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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, 1999 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 under Section 12(b) of the Exchange Act)
NONE
(Securities registered pursuant to Section 12(g) of the Exchange 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 ___
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. [X]
Transitional Small Business Disclosure Format Yes ___ No _X_
Registrant's total revenues for its most recent fiscal year..........$3,890,516.
As of September 23, 1999, there were outstanding 6,425,334 shares of Common
Stock, no par value, and 626,077 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 $12,673,271 on September
23, 1999 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 the direct sale of its control
systems and the resale of configured office products, from monthly
administrative fees paid by locations utilizing its control systems, and from
retaining a portion of the monies generated from all credit card transactions
conducted through 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(R), 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 fiscal year 1997, the Company introduced the Business
Express(R), which is being marketed to the hospitality industry as an amenity to
the business traveler. The Business Express(R) 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(R) 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, 1999, 304 Business Express(R) units are installed.
During the last part of the current fiscal year, the Company introduced
a product line extension to its flagship Business Express(R) product, called the
Business Express(R) Limited Service Series (LSS). The LSS has copier and fax
capabilities plus laptop printing, dataport capabilities and credit card
activated phone. The LSS is targeted to the heart of the hospitality industry,
which includes mid-market, limited service and economy properties. As of June
30, 1999, three LSS units are included in the total of 304 Business Express(R)
units installed.
The Company is beginning to explore the possibilities of apartment
buildings as a market for its technology. Approximately 27,000 operators of
apartment buildings in the United States have been identified. As of the end of
the fiscal year, one such location has been installed.
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The Company generates its revenues from the 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 ("JV") with Mail Boxes Etc. ("MBE"), in order to sell and market
automated, credit card activated business centers under the name MBE(TM)
Business Express(R) to the hospitality industry. The MBE(TM) Business Express(R)
bundles together the same components as the Business Express(R), but under the
MBE brand name. In addition, the MBE(TM) Business Express(R) includes a
dial-through service to a nearby MBE store making available the products and
services of the store. For the fiscal year ended June 30, 1999, the MBE Joint
Venture has sold and installed 151 MBE(TM) Business Express(R) business centers.
The Company terminated the JV in May 1999 and is currently involved in legal
proceedings with MBE. Notwithstanding these proceedings, the Company continues
to service all field installations without interruption, and to carry on
business with all customers of the JV. For further details, see Item 3., Legal
Proceedings.
In 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(TM) Business Express(R) units for installation at Prime's owned and
managed hotels (primarily the AmeriSuites brand). As of June 30, 1999, all but
two of the installations have been completed, generating total revenues of
approximately $1.9 million. Prime adopted the MBE(TM) Business Express(R) as a
brand standard at all of its AmeriSuites properties.
During the past year the Company has focused on developing a new
terminal, trademarked "e-port". It contains all the functionality of the current
TransAct(TM) terminal for credit card processing, control and data management,
and in addition would offer capability for public access electronic commerce and
advertising using the Internet. With the development of e-Port(TM), USA
Technologies has positioned itself to claim a piece of two important market
spaces within the new "Internet" economy - electronic commerce and pervasive
computing.
In May, 1999 the Company signed an agreement with International
Business Machines Corporation ("IBM") whereby IBM agreed to be the executional
partner for certain aspects of the Company's business, including project
management services, asset procurement, configuration and testing of equipment,
site preparation, installation, maintenance services, and asset management. This
agreement expands an earlier JV agreement from 1,000 to 5,000 locations, and
expands the array of USA products which are eligible for IBM installation. The
Company also is developing a proposal with IBM whereby IBM will provide value
added design, development, fulfillment and product warranty services for the
Company's e-port(TM) product. The goal is to benefit from IBM research,
purchasing, manufacturing and global services to provide the Company with
shortened time to market, product excellence, and a lower total cost of goods.
IBM has also signed a letter of intent to help the Company design an enhanced
version of the network which will underlie all transaction processing for
e-port(TM), including advertising and e-commerce.
The Company has entered into a corporate agreement on May 14, 1999 with
Choice Hotels International (which includes the Comfort, Clarion, Quality,
Sleep, Econo Lodge, Rodeway and Mainstay brands) which establishes USA as the
only endorsed vendor of business center products for its over 3,000 properties.
This agreement reflects Choice's commitment to promote the
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Company's LSS internally to its own hotels. Also, the Company has entered into a
corporate agreement with Promus Hotel Corporation (Embassy Suites, Hampton, and
Doubletree brands) which establishes itself as a preferred supplier of business
center products for those brands. In addition, the Company's Business Express(R)
has been approved and recommended as a solution for business center needs by
Marriott for its hotels.
On June 7, 1999, Ikon Office Solutions signed a letter of intent with
the Company wherein it stated its intent to market and sell the Company's
Transact solutions to businesses through its sales representatives. Ikon, with
fiscal 1998 revenues of more than $5.6 billion, is one of the world's leading
office technology companies, providing copier and printing systems, computer
networking and digital document services. Training of Ikon sales representatives
has begun, and sales to Ikon are expected to begin in the second quarter of
fiscal 2000.
For the years ended June 30, 1999 and 1998, the Company has spent
approximately $198,000 and $199,000, 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 Company's
employees and are reflected in compensation expense in the accompanying
consolidated financial statements.
As of June 30, 1999, the Company had 1,119 Business Express(R) control
systems, 36 Copy Express(TM) control systems, 27 Debit Express(TM) control
systems, 10 Fax/Printer Express(TM) control systems, and 41 Public PC(R) control
systems located at various hotels and libraries throughout the United States and
Canada. Through June 30, 1999 the total gross revenues received by the Company
from these systems, although growing, 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.
Further, trends in the space of electronic commerce and pervasive
computing are encouraging signs for e-Port(TM):
>> By the year 2003, 500 million internet users will be conducting $1.3
trillion in commerce over the net (versus 160 million users conducting $50
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billion in 1998). This increased use would amount to two new users per
second.
>> By the year 2001, consumer used pervasive computing devices/network
appliances will outship desktop PC shipments to homes - nearly 20 million
per year by 2001.
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 management fee
which is generally $20-$25 per control device.
Product Lines
The Business Express(R)
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 of the
business traveler. The Business Express(R) enables a hotel to address these
needs in a comprehensive and cost effective manner, while simultaneously
generating incremental revenue.
The Business Express(R) utilizes the Company's existing applications
for computers, copiers, and facsimile equipment, and combines them into a
branded product. The Business Express(R) bundles the Public PC(R) 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(TM) Business Express(R)
The MBE(TM) Business Express(R) bundles together the same components as
the Business Express(R): Public PC(R), Copy Express(TM), and Fax Express(TM),
but under the MBE brand name. In addition, the MBE(TM) Business Express(R)
includes a dial-through service to a nearby MBE store making available the
products and services of the store.
The Company terminated the JV in May 1999 and is presently engaged in
legal proceedings with MBE which are set forth in detail in the Legal
Proceedings section.
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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.
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(R)
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(R). Through June 30, 1999, the Company has
an installed base of 38 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.
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The e-Port(TM)
e-Port(TM) contains all the functionality of the current TransAct(TM)
terminal for credit card processing, control and data management, and in
addition would offer capability for public access electronic commerce and
advertising using the Internet. With e-Port(TM), USA Technologies has positioned
itself to claim a piece of two important market spaces within the new "Internet"
economy -- electronic commerce and pervasive computing. e-Port(TM) takes
e-commerce to the streets in the sense that it enables e-commerce to be
transacted away from the computer. This offers internet merchants an extension
of their business without brick and mortar outlays. It could be considered a low
cost "physical" location for "virtual" merchants.
e-Port(TM) will possibly give consumers the opportunity to engage in
interactive advertising and e-Commerce while making routine purchases at
millions of points of sale - including our Business Express(R) locations,
vending machines, and convenience stores. The US markets for this device, and
approximate sizes, are estimated at: vending - 6 million locations; retail
points of sale - 7.5 million devices with expected shipments of 2 million
devices in year 2000; and the Company's credit card activated business
equipment.
TransAct(TM) as a Stand Alone Product
USA Technologies produced and patented TransAct(TM), a cashless
transaction terminal that enables secure, low cost credit transactions to take
place. As the nerve center for USA's Business Express(R) product line,
TransAct(TM) currently enables over 400 automated business center locations,
that benefit from TransAct's ability to provide 24/7 business center
accessibility, secure transaction settlements and voice and display instructions
for users. The installed locations of Business Express(R) indicates that
TransAct(TM) works effectively to transform a la carte office components into
automated, credit card-operated, revenue centers.
To effectively penetrate the "pay as you go" business service markets
within the retail, university, transportation and apartment communities, three
standardized TransAct(TM) packages have been developed, priced and launched to
office component dealers who already service these markets. The interest from
these dealers has been excellent, and the Company anticipates that the
development of a dealer channel to sell TransAct(TM) units will increase the
licensing and usage revenue streams that USA currently enjoys.
Marketing
The Company is currently marketing its products through its full-time
sales staff consisting of six salespeople and one marketing director, to hotel
and retail locations, either directly or through facility management companies
servicing these locations. The Company believes the agreements with Marriott,
Choice Hotels International, and Promus Hotel Corporation are an important
component of the Company's effort to market the Business Express(R) to the
hospitality industry because they provide instant brand name recognition.
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. As of September 28,
1999, the Company has no outstanding orders with LMC.
The Company anticipates obtaining its complete computer systems (other
than the control system) through IBM. As of September 28, 1999, the Company has
adequate inventory, and has no outstanding orders through IBM.
Competition
There are currently other businesses offering an unattended, credit
card activated control system for use in connection with copiers, printers,
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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 businesses which have developed an unattended,
credit card activated control system to be 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. Such services might
compete with the Company's Business Express(R), and the locations may not order
the Business Express(R), or if ordered, the hotel guest may not use it. The
Company is aware that credit card activated personal computer kiosks have been
developed and are in the marketplace.
Patents, Trademarks and Proprietary Information
The Company received federal registration approval of its trademark
Business Express(R), and has applied for federal registration of its trademarks
Copy Express(TM), C3X(R), Public PC(R) 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.
As of June 30, 1999, the Company has applied for twenty-six patents
including seven foreign patents. To date, two of these patents have been issued:
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." Three additional United States patents have been
allowed (approved). The remaining twenty-one applications are pending and have
not been granted.
Employees
As of June 30, 1999, the Company had twenty-six 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 $10,500 plus utilities and operating expenses. The lease
expires on July 1, 2002.
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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 14, 1999,
the Superior Court affirmed the judgment in favor of the Company. On August 5,
1999, the former employee filed a Petition for Allowance of Appeal with the
Pennsylvania Supreme Court. The Pennsylvania Supreme Court has not yet decided
whether to grant the appeal.
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 had 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(R). 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.
Alphanet Telecom, Inc. filed for bankruptcy in Canada and therefore the
lawsuit against them has been stayed. Tech Electro Industries announced on
August 12, 1999 that it intends to acquire Alphanet Hospitality. The Company's
lawsuit against Alphanet Hospitality is on-going.
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 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 judgement that MBE is not obligated to purchase the 600 terminals
ordered in April 1998. In October 1998, the Company had the case removed to the
United States District Court for the southern District of California. 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.
In September 1998, the Company commenced arbitration proceedings
against MBE in connection with MBE's breach of the Joint Venture Agreement. In
December 1998, the parties agreed that the arbitration proceedings would be
terminated, and the Company would proceed with all of its claims against MBE in
the pending Federal Court action described above.
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Pursuant to the above Federal Court Action, the Company asserted
counterclaims. These counterclaims allege that MBE breached the Joint Venture
Agreement by among other things, utilizing a competitor of the Company in
connection with MBE's in-store computer workstation project ("ICW Project"), for
which project the Company believes MBE was obligated to purchase USA's
terminals. The counterclaims also allege that MBE breached a separate agreement
pursuant to which it had agreed to purchase USA terminals for use in the ICW
Project. The counterclaims also allege that by attempting to revoke or cancel
its written purchase orders with the Company for in excess of 700 terminals, MBE
breached its obligations under these purchase orders. The Counterclaim includes
claims by the Company against MBE for breach of contract, breach of fiduciary
duty, and trade libel. The Counterclaims seek recovery from MBE of monetary
damages caused by MBE's actions, including lost profits, consequential damages
and/or incidental damages, and punitive damages. The total counterclaims are for
an amount in excess of $10 million. The Company has also requested a declaration
that MBE is required to use the Company in connections with its ICW project and
prohibiting MBE from continuing to breach the Joint Venture Agreement. As of the
date hereof, limited discovery has been conducted by the parties and no trial
date has been set. By court order, discovery is to be completed by February 18,
2000.
On May 14, 1999, the Company notified MBE that the Company was
terminating the Joint Venture Agreement. On May 19, 1999, the Company received a
letter from MBE purporting to terminate the Joint Venture Agreement. The Joint
Venture Agreement provided that it could be terminated at any time by either
partner if the other partner breached any material term or condition of the
agreement; provided that the terminating partner will have provided the other
partner with written notice of the alleged breach and at least a sixty day
period to cure such alleged breach. Previously, as required under the Joint
Venture Agreement, on February 4, 1999 and February 19, 1999, the Company had
given to MBE notice that MBE was in default of the Joint Venture Agreement in
connection with five separate items, and demanded that MBE cure the breaches
within sixty days. Through the date of the termination of the Joint Venture
Agreement, MBE failed to cure any of these breaches.
The Company's May 14, 1999 letter to MBE states five reasons for the
termination: MBE's refusal to authorize the installation of data port terminals
as required under the sales agreement between the joint venture and a customer;
MBE's refusal to allow the joint venture to market and sell the data port
terminals; MBE's ongoing failure to commit adequate and appropriate resources to
joint venture sales and marketing to effectuate a reasonable number of sales of
joint venture business center equipment; MBE's failure to acknowledge the
Company's ownership of the trademark "Business Express" and its actions
inconsistent with the Company's ownership of the mark; and MBE's refusal to
timely meet with the Company to discuss and conclude a joint venture sales and
marketing budget for the fiscal year commencing April 1, 1999. See "Business
Procurement."
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on May 27, 1999.
(b) Election of Directors
Each of the following individuals was elected as a director at
the Annual Meeting. The number of votes cast with respect to
the election of the directors was as follows:
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For Withhold
---------- --------
George R. Jensen, Jr. 39,556,652 771,144
Stephen P. Herbert 39,577,852 749,944
Steven Katz 39,599,052 728,744
Peter G. Kapourelos 39,599,052 728,744
William W. Sellers 39,599,052 728,744
Henry B. duPont Smith 39,202,973 1,124,823
William L. Van Alen, Jr. 39,554,919 772,877
(c) In addition to the election of directors, the following other
matters were also voted on and approved at the Annual Meeting:
(i) Ratification of the appointment of Ernst & Young LLP as
independent public accountants for the Company for its 1999
fiscal year.
Affirmative Votes 39,993,790
Negative Votes 187,711
Abstaining Votes 226,295
(ii) A proposal to approve a Plan of Recapitalization and
amendment to the Company's Articles of Incorporation to
effect a 1-for-10 reverse split of the Common Stock.
Affirmative Votes 37,527,408
Negative Votes 2,264,999
Abstaining Votes 615,389
(iii) A proposal to amend the Company's Articles of Incorporation
to increase the number of authorized shares of undesignated
Series Preferred Stock from 1,200,000 to 1,800,000.
Affirmative Votes 18,414,890
Negative Votes 2,585,030
Abstaining Votes 993,931
(iv) A proposal to amend the Company's Articles of Incorporation
to increase the number of authorized shares of Series A
Preferred Stock from 787,591 to 900,000.
Affirmative Votes 18,290,060
Negative Votes 2,576,779
Abstaining Votes 1,127,012
10
<PAGE>
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
1998 High Low
- ---- ---- ---
First Quarter (through September 30, 1997) $ 8.00 $2.70
Second Quarter (through December 31, 1997) $ 6.00 $2.20
Third Quarter (through March 31, 1998) $ 4.90 $2.50
Fourth Quarter (through June 30, 1998) $ 4.60 $2.50
1999
- ----
First Quarter (through September 30, 1998) $ 3.10 $1.20
Second Quarter (through December 31, 1998) $ 1.70 $ .80
Third Quarter (through March 31, 1999) $ 3.20 $1.10
Fourth Quarter (through June 30, 1999) $ 4.75 $1.20
2000
- ----
First quarter (through September 23, 1999) $ 2.94 $1.63
Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
At June 30, 1999, there are 917,100 shares of Common Stock issuable
upon exercise of outstanding options, and 11,740 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 917,000 options, 15,000 are exercisable at
$5.00 per share, 84,000 are exercisable at $4.50 per share, 131,500 are
exercisable at $2.50 per share, 549,500 are exercisable at $2.00 per share,
132,000 are exercisable at $1.50 per share, and 5,000 are exercisable at $.50
per share. In connection with the above options and outstanding Purchase Rights
to acquire up to 11,740 shares of Common Stock at $10.00 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, 1999, there were 67,300 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, 1999, there are 86,800 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, 1999,
there were 4,000 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, 1999, there are 1,500 shares of Common Stock
issuable upon exercise of the outstanding 1997 Warrants, which when and if
issued
11
<PAGE>
would be freely tradeable under the Act. As of June 30, 1999, there were 110,000
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, 1999, there were 4,000 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. As of June 30, 1999,
there were 5,000 shares of Common Stock issuable upon the exercise of the
outstanding 1998-B Warrants, which when and if issued would not be freely
tradeable under the Act. As of June 30, 1999, there were 933,600 shares of
Common Stock issuable upon the exercise of the outstanding 1999-A Warrants,
which when and if issued would not be freely tradeable under the Act.
On June 30, 1999 there were 874 record holders of the Common Stock and
684 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, 1999, such accumulated unpaid
dividends amount to $3,328,442 and an additional $469,183 of dividends accrued
on August 1, 1999.
During the fourth quarter of the fiscal year, certain holders of the
Company's Preferred Stock converted 19,450 shares into 19,450 shares of Common
Stock. Certain of these shareholders also converted cumulative preferred
dividends of $54,112 into 5,411 shares of Common Stock. Also during the fourth
quarter of the fiscal year, 5,100 warrants were exercised, resulting in the
issuance of 5,100 shares of Common Stock.
Subsequent to June 30, 1999 and through September 23, 1999, certain
holders of the Company's Preferred Stock converted 14,500 shares into 14,500
shares of Common Stock. Certain of these shareholders also converted cumulative
preferred dividends of $8,737 into 8,737 shares of Common Stock.
During August and September 1999, certain holders of 136,000 of the
Company's 1999-A Warrants exercised them at $.50 per warrant, generating $68,000
in gross proceeds to the Company.
On June 7, 1999, the Company effectuated a 1-for-10 reverse stock split
of all of its issued and outstanding Common Stock. Pursuant thereto, on the
effective date of the reverse stock split (i) each 10 shares of outstanding
Common Stock were reduced to one share of Common Stock; (ii) the number of
shares of Common Stock into which each outstanding warrant, purchase right or
option is exercisable was proportionately reduced on a 10-to-1 basis; (iii) the
exercise price of each outstanding warrant, purchase right, or option was
proportionately increased on a 1-to-10 basis; (iv) the number of shares of
Common Stock into which each share of Series A Preferred Stock is convertible
was reduced from 10 shares to 1 share; (v) the conversion rate of the accrued
and unpaid dividends on the Series A Preferred Stock was increased from $1.00 to
$10.00 per share of Common Stock; and (vi) each share of Series B Preferred
Stock was converted into 4 shares of Common Stock. All of the share numbers,
share prices, exercise prices, and all other similar items contained in this
Form 10-KSB have been properly adjusted, on a retroactive basis, to reflect all
of the foregoing.
In June 1999, the Company issued 4,000 shares of Common Stock to Robert
Flaherty in connection with public relations services rendered to the Company.
The shares constitute restricted securities as such term is defined under Rule
144 promulgated under the Act.
In June 1999, the Company issued 10,000 shares of Common Stock to Rick
Joshi, for consulting services rendered to the Company. The shares constitute
restricted securities as such term is defined under Rule 144 promulgated under
the Act.
In June 1999, the Company issued options to purchase an aggregate of
12,000 shares of Common Stock to six employees. The options are fully vested and
may be exercised at any time for five years following vesting at $2.00 per share
of Common Stock. The Company has agreed to register for resale under the Act the
Common Stock underlying the options.
In June 1999, the Company issued options to purchase an aggregate of
470,000 shares of Common Stock to its executive officers and an aggregate of
60,000 shares of Common Stock to its directors who were not executive officers.
The Company has agreed to register for resale under the Act the Common Stock
underlying the options.
From September 1998 through June 1999, the Company sold 466.8 units at
$10,000 each, for an aggregate of $4,668,000. Each unit consisted of a $10,000
principal amount 12% Senior Note, 2,000 1999-A Common Stock Purchase Warrants,
and 1,000 shares of Series B Equity Participating Preferred Stock. The offering
was sold to 223 accredited investors, and did not involve any general
advertising or solicitation, and was therefore exempt from registration under
Rule 506 of Regulation D promulgated under the Act. The Company paid
compensation to Harmonic Research, Inc., a broker-dealer, in connection with the
47 units sold by such broker-dealer. In this regard, the Company paid to such
12
<PAGE>
broker-dealer cash compensation of $47,000 as well as 43,800 shares of Common
Stock and 9,400 1999-A-Warrants. The shares of Common Stock issued to such
broker-dealer are restricted securities as such term is defined under Rule 144
promulgated under the Act. Pursuant to the private placement offering, the
Company had issued 466,800 shares of Series B Preferred Stock. The Series B
Preferred Stock was convertible into 4 shares of Common Stock in the event of a
reverse stock split of the Common Stock. As a result of the 1-for-10 reverse
stock split which became effective on June 7, 1999, all of the shares of Series
B Preferred Stock were exchanged for 1,867,200 shares of Common Stock, and as of
the date hereof, there are no issued and outstanding shares of Series B
Preferred Stock. The shares of Common Stock issued to the holders of the Series
B Preferred Stock are restricted securities as defined under Rule 144
promulgated under the Act, and can not be sold or transferred without
registration under the Act or pursuant to an applicable exemption therefrom. The
Company has registered for resale under the Act the shares of Common Stock
underlying the 1999-A Warrants.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
This Form 10-KSB contains certain forward looking statements regarding,
among other things, the anticipated financial and operating results of the
Company. For this purpose, forward looking statements are any statements
contained herein that are not statements of historical fact and include, but are
not limited to, those preceded by or that include the words, "believes,"
"expects," "anticipates," or similar expressions. Those statements are subject
to known and unknown risks, uncertainties and other factors that could cause the
actual results to differ materially from those contemplated by the statements.
The forward looking information is based on various factors and was derived
using numerous assumptions. Important factors that could cause the Company's
actual results to differ materially from those projected, include, for example
(i) the ability of the Company to generate sufficient sales to generate
operating profits, or to sell products at a profit, (ii) the ability of the
Company to raise funds in the future through sales of securities, (iii) whether
the Company is able to enter into binding agreements with third parties to
assist in product or network development, (iv) the ability of the Company to
commercialize its developmental products, or if actually commercialized, to
obtain commercial acceptance thereof, (v) the ability of the Company to compete
with its competitors to obtain market share, or (vi) the ability of the Company
to obtain sufficient funds through operations or otherwise to repay its debt
obligations. Although the Company believes that the forward looking statements
contained herein are reasonable, it can give no assurance that the Company's
expectations will be met.
Introduction
Events in the latter portion of the fiscal year ended June 30, 1998
enabled the Company to complete its transition from a development stage
enterprise to an enterprise focusing on marketing its products and its
commercial operations. The Company has incurred operating losses during the
years ended June 30, 1999 and 1998 of $3,651,624 and $3,568,281, respectively,
and anticipates incurring operating losses through at least the majority of
fiscal 2000.
The Company's independent auditors have included an explanatory
paragraph in their report on the Company's June 30, 1999 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, 1999 combined with the revenues to be generated during
fiscal year 2000, the potential capital to be raised from the exercise of Common
Stock Purchase Warrants, a private placement offering, 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, 1999:
For the fiscal year ended June 30, 1999, the Company had a net loss of
$3,651,624. The overall loss applicable to common shares of $4,654,077 or $1.07
per common share (basic and diluted) was derived by adding the $3,651,624 net
loss and the $1,002,453 of cumulative preferred and other adjustments and
dividing by the weighted average shares outstanding of 4,348,866.
13
<PAGE>
Revenues for the fiscal year ended June 30, 1999 were $3,890,516, an
increase of $2,065,287 or 113% over the prior year, reflecting the continued
penetration of the Business Express(R) and the MBE Business ExpressTM into the
marketplace.
Operating expenses for the fiscal year ended June 30, 1999 were
$7,295,628, representing a $1,793,978 or 33% increase over the prior year. The
primary contributors to this increase were cost of equipment sales and general
and administrative expenses, as detailed below.
Cost of sales increased by $1,701,193 from the prior year, primarily
reflecting the increase in MBE(TM) Business Express(TM) business. General and
administrative expenses of $2,687,744 increased by $473,760 or 21%. This
increase is primarily due to legal expenses associated with the pending MBE
litigation, which amounted to over $600,000. Without these legal expenses,
general and administrative expenses would have declined by over $100,000. In
addition, outside services increased by $141,135 or 199% primarily to fund
promotional programs in the marketing and investor relations areas. Offsetting
these increases were decreases in travel and entertainment expenses of $147,097,
or 42%; decreases in product development of $45,760 or 46%; and decreases in
advertising by $103,270 or 49%.
Compensation expense was $1,553,189, a decrease of $356,493 or 19% from
the previous year. The decrease was primarily due to the non-cash expense of
$554,630 last year which reflected the compensation charge recorded for the
repricing of the common stock options below fair market value during April 1998.
Offsetting this decrease were increases in salaries of $237,260, or 21%, which
is due to increased personnel requirements in the operations and sales areas.
Depreciation expense of $91,773 decreased by $24,382 or 21%, due to a
lower depreciable asset base.
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 $1.51
per common share (basic and diluted) was derived by adding the $3,568,281 net
loss and the $1,754,566 of cumulative preferred and other adjustments and
dividing by the weighted average shares outstanding of 3,532,048.
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 Express(R) and the MBE(TM) 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 detailed below.
Cost of sales increased by $736,639 from the prior year, primarily
reflecting the increase in MBE(TM) Business Express(TM) business. General and
administrative expense 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(R) terminals; marketing promotions and trade show expenses
14
<PAGE>
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.
Depreciation expense of $116,255 increased by $19,005, which is
attributable to the increased depreciable asset base.
Plan of Operations
As of June 30, 1999, the Company had a total of 1,233 credit card
activated control systems installed in the field as follows: Business Express(R)
1,119, Copy Express(TM) 36, Debit Express(TM) 27, Public PC(R) 41, Fax/Printer
Express(TM) 10. Through June 30, 1999 total license and transaction fees earned
by the Company from these systems were $448,319, which was almost double the
fees from the prior year.
During the past year the Company has focused on developing a new
terminal with an approved trademark of "e-port". It contains all the
functionality of the current TransAct(TM) terminal for credit card processing,
control and data management, and in addition would offer capability for public
access, electronic commerce and advertising using the Internet. The Company
anticipates that Beta testing of e-port(TM) will occur in the second quarter of
fiscal 2000. The Company also is developing a proposal with IBM whereby IBM will
provide value added design, development, fulfillment and product warranty
services for the e-port(TM). The goal is to leverage IBM research, purchasing,
manufacturing and global services to provide the Company with shortened time to
market, product excellence, and a lower total cost of goods. IBM has also signed
a letter of intent to help the Company design an enhanced version of the network
which will underlie all transaction processing for e-port(TM), including
advertising and e-commerce.
On June 7, 1999, Ikon Office Solutions signed a letter of intent with
the Company wherein it stated its intent to market and sell the Company's
Transact solutions to businesses through its sales representatives. Ikon, with
fiscal 1998 revenues of more than $5.6 billion, is one of the world's leading
office technology companies, providing copier and printing systems, computer
networking and digital document document services. Training of Ikon sales
representatives has begun, and sales to Ikon are expected to begin in the second
quarter of fiscal 2000.
Additional plans for the coming fiscal year include continued focus on
the sales and/or leasing of its Business Express(R) business centers, and
development of strategic partnering relationships.
Liquidity and Capital Resources
During the fiscal year ended June 30, 1999, the Company completed
several financing transactions. Net proceeds of $4,106,440 were realized from
issuance of Senior Notes, $254,360 were realized from private placement
offerings of Series A Preferred Stock, and $182,540 were realized from Common
15
<PAGE>
Stock transactions, principally the exercise of Common Stock Purchase Warrants
and Options. As of June 30, 1999, the Company had working capital of $1,279,367,
which included cash and cash equivalents of $1,665,016 and inventory of
$1,255,836.
During the fiscal year ended June 30, 1999, net cash of $3,940,414 was
used by operating activities, primarily due to the net loss of $3,651,624. The
net cash provided by financing activities of $5,320,747 was principally due to
the net proceeds generated from the issuance of the Senior Notes described in
the prior paragraph and the $804,485 proceeds from the line of credit from IBM
Global Financing (see below).
During August and September 1999, shareholders have exercised an
aggregate of 136,000 1999-A Warrants for gross proceeds of $68,000.
The Company's independent auditors have included an explanatory
paragraph in their report on the Company's June 30, 1999 consolidated financial
statements discussing issues which raise substantial doubt about the Company's
ability to continue as a going concern. The Company anticipates that for the
year ending June 30, 2000 there will be a negative cash flow from operations in
excess of $3.0 million. However, the Company believes that the funds available
at June 30, 1999 combined with the revenues to be generated during fiscal year
2000, the potential capital to be raised from the exercise of the Common Stock
Purchase Warrants, a possible private placement offering, and the ability to
reduce anticipated expenditures, if required, will provide for the Company to
continue as a going concern through at least the third quarter of fiscal year
2000.
Commitments
The Company leases approximately 7,000 square feet in Wayne,
Pennsylvania for a monthly rental of $10,500 plus utilities and operating
expenses. The lease expires on July 1, 2002.
The Company has acquired inventory financing using IBM Global
Financing. The debt to IBM is secured primarily by the inventory being financed.
As of June 30, 1999, $804,485 of inventory is being financed. Such inventory was
originally the inventory of the JV, but was purchased by the Company from the
JV when the JV was terminated in May 1999.
Year 2000 Compliance
In general, 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.
The Company's remediation efforts have proceeded with Executive level
management sponsorship, funding and support. Efforts have been made to insure an
orderly transition leading up to and across the date change event. The Company
is committed to making the Millennium event come and pass without disruption to
its customers, suppliers and business partners. November 30, 1999 has been
targeted as the final trialing test and contingency planning in the event that
issues arise that are outside of the Company's control, specifically utilities,
municipal infrastructures, communications facilities and key interfaces.
In analyzing its business in order to determine whether its computer
systems are in compliance with Year 2000 issues, the Company has incurred costs
estimated to be approximately $5,000 for internal and external study and
analysis and anticipates additional costs of approximately the same to complete
the study.
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; (iv)
its back-up, off-site recovery system and (v) its non-Information Technology
("IT") systems. The study should be completed on or before November 30, 1999.
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, which would be incurred for
replacement accounting software, other software and database upgrades and
internal or external services.
In reference to item (i) above, selected terminals have been reexamined
by the terminal designer. No hardware or firmware was found to contain any date
sensitive element which would cause a Y2K problem. In addition, several
terminals were tested by using year 2000 dates, and no problem was found. Future
work will include contact with the terminal supplier to ascertain if any
manufacturing processes could have introduced a Y2K problem. In reference to
item (ii) above, the Company has already found all but two office computers
16
<PAGE>
to be compliant. These two computers have been re-utilized in a capacity that
does not involve date sensitive processing. In reference to item (iii), the
programs written by the Company to process credit card data received from the
terminals in the field have been reviewed, and no Y2K problems have emerged.
Further, the programs are presently being rewritten in a Y2K compliant Visual
Basic programming language, and the code will be examined for Y2K issues as part
of its quality testing. As indicated above, vendor software and database reviews
are on going, and expenditures to procure Y2K compliant software have already
been made. In reference to item (iv), the off-site recovery systems utilize IBM
facilities nearby which are believed to be Y2K compliant. Item (v), non IT
systems, is currently under investigation.
The Company is in the process of obtaining written assurances of
compliance from all third parties whose products may materially affect the
Company's operations. These parties include, but are not limited to, the
Company's credit card processor, control system manufacturer, and various
equipment manufacturers.
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. The Company
believes that 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's licensing and
processing revenues might be materially impacted if the time required to replace
all defective units using compliant terminals was many months. The Company
anticipates the cost of such replacement units to be approximately $150,000.
17
<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 Statements of Shareholders' Equity F-4
Consolidated Statements of Cash Flows F-10
Notes to Consolidated Financial Statements F-11
18
<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, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
two years in the period ended June 30, 1999. 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 financial position of USA Technologies,
Inc. at June 30, 1999 and 1998, and the consolidated results of its operations
and its cash flows for each of the two years in the period ended June 30, 1999,
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 financial statements, the Company's recurring losses from operations from
its inception and its accumulated deficit through June 30, 1999, 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
September 14, 1999
F-1
<PAGE>
USA Technologies, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30
1999 1998
---------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $1,665,016 $ 324,824
Accounts receivable, less allowance for uncollectible accounts
of $69,555 and $23,764 in 1999 and 1998, respectively 361,463 222,743
Inventory 1,255,836 436,971
Subscriptions receivable 178,873 19,875
Prepaid expenses and deposits 42,746 20,515
---------- -----------
Total current assets 3,503,934 1,024,928
Property and equipment, net 143,670 151,906
Other assets 10,250 10,250
---------- -----------
Total assets $3,657,854 $ 1,187,084
========== ============
Liabilities and shareholders' equity (deficit)
Current liabilities:
Accounts payable $ 917,141 $ 576,787
Equipment line of credit 804,485 -
Accrued expenses 498,548 430,643
Current obligations under capital leases 4,393 22,810
---------- -----------
Total current liabilities 2,224,567 1,030,240
Senior Note, net of unamortized discount 2,054,232 -
Obligations under capital leases, less current portion 22,584 1,669
---------- -----------
Total liabilities 4,301,383 1,031,909
Shareholders' equity (deficit):
Preferred Stock, no par value:
Authorized shares - 1,800,000
Series A Convertible Preferred Authorized shares - 900,000
Issued and outstanding shares - 640,577 and 618,236 at
June 30, 1999 and 1998, respectively (liquidation preference
of $ 9,734,212 at June 30, 1999) 4,537,128 4,538,114
Common Stock, no par value:
Authorized shares - 62,000,000
Issued and outstanding shares - 6,191,097 and 4,016,384 at
June 30, 1999 and 1998, respectively 14,277,763 11,223,213
Subscriptions receivable (83,983) -
Accumulated deficit (19,374,437) (15,606,152)
---------- -----------
Total shareholders' equity (deficit) (643,529) 155,175
---------- -----------
Total liabilities and shareholders' equity (deficit) $3,657,854 $ 1,187,084
========== ===========
</TABLE>
See accompanying notes.
F-2
<PAGE>
USA Technologies, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended June 30
1999 1998
----------- ------------
<S> <C> <C>
Revenues:
Equipment sales $ 3,442,197 $ 1,588,487
License and transaction fees 448,319 236,742
----------- ------------
Total revenues 3,890,516 1,825,229
Operating expenses:
Cost of equipment sales 2,962,922 1,261,729
General and administrative 2,687,744 2,213,984
Compensation 1,553,189 1,909,682
Depreciation 91,773 116,255
----------- ------------
Total operating expenses 7,295,628 5,501,650
----------- ------------
(3,405,112) (3,676,421)
Other income (expense):
Interest income 8,347 18,225
Interest expense (135,505) (8,443)
Joint Venture activities (119,354) 98,358
----------- ------------
Total other income (expense) (246,512) 108,140
----------- ------------
Net loss (3,651,624) (3,568,281)
Cumulative preferred dividends and other adjustments (1,002,453) (1,754,566)
----------- ------------
Loss applicable to common shares $(4,654,077) $ (5,322,847)
=========== ============
Loss per common share (basic and diluted) $ (1.07) $ (1.51)
=========== ============
Weighted average number of common shares
outstanding (basic and diluted) 4,348,866 3,532,048
=========== ============
</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, 1997 $ 7,024,811 $ 4,355,334 $ (10,534,004) $ 846,141
Issuance of 20,500 shares of Common Stock in
exchange for consulting services - 68,096 - 68,096
Issuance of 950 shares of Common Stock to
employees as compensation - 2,565 - 2,565
Conversion of 392,969 shares of Convertible
Preferred Stock to 466,453 shares of
Common Stock (3,188,207) 3,188,207 - -
Conversion of $1,388,772 of cumulative
preferred dividends into 167,455 shares of
Common Stock at $8.30 per share - 1,388,772 (1,388,772) -
Conversion of $115,095 of cumulative
preferred dividends into 11,509 shares of
Common Stock at $10.00 per share - 115,095 (115,095) -
Common Stock warrants exercised - 371,000 at
$1.50 per warrant - 556,500 - 556,500
Common Stock warrants exercised - 281,900 at
$2.00 per warrant, net of offering costs - 521,639 - 521,639
Common Stock warrants exercised - 187,100 at
$2.50 per warrant - 467,750 - 467,750
Exercise of 7,000 Common Stock options -
at $.50 per share - 3,500 - 3,500
Exercise of 4.50 Common Stock purchase rights
- at $2.50 per share - 1,125 - 1,125
Cancellation of 436,500 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 189,600 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>
F-4
<PAGE>
USA Technologies, Inc.
Consolidated Statements of Shareholders' Equity (continued)
<TABLE>
<CAPTION>
Series A
Convertible
Preferred Common Subscriptions Accumulated
Stock Stock Receivable Deficit Total
------------ -------------- ------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Issuance of 55,600 shares (27.8 units) of
Convertible Preferred Stock at $5.00
per share, in connection with 1998B Private
Placement, net of offering costs $ 234,485 $ - $ - $ - $ 234,485
Issuance of 9,200 warrants of Common Stock in
exchange for services - 18,400 - - 18,400
Issuance of 80,400 shares of Common Stock in
exchange for services - 150,820 - - 150,820
Issuance of 50 shares of Common Stock to an
employee as compensation - 100 - - 100
Conversion of 3,326 shares of Convertible
Preferred Stock to 3,326 shares of Common
Stock (235,471) 235,471 - - -
Conversion of $116,661 of cumulative
preferred dividends into 11,666 shares of
Common Stock at $10.00 per share - 116,661 - (116,661) -
Common Stock warrants exercised - 134,000 at
$1.00 per warrant - 134,000 - - 134,000
Exercise of 45,000 Common Stock options - at
$1.00 per share - 45,000 - - 45,000
Exercise of 3,540 Common Stock purchase rights
- at $1.00 per share - 3,540 - - 3,540
Issuance of 1,867,200 shares of Common
Stock from the conversion of 466,800
shares of Series B Equity Participating
Preferred Stock, in connection with
the 1999 Senior Note Offering (Note 9) - 524,485 - - 524,485
Issuance of 933,600 warrants in connection
with the 1999 Senior Note Offering - 1,826,073 - - 1,826,073
Subscriptions receivable relating to the 1999
Senior Note Offering - - (83,983) - (83,983)
Net loss - - - (3,651,624) (3,651,624)
------------ ------------- ---------- -------------- ------------
Balance, June 30, 1999 $ 4,537,128 $ 14,277,763 $ (83,983) $ (19,374,437) $ (643,529)
============ ============= ========== ============== ============
</TABLE>
See accompanying notes
F-5
<PAGE>
USA Technologies, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended June 30
1999 1998
---------------- ----------------
<S> <C> <C>
Operating activities
Net loss $ (3,651,624) $ (3,568,281)
Adjustments to reconcile net loss to net cash used in
operating activities:
Compensation charges incurred in connection with the
issuance of Common Stock and Common Stock
Purchase Warrants and repricing of Common Stock 169,320 625,291
options
Depreciation 91,773 116,255
Interest relating to Senior Note Offering 35,494 -
Provision for allowance for uncollectible accounts 45,791 10,441
Changes in operating assets and liabilities:
Accounts receivable (184,511) (204,224)
Inventory (832,685) (147,634)
Prepaid expenses, deposits, and other assets (22,231) 5,155
Accounts payable 340,354 200,499
Accrued expenses 67,905 383,901
------------- -------------
Net cash used in operating activities (3,940,414) (2,578,597)
Investing activities
Purchase of property and equipment (40,141) (723)
------------- -------------
Net cash used in investing activities (40,141) (723)
Financing activities
Proceeds from line of credit agreement 804,485 -
Net proceeds from issuance of Senior Notes 4,106,440 -
Net proceeds from issuance of Common Stock and
exercise of Common Stock Purchase Warrants 182,540 1,530,639
Net proceeds from issuance of Convertible
Preferred Stock 254,360 761,510
Repayment of principal on capital lease obligations (27,078) (18,271)
------------- -------------
Net cash provided by financing activities 5,320,747 2,273,878
------------- -------------
Net increase (decrease) in cash and cash equivalents 1,340,192 (305,442)
Cash and cash equivalents at beginning of year 324,824 630,266
------------- -------------
Cash and cash equivalents at end of year $ 1,665,016 $ 324,824
============= =============
Supplemental disclosures of cash flow information:
Conversion of Convertible Preferred Stock to
Common Stock $ 235,471 $ 3,188,207
============= =============
Conversion of Cumulative Preferred Dividends to
Common Stock $ 116,661 $ 1,503,867
============= =============
Subscriptions receivable $ 262,856 $ 19,875
============= =============
Cash paid during the year for interest $ 95,089 $ 18,777
============= =============
Transfer of inventory to property and equipment $ 13,820 $ 88,981
============= =============
Capital lease obligations incurred $ 29,576 $ -
============= =============
</TABLE>
See accompanying notes.
F-6
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements
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. The Company offers the Business
Express(R) principally to the hospitality industry. The Business Express(R)
combines the Company's business applications for computers, copiers and
facsimile machines into a business center unit.
2. Accounting Policies
Basis of Financial Statement Presentation
The consolidated financial 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 $3.7 million and $3.6
million during each of the fiscal years ending June 30, 1999 and 1998,
respectively, and cumulative losses from its inception through June 30, 1999
amounting to $16.6 million. Losses have continued through September 1999. 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, additional private placement offerings, 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 (continued)
2. Accounting Policies (continued)
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 for the years ended June 30, 1999 and 1998,
respectively.
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. Cash equivalents are 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.
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.
F-8
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
2. Accounting Practices (continued)
Research and Development
Research and development costs are charged to operations as incurred. Such
research and development costs amounted to approximately $198,000 and $199,000
for the years ended June 30, 1999 and 1998, respectively. These costs are
reflected in general and administrative and compensation expenses in the
accompanying 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
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 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, if 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 12.
F-9
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
2. Accounting Practices (continued)
Loss Per Common 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 of the period plus the dilutive effect of equity instruments.
No exercise of stock options, purchase rights, stock purchase warrants, or the
conversion of preferred stock and cumulative preferred dividends was assumed
during fiscal 1999 or 1998 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 SFAS 131 are effective for fiscal years
beginning after December 15, 1997. The adoption of SFAS 130 and SFAS 131 had no
material effect on the Company's results of operations or financial condition.
Fair Value of Financial Instruments
Financial Accounting Standards Board Statement No. 107, Disclosures About Fair
Value of Financial Instruments, defines the fair value of a financial instrument
as the amount at which the instrument could be exchanged in a current
transaction between willing parties. Cash and cash equivalents, accounts
receivable, other current assets, accounts payable and accrued expenses reported
in the consolidated balance sheets equal or approximate fair value due to their
short maturities. The fair value of the Company's Senior Notes approximates book
value as such notes are at market rates currently available to the Company.
F-10
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
3. Joint Venture
During September 1997, the Company entered into a five year Joint Venture
Agreement with Mail Boxes Etc. ("MBE") to operate under the name "MBE Express
Joint Venture" (hereinafter referred to as "Joint Venture") and exclusively sell
and market the Company's Business Express(R) 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. All other revenues and expenses of the Joint Venture
are shared equally by the partners. 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. The
Company manages the operations of the Joint Venture and handles all of its
administrative matters. The Joint Venture also specifies that it 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.
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. Services provided
under this agreement commenced during the first quarter of fiscal 1999.
During 1998, the Joint Venture entered into an agreement with a hospitality
corporation ("Corporation") that represented various hotel chains. The agreement
provided for the Corporation to purchase a minimum of 100 MBE Business
Express(TM) units for installation. Through June 30, 1999, all but two
installations were completed. Revenues generated in connection with this
agreement represented 49% of the fiscal year 1999 consolidated revenues.
F-11
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
3. Joint Venture (continued)
During September 1998, MBE commenced a legal action against the Company in the
Superior Court of the State of California, (subsequently removed to the United
States District Court for the southern District of California), alleging that
195 terminals purchased by MBE were defective and a refund of $141,260 plus lost
profits (claimed to be several hundred thousand dollars) were sought by MBE. MBE
further claimed that it was not obligated to purchase 600 additional terminals
ordered in April 1998. The Company filed a counterclaim against MBE which
claimed numerous areas where MBE breached the Joint Venture Agreement, breached
its fiduciary responsibility, and trade libel. The counterclaim seeks recovery
from MBE of monetary damages caused by MBE's actions, including lost profits,
consequential damages and/or incidental damages and punitive damages for a total
amount in excess of $10 million. As of June 30, 1999, limited discovery has been
conducted by the parties and a trial date has not been set. Discovery is to be
completed by February 18, 2000. On May 14, 1999 the Company notified MBE that
the Company was terminating the Joint Venture Agreement, citing the numerous
breaches of the Joint Venture Agreement. The Company believes the claims made by
MBE are without merit and it will prevail in this matter. Accordingly, there has
been no provision recorded in the consolidated financial statements.
At June 30, 1999 and 1998 the Joint Venture recorded accounts payable to MBE of
approximately $64,000 and $64,000, respectively which principally represents
amounts payable for inventory and other expenditures paid by MBE on behalf of
the Joint Venture.
4. Property and Equipment
Property and equipment consist of the following:
June 30
1999 1998
-------- --------
Control systems $410,983 $357,021
Furniture and equipment 105,286 75,710
Vehicles 10,258 10,259
-------- --------
526,527 442,990
Less accumulated depreciation 382,857 291,084
-------- --------
$143,670 $151,906
======== ========
Depreciation expense was approximately $92,000 and $116,000 for the years ended
June 30, 1999 and 1998, respectively.
F-12
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
5. Accrued Expenses
Accrued expenses consist of the following:
June 30
1999 1998
--------- --------
Accrued product warranty costs $ 117,300 $102,520
Accrued professional fees 101,000 76,000
Accrued compensation and related
sales commissions 88,135 79,147
Accrued other 64,484 30,524
Accrued software license and support costs 60,312 84,297
Accrued sales tax 46,347 44,630
Advanced customer billings 20,970 13,525
--------- --------
$ 498,548 $430,643
========= ========
6. Related Party Transactions
At June 30, 1999 and 1998, approximately $84,000 and $26,000, 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, 1999 and
1998, the Company incurred approximately $381,000 and $340,000, respectively for
these services.
7. Commitments
o During May 1999, the Company entered into an agreement with IBM whereby IBM
agreed to be the executional partner for certain aspects of the Company's
business, including project management services, asset procurement,
configuration and testing of equipment, site preparation, installation,
maintenance services, and asset management. The agreement expands the
original agreement entered into with the Joint Venture (Note 3) and provides
for an increase from 1,000 to 5,000 locations and expanded the array of USA
products which are eligible for IBM installation. In connection with this
agreement, the Company has also entered into an inventory financing
arrangement with IBM Credit Corporation whereby IBM Credit Corporation
granted the Company an equipment line of credit of up to $1.5 million.
Interest accrues on the outstanding line of credit balance at 10% per annum.
At June 30, 1999, $804,485 was outstanding.
F-13
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
7. Commitments (continued)
o 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 Chief Executive Officer, providing for a base annual
salary of $100,000. The Employment Agreement is automatically renewed
annually thereafter unless canceled by either the Chief Executive Officer or
the Company. In connection with the Employment Agreement, the Chief Executive
Officer canceled an aggregate of 436,500 shares of Common Stock held in
escrow in accordance with the terms of an agreement with Pennsylvania
Securities Commission entered into at the time of the initial public
offering. The Employment Agreement also granted the Chief Executive Officer
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 (subsequently amended to eight percent during fiscal year
1999) of all the then issued and outstanding shares of the Company's Common
Stock. The Chief Executive Officer is not required to pay any additional
compensation for such shares. The stock rights have no expiration and are not
affected by the Chief Executive Officer's termination of employment.
o The Company conducts its operations from various facilities under operating
leases. Rental expense under such arrangements was approximately $83,000 and
$70,000 during the years ended June 30, 1999 and 1998, respectively. During
the year ended June 30, 1999, the Company entered into agreements to lease
$29,576 of equipment which was accounted for as capital leases. This computer
equipment is included in control systems in the accompanying consolidated
financial statements. Lease amortization of $25,076 and $30,121 is included
in depreciation expense for the years ended June 30, 1999 and 1998,
respectively.
Future minimum lease payments subsequent to June 30, 1999 under capital and
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ----------
<S> <C> <C>
2000 $ 8,478 $139,000
2001 8,478 135,000
2002 8,478 133,000
2003 8,478 132,000
2004, thereafter 4,413 126,000
-------- --------
Total minimum lease payments 38,325 $665,000
Less amount representing interest 11,348 ========
--------
Present value of net minimum lease payments 26,977
Less current obligation under capital leases 4,393
--------
Obligation under capital leases, less current portion $ 22,584
========
</TABLE>
F-14
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
8. Income Taxes
At June 30, 1999 and 1998, the Company had net operating loss carryforwards of
approximately $15,115,000 and $11,231,000, respectively, to offset future
taxable income expiring through 2013. At June 30, 1999 and 1998, the Company
recorded a deferred tax asset of $6,013,100 and $4,905,000, 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
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax asset:
Net operating loss carryforwards $ 5,530,000 $ 4,384,000
Compensation expense on stock option re-pricing 207,000 222,000
Deferred research and development costs 143,000 207,000
Deferred pre-operating costs 900 18,000
Other temporary differences 132,200 81,000
----------- -----------
6,013,100 4,912,000
Deferred tax liabilities:
Depreciation - (7,000)
----------- -----------
Deferred tax asset, net 6,013,100 4,905,000
Valuation allowance (6,013,100) (4,905,000)
----------- -----------
$ - $ -
=========== ===========
</TABLE>
As of June 30, 1993, 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
could have an impact on the ultimate realization of its carryforwards and future
tax deductions (generated through June 30, 1993). Cumulative losses generated
for income tax purposes after June 30, 1993 through June 30, 1999, may be
subject to similar limitation.
F-15
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
9. Senior Note Offering
During September 1998, the Company's Board of Directors authorized a $2,000,000
private placement offering (the "Senior Note Offering") of 200 units at a unit
price of $10,000. Each unit consisted of a 12% Senior Note in the principal
amount of $10,000, 1,500 1999-A Common Stock Purchase Warrants (subsequently
increased to 2,000 Warrants) and 1,000 shares of Series B Equity Participating
Preferred Stock (Series B). The Board of Directors also authorized the creation
of 200,000 shares of the Series B. Each 1999-A Common Stock purchase warrant
entitles the holder to purchase one share of Common Stock for $1.00 at any time
through December 31, 2001. During January 1999, the Board of Directors
authorized the reduction of the exercise price of the 1999-A Common Stock
purchase warrants to $.50 through December 31, 1999. Each share of the Series B
was automatically convertible into 4 shares of Restricted Common Stock at the
time of a "USA Transaction," as defined in the Offering agreement. During
January 1999, the Company's Board of Directors authorized the expanding of the
rights of the Series B holders providing for each share of Series B to convert
into 4 shares of Restricted Common Stock in the event of a reverse stock split.
During fiscal year 1999, the Company's Board of Directors authorized several
increases to the allowable size of the Senior Note Offering with a total
authorization of 500 units, $5,000,000 in gross proceeds, 1,000,000 1999-A
Common Stock Purchase Warrants and 500,000 shares of Series B Equity
Participating Preferred Stock.
During January 1999, the Chief Executive Officer purchased ten units of the
Senior Note Offering for $100,000. The Board of Directors also approved the
Chief Executive Officer's commitment to purchase an additional ten units for
$100,000 which will be funded by his foregoing salary from April 1, 1999
through June 30, 2000. At June 30, 1999, $84,296 of this amount is included in
subscriptions receivable.
The Senior Note Offering closed on June 23, 1999, generating net proceeds of
$4,106,440 through the sale of 466.8 units, the issuance of 933,600 1999-A
Common Stock purchase warrants and the issuance of 466,800 shares of Series B.
In connection with the reverse stock split approved by the Company's
shareholders at the Annual Meeting on May 27, 1999 (Note 11), the 466,800 shares
of Series B were converted into 1,867,200 shares of restricted Common Stock
effective June 7, 1999. The estimated fair value of the debt issue costs
consisting of the 1999-A Common Stock purchase warrants and the Restricted
Common Stock issued in connection with this Offering in the amount of $2,350,558
have been allocated to paid in capital. The resulting debt discount is being
amortized over the term of the Senior Notes. Accumulated debt discount
amortization at June 30, 1999 was $35,494.
F-16
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
10. 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 one vote and is convertible at any time into one share of Common Stock
(1.2 shares from March 31, 1997 to December 31, 1997). Each share of Common
Stock entitles the holder to one voting right. Series A Convertible Preferred
Stock provides for an annual cumulative dividend of $.15 per share payable to
the shareholders of record in equal parts on February 1 and August 1 of each
year. Cumulative unpaid dividends at June 30, 1999 and 1998 amounted to
$3,328,442 and $2,442,650, respectively. Cumulative unpaid dividends are
convertible into common shares at $10.00 per common share at the option of the
shareholder ($8.30 from March 31, 1997 to December 31, 1997). During the years
ended June 30, 1999 and 1998, certain holders of the Preferred Stock converted
3,326 and 392,969 shares, respectively, into 3,326 and 466,453 shares of Common
Stock, respectively. Certain of these shareholders also converted cumulative
preferred dividends of $116,661 and $1,503,867, respectively, into 11,666 and
178,964 shares of Common Stock during the years ended June 30, 1999 and 1998,
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, 1999. 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.
11. Common Stock Transactions
On May 27, 1999 the Company's shareholders approved a Plan of Recapitalization
and amendment to the Company's Articles of Incorporation to effect a 1-for-10
reverse split of Common Stock. The reverse stock split became effective on June
7, 1999. All Common Stock per share amounts, and related Common Stock
equivalents have been restated to reflect the reverse split in the accompanying
consolidated financial statements.
The shareholders also approved an increase in the number of authorized shares of
undesignated Series Preferred Stock from 1,200,000 to 1,800,000 and an increase
in the number of authorized shares of Series A Preferred Stock from 787,591 to
900,000.
F-17
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
11. Common Stock Transactions (continued)
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 5,000 1998-B Common Stock
purchase warrants at an exercise price of $1.50 through January 1, 1999 and
$4.00 per warrant thereafter. The Company terminated the offering on August 17,
1998, with 27.8 units sold generating net proceeds of $234,485 ($278,000 less
offering costs of $43,515). During January 1999, the Company's Board of
Directors reduced the exercise price of the 1998-B warrants to $1.00 per warrant
through March 31, 1999. During fiscal year 1999, 134,000 warrants were exercised
generating gross proceeds of $134,000. At June 30, 1999, there were 5,000 1998-B
Common Stock purchase warrants outstanding from this offering.
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 5,000 1998-A Common
Stock purchase warrants at an exercise price of $1.50 through June 30, 1998 and
$4.00 thereafter through March 5, 2003. The Company terminated this offering
during February 1998 selling all 75 units and generating net proceeds of
$701,510 ($750,000 less offering costs of $48,490). During fiscal year 1998,
371,000 1998-A Common Stock purchase warrants were exercised at $1.50 per
warrant generating gross proceeds of $556,500. At June 30, 1999, there were
4,000 1998-A Common Stock purchase warrants outstanding from this offering.
During June 1997, the Company closed on a private placement offering of
Convertible Debentures (the Placement) resulting in net proceeds to the Company
of $451,169. 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 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. During fiscal year 1998, the
entire Placement was converted (at varying prices) into 191,574 common shares.
Certain affiliates of the placement agent
F-18
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
11. Common Stock Transactions (continued)
were issued non-detachable Common Stock purchase warrants, exercisable
immediately, to purchase up to 200,000 shares of the Company's Common Stock at
$2.00 per warrant at any time through June 22, 2002. Through June 30, 1999,
90,000 of these warrants were exercised generating gross proceeds of $180,000.
At June 30, 1999, there were 110,000 purchase warrants outstanding.
In connection with a March 1997 private placement offering, the Company issued
160,000 1997 Common Stock purchase warrants at an exercise price of $2.00 per
warrant through October 31, 1997 and $4.00 per warrant thereafter through
February 28, 2002. Through June 30, 1999, 158,500 warrants were exercised at
$2.00 per warrant generating gross proceeds of $317,000. At June 30, 1999, 1,500
of the 1997 Common Stock purchase warrants were outstanding.
In connection with a November 1996 private placement offering, the Company
issued 37,400 1996-B Common Stock purchase warrants at an exercise price of
$2.00 per share through October 31, 1997 and $3.00 per warrant thereafter
through February 28, 2002. Through June 30, 1999, 33,400 warrants were exercised
at $2.00 per warrant generating gross proceeds of $66,800.
At June 30, 1999, 4,000 of the 1996-B Common Stock purchase warrants were
outstanding.
In connection with a 1996 private placement offering, the Company issued 520,000
1996 Common Stock purchase warrants at an exercise price of $4.00 through
December 31, 1996 and $5.00 per warrant thereafter through May 31, 2001. Through
June 30, 1999, 433,200 warrants were exercised generating gross proceeds of
$922,900. At June 30, 1999, 86,800 1996 Common Stock purchase warrants were
outstanding.
In connection with a 1995 private placement offering, the Company issued 141,400
1995 Common Stock purchase warrants at an exercise price of $2.50 through
October 1997 and $5.00 per warrant thereafter through January 31, 2001. Through
June 30, 1999, 74,100 warrants were exercised at $2.50 per warrant generating
gross proceeds of $185,250. At June 30, 1999, 67,300 1995 Common Stock purchase
warrants were outstanding.
At June 30, 1999 and 1998, the Company had outstanding 11,740 and 15,280 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
$10.00 per share and are exercisable through June 30, 2000. During fiscal year
1999, the Company's Board of Directors authorized a reduction in the exercise
price from $10.00 per share to $1.00 per share from January 21, 1999 through
March 31, 1999.
F-19
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
12. 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 April
1998, the Company's Board of Directors authorized the reduction in the exercise
price of 189,600 options from $2.50-$4.50 per share to $.50-$2.00 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:
Exercise
Common Shares Under Price
Options Granted Per Share
------------------- ----------
Balance at June 30, 1997 397,100 $ .50-$5.00
Granted 30,000 $ 4.50-$5.00
Exercised (7,000) $ .50
Balance at June 30, 1998 420,100 $ .50-$5.00
Granted 542,000 $ 2.00
Exercised (45,000) $ 1.00
------- ------------
Balance at June 30, 1999 917,100 $ .50-$5.00
======= ============
The price range of the outstanding and exercisable common stock options at June
30, 1999 is as follows:
<TABLE>
<CAPTION>
Weighted
Average Weighted
Option Remaining Weighted Average
Exercise Options Contract Life Excercise Options Exercise
Prices Outstanding (Yrs.) Price Exercisable Price
-------- ----------- ------------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.50 5,000 2.02 $ 0.50 5,000 $ 0.50
$ 1.50 132,100 1.31 $ 1.50 132,100 $ 1.50
$ 2.00 549,500 4.76 $ 2.00 346,167 $ 2.00
$ 2.50 131,500 2.76 $ 2.50 131,500 $ 2.50
$ 4.50 84,000 2.34 $ 4.50 84,000 $ 4.50
$ 5.00 15,000 2.55 $ 5.00 15,000 $ 5.00
------- --------------- -------
917,100 $ 0.50-$5.00 713,767
======= =============== =======
</TABLE>
F-20
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
12. Stock Options (continued)
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
1999 1998
------------- -------------
<S> <C> <C>
Net loss applicable to common shares as reported under APB 25:
$ (4,654,077) $ (5,322,847)
Stock option expense per SFAS 123 (620,236) (391,704)
------------ ------------
Pro forma net loss $ (5,274,313) $ (5,714,551)
============ ============
Loss per common share as reported $ (1.07) $ (1.51)
Pro forma net loss per common share $ (1.21) $ (1.62)
</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 1999 and 1998; risk-free interest
rate of 6.0% and 5.5%, respectively; 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
1.364 and 0.793, respectively.
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.
F-21
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
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 1999 and 1998, there were no contributions made to the Plan by the
Company.
14. Subsequent Events
During July 1999, the Company's Board of Directors granted a new director 10,000
options to purchase Common Stock of the Company at $2.00 per share. The Board
also granted to two consultants a total of 250,000 Common Stock purchase
warrants at $2.50 per share in connection with financial and public relations
services. During August 1999, the Company's Board of Directors issued to various
employees and consultants a total of 377,800 shares of Common Stock at $2.00 per
share for services rendered in fiscal year 2000 or to be rendered, in lieu of
cash compensation.
Subsequent to June 30, 1999 136,000 1999-A Common Stock purchase warrants were
exercised at $.50 per warrant, generating gross proceeds of $68,000.
F-22
<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, as of June 30,
1999, together with their ages and business backgrounds are as follows.
Name Age Position(s) Held
---- --- ----------------
George R. Jensen, Jr. 50 Chief Executive Officer,
Chairman of the Board of
Directors
Stephen P. Herbert 36 President, Director
Haven Brock Kolls, Jr. 33 Vice President - Research and
Development
Leland P. Maxwell 52 Senior Vice President, Chief
Financial Officer, Treasurer
Peter G. Kapourelos 79 Director
William W. Sellers(1)(2) 77 Director
Henry B. duPont Smith 37 Director
William L. Van Alen, Jr.(1)(2) 65 Director
Steven Katz(1) 50 Director
Douglas M. Lurio(2) 42 Director
- ------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
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 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 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.
19
<PAGE>
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.
20
<PAGE>
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.
Steven Katz joined the Board of Directors in May 1999. He is President
of Steven Katz & Associates, Inc., a management consulting firm specializing in
strategic planning and corporate development for technology and service-based
companies in the health care, environmental, telecommunications and Internet
markets. Mr. Katz's prior experience includes five years with Price Waterhouse &
Co. in audit, tax and management advisory services; two years of corporate
planning with Revlon, Inc.; five years with National Patent Development
Corporation (NPDC) in strategic planning, merger and acquisition, technology
in-licensing and out-licensing, and corporate turnaround experience as President
of three NPDC subsidiaries; and two years as a Vice President and General
Manager of a non-banking division of Citicorp, N.A.
Douglas M. Lurio joined the Board of Directors of the Company in June
1999. Mr. Lurio is President of Lurio & Associates, P.C., attorneys-at-law,
which he founded in 1991. He specializes in the practice of corporate and
securities law. Prior thereto, he was a partner with Dilworth, Paxson LLP. Mr.
Lurio received a Bachelor of Arts Degree in Government from Franklin & Marshall
College, a Juris Doctor Degree from Villanova Law School, and a Masters in Law
(Taxation) from Temple Law School.
On July 30, 1999, the Board of Directors approved the appointment of
Edwin R. Boynton as a Director
of the Company.
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, 1997, June 30, 1998 and June 30, 1999 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, 1997, June 30, 1998 or June 30, 1999 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., 1999 $100,000 $0
Chief Executive Officer, 1998 $100,000 $0
President 1997 $100,000 $0
21
<PAGE>
Executive Employment Agreements
The Company has entered into an employment agreement with Mr. Jensen
which expires June 30, 2001. 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 436,500
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
(subsequently increased to eight 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.
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.
On January 21, 1999, Mr. Jensen purchased ten (10) units of
the recently completed private debt placement offering for $100,000. In full
payment for such Units, Mr. Jensen has agreed to forego any base salary
otherwise payable to him under his employment agreement during the period of
time commencing on April 1, 1999 and ending on June 30, 2000, or such longer
period of time as may be required based upon his monthly net base salary after
all applicable withholding taxes and other deductions.
During June 1999, the Board of Directors approved an amendment
to Mr. Jensen's employment agreement to increase the number of shares of Common
Stock issuable to him upon the occurrence of a "USA Transaction from five
percent to eight percent.
22
<PAGE>
The Company has entered into a one-year employment agreement with Mr.
Herbert which expires on April 30, 2000. 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, 2000, 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, 2000, 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 or any Committee thereof.
In July 1993, the Company issued to each of Messrs. Kapourelos,
Sellers, and Van Alen fully vested options to purchase 10,000 shares of Common
Stock at an exercise price of $2.50 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 $2.50 to $1.50.
In March 1995, the Company issued to Mr. Smith fully vested options to
purchase 10,000 shares of Common Stock, to Mr. Sellers fully vested options to
purchase 5,500 shares of Common Stock, to Mr. Kapourelos fully vested options to
purchase 7,000 shares of Common Stock, and to Mr. Van Alen fully vested options
to purchase 2,500 shares of Common Stock. The exercise price of these options is
$2.50 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 $2.50 to $1.50.
23
<PAGE>
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: Peter G. Kapourelos - 10,000 options;
William W. Sellers - 10,000 options; Keith L. Sterling - 10,000 options; and
William L. Van Alen, Jr. - 10,000 options.
In April 1998, the Company reduced from $2.50 to $1.50 the exercise
price of the following options to purchase Common Stock issued to the following
Directors of the Company: Peter G. Kapourelos - 17,000 options; William W.
Sellers - 15,500 options; William L. Van Alen, Jr. - 12,500 options; and Henry
B. duPont Smith - 10,000 options.
In November 1998, all of the Common Stock underlying the options held
by all Directors was registered by the Company under the Act for resale by the
holder thereof. Such registration was at the Company's cost and expense.
During June and July 1999, the Company granted 10,000 options to each
of the seven Directors who were not executive officers of the Company. Each
option is exercisable at $2.00 per share at any time for five years following
the vesting thereof.
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 repricing of stock
options, the exercise prices of all these fully vested options were below the
fair market value on the date or 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.
Executive Stock Options
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. The Company agreed to permanently reduce the
exercise price of Mr. Sterling's options to purchase 45,000 shares of Common
Stock to $1.00 per share from $2.50 per share and $4.50 per share, and
accelerated the vesting of 2,500 options to April 1998. Mr. Sterling agreed to
act as a consultant through June 30, 1998.
In April 1998, the Company issued to each of Messrs. Herbert, Kolls and
Maxwell options to purchase up to 5,000 shares of Common Stock at $4.50 per
share. The options become vested over a one-year period at the rate of 1,200 per
quarter and must be exercised within five years of vesting.
24
<PAGE>
In April 1998, the Company permanently reduced the exercise price of
the following options to purchase Common Stock issued to the following
executives: Haven Brock Kolls, Jr. - 10,000 options from $2.50 to $1.50; Stephen
P. Herbert - 10,000 options from $4.50 to $1.50; and Leland P. Maxwell - 10,000
options from $4.50 to $1.50.
In June 1999, the Company granted an aggregate of 470,000 options to
the executive officers as follows: Mr. Jensen - 180,000 options; Mr. Herbert -
110,000; Mr. Kolls - 100,000 options; Mr. Maxwell - 40,000 options; Mr. Lawlor -
20,000 options; Mr. Donahue - 20,000 options. All of Mr. Jensen's options became
vested immediately. All of the other executive officers' options would vest as
follows: one-third immediately; one-third on June 17, 2000, and one-third on
June 17, 2001. Each option is exercisable at $2.00 per share at any time for
five years following vesting thereof.
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 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.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Common Stock
The following table sets forth 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.
25
<PAGE>
Number of Shares
Name and Address of Common Stock Percent
of Beneficial Owner Beneficially Owned(1) of Class(2)
------------------- --------------------- -----------
George R. Jensen, Jr. 460,000 shares(3) 4.93%
16 Marlborough Road
Newtown Square, Pennsylvania 19073
Stephen P. Herbert 97,717 shares(4) 1.05%
536 West Beach Tree Lane
Strafford, Pennsylvania 19087
Haven Brock Kolls, Jr. 93,183 shares(5) 1.00%
52 Norwood House Road
Downingtown, PA 19335
Leland P. Maxwell 38,383 shares(6) *
129 Windham Drive
Langhorne, Pennsylvania 19047
Edwin R. Boynton 55,500 shares(7) *
104 Leighton Drive
Bryn Mawr, Pennsylvania 19010
Peter G. Kapourelos 41,300 shares(8) *
1515 Richard Drive
West Chester, Pennsylvania 19380
Steven Katz 5,000 shares(9) *
20 Rebel Run Drive
East Brunswick, New Jersey 08816
Douglas M. Lurio 34,533 shares(10) *
1760 Market Street, Suite 1300
Philadelphia, Pennsylvania 19103
William W. Sellers 166,075 shares(11) 1.78%
394 East Church Road
King of Prussia, Pennsylvania 19406
Henry B. duPont Smith 50,000 shares(12) *
350 Mill Bank Road
Bryn Mawr, Pennsylvania 19010
William L. Van Alen, Jr. 32,500 shares(13) *
Cornerstone Entertainment, Inc.
P.O. Box 727
Edgemont, Pennsylvania 19028
All Directors and Executive Officers
As a Group (11 persons) 1,074,190 shares(14) 11.50%
- ---------
*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, 1999, are deemed to be beneficially owned for purposes hereof.
26
<PAGE>
(2) On June 30,1999 there were 6,191,097 shares of Common Stock and 640,577
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 640,577 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, 1999 (or within
60-days of June 30, 1999) have been converted into 730,507 shares of Common
Stock. Of the 928,840 options or purchase rights to acquire Common Stock issued
as of June 30, 1999, only 730,507 are vested (or become vested within 60-days),
and are included in this table. For purposes of computing such percentages it
has also been assumed that all of the remaining 1995 Warrants have been
exercised for 67,300 shares of Common Stock, all of the remaining 1996 Warrants
have been exercised for 86,800 shares of Common Stock, that all of the 1996-B
Warrants have been exercised for 4,000 shares of Common Stock, that all of the
1997 Warrants have been exercised for 1,500 shares of Common Stock, that all of
the Warrants issued to affiliates and/or consultants to GEM Advisors, Inc. have
been exercised for 110,000 shares of Common Stock, that all of the 1998-A
Warrants have been exercised for 4,000 shares of Common Stock, that all of the
1998-B Warrants have been exercised for 5,000 shares of Common Stock, and all of
the accrued and unpaid dividends on the Preferred Stock as of June 30, 1999 have
been converted, into 332,844 shares of Common Stock. It has also been assumed
that all 933,600 of the 1999-A Warrants have been exercised and converted into
933,600 shares of Common Stock. Therefore, for purposes of computing the
percentages under this table, there are 9,107,225 shares of Common Stock issued
and outstanding.
(3) Includes 200,000 shares of Common Stock held by Mr. Jensen with his children
as joint tenants with right of survivorship, 180,000 shares of Common Stock
issuable upon the exercise of options, and 40,000 shares of Common Stock
issuable upon the exercise of the 1999-A Warrants. Does not include the right
granted to Mr. Jensen under his Employment Agreement to receive eight percent
(8%) of the issued and outstanding Common Stock upon the occurrence of a USA
Transaction (as defined herein). See "Executive Employment Agreements".
(4) Includes 91,666 shares of Common Stock issuable to Mr. Herbert upon the
exercise of options, 2,000 shares issuable to his spouse upon the exercise of
1999-A Warrants, and 4,000 shares of Common Stock owned by his spouse.
(5) Includes 73,333 shares of Common Stock issuable to Mr. Kolls upon the
exercise of options, 6,000 shares issuable to his spouse upon the exercise of
1999-A Warrants, and 12,000 shares of Common Stock owned by his spouse.
(6) Includes 38,333 shares of Common Stock issuable to Mr. Maxwell upon the
exercise of options.
(7) Includes 5,500 shares of Common Stock issuable upon conversion of the 5,500
shares of Series A Preferred Stock. Includes 5,000 vested shares of Common Stock
issuable upon exercise of options. Includes 10,000 shares of Common Stock
issuable upon exercise of the 1999-A Warrants. Does not include any shares of
Common Stock issuable upon conversion of any accrued and unpaid dividends in the
Series A Preferred Stock. Mr. Boynton was appointed a Director of the Company by
the Board of Directors on July 30, 1999.
(8) Includes 1,000 shares of Common Stock issuable upon the conversion of 1,000
shares of Preferred Stock beneficially owned by Mr. Kapourelos. Includes 3,000
shares of Common Stock held on the date hereof by Mr. Kapourelos with his spouse
as joint tenants with right of survivorship. Includes 27,000 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.
(9) Includes 5,000 shares of Common Stock issuable upon exercise of options.
(10) Includes 23,533 shares of Common Stock held jointly with Mr. Lurio's
spouse, 5,000 shares of Common Stock issuable upon exercise of options and 6,000
shares issuable upon exercise of 1999-A Warrants.
(11) Includes 17,245 shares of Common Stock owned by the Sellers Pension Plan of
which Mr. Sellers is a trustee, 4,651 shares of Common Stock owned by Sellers
Process Equipment Company of which he is a Director, and 9,929 shares of Common
Stock owned by Mr. Seller's wife. Includes 25,500 shares of Common Stock
issuable upon exercise of options and 14,000 shares issuable upon exercise of
1999-A Warrants.
27
<PAGE>
(12) Includes 12,000 shares of Common Stock issuable upon conversion of the
12,000 shares of Preferred Stock beneficially owned by Mr. Smith. Includes
20,000 shares of Common Stock issuable upon exercise of options. Includes 8,000
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.
(13) Includes 22,500 shares of Common Stock issuable to Mr. Van Alen upon
exercise of options.
(14) Includes all shares of Common Stock described in footnotes (2) through (13)
above.
Preferred Stock
The following table sets forth, as of June 30, 1999 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)
- ------------------- ------------------ -----------
Edwin R. Boynton
104 Leighton Avenue
Bryn Mawr, Pennsylvania 19010 5,500 *
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 (11 persons) 18,500 2.9%
- --------------
*Less than one percent (1%)
(1) There were 640,577 shares of Preferred Stock issued and outstanding as of
June 30, 1999.
(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.
28
<PAGE>
Item 12. Certain Relationships and Related Transactions
At June 30, 1999 and 1998, approximately $84,000 and $26,000
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,
1999 and June 30, 1998, the Company incurred approximately $381,000 and $340,000
respectively for these services.
In November 1997, Mr. Jensen canceled 436,500 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 5,000
shares of Common Stock at $4.50 per share. The options vest at the rate of 1,250
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 - 5,000 options; Peter G.
Kapourelos - 10,000 options; William W. Sellers - 10,000 options; William L. Van
Alen, Jr. - 10,000 options; and Keith L. Sterling - 10,000 options.
In March 1998, the Company extended the expiration date of all the
purchase rights to acquire 15,730 shares of Common Stock at $10.00 per share
from June 30, 1998 to the close of business June 30, 2000.
In April 1998, the Company permanently reduced from $2.50 to $1.50 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 - 17,000 options; William W. Sellers - 15,500 options; William L. Van
Alen, Jr. - 12,500 options; Henry B. duPont Smith - 10,000 options; and Haven
Brock Kolls, Jr. - 10,000 options.
In April, 1998, the Company permanently reduced the exercise price of
5,000 of the 10,000 options to purchase shares of Common Stock of the Company
owned by Michael Lawlor, an officer of the Company, from $4.50 per share to $.50
per share and the exercise price of the remaining 5,000 options was permanently
reduced from $4.50 to $1.50 per share. The reduced exercise price of the 10,000
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 permanently reduced from $4.50 to $1.50 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 - 10,000 options; Haven Brock Kolls, Jr. - 10,000 options; and
Stephen Herbert - 10,000 options.
29
<PAGE>
In April 1998, the Company authorized the permanent reduction in the
exercise price of the options to purchase 20,000 shares of Common Stock of the
company owned by Adele Hepburn, an employee of the company, from $2.50 to $1.50.
In April 1998, the Company authorized a reduction in the exercise price
of 15,730 purchase rights from $10.00 per share to $2.50 per share through June
30, 1998. At that time the price reverted back to $10.00 per share.
In April 1998, the Company authorized a temporary reduction in the
exercise price of all of the options to purchase up to 12,100 shares of Common
Stock of the Company owned by Edward J. Sullivan, a former officer and employee
of the Company, to $1.50 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 $4.50
to $1.50 in the exercise price of 10,000 options to purchase shares of Common
Stock owned by Joseph Donahue. Also in April 1998 the Company authorized a
permanent reduction from $4.50 to $2.00 in the exercise price of 7,500 options
to purchase shares of Common Stock owned by Phillip Harvey.
All of the above reductions to the exercise price of $.50, $1.00,
$1.50, $2.00 or $2.50 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.
In June and July 1999, the Company issued options to purchase an
aggregate of 470,000 shares of Common Stock to its executive officers and an
aggregate of 70,000 shares of Common Stock to its directors who were not
executive officers. Each option is exercisable at $2.00 per share of Common
Stock. See "Management - Director Compensation and Stock Options" and "Executive
Stock Options".
In July 1999, the Company extended the expiration dates until June 30,
2001 of the options to acquire Common Stock held by the following directors,
officers, and employees: Adele Hepburn - 77,000 options; H. Brock Kolls - 20,000
options; Henry duPont Smith - 10,000 options; William Sellers - 15,500 options;
Peter Kapourelos - 17,000 otions; and William Van Alen - 12,500 options. All of
the foregoing options would have expired in the first two calendar quarters of
the year 2000 or the first calendar quarter of year 2001.
During the fiscal year ended June 30, 1999, the Company paid
Lurio & Associates, P.C., of which Mr. Lurio is President, professional fees of
approximately $155,000 for legal services rendered to the Company by such law
firm.
In August 1999, the Company issued to Stephen P. Herbert, President of
the Company, an aggregate of 25,000 shares of Common Stock. Such Common Stock
was issued in exchange for services rendered or to be rendered to the Company by
Mr. Herbert. The shares of Common Stock were valued at $2.00 per share, the
closing bid price on the date of the grant. The Company has registered these
shares under the Act.
In August 1999, the Company agreed to issue to Leland P. Maxwell, Chief
Financial Officer of the Company, an aggregate of 10,500 shares of Common Stock.
Such Common Stock was issued in exchange for services rendered or to be rendered
to the Company by Mr. Maxwell. The shares of Common Stock were valued at $2.00
per share, the closing bid price on the date of the grant. The Company has
agreed to register these shares under the Act.
30
<PAGE>
In August 1999, the Company agreed issued to Michael Lawlor, Vice
President of the Company, an aggregate of 10,000 shares of Common Stock and
agreed to issue to him an aggregate of 15,000 additional shares. Such Common
Stock was or will be issued in exchange for services to be rendered to the
Company by Mr. Lawlor. The shares of Common Stock were valued at $2.00 per
share, the closing bid price on the date of the grant. The Company has
registered 10,000 of these shares under the Act and has agreed to register the
remaining 15,000 shares under the Act.
In August 1999, the Company also issued to Mr. Lawlor fully vested
options to acquire up to 20,000 shares of Common Stock at $2.00 per share. The
options are exercisable at any time within five years following issuance. The
Company has agreed to register under the Act the Common Stock underlying the
options for resale by Mr. Lawlor.
In August 1999, the Company agreed to issue to Joseph Donahue, Vice
President of the Company, an aggregate of 15,000 shares of Common Stock. Such
Common Stock will be issued in exchange for services to be rendered to the
Company by Mr. Donahue. The shares of Common Stock were valued at $2.00 per
share, the closing bid price on the date of the grant. The Company has agreed to
register these shares under the Act.
31
<PAGE>
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, 1999 and 1998 and statements of
operations, shareholders' equity, and cash flows, for the years ended
June 30, 1999 and 1998. 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. During the last quarter of the fiscal year ended June 30, 1999, the
Company did not file any reports on Form 8-K.
c. The Exhibits filed as part of, or incorporated by reference into this
Form 10-KSB are listed below.
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).
32
<PAGE>
3.1.8 Eighth Amendment to Articles of Incorporation of the
company filed on July 5, 1998 (Incorporated by reference
to Exhibit 3.1.8 to Form 10-KSB for the fiscal year ended
June 30, 1998).
3.1.9 Ninth Amendment to Articles of Incorporation of the
Company filed on October 1, 1998 (Incorporated by
reference to Exhibit 3.1.9 to Form SB-2 Registration
Statement No. 333-81591).
3.1.10 Tenth Amendment to Articles of Incorporation of the
Company filed on April 12, 1999 (Incorporated by
reference to Exhibit 3.1.10 to Form SB-2 Registration
Statement No. 333-81591).
3.1.11 Eleventh Amendment to Articles of Incorporation of the
Company filed on June 7, 1999 (Incorporated by reference
to Exhibit 3.1.11 to Form SB-2 Registration Statement No.
333-81591).
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
(Incorporated by reference to Exhibit 4.3 to Form SB-2
Registration Statement No. 333-09465).
4.4 Form of 1996 Warrant Certificate (Incorporated by
reference to Exhibit 4.4 to Form SB-2 Registration
Statement No. 333-09465).
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).
4.6 Form of 12% Senior Note (Incorporated by reference to
Exhibit 4.6 to Form SB-2 Registration Statement No.
333-81591).
4.7 Warrant Certificate of I. W. Miller Group, Inc.
(Incorporated by reference to Exhibit 4.7 to Form SB-2
Registration Statement No. 84513).
4.8 Warrant Certificate of Harmonic Research, Inc.
(Incorporated by reference to Exhibit 4.8 to Form SB-2
Registration Statement No. 333-84513).
33
<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).
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).
10.10 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).
34
<PAGE>
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).
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).
35
<PAGE>
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).
10.25 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 333-30853).
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).
36
<PAGE>
10.35 Phillip A. Harvey Common Stock Option Certificate dated
as of April 22, 1999 (Incorporated by reference to
Exhibit 10.35 to Form SB-2 Registration Statement No.
333-81591).
10.36 Consulting Agreement between Ronald Trahan and the
Company dated November 16, 1998 (incorporated by
Reference to Exhibit 28 to Registration Statement No.
333-67503 on Form S-8 filed on November 18, 1998).
10.37 Consulting Agreement between Mason Sexton and the Company
dated March 10, 1999 (incorporated by reference to
Exhibit 28 to Registration Statement No. 333-74807 on
Form S-8 filed on March 22, 1999).
10.38 Financial Public Relations Agreement between the Company
and I. W. Miller Group, Inc. dated August 1, 1999
(Incorporated by reference to Exhibit 10.38 to Form SB-2
Registration Statement No. 333-84513).
10.39 Consulting Agreement between Harmonic Research, Inc. and
the Company dated August 3, 1999 (Incorporated by
reference to Exhibit 10.39 to Form SB-2 Registration
Statement No. 333-84513).
**10.40 Agreement for Wholesale Financing and Addendum for
Scheduled Payment Plan with IBM Credit Corporation dated
May 6, 1999.
**27.1 Financial Data Schedule (Electronic Filing Only)
- --------------------------------------------------------------------------------
** -- Filed herewith.
d. Schedules filed herewith include: Financial Data Schedule
37
<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., Chairman
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, 1999
- -------------------------- Chief Executive Officer
George R. Jensen, Jr. (Principal Executive Officer)
/s/ Leland P. Maxwell Vice President and Chief Financial September 28, 1999
- -------------------------- Officer (Principal Accounting Officer)
Leland P. Maxwell
/s/ William W. Sellers Director September 28, 1999
- --------------------------
William W. Sellers
/s/ Peter G. Kapourelos Director September 28, 1999
- --------------------------
Peter G. Kapourelos
/s/ Stephen P. Herbert Director September 28, 1999
- --------------------------
Stephen P. Herbert
/s/ Douglas M. Lurio Director September 28, 1999
- --------------------------
Douglas M. Lurio
Director September --, 1999
- --------------------------
Steven Katz
Director September --, 1999
- --------------------------
Henry B. duPont Smith
Director September --, 1999
- --------------------------
Edwin R. Boynton
</TABLE>
<PAGE>
IBM Credit Corporation
AGREEMENT FOR WHOLESALE FINANCING
(SECURITY AGREEMENT)
This Agreement for Wholesale Financing - Security Agreement (as amended,
supplemented or otherwise modified from time to time, this "Agreement") dated
May 6, 1999 is by and between IBM Credit Corporation, a Delaware corporation,
with a place of business at 1500 RiverEdge Parkway Atlanta, Georgia 30328 ("IBM
Credit") and USA Technologies, Inc., a Pennsylvania corporation, ("Customer").
In the course of Customer's business, Customer acquires products and wants
IBM Credit to finance Customer's purchase of such products under the following
terms and conditions and IBM Credit is willing to provide such financing under
the following terms and conditions and contingent upon IBM Global Services
("IGS") providing Customer with product management and other services pursuant
to the IBM Statement of Work or Project Support Services #7J09617 executed by
Customer and IGS on 5/14/99.
1. Subject to the terms and conditions set forth in this Agreement to but not
including the date that is the earlier of (x) the date on which this Agreement
is terminated pursuant to paragraph 15 and (y) the date on which IBM Credit
terminates the credit line pursuant to paragraph 15, IBM Credit agrees to extend
to Customer a credit line of One Million Five Hundred Thousand Dollars
($1,500,000.00) ("Credit Line") pursuant to which IBM Credit may make to the
Customer from time to time in an aggregate amount at any one time outstanding
not to exceed the lesser (1) the Credit Line and (2) the value of the SPP
Collateral (as described in the Addendum to Agreement for Wholesale Financing -
Scheduled Payment Plan) (the "Addendum").
2. Notwithstanding any other term or provision of this Agreement IBM Credit may,
at any time and from time to time, in its sole discretion (x) temporarily
increase the amount of the Credit Line above the amount set forth in paragraph 1
of this Agreement and decrease the amount of the Credit Line back to the amount
of the Credit Line set forth in paragraph 1 of this Agreement, in each case upon
written notice to the Customer and (y) make Advances (as defined in the
Addendum) pursuant to this Agreement upon the request of Customer in an
aggregate amount at any one time outstanding in excess of the Credit Line.
Customer agrees that any decision to finance products will not be binding on IBM
Credit until such time as the funds are actually advanced by IBM Credit. IBM
Credit may combine all of its advances to make one debt owed by Customer.
3. In the course of Customer's operations, Customer intends to purchase from
persons approved in writing by IBM Credit for the purpose of this Agreement (the
"Authorized Suppliers") computer hardware and software products manufactured or
distributed by or bearing any trademark or trade name of such Authorized
Suppliers (the "Approved Inventory"). When IBM Credit advances funds, IBM Credit
may send Customer a Statement of Transaction or other statement. If IBM Credit
does, Customer will have acknowledged the debt to be an account stated and
Customer will have agreed to the terms set forth on such statement unless
Customer notifies IBM Credit in writing of any question or objection within
seven (7) days after such statement is mailed to Customer.
4. To secure payment of all of the Customer's current and future obligations to
IBM Credit whether under this Agreement, any guaranty that Customer now or
hereafter executes, or any other agreement between Customer and IBM Credit,
whether direct or contingent, Customer grants IBM Credit a security interest in
all of customer's inventory and equipment bearing the trademark or trade name of
Authorized Suppliers or manufactured or sold by Authorized Suppliers, and all
parts thereof, attachments, accessories, accessions, substitutions and/or
replacements for all of the foregoing, all rebates, discounts, credits, refunds,
and incentive payments relating to the foregoing and all accounts, contract
rights, chattel paper, instruments, reserves, documents of title and deposit
accounts whether now owned or hereafter acquired and all proceeds thereof. All
of the above assets are defined pursuant to the provisions of Article 9 of the
Uniform Commercial Code or the Commercial Transactions Act (the "CTA") and
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<PAGE>
hereinafter collectively referred to as the "Collateral" and are hereinafter
collectively referred to as the "Collateral". This security interest is also
granted to secure Customer's obligations to all of IBM Credit's affiliates.
Customer will hold all of the Collateral financed by IBM Credit, and the
proceeds thereof, in trust for IBM Credit and Customer will immediately account
for and remit directly to IBM Credit all such proceeds when payment is required
under the terms set forth in the billing statement or as otherwise provided in
this Agreement. IBM Credit may directly collect any amount owed to Customer from
Authorized Suppliers with respect to the Collateral and credit Customer with all
such sums received by IBM Credit from Authorized Suppliers. IBM Credit's title,
lien or security interest will not be impaired by any payments Customer makes to
the seller or anyone else or by Customer's failure or refusal to account to IBM
Credit for proceeds.
5. Customer's principal place of business is located at:
200 Plant Avenue Wayne, PA 19087 USA
- --------------------------------------------------------------------------------
(Number and Street) (County, State, Zip Code)
and Customer represents that its business is conducted as a _____ SOLE
PROPRIETORSHIP, ______ PARTNERSHIP, __X__ CORPORATION, _____ LIMITED LIABILITY
COMPANY (check applicable term). Customer will notify IBM Credit, in writing,
prior to any change in Customer's identity, name, form of ownership or
management, and of any change in Customer's principal place of business, or any
additions or discontinuances of other business locations. The Collateral will be
kept at Customer's principal place of business. Customer will notify IBM Credit,
in writing, thirty (30) days prior to moving any of the Collateral to any other
address. Customer and Customer's predecessors have done business during the last
six (6) months only under the following names:
________________________________________________________________________________
________________________________________________________________________________
This paragraph is not in any manner intended to limit the extent of IBM Credit's
security interest in the Collateral.
6. Customer represents and covenants that the Collateral is and will remain free
from all claims and liens superior to IBM Credit's unless otherwise agreed to by
IBM Credit in writing, and that Customer will defend the Collateral against all
other claims and demands. Customer will not sell, rent, lease, lend,
demonstrate, pledge, transfer or secrete any of the Collateral or use any of the
Collateral for any purpose other than exhibition and sale to buyers in the
ordinary course of business, without IBM Credit's prior written consent.
Customer will execute all documents IBM Credit may request to confirm or perfect
IBM Credit's security interest in the Collateral. Customer warrants and
represents that Customer is not in default in the payment of any principal,
interest or other charges relating to any indebtedness owed to any third party,
and no event has occurred, as of the effective date of this Agreement or as of
the date of any request by Customer to IBM Credit for financing in the future,
under the terms of any agreement, document, promissory note or other instrument,
which with or without the passage of time and/or the giving of notice
constitutes or would constitute an event of default thereunder. Customer will
promptly provide its year-end financial statement, in form and detail
satisfactory to IBM Credit, to IBM Credit within ninety (90) days after
Customer's fiscal year ends and, if requested by IBM Credit, Customer will also
promptly provide Customer's financial statement to IBM Credit after each fiscal
quarter within forty-five (45) days. Customer represents and covenants that each
financial statement that Customer submits to IBM Credit will be prepared
according to generally accepted accounting principles in effect in the United
States from time to time, and is and will be correct and will accurately
represent Customer's financial condition. Customer further acknowledges IBM
Credit's reliance on the truthfulness and accuracy of each financial statement
that Customer submits to IBM Credit in IBM Credit's extension of various
financial accommodations to Customer.
7. Customer will pay all taxes, license fees, assessments and charges on the
Collateral when due. Customer will immediately notify IBM Credit of any loss,
theft, or destruction of or damage to any of the Collateral. Customer will be
responsible for any loss, theft or destruction or damage of Collateral. Customer
will keep the Collateral insured for its full insurable value against loss or
damage under an "all risk" insurance policy. Customer will obtain insurance
under such terms and in such amounts acceptable to IBM Credit, from time to
time, with companies acceptable to IBM Credit, with a lender loss-payee or
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<PAGE>
mortgagee clause payable to IBM Credit to the extent of any loss to the
Collateral and containing a waiver of all defenses against Customer that is
acceptable to IBM Credit. Customer agrees to provide IBM Credit with written
evidence of the required insurance coverage and lender loss-payee or mortgagee
clause. Customer assigns to IBM Credit all amounts owed to Customer under any
insurance policy, and Customer directs any insurance company to make payment
directly to IBM Credit to be applied to the unpaid obligations owed IBM Credit.
Customer further grants IBM Credit an irrevocable power of attorney to endorse
any checks or drafts and sign and file any of the papers, forms and documents
required to initiate and settle any insurance claims with respect to the
Collateral. If Customer fails to pay any of the above-referenced costs, charges,
or insurance premiums, or if Customer fails to insure the Collateral, IBM Credit
may, but will not be obligated to, pay such costs, charges and insurance
premiums, and the amounts paid will be considered an additional obligation owed
by Customer to IBM Credit.
8. IBM Credit has the right to enter upon Customer's premises from time to time,
as IBM Credit in its sole discretion may determine for IBM Credit's sole
benefit, and all without any advance notice to Customer, to: examine the
Collateral; appraise it as security; verify its condition and non-use; verify
that all Collateral have been properly accounted for; verify that Customer has
complied with all terms and provisions of this Agreement; and assess, examine,
and make copies of Customer's books and records. Any collection by IBM Credit of
any amounts Customer owes at or during IBM Credit's examination of the
Collateral does not relieve customer of its continuing obligation to pay
Customer's obligations owed to IBM Credit in accordance with such terms.
9. Customer agrees to immediately pay IBM Credit the full amount of the
principal balance owed IBM Credit on each item of Approved Inventory financed by
IBM Credit at the time such Approved Inventory is sold, lost, stolen, destroyed,
or damaged, whichever occurs first, unless IBM Credit has agreed in writing to
provide financing to Customer on other terms. Customer also agrees to provide
IBM Credit, upon IBM Credit's request, an inventory report which describes all
the Approved Inventory in Customer's possession (excluding any Approved
Inventory financed by IBM Credit under the Demonstration and Training Equipment
Financing Option). Regardless of the repayment terms set forth in any billing
statement, if IBM Credit determines in its reasonable and sole discretion, after
conducting an inspection of all of Customer's inventory, that the current
outstanding obligations owed by Customer to IBM Credit exceeds the value of the
SPP Collateral, Customer agrees to immediately pay to IBM Credit an amount equal
to the difference between such outstanding obligations and the value of the SPP
Collateral. Customer will make all payments to IBM Credit according to the remit
to instructions in the billing statement. Any checks or other instruments
delivered to IBM Credit to be applied against Customer's outstanding obligations
will constitute conditional payment until the funds represented by such
instruments are actually received by IBM Credit. IBM Credit may apply payments
to reduce finance charges first and then principal, irrespective of Customer's
instructions. Further, IBM Credit may apply principal payments to the oldest
(earliest) invoice for the Approved Inventory financed by IBM Credit, or to such
Approved Inventory which is sold, lost, stolen, destroyed, damaged, or otherwise
disposed of. If Customer signs any instrument for any outstanding obligations,
it will be evidence of Customer's obligation to pay and will not be payment. Any
discount, rebate, bonus, or credit for Approved Inventory granted to Customer by
any Authorized Supplier will not, in any way, reduce the obligations Customer
owes IBM Credit, until IBM Credit has received payment in good funds.
10. Customer will pay IBM Credit finance charges as set forth in the Schedule of
SPP Definitions & Charges attached hereto and as may be agreed to between
Customer and IBM Credit from time to time. The period of any financing will
begin on the invoice date for the Approved Inventory whether or not IBM Credit
advances payment on such date. This period will be included in the calculation
of the annual percentage rate of the finance charges. Such finance charges may
be applied by IBM Credit to cover any amounts expended for IBM Credit's:
appraisal and examination of the Collateral; maintenance of facilities for
payment; assistance in support of Customer's retail sales; IBM Credit's
commitments to Authorized Suppliers to finance shipments of Approved Inventory
to Customer; recording and filing fees; expenses incurred in obtaining
additional collateral or security; and any costs and expenses incurred by IBM
Credit arising out of the financing IBM Credit extends to Customer. Customer
also agrees to pay IBM Credit additional charges which will include: late
payment fees at a per annum rate equal to the Prime Rate plus 6.5%; flat
charges; charges for receiving NSF checks from Customer; renewal charges; and
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<PAGE>
any other charges agreed to by Customer and IBM Credit from time to time. For
purposes of this Agreement, "Prime Rate" will mean the average of the rates of
interest announced by banks which IBM Credit uses in its normal course of
business of determining prime rate. Unless Customer hereafter otherwise agrees
in writing, the finance charges and additional charges agreed upon will be IBM
Credit's applicable finance charges and additional charges for the class of
Approved Inventory involved prevailing from time to time at IBM Credit's
principal place of business, but in no event greater than the highest rate from
time to time permitted by applicable law. If it is determined that amounts
received from Customer were in excess of such highest rate, then the amount
representing such excess will be considered reductions to the outstanding
principal of IBM Credit's advances to Customer. IBM Credit will send Customer,
at monthly or other intervals, a statement of all charges due on Customer's
account with IBM Credit. Customer will have acknowledged the charges due, as
indicated on the statement, to be an account stated, unless Customer objects in
writing to IBM Credit within seven (7) days after such statement is mailed to
Customer. This statement may be adjusted by IBM Credit at any time to conform to
applicable law and this Agreement. IBM Credit shall calculate any free financing
period utilizing a methodology that is consistent with the methodologies used
for similarly situated customers of IBM Credit. The Customer understands that
IBM Credit may not offer, may change or may cease to offer a free financing
period for the Customer's purchases of Approved Inventory. If any Authorized
Supplier fails to provide payment of a finance charge for Customer, as agreed,
Customer will be responsible for and pay to IBM Credit all financing charges
billed to Customer's account.
11. Any of the following events will constitute an event of default by Customer
under this Agreement: Customer breaches any of the terms, warranties or
representations contained in this Agreement or in any other agreements between
Customer and IBM Credit or between Customer and any of IBM Credit's affiliates;
any guarantor of Customer's obligations to IBM Credit under this Agreement or
any other agreements breaches any of the terms, warranties or representations
contained in such guaranty or other agreements between such guarantor and IBM
Credit; any representation, statement, report or certificate made or delivered
by Customer or any of Customer's owners, representatives, employees or agents or
by any guarantor to IBM Credit is not true and correct; Customer fails to pay
any of the liabilities or obligations owned to IBM Credit or any of IBM Credit's
affiliates when due and payable under this Agreement or under any other
agreements between Customer and IBM Credit or between Customer and any of IBM
Credit's affiliates; Customer abandons the Collateral or any part thereof;
Customer or any guarantor becomes in default in the payment of any indebtedness
owed to any third party; a judgment issues on any money demand against Customer
or any guarantor; an attachment, sale or seizure is issued against Customer or
any of the Collateral; any part of the Collateral is seized or taken in
execution; the death of the undersigned if the business is operated as a sole
proprietorship, or the death of a partner if the business is operated as a
partnership, or the death of any guarantor; Customer ceases or suspends
Customer's business; Customer or any guarantor makes a general assignment for
the benefit of creditors; Customer or any guarantor becomes insolvent or
voluntarily or involuntarily becomes subject to the Federal Bankruptcy Code,
state insolvency laws or any act for the benefit of creditors; any receiver is
appointed for any of Customer's or any guarantor's assets, or any guaranty
pertaining to Customer's obligations to IBM Credit is terminated for any reason
whatsoever; any guarantor disclaims any obligations under any guaranty; Customer
or any guarantor misrepresents its respective financial condition or
organizational structure; or IBM Credit determines, in its sole discretion, that
the Collateral, any other collateral given to IBM Credit to secure Customer's
obligations to IBM Credit, any guarantor's guaranty, or Customer's or any
guarantor's net worth has decreased in value, and Customer has been unable,
within the time period prescribed by IBM Credit, to either provide IBM Credit
with additional collateral in a form and substance satisfactory to IBM Credit or
reduce Customer's total obligations by an amount sufficient to satisfy IBM
Credit. Following an event of a default:
(a) IBM Credit may, at any time at IBM Credit's election, without notice or
demand to Customer do any one or more of the following: declare all or any part
of the obligations Customer owes IBM Credit immediately due and payable,
together with all court costs and all costs and expenses of IBM Credit's
repossession and collection activity, including, but not limited to, all
attorney's fees; exercise any or all rights of a secured party under applicable
law; cease making any further financial accommodations or extending any
additional credit to Customer; and/or exercise any or all rights available at
law or in equity. All of IBM Credit's rights and remedies are cumulative.
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<PAGE>
(b) Customer will segregate, hold and keep the Collateral in trust, in good
order and repair, only for IBM Credit's benefit, and Customer will not exhibit,
transfer, sell, further encumber, otherwise dispose of or use for any other
purpose whatsoever any of the Collateral.
(c) Upon IBM Credit's oral or written demand, Customer will immediately
deliver the Collateral to IBM Credit, in good order and repair, at a place
specified by IBM Credit, together with all related documents; or IBM Credit may,
in its sole discretion and without notice or demand to Customer, take immediate
possession of the Collateral, together with all related documents.
(d) Customer waives and releases: any claims and causes of action which
Customer may now or ever have against IBM Credit as a direct or indirect result
of any possession, repossession, collection or sale by IBM Credit of any of the
Collateral and the benefit of all valuation, appraisal and exemption laws. If
IBM Credit seeks to take possession of any of the Collateral by court process,
Customer irrevocably waives any notice, bonds, surety and security relating
thereto required by any statute, court rule or otherwise.
(e) Customer appoints IBM Credit or any person IBM Credit may delegate as
Customer's duly authorized Attorney-In-Fact to do, in IBM Credit's sole
discretion, any of the following in the event of a default: endorse Customer's
name on any notes, checks, drafts or other forms of exchange constituting
Collateral or received as payment on any Collateral for deposit in IBM Credit's
account; sell, assign, transfer, negotiate, demand, collect, receive, settle,
extend or renew any amounts due on any of the Collateral; and exercise any
rights Customer has in the Collateral.
If either party brings any action or asserts any claim against the other party
which arises out of this Agreement, any other agreement or any of the business
dealings between IBM Credit and Customer, the non-prevailing party agrees to pay
the prevailing party's costs and expenses including, but not limited to, all
attorney's fees. If IBM Credit fails to exercise any of IBM Credit's rights or
remedies under this Agreement, such failure will in no way or manner waive any
of IBM Credit's rights or remedies as to any past, current or future default.
12. Customer agrees that if IBM Credit conducts a private sale of any Collateral
by soliciting bids from ten (10) or more other dealers or distributors in the
type of Collateral repossessed by or returned to IBM Credit hereunder, any sale
by IBM Credit of such property will be deemed to be a commercially reasonable
disposition under the Uniform Commercial Code. IBM Credit agrees that
commercially reasonable notice of any public or private sale will be deemed
given to Customer if IBM Credit sends Customer a notice of sale at least seven
(7) days prior to the date of any public sale or the time after which a private
sale will be made. If IBM Credit disposes of any such Collateral other than as
herein contemplated, the commercial reasonableness of such sale will be
determined in accordance with the provisions of the Uniform Commercial Code as
adopted by the state whose laws govern this Agreement.
Customer agrees that IBM Credit does not warrant the Approved Inventory.
Customer will pay IBM Credit in full even if the Approved Inventory is defective
or fails to conform to any warranties extended by any third party. Customer's
obligations to IBM Credit will not be affected by any dispute Customer may have
with any third party. Customer will not assert against IBM Credit any claim or
defense Customer may have against any third party. Customer will indemnify and
hold IBM Credit harmless against any claims or defenses asserted by any buyer of
the Approved Inventory by reason of: the condition of any Approved Inventory;
any representations made about the Approved Inventory; or for any and all other
reasons whatsoever.
13. Customer grants to IBM Credit a power of attorney authorizing any of IBM
Credit's representatives to: execute or endorse on Customer's behalf any
documents, financing statements and instruments evidencing Customer's
obligations to IBM Credit; supply any omitted information and correct errors in
any documents or other instruments executed by or for Customer; do any and every
act which Customer is obligated to perform under this Agreement; and do any
other things necessary to preserve and protect the Collateral and IBM Credit's
security interest in the Collateral. Customer further authorizes IBM Credit to
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provide to any third party any credit, financial or other information about
Customer that is in IBM Credit's possession.
14. Each party may electronically transmit to or receive from the other party
certain documents specified in the E-Business Schedule A attached hereto
("E-Documents") via the Internet or electronic data interchange ("EDI"). Any
transmission of data which is not an E-Document shall have no force or effect
between the parties. EDI transmissions may be transmitted directly or through
any third party service provider ("Provider") with which either party may
contract. Each party will be liable for the acts or omissions of its Provider
while handling E-Documents for such party, provided, that if both parties use
the same provider, the originating party will be liable for the acts or
omissions of such Provider as to such E-Document. Some information to be made
available to Customer will be specific to Customer and will require Customer to
register with IBM Credit before access is provided. After IBM Credit has
approved the registration submitted by Customer, IBM Credit will provide an ID
and password(s) to an individual designated by Customer ("Customer Recipient").
Customer accepts responsibility for the designated individual's distribution of
the ID and password(s) within its organization and Customer will take reasonable
measures to ensure that passwords are not shared or disclosed to unauthorized
individuals. Customer will conduct an annual review of all IDs and passwords to
ensure that they are accurate and properly authorized. IBM CREDIT MAY CHANGE OR
DISCONTINUE USE OF AN ID OR PASSWORD AT ITS DISCRETION AT ANY TIME. E-Documents
will not be deemed to have been properly received, and no E-Document will give
rise to any obligation, until accessible to the receiving party at such party's
receipt computer at the address specified herein. Upon proper receipt of an
E-Document, the receiving party will promptly transmit a functional
acknowledgment in return. A functional acknowledgment will constitute conclusive
evidence that an E-Document has been properly received. If any transmitted
E-Document is received in an unintelligible or garbled form, the receiving party
will promptly notify the originating party in a reasonable manner. In the
absence of such a notice, the originating party's records of the contents of
such E-Document will control.
Each party will use those security procedures which are reasonably sufficient to
ensure that all transmissions to E-Documents are authorized and to protect its
business records and data from improper access. Any E-Document received pursuant
to this paragraph 14 will have the same effect as if the contents of the
E-Document had been sent in paper rather than electronic form. The conduct of
the parties pursuant to this paragraph 14 will, for all legal purposes, evidence
a course of dealing and a course of performance accepted by the parties. The
parties agree not to contest the validity or enforceability of E-Documents under
the provisions of any applicable law relating to whether certain agreements are
to be in writing or signed by the party to be bound thereby. The parties agree,
as to any E-Document accompanied by Customer's ID, that IBM Credit can
reasonably rely on the fact that such E-Document is properly authorized by
Customer. E-Documents, if introduced as evidence on paper in any judicial,
arbitration, mediation or administrative proceedings, will be admissible as
between the parties to the same extent and under the same conditions as other
business records originated and maintained in documentary form. Neither party
will contest the admissibility of copies of E-Documents under either the
business records exception to the hearsay rule or the best evidence rule on the
basis that the E-Documents were not originated or maintained in documentary
form.
Neither party will be liable to the other for any special, incidental, exemplary
or consequential damages arising from or as a result of any delay, omission or
error in the electronic transmission or receipt of any E-Document pursuant to
this paragraph 14, even if either party has been advised of the possibility of
such damages. In the event Customer requests IBM Credit to effect a withdrawal
or debit of funds from an account of Customer, then in no event will IBM Credit
be liable for any amount in excess of any amount incorrectly debited, except in
the event of IBM Credit's gross negligence or willful misconduct. No party will
be liable for any failure to perform its obligations pursuant to this paragraph
14 in connection with any E-Document, where such failure results from any act of
God or other cause beyond such party's reasonable control (including, without
limitation, any mechanical, electronic or communications failure) which prevents
such party from transmitting or receiving E-Documents.
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CUSTOMER RECIPIENT for Internet transmissions:
(PLEASE PRINT)
Name of Customer's Designated Central Contact Authorized to Receive IDs and
Passwords:
- ------------------------------------------------
e-mail Address: [email protected]
--------------------------------
Phone Number: 610-989-0340
----------------------------------
15. Time is of the essence in this Agreement. This Agreement will be effective
from the date of its acceptance at IBM Credit's office. Customer acknowledges
receipt of a true copy and waives notice of IBM Credit's acceptance of it. If
IBM Credit advances funds under this Agreement, IBM Credit will have accepted
it. This Agreement will remain in force until one of the parties gives notice to
the other that it is terminated. If Customer terminates this Agreement, IBM
Credit may declare all or any part of the obligations Customer owes IBM Credit
due and payable immediately. If this Agreement is terminated, Customer will not
be relieved from any obligations to IBM Credit arising out of IBM Credit's
advances or commitments made before the effective date of termination. IBM
Credit's rights under this Agreement and IBM Credit's security interest in
present and future Collateral will remain valid and enforceable until all
Customer's obligations to IBM Credit are paid in full. This Agreement shall be
binding upon and inure to the benefit of IBM Credit and the Customer and their
respective successors and assigns; provided, that the Customer shall have no
right to assign this Agreement without the prior written consent of IBM Credit.
This Agreement will protect and bind IBM Credit's and Customer's respective
heirs, representatives, successors and assigns. It can be varied only by a
document signed by IBM Credit's and Customer's authorized representatives. If
any provision of this Agreement or its application is invalid or unenforceable,
the remainder of this Agreement will not be impaired or affected and will remain
binding and enforceable. This Agreement is executed with the authority of
Customer's Board of Directors, and with shareholder approval, if required by the
law, if Customer is a corporation or if Customer is a limited liability company,
with the authority of authorized members. All notices IBM Credit sends to
Customer will be sufficiently given if mailed or delivered to Customer at its
address shown in paragraph 5.
16. The laws of the State of New York will govern this Agreement. Customer
agrees that venue for any lawsuit will be in the State or Federal Court within
the county, parish, or district where IBM Credit's office, which provides the
financial accommodations, is located. Customer hereby waives any right to change
the venue of any action.
17. If Customer has previously executed any security agreements relating to the
Collateral with IBM Credit, Customer agrees that this Agreement is intended only
to amend and supplement such written agreements, and will not be deemed to be a
novation or termination of such written agreements. In the event the terms of
this Agreement conflict with the terms of any prior security agreement that
Customer previously executed with IBM Credit, the terms of this Agreement will
control in determining the agreement between Customer and IBM Credit.
18. CUSTOMER WAIVES ALL EXEMPTIONS AND HOMESTEAD LAWS TO THE MAXIMUM EXTENT
PERMITTED BY LAW. CUSTOMER WAIVES ANY STATUTORY RIGHT TO NOTICE OR HEARING PRIOR
TO IBM CREDIT'S ATTACHMENT, REPOSSESSION OR SEIZURE OF THE GOODS. CUSTOMER
FURTHER WAIVES ANY AND ALL RIGHTS OF SETOFF CUSTOMER MAY HAVE AGAINST IBM
CREDIT. CUSTOMER AGREES THAT ANY PROCEEDING IN WHICH CUSTOMER, OR IBM CREDIT OR
ANY OF IBM CREDIT'S AFFILIATES, OR CUSTOMER's OR IBM CREDIT's ASSIGNS ARE
PARTIES, AS TO ALL MATTERS AND THINGS ARISING DIRECTLY OR INDIRECTLY OUT OF THIS
AGREEMENT, OR THE RELATIONS AMONG THE PARTIES LISTED IN THIS PARAGRAPH WILL BE
TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE WITHOUT A JURY. EACH PARTY
TO THIS AGREEMENT HEREBY WAIVES ANY RIGHT TO A JURY TRIAL IN ANY SUCH
PROCEEDING.
ATTEST:
Leland P. Maxwell USA Technologies, Inc.
- ---------------------------------- ----------------------------------------
Secretary Customer
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Print Name: Leland P. Maxwell By: /s/ George R. Jenson Jr.
------------------ -------------------------------------
Print Name: George R. Jenson Jr.
----------------------------
(CORPORATE SEAL) Title: Chairman/CEO
---------------------------------
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<PAGE>
E-BUSINESS SCHEDULE A ("SCHEDULE A")
CUSTOMER NAME: USA Technologies, Inc.
-----------------------------------------
EFFECTIVE DATE OF THIS SCHEDULE A:
-----------------------
E-DOCUMENTS AVAILABLE TO SUPPLIERS:
Invoices
Payment Report/Remittance Advisor
E-DOCUMENTS AVAILABLE TO CUSTOMER:
Invoices
Remittance Advisor
Transaction Approval
Billing Statement
Payment Planner
Auto Cash
Statements of Transaction
Common Dispute Form
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SECRETARY'S CERTIFICATE OF RESOLUTION
I certify that I am the Secretary and the official custodian of certain
records, including the certificate of incorporation, charter, by-laws and
minutes of the meeting of the Board of Directors of the corporation named below,
and that the following is a true, accurate statement.
"That Customer reviewed its intention to establish a credit facility
with IBM Credit Corporation ("IBM Credit") and the several officers, directors
and agents of this corporation, or any one or more of them, are hereby
authorized and empowered on behalf of this corporation: to obtain financing from
IBM Credit in such amounts and on such terms as such officers, directors or
agents deem proper; to enter into security and other agreements with IBM Credit
relating to the terms upon which financing may be obtained and security to be
furnished by this corporation therefor; from time to time to supplement or amend
any such agreements; and from time to time to pledge, assign, guaranty,
mortgage, grant security interest in and, otherwise transfer to IBM Credit as
collateral security for any obligations of this corporation to IBM Credit and
its affiliated companies, whenever and however arising, any assets of this
corporation, whether now owned or hereafter acquired; hereby ratifying,
approving and confirming all that any of said officers, directors or agents have
done or may do in the premises."
IN WITNESS WHEREOF, I have executed and affixed the seal of the
corporation on the date stated below.
Dated: May 6, 1999 Leland P. Maxwell
---------------------- -------------------------------------
Secretary
USA Technologies, Inc.
-------------------------------------
Corporate Name
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IBM Credit Corporation
ADDENDUM TO AGREEMENT FOR WHOLESALE FINANCING
(SCHEDULED PAYMENT PLAN)
This Addendum is hereby made to the Agreement for Wholesale Financing
(as supplemented by this Addendum and as amended, restated, supplemented or
otherwise modified from time to time, hereinafter referred to as the
"Agreement") executed on the 6th day of May, 1999, between IBM Credit
Corporation ("IBM Credit") AND USA Technologies, Inc. ("Customer").
1. The following provision is hereby incorporated into the Agreement as if
fully set forth therein:
SCHEDULED PAYMENT PLAN
IBM Credit may, from time to time at its discretion, extend financing
to Customer under this Agreement pursuant to the terms of the Scheduled Payment
Plan (hereinafter referred to as the "SPP") and its two optional plans; the
SPP/International Business Machines Corporation Plan ("SPP/IBM Plan") and the
SPP/IBM Extension Plan ("SPP/IBM-E Plan") each as described in the Schedule of
SPP Definitions & Charges (the "Schedule") attached hereto and incorporated
herein. The financing to be extended to Customer will be based on Approved
Inventory and Accounts, both as defined in the attached Schedule (Accounts and
Approved Inventory will hereinafter be referred to as "SPP Collateral"). SPP
financing will be provided to Customer by IBM Credit under this Agreement
pursuant to the following terms and conditions:
A. IBM Credit may in its sole discretion from time to time determine the
amount of financing which it elects to extend to Customer as set forth in
paragraph 1 of the Agreement;
B. Customer will pay to IBM Credit or cause IBM Credit to be paid by IBM,
as defined in the Schedule, all finance charges and fees each (as described in
the attached Schedule) which are due in connection with SPP (the "SPP Charges").
IBM Credit will notify Customer from time to time of the SPP Charges applicable
to financing extended to Customer under SPP by sending Customer a revised
Schedule. Customer agrees that IBM Credit may from time to time, upon sixty (60)
days written notice, increase or decrease the SPP Charges and/or eliminate or
add SPP Charges applicable to any financing IBM Credit extends to Customer under
SPP. If Customer requests financing from IBM Credit after the date Customer has
received any such revised Schedule such request will constitute Customer's
acceptance of and agreement to such new SPP Charges and such revised Schedule
will be incorporated into and made a part of this Agreement as of the effective
date specified on revised Schedule.
C. IBM Credit may, in its sole discretion, apply, in whole or in part,
the proceeds of any Collateral to any amount which customer owes to IBM Credit,
including any amounts Customer owes to IBM Credit under this Agreement, the SPP
or any other financing programs.
D. Customer will, as requested by IBM Credit from time to time, provide to
IBM Credit a collateral report ("SPP Collateral Report"), the requirements of
which will be set forth by IBM Credit from time to time, and which will include,
but not be limited to, a summary of Customer's Approved Inventory, Eligible
Accounts (as defined in paragraph G of this Addendum), total qualifying
collateral value, total outstanding indebtedness and any Shortfall Amount (as
hereinafter defined).
In addition, if requested by IBM Credit Customer will submit the following
reports which will be included as attachments to each SPP Collateral Report:
a) Accounts Aging Report which describes the amounts and aging of
Customer's accounts as of the date of the report;
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b) Inventory Report which describes all of the Approved Inventory in
Customer's possession as of the date of the report by quantity, type, model,
supplier's invoice price to Customer (net of applicable credits), and the total
number of each model times the invoice price of all Approved Inventory;
c) Accounts Payable Report which identifies the amounts and aging of
all of Customer's accounts payable; and
d) Additional SPP Collateral Report which identifies any other
collateral which may be required by IBM Credit.
On or prior to the date this Addendum is executed by IBM Credit, and
once each quarter thereafter, Customer will also submit to IBM Credit the name,
address and phone number of each of Customer's account debtor's primary
contacts for each account on the Accounts Aging Report.
E. Notwithstanding the scheduled repayment terms of the SPP, if the
current outstanding indebtedness (excluding the outstanding indebtedness owed to
IBM Credit pursuant to the terms of the Addendum to Agreement for Wholesale
Financing - Large Sale Financing Option) owed by Customer to IBM Credit exceeds
the sum of: (i) an amount equal to one hundred percent (100%) of the aggregate
invoice price to Customer (net of any applicable credits) of the Approved
Inventory in Customer's or IBM's invoice price to Customer (net of any
applicable credits) of the Approved Inventory in Customer's or IBM's
possession; plus, (ii) an amount equal to eighty percent (80%) of the sum of
Eligible Accounts; plus (iii) in IBM Credit's sole and absolute discretion, the
value which IBM Credit may place on any other collateral provided to IBM Credit
(such excess, the "Shortfall Amount"), Customer will immediately pay to IBM
Credit an amount equal to the Shortfall Amount.
F. IBM Credit will charge Customer and Customer agrees to pay a fee
("Shortfall Transaction Fee") for each occurrence of a Shortfall Amount unless
Customer has, within two business days of occurrence of such Shortfall Amount
(the "Shortfall Amount Due Date"), paid IBM Credit the amount of such Shortfall
Amount. Shortfall Transaction Fees are calculated by multiplying the Shortfall
Amount times 0.30%. In addition to the Shortfall Transaction Fee(s), for each
unpaid Shortfall Amount, there will be a charge equal to Prime Rate plus 6.50%
on the ADB beginning on the applicable Shortfall Amount Due Date to and
including the date IBM Credit receives payment thereof.
G. IBM Credit will have the sole right to determine which of Customer's
Accounts are eligible ("Eligible Accounts") for purposes of providing financing
hereunder and, without limiting IBM Credit's discretion in that regard, and
unless waived by IBM Credit, the following Accounts will be deemed ineligible:
a) Accounts which remain unpaid after ninety (90) days from the date
of invoice, provided, however, with respect to IBM Accounts, as defined in the
Schedule, such IBM Accounts may be unpaid up to one hundred twenty (120) days
from the date of invoice;
b) Accounts with respect to which the account debtor is a parent,
subsidiary or affiliate of Customer's company, or is related to Customer, or has
common shareholders, officers or directors with Customer;
c) Accounts with respect to which (i) the account debtor (other than
a federal government account debtor) is not a commercial or institutional entity
or (ii) account debtor is not a resident of the United States;
d) Accounts with respect to which Customer is or may become liable to
the account debtor thereof for goods sold or services rendered by such account
debtor to Customer;
e) Accounts which represent goods purchased for a personal, family or
household purpose;
f) Accounts which represent goods that have been used for
demonstration purposes or loaned by Customer to another party;
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g) Accounts which are progress payment accounts or contra accounts;
h) Accounts which represent goods that have been refused or returned
to Customer for any reason whatsoever;
i) Accounts with respect to which IBM Credit does not have a first
priority perfected security interest;
j) Accounts arising from the sale of Approved Inventory financed
pursuant to the terms of the Addendum to Agreement for Wholesale Financing -
Large Sale Financing Option or any of IBM Credit's other financing options or
plans; and
k) Any and all other Accounts which IBM Credit upon prior notice deems
in its reasonable discretion to be ineligible.
H. IBM Credit may, in its name or Customer's name, at any time and from
time to time verify with account debtors the validity, amount or any other
matter relating to any Accounts by mail, telephone or by other means as agreed
to by the parties.
I. Customer will provide its year-end financial statements to IBM Credit
no later than ninety (90) days after the close of the fiscal year and, if
requested by IBM Credit, Customer will promptly provide its financial statements
to IBM Credit after each fiscal quarter.
J. If requested by IBM Credit, Customer will obtain a subordination
agreement, in form and substance satisfactory to IBM Credit, from any of
Customer's creditors to provide IBM Credit a first priority security interest
in all of Customer's products and accounts to be used as SPP Collateral and all
proceeds thereof.
K. IBM Credit may, in its sole discretion, prior to or after a default,
notify account debtors, other than account debtors whose Accounts are IBM
Accounts, to make payments in respect to Customer's Accounts directly to IBM
Credit. Upon IBM Credit's request, Customer will execute and delivery such
further instruments and documents and take such further action as IBM Credit may
request to preserve or obtain the full benefits of IBM Credit's security
interest in the Collateral.
L. Customer represents and covenants that it has authorized IBM to pay
IBM Credit directly for Approved Inventory financed by IBM Credit sold to
account debtors whose Account are IBM Accounts. Customer acknowledges and agrees
that payments are received by IBM Credit from IBM are to be applied to Advances
(as hereinafter defined in the Schedule) owed by Customer to IBM Credit.
Customer agrees that IBM Credit may apply payments to reduce finance charges
first and then principal. Further, IBM Credit may apply such payments to the
oldest (earliest) invoice for Approved Inventory financed by IBM Credit.
M. Customer hereby irrevocably appoints IBM Credit, with full power of
substitution, as its true and lawful attorney-in-fact with full power, in good
faith and in compliance with commercially reasonable standards, in IBM Credit's
discretion, to: (a) sign Customer's name on any document or instrument that IBM
Credit deems necessary or appropriate to perfect and maintain perfected any
security interest or claim in the Collateral contemplated under the Agreement;
(b) endorse Customer's name upon any of the items of payment of proceeds and
deposit the same in IBM Credit's account for application to Customer's
obligations; and, with respect to clauses (c) through (n), upon the occurrence
and during the continuance of a default pursuant to the terms of the Agreement;
(c) demand payment, enforce payment and otherwise exercise all of Customer's
rights and remedies with respect to collection of any accounts; (d) settle,
adjust, compromise, extend or renew any accounts; (e) settle, adjust or
compromise any legal proceedings brought to collect any accounts; (f) sell or
assign any accounts upon such terms, for such amounts and at such time or times
as IBM Credit may deem advisable; (g) discharge and release any accounts; (h)
prepare, file and sign Customer's name on any proof of claim in bankruptcy, or
similar document against any account debtor; (i) prepare, file and sign
Customer's name on any notice of lien, claim of mechanics
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lien, assignment or satisfaction of lien or mechanics lien, or similar document
in connection with any accounts; (j) endorse Customer's name upon any chattel
paper, document, instrument, invoice, freight bill, bill of lading or similar
document or agreement relating to any SPP Collateral pertaining thereto; (k)
sign Customer's name to requests for verification of accounts and notices
thereof to account debtors; (l) sign Customer's name on any document or
instrument that IBM Credit may deem necessary or appropriate to enforce any and
all remedies IBM Credit may have under the Agreement, at law or otherwise; (m)
make, settle and adjust claims under any insurance policies with respect to the
SPP Collateral and endorse Customer's name on any check, draft, instrument or
other item of payment of the proceeds of such insurance policies with respect to
the SPP Collateral; and (n) take control in any manner of any item of payment
or proceeds and for such purpose to notify the postal authorities to change the
address for delivery of mail addressed to Customer to such address as IBM Credit
may request.
N. With respect to each of the Accounts used as SPP Collateral, Customer
warrants and represents to IBM Credit that: (a) the Accounts are genuine, in all
respects what they purport to be and are not evidenced by a judgment or
promissory note or similar instrument or agreement; (b) the Accounts represent
undisputed bona fide transactions completed in accordance with the terms and
conditions contained in the documents, contracts, agreements, papers and
writings giving rise to or related to the Accounts ("Documents"); (c) the goods
sold (or services rendered) which resulted in the creation of the Accounts have
been delivered or rendered to and accepted by the account debtor; (d) the
amounts owed with respect to the Accounts as shown on Customer's records are
absolutely owing to Customer and are not contingent for any reason; (e) there
are no setoffs, counterclaims or disputes existing or asserted with respect to
any of the Accounts, and Customer has not made any agreement with any account
debtor for any deduction or discount of any sums payable thereunder except
regular discounts allowed by Customer in the ordinary course of business for
prompt payment; (f) there are no facts, events or occurrences which in any way
impair the validity or enforcement of any of the Accounts or tend to reduce the
amount payable thereunder from the amount thereof as shown on Customer's
records; (g) all account debtors thereon have the ostensible authority to
contract; (h) none of the goods sold or transferred or the services furnished
giving rise to any of the Accounts are subject to any lien, claim, encumbrances
or security interest which will be superior to IBM Credit's security interest;
(i) there are no proceedings or actions known to Customer which are threatened
or pending against any account debtor of any of the Accounts and which might
result in any material adverse change in the account debtor's financial
condition; (j) Customer is the owner of all of the Accounts; (k) Customer has
good right, tile and authority to sell, assign and transfer all of the Accounts
to IBM Credit; and (l) IBM Credit has a perfected, first-priority security
interest in and to all of the Accounts, and all proceeds therefrom.
O. IBM Credit has the right and is hereby authorized to enter upon
Customer's premises from time to time, at IBM Credit's sole discretion, and all
without notice to Customer, to: examine and make copies of Customer's books,
records and files which in any way relate to the Accounts or Approved Inventory;
appraise the Accounts or Approved Inventory as security; verify that all of the
Accounts and Approved Inventory have been properly accounted for, and verify
that customer has complied with all terms and provisions of this Agreement.
2. Customer hereby expressly agrees to indemnify, defend and hold IBM
Credit harmless from and against any and all loss and/or liability whatsoever
relating, directly or indirectly to or arising out of the Agreement.
3. If there is a conflict between the terms of this Addendum and those of
the Agreement, the terms of this Addendum will prevail with respect to the
financing provided under the terms of the SPP. "Collateral" shall mean "Goods"
or "Collateral" as such terms may be defined in the Agreement.
4. This Addendum may be modified by IBM Credit upon written notice to
Customer. This Addendum will remain in force until one party gives written
notice to the other that it is terminated, provided however, that Customer's
obligations hereunder and IBM Credit's right hereunder will not be terminated
until all of the Customer's obligations have been satisfied in full.
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5. Except as herein provided, the other terms of the Agreement will remain
unchanged, and will continue to be in full force and effect.
6. IBM CREDIT SHALL NOT HAVE ANY LIABILITY WITH RESPECT TO ANY SPECIAL,
INDIRECT OR CONSEQUENTIAL DAMAGES SUFFERED BY CUSTOMER IN CONNECTION WITH THIS
AGREEMENT, ANY OTHER AGREEMENT OR ANY CLAIMS IN ANY MANNER RELATED THERETO, NOR
SHALL IBM CREDIT HAVE ANY LIABILITY TO CUSTOMER OR ANY OTHER PERSON FOR ANY
ACTION TAKEN OR OMITTED TO BE TAKEN BY IBM CREDIT OR THEM HEREUNDER, EXCEPT FOR
IBM CREDIT'S OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.
7. CUSTOMER AGREES THAT THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF
THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS (WITHOUT GIVING EFFECT TO CONFLICT
OF LAW PROVISIONS) GOVERNING CUSTOMER'S AGREEMENT FOR WHOLESALE FINANCING.
8. CUSTOMER AND IBM CREDIT HEREBY IRREVOCABLY WAIVES THE RIGHT TO TRIAL
BY JURY IN ANY ACTION OR PROCEEDING (INCLUDING ANY COUNTERCLAIM) OF ANY TYPE
IN WHICH CUSTOMER AND IBM CREDIT ARE PARTIES AS TO ALL MATTERS ARISING DIRECTLY
OR INDIRECTLY OUT OF THIS AGREEMENT OR ANY DOCUMENT, INSTRUMENT OR AGREEMENT
EXECUTED IN CONNECTION HEREWITH.
IN WITNESS WHEREOF, Customer has caused a duly authorized
representative to execute this Addendum on this 6th day of May, 1999.
--- -------------
USA Technologies, Inc.
By: /s/ George R. Jensen, Jr.
------------------------------------------
Print Name: George R. Jensen, Jr.
---------------------------------
Title: Chairman/CEO
--------------------------------------
ATTEST:
/s/ Leland P. Maxwell
- -----------------------------------
(Secretary)
IBM CREDIT CORPORATION
By: /s/ Gary Sanchez
------------------------------------------
Print Name: Gary Sanchez
---------------------------------
Title: Region Credit Manager
--------------------------------------
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SCHEDULE OF
SPP DEFINITIONS & CHARGES
The effective date of this Schedule of SPP Definitions & Charges is May 6, 1999
------------
Customer: USA Technologies, Inc.
----------------------------------------------------------------------
1.0 SPP Definitions
"Accounts" means all now existing and hereafter created Accounts arising from
the sale or licensing of inventory, software and/or performance of services by
Customer, including any interest, finance charges and other amounts payable with
respect thereto, provided, however, IBM Credit has a first priority security
interest in such Accounts.
"Advance" means any advance of funds made or committed to be made by IBM Credit
for the account of Customer to an Authorized Supplier in respect of an invoice
delivered or to be delivered by such Authorized Supplier to IBM Credit
describing Approved Inventory purchased by Customer.
"Approved Inventory" means computer hardware and software products sold or
distributed by any company, approved by IBM Credit in writing to receive
financing pursuant to the Agreement (the "Authorized Suppliers"), provided,
however, IBM Credit has a first priority security interest in such products and
such products are new and in manufacturer sealed boxes.
"Average Daily Balance" ("ADB") means the sum of the principal of outstanding
Advances unpaid after the Free Financing Period, if any, as of each day during a
calendar month divided by the number of days in the calendar month.
"Date of Note" means the invoice date or ship date specified by Authorized
Supplier in respect of Customer's Approved Inventory purchases financed by IBM
Credit pursuant to SPP.
"Delinquency Fee" means the fee set forth in Section 2.3 of this Schedule which
Customer will pay if an Advance is not paid by Customer or by IBM on Customer's
behalf to IBM Credit on the applicable Payment Due Date for each Advance.
"Delinquency Rate" means the rate set forth in Section 2.4 of this Schedule
which Customer will pay if an Advance is not paid by Customer or by IBM on
behalf of Customer to IBM Credit on the applicable Payment Due Date for each
Advance.
"Free Financing Period" means for each Advance made by IBM Credit pursuant to
SPP, the period, if any, commencing on the Date of Note, in which IBM Credit
does not charge Customer a financing charge. IBM Credit will calculate the Free
Financing Period utilizing a methodology that is consistent with the
methodologies used for IBM Credit's similarly situated customers. Customer
understands that IBM Credit may not offer, may change or may cease to offer a
Free Financing Period for Customer's purchases of Approved Inventory.
"IBM" means International Business Machines Corporation, IBM Global Services
Division.
"IBM Accounts" means Accounts arising from the sale of goods and services to
account debtors whose Accounts will be paid by IBM pursuant to the IBM Statement
of Work for Project Support Services executed by Customer and IBM (reference
IBM Customer Agreement Number 7J09617).
---------
"Minolta" means Minolta Corporation.
"PIN" means Professional Installation Network, Inc.
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"Prime Rate" means, as of the date of determination, the average of the rates of
interest announced by Citibank, N.A., Chase Manhattan Bank, and Bank of America
National Trust & Savings Association (or any other bank which IBM Credit uses
in its normal course of business of determining Prime Rate).
2.0 SPP Plans & Charges:
The following is a description of each of the SPP options and the fees and rates
that apply to these plans:
2.1 SPP/IBM Plan. The plan whereby IBM Credit makes a loan or extends credit to
or on behalf of Customer to extend the repayment terms of an Advance for
Approved Inventory ordered by Customer from Authorized Supplier sold to an
account debtor whose Account will be paid by IBM ("SPP/IBM Plan Advance"). Such
SPP/IBM Plan Advance will be due and payable on the date set forth in the
statement of transaction or billing statement applicable to such SPP/IBM Plan
Advance, which date will be the day that is the earlier of (i) one hundred
twenty (120) days following the Date of Note of such SPP/IBM Plan Advance or
(ii) when payment is received from Customer's customer, or such other number of
days as IBM Credit may notify Customer from time to time, (the "SPP/IBM Plan
Payment Due Date").
(A) SPP/IBM Plan Advance Fee: For each SPP/IBM Plan Advance made by IBM Credit
to an Authorized Supplier where there is a Free Financing Period associated with
such an SPP/IBM Plan Advance there will be a charge equal to 0.50% of the
invoice amount on the day after the Free Financing Period ends. For each SPP/IBM
Plan Advance made to Authorized Suppliers where there is no Free Financing
Period, there will be a charge equal to 0.50% of the invoice amount on the Date
of Note. All such SPP/IBM Plan Advance Fees will be due and payable on the date
set forth on the billing statement IBM Credit sends to Customer at the end of
each month.
(B) SPP/IBM Rate: For each SPP/IBM Plan Advance made by IBM Credit to an
Authorized Supplier where there is a Free Financing Period there will be a
charge equal to Prime Rate plus 2.25% on the ADB beginning on the day following
the end of the Free Financing Period to and including the one hundred twentieth
(120th) day following the Date of Note. For each SPP/IBM Plan Advance made by
IBM Credit to Authorized Suppliers where there is no Free Financing Period there
will be a charge equal to Prime Rate plus 2.25% on the ADB beginning on the Date
of Note.
2.2 SPP/IBM-E Plan. The plan by which IBM Credit makes a loan or extends credit
to or on behalf of Customer to extend the repayment terms of an SPP/IBM Plan
Advance for Approved Inventory in the possession of IBM organization or to be
placed under the terms of an IBM Credit Corporation or LeaseSource, Inc. or
other IBM Credit approved lessor leasing agreement ("SPP/IBM-E Advance"). Such
SPP/IBM-E Advance will be due and payable and payable on the date set forth in
the statement of transaction or billing statement applicable to such SPP/IBM-E
Advance, which date will be the earlier of (i) sixtY (60) days following the
Date of Note of such SPP/IBM-E Advance or (ii) when payment is received from
Customer's customer, or such other number of days as IBM Credit may notify
Customer from time to time, (the "SPP/IBM-E Payment Due Date").
(A) SPP/IBM-E Advance Fee: For each SPP/IBM-E Advance there will be a charge
each month equal to 0.30% of the outstanding invoice amount on the Date of Note.
All such SPP/IBM-E Advance Fees will be due and payable on the date set forth
on the billing statement IBM Credit sends to Customer at the end of each month;
and
(B) SPP/IBM-E Rate: Prime Rate plus 2.25% on the ADB beginning on the Date of
Note to and including the SPP/IBM-E Payment Due Date.
2.3 Delinquency Fee: For each Advance unpaid on its applicable Payment Due Date
there will be a charge equal to 0.30% of the total amount of such Advances
outstanding at the end of each billing period.
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2.4 Delinquency Rate: For each unpaid Advance there will be a charge equal to
Prime Rate plus 6.50% on the ADB beginning on the applicable Payment Due Date to
and including the date IBM Credit receives payment thereof.
3.0 Additional Terms Relating to Advances/Charges
(A) SPP Charges will be calculated by multiplying the applicable Delinquency
Rate or SPP Rate set forth in Section 2.0 of this Schedule by Customer's
applicable ADB. The Delinquency Rate and the various SPP Charges provided for in
this Delinquency Rate and the various SPP Charges provided for in this Addendum
are each computed on the basis of an actual day, 360 day year.
(B) If it is determined that the finance charges for any Advance paid by
Customer to IBM Credit were in excess of the highest rate allowed by law, then
the amount representing such excess shall be considered reductions to the
principal amount of Advances.
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Financing Statement
Uniform Commercial Code Form UCC-1
Important Please read instructions on
reverse side of page 4 before completing
- --------------------------------------------------------------------------------
Filing No. (stamped by filing officer): Date, Time, Filing Office (stamped by
filing officer):
5
- --------------------------------------------------------------------------------
This Financing Statement is presented for filing pursuant to the Uniform
Commercial Code, and is to be filed with the (check applicable box):
[x] Secretary of the Commonwealth.
[ ] Prothonotary of______________________________________________________County.
[ ] real estate records of_______________________________________________County.
6
- --------------------------------------------------------------------------------
Number of Additional Sheets (if any): 7
- --------------------------------------------------------------------------------
Optional Special Identification (Max. 10 characters): 8
- --------------------------------------------------------------------------------
COLLATERAL
- --------------------------------------------------------------------------------
Identify collateral by item and/or type:
All of Debtor's right, title, and interest in and to, whether now owned or
hereafter acquired or existing all inventory and equipment bearing the trademark
or trade name of Authorized Suppliers listed in Exhibit A attached hereto or
manufactured or sold by Authorized Suppliers, and all parts thereof,
attachments, accessories, accessions, substitutions and/or replacements for all
of the foregoing, all rebate discounts, credits, refunds, and incentive payments
relating to the foregoing and all accounts, contract rights, chattel paper,
instrument reserves, documents of title and deposit accounts whether now owned
or hereafter acquired and all proceeds thereof.
[ ] (check only if desired) Products of the collateral are also covered. 9
- --------------------------------------------------------------------------------
Identify related real estate, if applicable: The collateral is, or includes
(check appropriate box(es)) -
a. [ ] crops growing or to be grown on -
b. [ ] goods which are or are to become fixtures on -
c. [ ] minerals or the like (including oil and gas) as extracted on -
d. [ ] accounts resulting from the sale of minerals or the like (including oil
and gas) at the wellhead or minehead on -
the following real estate:
Street Address:
Described at Book_____of (check one) [ ] Deeds [ ] Mortgages, at Page(s)______
for___________________County, Uniform Parcel Identifier_________________________
[ ] Described on Additional Sheet
Name of record owner (required only if no Debtor has an interest of record):
10
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DEBTOR SIGNATURE(S)
- --------------------------------------------------------------------------------
Debtor Signature(s):
1 USA Technologies, Inc.
- --------------------------------------------------------------------------------
1a Leland P. Maxwell CFO
- --------------------------------------------------------------------------------
1b 11
- --------------------------------------------------------------------------------
RETURN RECEIPT TO:
12
- --------------------------------------------------------------------------------
SECURED PARTY COPY, KEEP THIS COPY
NOTE - Do not send to filing office.
<PAGE>
Financing Statement
Parties
- --------------------------------------------------------------------------------
Debtor name (last name first if individual) and mailing address:
USA Technologies, Inc.
200 Plant Avenue
Wayne, PA 19087 1
- --------------------------------------------------------------------------------
Debtor name (last name first if individual) and mailing address:
1a
- --------------------------------------------------------------------------------
Debtor name (last name first if individual) and mailing address:
1b
- --------------------------------------------------------------------------------
Secured Party(ies) name(s) (last name first if individual) and address for
security interest information:
IBM Credit Corporation
P.O. Box 105061
Atlanta, GA 30348-9990 2
- --------------------------------------------------------------------------------
Assignee(s) of Secured Party name(s) (last name first if individual) and address
for security interest information:
2a
- --------------------------------------------------------------------------------
Special Types of Parties (check if applicable):
[ ] The terms "Debtor" and "Secured Party" mean "Lessee" and "Lessor,"
respectively.
[ ] The terms "Debtor" and "Secured Party" mean "Consignee" and
"Consignor," respectively.
[ ] Debtor is a Transmitting Utility. 3
- --------------------------------------------------------------------------------
SECURED PARTY SIGNATURE(S)
- --------------------------------------------------------------------------------
This statement is filed with only the Secured Party's signature to perfect a
security interest in collateral (check applicable box(es)) -
a. [ ] acquired after a change of name, identity or corporate structure of the
Debtor.
b. [ ] as to which the filing has lapsed.
c. already subject to a security interest in another county in Pennsylvania-
[ ] when the collateral was moved to this county.
[ ] when the Debtor's residence or place of business was moved to
this county.
d. [ ] already subject to a security interest in another jurisdiction-
[ ] when the collateral was moved to Pennsylvania.
[ ] when the Debtor's location was moved to Pennsylvania
e. [ ] which is proceeds of the collateral described in block 9, in which a
security interest was previously perfected (also describe proceeds in
block 9, if purchased with cash proceeds and not adequately described on
the original financing statement).
Secured Party Signature(s)
(required only if box(es) is checked above:
IBM Credit Corporation
- --------------------------------------------------------------------------------
Phyllis Tallant
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4
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STANDARD FORM - FORM UCC-1 (7-89)
Approved by Secretary of Commonwealth of Pennsylvania
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
Supplier Supplier
- -------- --------
<S> <C>
Access Graphics, Inc. (ACC) Canon Computer Systems, Inc. (CAN)
Acer America, Inc. (ACE) Centron Electronics, Inc. (CEN)
Admor Memory LTD (ADM) Citizen America Corporation (CIT)
Advanced Logic Research, Inc. (ALR) CMS Enhancements, Inc. (CMS)
Advantage Memory Corporation (ADV) Combined Technology Computer Corp. (CTE)
Agama Systems (AGA) Compaq Computer Corporation (CPQ)
Almo Corporation (ALM) Compucom Systems, Inc. (CMP)
Alltel Supply, Inc. (ALL) Computer Graphics Technology, Inc. (CGT)
Alternative Technology, Inc. (ATI) Comtech Micro System, Inc. (CTH)
Amax Engineering Corporation (AMX) Continental Technology, Inc. (CTI)
Ameridata, Inc. (GEITS) (ADA) Comstor Corporation (CSR)
Ameriquest Technologies, Inc. (AQS) Cranel, Inc. (CRA)
Anntex, Inc. (ANI) Creative Labs (CIB)
Applied Technology Ventures, Inc. (ATV) CTX International, Inc. (CTX)
Arrow Electronics, Inc. (ARR) Data 1 (DAI)
ASI Corporation, Inc. (ASI) Data Security Services Corp. (DTS)
AST Research, Inc. (ASR) Datalink Corporation (DLC)
ATEC Group, Inc. Data Storage Marketing (DSM)
Attronica Computer, Inc. (ATR) Decision Support Systems, Inc. (DSF)
Avnet, Inc. (AVN) Dell Marketing (DEL)
Bay Networks, Inc. (WEL) D & H Distributing Company (DHD)
BDI Distributors, Inc. (BDI) Diamond Flower Instrument (DFI)
Bell Microproducts, Inc. (BMI) Diamond Multi Media Systems, Inc. (DMS)
Bustek, Inc. (BST) Dickens Data Systems, Inc. - Atlanta (DDG)
Brother International Corporation (BRO) Dickens Data Systems, Inc. - Dallas (DDT)
Busienss Partner Solutions, Inc (BPS) Digi International, Inc. (DGB)
Cabletron Systems, Inc (CBL) Digital Equipment Corp. (DEC)
</TABLE>
PAGE 1 of 3
<PAGE>
<TABLE>
<CAPTION>
Supplier Supplier
- -------- --------
<S> <C>
Dolch American Instruments, Inc. (DOL) Liuski, Inc. (LIU)
DTK Technology, Inc. (DTK) Logicare Inc. (LGC)
En Pointe Technologies, Inc. (EDT) MA Laboratories, Inc. (MAL)
EMJ America, Inc. (EMJ) Matrix Marketing, Inc. (MAT)
Epson America, Inc. (EPS) Max Group Corporation (MGC)
Equus Computer Systems, Inc. (EDU) MCBA Systems, Inc. (MBA)
First Source International, Inc. (FSI) McBride & Associates, Inc. (MCB)
FMG - Atlanta, Inc. (FMA) Megatron Computer Systems, Inc. (MCS)
FMG - New Jersey, Inc. (FMJ) Golden Ram (Memory Products)(MPM)
Fountain Technology, Inc. (FNT) MemoSun, Inc. (MSN)
Fujitsu Computer Products of America (FUJ) Merisel, Inc. (MER)
Gates/Arrow Distributing (GAT) MFP Technology Services, Inc. (MFP)
Gateway 2000 Corporation (GWT) MGV International, Inc. (MGV)
Government Technology Services, Inc. (GTS) Microage Computer Centers, Inc. (MIC)
Graphics Technologies, Inc. (GTI) Micron Electronics, Inc. (MCN)
Greenleaf Distribution, Inc. (GLF) Microland Electronics Corp (MLD)
H. Co. Computer Products, Inc. (HCO) MicroNet Technology (MNT)
Hartford Computer Group, Inc. (HAR) Microretailing, Inc. (MRI)
HB Corporation Group (HBC) Micro Distribution Center, Inc. (MDC)
Hitachi PC Corporation (HIT) Micro Distribution Center of Kansas (MDK)
Hotan Corporation, Inc. (HTN) Micro Equipment Corporation, Inc (MEC)
IBM Corporation (MO) Micro Supply, Inc. (MIS)
IBM Printing Systems Company (PRN) Micro Technology Concepts (MTC)
IBM Personal Systems Group (PCC) MicroTouch Systems(MTH)
IM&R Broker Sales (RBS) Millenium Electronics, Inc (MLE)
IM&R Retail Sales (RRS) Mitsubishi Electronics America, Inc. (MIT)
InaCom Corporation (ICM) Mitsumi Electronics Corporation (MIM)
Ingram Alliance (Div. of Ingram Micro)(IAL) Multi-Tech Systems, Inc. (MTS)
Ingram Micro, Inc. (ING) NCR Corporation (NCR)
International Computer Graphics, Inc. (ICG) NEC Computer System Division (NCS)
Inteva Technologies, Inc. (ITI) NEC Technologies, Inc (NEC)
Jaton Corporation (JAT) NEC Technologies, Inc. (NEC)(for Storage Products and
Jones Business Systems, Inc. (JNS) Advance Media Divisions Only)
JVC Americas Corporation (JVC) Nevcor Technologies Group, Inc (AMA)
Kenitec Computer & Technologies, Inc. (KCT) New Wave Technologies, Inc (NWA)
Kingston Technology Corp. (KTC) New World Technologies, Inc (NWT)
Kyocera Electronics, Inc. (KYO) Nexar Technologies, Inc. (NXR)
Lexmark International, Inc. (LEX) Nycom Technologies Distribution, Inc (NTD)
</TABLE>
Page 2 of 3
<PAGE>
<TABLE>
<CAPTION>
Supplier Supplier
- -------- --------
<S> <C>
Opal Technologies, Inc. (OPL) Southland Micro Systems, Inc. (SOU)
Optima Technology Corporation (OPT) Star Micronics (STA)
Orientec (ORI) Storage Dimensions, Inc. (STO)
Panasonic Communications and Systems Co (PCS) Sun Microsystems Computer Corporation (SUN)
Panasonic Industrial Company (PAN) Sunnytech, Inc. (SNT)
Panasonic Personal Computer Company (PSC) Supercom, Inc (SCI)
P & A Technology, Inc. (PAT) Support Net, Inc. (SPN)
PC Warehouse Investment, Inc. (PCW) Symbios Logic, Inc. (SLI)
PC Wholesale (PWD) Synnex Information Technologies, Inc. (IE/SIT)
Philips Components (PCO) Teac America, Inc. (TEA)
Philips Consumer Electronics, Inc. (PCE) Tech Data Corporation (TEC)
Pioneer-Standard Electronics, Inc. (PSE) Tech 101 (TOA)
Pionex Technologies, Inc. (POI) Technology Works, Inc. (TCW)
Powerstar, Inc. (POW) Telxon Corporation (TXN)
Premio Computer, Inc. (CSI) Tektronix, Inc. (TKT)
Procom Technology, Inc. (PTI) Time Trend, Inc. (TIM)
Pulsar Data Systems (PUL) Toshiba America Information Systems, Inc. (TOS)
QMS, Inc. (QMS) Total Peripherals, Inc. (TOP)
Quantum Corporation (QUA) Transcend Information, Inc. (TRA)
Riodan and Ross, Inc. (RAR) Trans America International (TAI)
RMOA-IT (RMO) Twinhead Systems, Inc. (TWI)
Sampo Technology, Inc. (STI) Unigen Corporation (UNG)
Samsung America, Inc. (SSA) US Robotics Mobile Communication Corp. (MEG)
Samsung Electronics America, Inc (SAM) ViewSonic Corporation (VIE)
Samsung Information Systems America, Inc (SIS) Viking Components, Inc. (VIK)
Scanscource, Inc. (SCA) VisionTek (VIS)
Scientific & Business Minicomputers, Inc. (SBM) Westcon, Inc. (WCN)
Seagate Technology, Inc. (SGT) Western Digital Corporation (WES)
Seneca Data Distributors Inc. (SEN) Western Micro Technology, Inc. (WMT)
Sharp Cash Registers (SHP) Wyle Laboratories (WYL)
Sharp Copiers & Faxes (SHP) Wyse Technology, Inc. (WYS)
Sharp Scanners/PTRS/PCs (SHP) Xylan Corporation (XYL)
Simple Technology Incorporated (SIM) Yamaha Corporation (YAM)
Sidus Computer Corporation (SID) Zenith Data Systems (ZEN)
Sony Electronics, Inc. (SON) 3 Com Corporation (3CO)
Southern Electronics Corporation (SED)
</TABLE>
Page 3 of 3
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