the Pennsylvania Securities
Commission, the President had agreed to place in escrow 7,593,000 shares of
Common Stock, of which 4,365,000 were subject to cancellation if certain events
did not occur on or before June 30, 1998. On November 20, 1997, the President
cancelled the 4,365,000 shares which had been in escrow, and the remaining
3,228,000 shares held in escrow were returned to the President. At the request
of the Pennsylvania Securities Commission, the President agreed that all of the
shares released to him shall not be sold, pledged, hypothecated or transferred,
directly or indirectly, by him through June 30, 1998, as stated in the escrow
agreement. In addition, any additional shares of Common Stock, of which the
President shall acquire beneficial and/or record ownership during such period of
time, whether by exercise of options, warrants, or otherwise (including a right
of conversion), shall be subject to such agreement.
5. Private Placement
On March 5, 1998 the Company completed a private placement offering
of 75 units of Series A Convertible Preferred Stock at a price of $10,000 per
unit, generating net proceeds to the Company of approximately $715,000. Each
unit of the offering consisted of 2,000 shares of Series A Convertible
Preferred Stock and 50,000 1998 Common Stock Purchase Warrants. The 1998
Warrants enable the holder to purchase one share of Common Stock for $.15 on
or before June 1, 1998 and for $.40 through March 5, 2003.
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Introduction
Since its inception in January 1992, the Company, a development stage
corporation, has been engaged largely in research and development activities
focused on designing, developing, and marketing its credit card activated
control systems. From inception through March 31, 1998, the Company has had
operating revenues of $1,951,442 and has generated funds primarily through the
sale of its securities. As of March 31, 1998, the Company has received, net of
expenses of such sales, the amount of $6,249,672 in connection with private
placements, $2,698,847 from the exercise of Common Stock purchase warrants and
options, and $2,345,104 in connection with its initial public offering. The
Company has incurred operating losses since its inception through March 31,
1998 of $11,410,484 and such losses are expected to continue at least into
the quarter ended December 31, 1998.
8
<PAGE>
Results of Operations
The fiscal quarter ended March 31, 1998 resulted in a net operating
loss of $643,317 compared to a net loss of $627,014 for the comparable fiscal
quarter ended March 31, 1997. On an overall basis these continuing losses
reflect the development stage nature of the Company. Losses are projected to
continue until sufficient revenue is generated from various applications of
the Company's proprietary technology as well as equipment sales.
Revenue from operations was $548,208 compared to $144,536 from the
previous year's fiscal quarter. This $403,672 improvement reflects the success
of the Company's sales efforts and the increasing marketplace acceptance of
the Company's products. Of the total revenues, equipment sales totaled
$477,239, an increase of $374,892 over the same period last year. License fees
increased to $70,969 from $32,332 for the same period during the prior year,
an increase of 120%. Despite these gains, revenue is still well below the
level required for the Company to be profitable.
Cost of sales for the period included labor and equipment of $380,473
which represented an increase of $286,550 over the same period during the
prior year, and is directly attributable to the increase in equipment sales.
General and administrative expenses of $468,044 increased by $72,716
or 18% from the same quarter last year. Higher professional fees, advertising
and promotional expenses offset reductions in consultant fees and supplies.
Compensation expense of $320,723 increased by 22% due to permanent
and higher personnel requirements in all areas of the Company. Depreciation
and amortization expense decreased nominally from $28,297 to $25,497.
The nine month period ended March 31, 1998 resulted in a net loss
of $2,046,813, compared to a net loss of $2,313,492 from the same period last
year. Net revenue increased to $1,280,012 from $280,994 for the same period
last year. Total expenses rose to $3,326,825 from $2,594,486, principally due
to increases in cost of sales ($770,743) and compensation expense ($236,177),
offset by decreases in general and administrative expense ($206,896).
Plan of Operations
As of March 31, 1998, the Company had a total of 514 control systems
in the field, distributed as follows: 331 Business Express(TM) control
systems, 43 Copy Express(TM) control systems, 36 Debit Express(TM) control
systems, 22 Fax/Printer Express(TM) control systems, and 81 Public PC(TM)
control systems located at various hotels and libraries throughout the United
States and Canada. The total license fee revenues received by the Company from
these systems has been increasing but is still well below the level required
to achieve profitability.
9
<PAGE>
During the past nine months the Company continued to emphasize the
resale of equipment utilizing the Company's control systems rather than the
revenue sharing arrangements previously employed. The Company still retains
all rights to software and proprietary technology which it licenses to
location operators for their exclusive use. This shift in approach reduces the
Company's dependency on licensing revenues and simultaneously reduces the
Company's capital asset requirements.
The Company is marketing its products through its full-time sales
staff consisting of four persons, either directly to customer locations or
through facility management companies servicing these locations.
On February 17, 1998, Prime Hospitality Corp. ("Prime") entered into
an agreement with the MBE Joint Venture pursuant to which Prime would purchase
100 MBE Business Express (TM) units for installation at Prime's owned and
managed hotels. The agreement provides that Prime would purchase the first six
units on a trial basis. If the 90 day trial is successful, then Prime would
order the remaining 94 units. If the trial period is not successful, Prime
would not purchase any additional units and the Joint Venture would repurchase
the initial six units from Prime at the price originally paid by Prime. The
agreement provides for a purchase price of approximately $1.7 million for all
100 units. As of May 5, 1998, 5 of the 6 initial units have been installed.
On March 31, 1998, the MBE Joint Venture signed agreements with
International Business Machines Corporation ("IBM") whereby IBM agrees 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 believes that its research and development efforts over the
past several years have produced an operational and marketable product, and that
sales of that product are becoming commercially significant. Accordingly,
effective April 1, 1998, the Company will no longer report results as a
development stage enterprise.
Liquidity and Capital Resources
For the nine month period ended March 31, 1998, there was a net
decrease in cash of $208,367. This was attributable to using $1,964,892 for
operating activities, partially offset by net proceeds of $1,055,439 raised
through the exercise of Common Stock purchase warrants, and net proceeds of
$715,125 raised through the issuance of Convertible Preferred Stock. As of
March 31, 1998, total cash on hand was $421,899, and working capital was
approximately $461,769 of which $596,330 was invested in inventory.
10
<PAGE>
On September 11, 1997, the Company's Board of Directors decided to
maintain the exercise price of the 1996-B and 1997 Common Stock purchase
warrants at $.20 through September 30, 1997 (rather than only through August
31, 1997 as previously provided). On November 13, 1997, the Company's Board of
Directors decided to maintain the exercise price of the 1996-B and 1997 Common
Stock purchase warrants at $.20 through October 31, 1997 (rather than
September 30, 1997 as revised above). During the nine months ended March 31,
1998, 368,000 1996-B and 1,585,000 1997 Common Stock purchase warrants were
exercised for gross proceeds to the Company of $390,600.
On September 11, 1997, the Board of Directors approved a temporary
reduction in the exercise price of the 1995 and 1996 Common Stock purchase
warrants from $.50 to $.25 during the period of September 11, 1997 through
October 31, 1997. During the nine month period ending March 31, 1998, a total
of 720,000 1995 and 1,134,000 1996 Common Stock purchase warrants were
exercised, providing gross proceeds of $463,500 to the Company.
During the nine months ended March 31, 1998, GEM Management Limited,
an affiliate of GEM Advisors, Inc., exercised Common Stock purchase warrants
for 900,000 shares of Common Stock at an exercise price of $.20 per share
generating gross proceeds of $180,000.
The 1998 Private Placement of 75 units of Convertible Preferred Stock
at $10,000 per unit generated net proceeds to the Company of $715,125.
Attached to each unit were 50,000 Common Stock Purchase Warrants ("1998-A
Warrants). The Company has registered the Common Stock underlying the 1998-A
Warrants for resale, and until June 1, 1998, the 1998-A Warrants can be
exercised at $.15 per Warrant. The Company believes that the above warrant
proceeds, together with money available from the exercise of outstanding
options and other warrants, plus inventory financing from IBM and increased
revenues from its business would be sufficient to fund operations through the
quarter ending September 30, 1998. There can be no assurance that any such
additional sales of securities could be made by the Company or that increased
revenues would result from its business. In such event, the Company may cease
to be a going concern or may have to reduce its operations or operating
procedures.
11
<PAGE>
Part II - Other information
Items 1, 3, and 4 are not applicable.
Item 2. Changes in Securities
During the quarter ended March 31, 1998, the Company completed a
private placement offering pursuant to Regulation D promulgated under the
Securities and Exchange Act of 1933, as amended, for $750,000 of the Company's
securities. The offering consisted of 75 units at $10,000 each, with each unit
consisting of 2,000 shares of Preferred Stock and 50,000 1998-A Warrants. The
Preferred Stock is convertible at any time into shares of Common Stock, no par
value, at a rate of 10 shares of Common Stock for each share of Preferred
Stock. The 1998-A Warrants enable the holder to purchase one share of Common
Stock for $.15 on or before June 1, 1998 and for $.40 through March 5, 2003.
Item 5. Other Information
Keith L. Sterling resigned as the Executive Vice President-Systems,
Chief Information Officer, Secretary and Director of the Company effective
April 3, 1998 for personal reasons. Mr. Sterling has agreed to act as a
consultant to the Company through June 30, 1998. The Company agreed to reduce
the exercise price of Mr. Sterling's options to purchase 450,000 shares of
Common Stock to $.10 per share from $.25 and $.45 per share, and accelerated the
additional vesting of 25,000 options to April 3, 1998.
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; Keith L.
Sterling - 100,000 options; and William L. Van Alen, Jr. - 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 on June 30, 2000.
In April 1998, the Company reduced from $.25 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: 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 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; and Stephen P. Herbert - 100,000 options.
12
<PAGE>
In April 1998, the Company authorized a 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 which time the exercise price will revert back to
$1.00 per share.
All of the above reductions of the exercise prices were to a price
which was less than the fair market value of the Common Stock as of the date
of such reductions.
In April 1998, the Company issued to each of Leland P. Maxwell, Haven
Brock Kolls, Jr., and Stephen P. Herbert, officers of the Company, options to
purchase up to 50,000 shares of Common Stock at $.45 per share. Such options
vest ratably over a 12 month period and shall be exercisable at any time for a
five year period following vesting. The exercise price of these options is equal
to or greater than the fair market value of the Common Stock on the date of
grant.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Separation Agreement between the Company and Keith L. Sterling
dated April 8, 1998.
(b) Reports on Form 8-K
On January 29, 1998, the Company filed with the Securities and
Exchange Commission a Form 8-K which reported items under Item 5.
Other Events and Item 7. Exhibits.
13
<PAGE>
Signatures
In accordance with the requirements 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.
Date: May 12, 1998 /s/ George R. Jensen, Jr.
---------------------------------------------------------
George R. Jensen, Jr., President, Chief Executive Officer
Date: May 12, 1998 /s/ Leland P. Maxwell
---------------------------------------------------------
Leland P. Maxwell, Senior Vice President,
Chief Financial Officer
14
<PAGE>
USA TECHNOLOGIES, INC.
200 Plant Avenue
Wayne, Pennsylvania 19087
April 8, 1998
Mr. Keith L. Sterling
114 South Valley Road
Paoli, Pennsylvania 19033
Re: Separation Agreement
--------------------
Dear Keith:
This will confirm your resignation as the Executive Vice
President-Systems and Chief Information Officer, Secretary and as a Director of
the Company effective at the close of business on April 2, 1998. This letter
also sets forth the various agreements we have reached concerning your
separation from the Company as well as the terms of a consulting arrangement.
1. Consulting Arrangement.
------------------------
A. Effective April 3, 1998, you shall no longer be an employee
of the Company and the Employment Period as defined under your Employment And
Non-Competition Agreement dated as of July 1, 1993, as amended by the First
Amendment thereto dated as of April 29, 1996 ("Employment Agreement"), is hereby
terminated. From and after April 3, 1998 and through June 30, 1998, you shall
act as a consultant to the Company. In such capacity, you shall perform such
projects, under my direction, as shall be requested from time to time on an "as
needed" basis. In consideration for your consulting services, and subject to
Section 8 hereof, the Company shall continue to pay to you your current base
salary through June 30, 1998, and to provide to you your existing benefits
through June 30, 1998 at no cost to you. After June 30, 1998, you shall not be
provided or covered by any Company-paid benefits or receive any further payments
from the Company.
B. Notwithstanding subparagraph A. above, and the termination
of the Employment Period under your Employment Agreement, this will confirm that
Sections 5, 6, and 7 of the Employment Agreement, relating to non-disclosure and
non-competition restrictions, shall not be terminated and shall survive and
remain in full force and effect in accordance with all of their terms and
conditions.
2. Stock Options. Subject to the provisions of Section 8 hereof, the
Company agrees that effective on and after July 5, 1998, all of the options to
purchase 450,000 shares of Common
1
<PAGE>
Stock of the Company which have been issued to you shall be exercisable at $.10
per share through the various expiration dates of the options. Of such options,
300,000 are currently exercisable at $.25 per share, and the remaining 150,000
are currently exercisable at $.45 per share. This will also confirm that as of
the date hereof, 425,000 of your 450,000 stock options are vested. We have
agreed that the 25,000 options which have been issued to you but which are not
vested as of the date hereof shall become irrevocably and fully vested
immediately. Except as specifically set forth in this Section 2, all of the
existing terms and conditions of the stock options shall remain in full force
and effect. You acknowledge that your stock options are not incentive stock
options as such term is defined in Section 422 of the Internal Revenue Code of
1986, as amended, or part of an employee stock purchase plan as defined in
Section 423 thereunder. As a result, among other things, taxable income will be
realized by you during the 1998 calendar year as a result of the reduction of
the exercise price of the stock options as set forth herein as well as at the
time of the exercise of any such stock options. You understand that you and not
the Company shall be responsible for the payment of all such taxes resulting
therefrom.
3. Sterling General Release. You agree, intending to be legally bound,
to voluntarily and forever release and discharge the Company, as well as all of
its past, present and future officers, directors, employees, shareholders and
agents and their respective successors and assigns (collectively "Releasees"),
jointly and severally, from any and all actions, charges, causes of action or
claims of any kind (collectively, "claims"), known or unknown, suspected or
claimed, which you, your heirs, agents, successors or assigns ever had, now have
or hereafter may have against Releasees arising heretofore out of any matter,
occurrence or event existing or occurring prior to the execution hereof,
including, without limitation:
(a) Any claims relating to or arising out of your employment
with and/or separation of employment by the Company;
(b) Except as specifically provided otherwise herein, any claims
for unpaid or withheld wages, severance, benefits, bonuses
and/or other compensation of any kind;
(c) Any claims for attorneys' fees, costs or expenses;
(d) Any claims of discrimination and/or harassment based on age,
sex, race, religion, color, creed, disability, handicap,
citizenship, national origin, sexual preference or any other
factor prohibited by Federal, state or local law or
ordinance, common law or administrative regulations (such as
the Age Discrimination in Employment Act, the Americans With
Disabilities Act, Title VII of the Civil Rights Act of 1964,
the Employee Retirement Income Security Act and the
Pennsylvania Human Relations Act), and/or any other
statutory or common law claims, now existing or hereinafter
recognized, including, but not limited to, breach of
contract, quasi-contract, breach of
2
<PAGE>
covenant of good faith and fair dealing, detrimental
reliance, libel, slander, fraud, wrongful discharge,
promissory estoppel, equitable estoppel and intentional or
negligent misrepresentation, and/or any rights under any of
the foregoing laws or regulations.
In addition, you covenant and agree to never, individually or with any
other person or in any way, commence, aid in any fashion, prosecute or cause or
permit to be commenced against the Company or any Releasee any action,
obligation, damage, or liability that is the subject matter of this Section 3.
You agree that your resignation as a Director is not in connection with
any disagreement with the Company on any matter relating to the Company's
operations, policies or practices, and that you shall not request the Company to
disclose any such disagreement in connection with your resignation as a Director
in any public filing under the Securities Exchange Act of 1934.
4. A. Company General Release. The Company agrees, intending to be
legally bound, to voluntarily and forever release and discharge you, as well as
all of your heirs, personal representatives, successors and assigns
(collectively "Releasees"), jointly and severally, from any and all actions,
charges, causes of action or claims of any kind, known or unknown, suspected or
claimed, which the Company ever had, now has or hereafter may have against
Releasees arising heretofore out of any matter, occurrence or event existing or
occurring prior to the Company's execution hereof. In addition, the Company
covenants and agrees to never, by itself or with any other person or in any way,
commence, aid in any fashion, prosecute or cause or permit to be commenced
against any Releasee any action, obligation, damage, or liability that is the
subject matter of this Section 4.
B. Company Indemnification. This will confirm that
notwithstanding anything else contained in this letter, you shall continue to be
indemnified under the Company's By-laws to the fullest extent provided or to be
provided from time to time thereunder to officers or Directors of the Company.
5. Return of Company Property. As a condition precedent to the
execution of this Agreement, you agree to return to the Company any of its
property either issued to you or now in your possession, including but not
limited to, any Company credit cards, American Express cards, pagers and keys to
the Company's office. In addition, you shall immediately surrender to the
Company any and all materials, documents, software, manuals or other records, in
your possession or control, which include or contain any confidential
information of or concerning the business or policies of the Company, and you
will not retain or use any copies or summaries thereof.
6. Future Actions.
A. From and after the date hereof, you agree not to take any
actions which are specifically intended to damage the business interests of the
Company or which reflect negatively on the Company or its employees, directors,
shareholders or agents, including but not limited to, contacting the Company's
agents, customers, suppliers, employees (past, present or future to the
3
<PAGE>
extent you know them to be related to the Company), or using documents or other
data obtained while in the employ of the Company, in a manner that interferes
with or damages the Company's reputation, purpose or employee relations.
B. In addition to the restrictions set forth in subparagraph
A., and unless you shall have obtained the prior written consent of the Company,
from and after the date hereof, you shall not, directly or indirectly, disclose,
discuss or communicate in any manner whatsoever, any information or data about
or concerning the Company's business, employees, policies, products, contractual
arrangements, shareholders, or operations, with any past, present or future
customer, supplier, or agent of the Company, including but not limited to
International Business Machines Corporation or Mail Boxes Etc. USA, Inc. The
foregoing shall apply to all information or data concerning the Company's
business, operations, products, contractual arrangements, shareholders,
policies, or employees, whether or not such information is claimed to be secret
or proprietary by the Company, and whether or not such information is
disseminated to or otherwise available to the public.
7. Proprietary Information.
A. This will confirm that all documents, data, know-how,
designs, processes, inventions, names, marketing information, method or means,
materials, software programs, hardware, configurations, information, data
processing reports, lists and sales analyses, price lists or information, or any
other materials or data of any kind furnished to you by the Company, or
developed by you on behalf of the Company or at the Company's direction or for
the Company's use, or otherwise devised, developed, created, or invented in
connection with your employment or your affiliation with the Company, are and
shall remain the sole and exclusive property of the Company, and you shall have
no right or interest whatsoever thereto, including but not limited to any
copyright or patent interest whatsoever.
B. You shall not, directly or indirectly, at any time from and
after the date hereof, make any use of, exploit, disclose, or divulge to any
other person, firm or corporation, any trade or business secret, customer or
supplier information, documents, know-how, data, marketing information, method
or means, or any other confidential (i.e. not already otherwise disseminated to
or available to the public) information concerning the business or policies of
the Company, that you learned as a result of, in connection with, through your
employment with, or through your affiliation with the Company.
8. Remedies. In the event that you should breach any term or condition
of this letter or the Employment Agreement, the exercise price of any of the
unexercised options then held by you (or your assignees) shall automatically and
without any action on the part of the Company be increased to their original
exercise price. In addition, in the event of any such breach, the Company shall
cease paying to you any payments under Section 1 hereof, and immediately cease
to provide you with Company-paid benefits pursuant to such Section. The
foregoing remedies shall be cumulative, and shall be in addition to any remedies
otherwise available to the Company at law or in equity or otherwise. In the
event of any breach hereof, you shall pay all of the costs and expenses incurred
by the Company in enforcing the provisions hereof, including its attorney's
fees.
9. Severability. Should any provision of this letter be held invalid or
illegal, such illegality shall not invalidate the whole of this letter but
rather, the letter shall be construed as if it did not contain the invalid or
illegal part, and the rights and obligations of the parties shall be construed
and
4
<PAGE>
enforced accordingly.
10. Merger Clause. This letter contains the complete understanding and
agreement between the parties hereto and supersedes any and all prior and
contemporaneous agreements, understandings, negotiations and discussions between
the parties, oral or written, express or implied. Notwithstanding the prior
sentence, however, and as indicated in Section 1.B., the provisions of Sections
5, 6 and 7 of your Employment Agreement shall remain in full force and effect.
11. Choice of Law; Successors . This letter has been executed in the
Commonwealth of Pennsylvania and shall be construed in accordance with the laws
of the Commonwealth of Pennsylvania without regard to its conflict of law rules.
This letter shall be binding upon our respective, permitted successors, assigns,
heirs, and personal representatives.
12. Effective Date. You have twenty-one (21) days within which to
consider this letter. If you sign this letter, you will retain the right to
revoke it for seven (7) days. This letter shall not be effective until this
revocation period has expired. To revoke the letter, you must send a certified
letter to my attention. The letter must be postmarked within seven (7) days of
your execution of this letter. Finally, this will confirm that the Company has
advised you to consult with an attorney prior to your execution of this letter.
Keith, please indicate your agreement with this letter by signing this
letter below where indicated and returning it to me.
Sincerely,
USA TECHNOLOGIES, INC.
By: /s/ George R. Jensen, Jr.
-----------------------------------
George R. Jensen, Jr., Chief
Executive Officer
UNDERSTOOD AND AGREED:
/s/ Keith L. Sterling
- ------------------------------
KEITH L. STERLING
Date: 4/2/98
5
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