<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1O-QSB
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
---------------------------------------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to _____________________
Commission file number 33-70992
USA Technologies, Inc.
----------------------
(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C>
Pennsylvania 23-2679963
- --------------------------------------------- -----------------------------------
(State or other jurisdiction of incorporation (I.R.S. employer Identification No.)
or organization)
200 Plant Avenue, Wayne, Pennsylvania 19087
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, area code first. (610)-989-0340
--------------
</TABLE>
Check whether the Registrant has (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
---- ----
As of February 9, 1999, there were 41,874,376 shares of Common Stock, no par
value, 665,377 shares of Series A Convertible Preferred Stock, no par value,
outstanding, and 61,900 shares of Series B Equity Participating Preferred Stock,
no par value, outstanding.
<PAGE>
USA TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
Part I - Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - December 31, 1998 and June 30, 1998 1
Consolidated Statements of Operations - Three and six months ended
December 31, 1998 and 1997 2
Consolidated Statement of Shareholders' Equity - 3
December 31, 1998
Consolidated Statements of Cash Flows - Six months ended 4
December 31, 1998 and 1997
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
Part II - Other Information 10
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 11
</TABLE>
<PAGE>
USA Technologies, Inc.
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------ ---------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 284,068 $ 324,824
Accounts receivable less allowance 400,742 222,743
for uncollectible accounts of $8,783 at December
31, 1998 (unaudited) and $23,764 at June 30, 1998
Inventory 894,707 436,971
Stock subscriptions receivable - 19,875
Prepaid expenses and deposits 21,421 20,515
---------- ----------
Total current assets 1,600,938 1,024,928
Property and equipment, at cost, net of accumulated 153,315 151,906
depreciation of $341,386 at December 31, 1998
(unaudited) and $291,084 at June 30, 1998
Other assets 10,250 10,250
---------- ----------
Total assets $1,764,503 $1,187,084
========== ==========
Liabilities and shareholders' equity/(deficit)
Current liabilities:
Accounts payable $ 1,860,421 $ 576,787
Accrued expenses 477,819 430,643
Current obligations under capital leases 17,799 22,810
---------- ----------
Total current liabilities 2,356,039 1,030,240
Senior Notes 368,206 -
Obligations under capital leases, less current portion 23,635 1,669
---------- ----------
Total liabilities 2,747,880 1,031,909
Shareholders' equity (deficit):
Preferred Stock, no par value:
Series A Convertible Preferred: 4,724,101 4,538,114
Authorized shares - 1,200,000; issued and outstanding shares -
667,161 at December 31, 1998 (unaudited) and 618,236 at June 30,
1998 (liquidation preference of $ 9,590,595 at December 31, 1998 -
unaudited)
Series B Equity Participating Preferred: - -
Authorized shares - 200,000; issued and outstanding shares
- 43,500 at December 31, 1998 (unaudited)
Common Stock, no par value:
Authorized shares - 62,000,000 at December 31, 1998 and
June 30, 1998
Issued and outstanding shares - 40,308,171 at 11,305,895 11,223,213
December 31, 1998 (unaudited) and 40,163,837
at June 30, 1998
Accumulated deficit (17,013,373) (15,606,152)
----------- -----------
Total shareholders' equity (deficit) (983,377) 155,175
----------- -----------
Total liabilities and shareholders' equity $ 1,764,503 $ 1,187,084
=========== ===========
</TABLE>
See accompanying notes.
1
<PAGE>
USA Technologies, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1998 1997 1998 1997
----------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Equipment Sales $ 1,445,090 $ 309,411 $ 2,157,384 $ 622,639
License and transaction fees 105,297 58,638 185,462 107,740
----------- --------- ----------- ----------
Total revenues 1,550,387 368,049 2,342,846 730,379
Operating Expenses:
Cost of equipment sales 1,268,380 256,497 1,891,558 549,137
General and administrative 544,918 490,780 998,338 890,493
Compensation 349,000 340,858 688,480 648,075
Depreciation and amortization 27,220 25,497 50,302 50,994
----------- --------- ----------- ----------
Total operating expenses 2,189,518 1,113,632 3,628,678 2,138,699
----------- --------- ----------- ----------
(639,131) (745,583) (1,285,832) (1,408,320)
Other income (expense):
Interest income 1,186 4,942 3,695 9,473
Interest expense (6,496) (2,330) (7,907) (4,649)
Joint Venture activities (65,215) - (90,093) -
----------- --------- ----------- ----------
Total other income (expense) (70,525) 2,612 (94,305) 4,824
----------- --------- ----------- ----------
Net loss (709,656) (742,971) (1,380,137) (1,403,496)
Cumulative preferred dividends and other
adjustments (499,033) (151,298) (1,002,453) (1,231,574)
----------- --------- ----------- ----------
Loss applicable to common shares $(1,208,689) $ (894,269) $(2,382,590) $(2,635,070)
=========== ========== =========== ===========
Loss per common share (basic and diluted) $(0.03) $(0.03) $(0.06) $(0.08)
=========== ========== =========== ===========
Weighted average number of common shares
outstanding (basic and diluted) 40,268,647 34,734,876 40,232,564 33,193,774
=========== ========== =========== ===========
</TABLE>
See accompanying notes.
2
<PAGE>
USA Technologies, Inc.
Consolidated Statements of Shareholders' Equity (Deficit)
(Unaudited)
<TABLE>
<CAPTION>
Series A Series B
Convertible Equity
Preferred Participating Common Accumulated
Stock Preferred Stock Stock Deficit Total
----------- --------------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1998 $4,538,114 $0 $11,223,213 $(15,606,152) $155,175
Issuance of 500 shares of Common Stock to an
employee as compensation - - 100 - 100
Issuance of 50,00 shares of Common Stock
in exchange for consulting services - - 7,000 - 7,000
Conversion of 6,675 shares of Convertible
Preferred Stock to 66,750 shares of Common
Stock (48,498) - 48,498 - -
Conversion of $27,084 of cumulative preferred
dividends into 27,084 shares of Common
Stock - - 27,084 (27,084) -
Issuance of 55,600 shares (27.8 units) of
Series A Convertible Preferred Stock at
$5.00 per share in connection with
the 1998-B Private Placement, net of offering
costs of $43,515 234,485 - - - 234,485
Issuance of 43,500 shares (43.5 units) of
Series B Equity Participating Preferred - - - - -
Stock
Net loss - - - (1,380,137) (1,380,137)
---------- ---- ------------ ------------ -----------
Balance, December 31, 1998 $4,724,101 $0 $ 11,305,895 $(17,013,373) $ (983,377)
========== ==== ============ ============ ===========
</TABLE>
See accompanying notes.
3
<PAGE>
USA Technologies, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months ended December 31,
1998 1997
------------- -----------
<S> <C> <C>
Operating activities
Net loss $(1,380,137) $(1,403,496)
Adjustments to reconcile net loss to net cash
used in operating activities:
Compensation charges incurred in
connection with the issuance of Common Stock
and repricing of Common Stock options 7,100 42,443
Depreciation and amortization 50,302 50,994
Changes in operating assets and liabilities:
Accounts receivable (177,999) (157,497)
Inventory (471,555) (138,212)
Prepaid expenses, deposits, and other assets (906) ( 3,353)
Accounts payable 1,283,634 25,723
Accrued expenses 47,176 181,627
---------- ----------
Net cash used in operating activities (642,385) (1,401,771)
Investing activities
Purchase of property and equipment (8,650) (723)
---------- ----------
Net cash used in investing activities (8,650) (723)
Financing activities
Net proceeds from issuance of Senior Notes 368,206 -
Net proceeds from issuance of Common Stock and
exercise of Common Stock warrants 19,875 1,055,439
Net proceeds from issuance of Convertible
Preferred Stock 234,485 -
Repayment of principal on capital lease obligations (12,287) (8,629)
---------- ----------
Net cash provided by financing activities 610,279 1,046,810
---------- ----------
Net decrease in cash and cash equivalents (40,756) (355,684)
Cash and cash equivalents at beginning of year 324,824 630,266
---------- ----------
Cash and cash equivalents at end of period $ 284,068 $ 274,582
========== ==========
Supplemental Disclosure of Cashflow Information:
Capital lease obligations $ 29,242 -
</TABLE>
See accompanying notes.
4
<PAGE>
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business
USA Technologies, Inc., a Pennsylvania corporation (the
"Company") is a leading provider and licensor of automated business centers,
primarily to the hospitality industry. The Company's patented unattended credit
card activated devices make available the use of various business equipment
including personal computers, copiers, fax machines and laptop connectivity to
the internet. The Company generates its revenues from the direct sale of its
control systems and the resale of configured office products, as well as by
license fees and a portion of the monies generated from all credit card
transactions conducted through its control systems.
As of December 31, 1998, the Company had an installed base of
a total of 1,045 control systems, distributed as follows: 894 Business
Express(TM) or MBE Business Express(TM) control systems, 45 Copy Express(TM)
control systems, 33 Debit Express(TM) control systems, 9 Fax/Printer Express(TM)
control systems, and 64 Public PC(TM) control systems located primarily at
various hotels and libraries throughout the United States and Canada.
2. Accounting Policies
Interim Financial Information
The financial statements and disclosures included herein for the three
and six months ended December 31, 1998 and 1997 are unaudited. These financial
statements and disclosures have been prepared by the Company in accordance with
generally accepted accounting principles and reflect all adjustments consisting
of adjustments of a normal and recurring nature which, in the opinion of
management, are necessary for a fair presentation of the Company's consolidated
financial position and the results of its operations and cash flows.
Consolidation
The consolidated financial statements include the accounts of the MBE
Joint Venture (Note 4). All significant intercompany accounts and transactions
have been eliminated in consolidation.
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. Depreciation is computed
using the straight-line method over three to seven years for financial statement
purposes and accelerated methods for income tax reporting purposes.
5
<PAGE>
Revenue Recognition
Revenue from the sale of equipment is recognized upon
installation and customer acceptance of the related equipment. License fee
revenue (including transaction processing revenue) is recognized upon the usage
of the Company's credit card activated control systems.
Loss per Common Share
Loss per share is calculated by dividing the loss by the weighted
average common shares outstanding for the period. No exercise of stock options,
purchase rights, stock purchase warrants, or the conversion of preferred stock
and cumulative preferred dividends was assumed because the assumed exercise of
these securities would be antidilutive.
3. Stock Options, Warrants and Purchase Rights
As of December 31, 1998, there was a total of 152,800 Common Stock
Purchase Rights outstanding at a price of $1.00 per share. As of December 31,
1998, there was a total of 3,751,000 options outstanding to purchase Common
Stock at exercise prices ranging from $.05 to $.50 per share, of which 3,601,000
were vested. As of December 31, 1998, many of the options and purchase rights
granted were issued at or above fair market value on the date of grant, and
those that were issued below fair market value have resulted in an appropriate
charge against earnings during the period the options were issued.
In January, 1999, the Board of Directors approved the following: a) a
reduction of the exercise of the warrants of the 1998-C debt offering from $.10
to $.05, effective until December 31, 1999 at which time the price shall revert
to $.10; b) an increase in the number of warrants in each unit of the current
debt offering from 15,000 per unit to 20,000 per unit. If all 200 units are
sold, the increase would total 1,000,000 warrants; c) an extension of the
reduced exercise price of $.10 for the 1,390,000 1998-B warrants through March
31, 1999 instead of only through February 1, 1999; and d)a reduction in the
exercise price of the 152,800 purchase rights issued in July 1993 from $1.00 per
share to $.10 per share through March 31, 1999, at which time the price will
revert to $1.00.
There are also 870,000 shares of Common Stock issuable upon exercise of
the 1998-C warrants issued in November and December 1998; 1,390,000 shares of
Common Stock issuable upon exercise of the 1998-B warrants issued in July 1998;
40,000 shares of Common Stock issuable upon exercise of the 1998-A warrants
issued in January and February 1998; 1,100,000 shares of Common Stock issuable
upon exercise of warrants issued to affiliates and/or consultants of GEM
Advisors, Inc. in June 1997; 15,000 shares of Common Stock issuable upon
exercise of the 1997 warrants issued in 1997; 40,000 shares of Common Stock
issuable upon exercise of the 1996-B warrants issued in January and February
1997; 868,000 shares of Common Stock issuable upon exercise of the 1996 warrants
issued in 1996; and 673,000 shares of Common Stock issuable upon exercise of the
1995 warrants issued in 1995.
4. MBE Joint Venture
On March 31, 1998, the MBE Joint Venture signed agreements with
International Business Machines Corporation ("IBM") whereby IBM agreed to be the
executional partner for certain
6
<PAGE>
aspects of the MBE Joint Venture's business, including project management
services, asset procurement and inventory financing, configuration and testing
of equipment, site preparation, installation, maintenance services, and asset
management. IBM would also assist the MBE Joint Venture with marketing and
technology exchange. For the quarter ended December 31, 1998, IBM installed 73
MBE Business Express(TM) units for the Joint Venture.
During the quarter ended December 31, 1998, IBM continued purchasing
and financing inventory, installing assembled product, and billing customers on
behalf of the MBE Joint Venture. A significant portion of the installations (and
revenues) was the continued fulfillment of the 100 unit order from Prime
Hospitality for the MBE Business Express(TM) units installed in Amerisuites
hotels across the United States. As of December 31, 1998, 85 units have been
installed.
At December 31, 1998 the Joint Venture recorded gross accounts payable
to MBE of approximately $218,000, due to inventory and other items. This amount
has been partially offset by approximately $8,000 which is due to the Company
from MBE.
The Company is involved in legal claims and counterclaims relating to
the Joint Venture. See discussion in Legal Proceedings in Part II of this
document.
5. Private Placements
During September 1998, the Company's Board of Directors authorized a
$2,000,000 private placement offering of 200 units at a unit price of $10,000.
Each unit of the offering consists of a 12% Senior Note in the principal amount
of $10,000, 15,000 1998-C Common Stock purchase warrants and 1,000 shares of
Series B Equity Participating Preferred Stock. Each 1998-C Common Stock purchase
warrant entitles the holder to purchase 1 share of Common Stock for $.10 at any
time through December 31, 2001. Each share of Series B Preferred Stock is
automatically convertible into 40 shares of Common Stock at the time of a "USA
Transaction," as defined. In connection with this Offering, the Board of
Directors also authorized the creation of 200,000 shares of a new Series B
Equity Participating Preferred Stock. The offering commenced on September 28,
1998. As of December 31, 1998, 43.5 units have been sold at $10,000 per unit,
resulting in net proceeds of $368,206 to the Company after deducting costs, and
no warrants have been exercised.
In connection with the Senior Note described above, in January, 1999
the Board of Directors approved a commitment by the President to purchase 10
units for $100,000. The President will pay for the units by foregoing payroll
from April 1, 1999 through June 30, 2000.
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
The fiscal quarter ended December 31, 1998 resulted in a net operating
loss of $709,656 compared to a net loss of $742,971 for the comparable fiscal
quarter ended December 31, 1997. Losses are projected to continue until
sufficient revenue is generated from equipment sales and licensing fees from the
Company's proprietary technology.
7
<PAGE>
Revenues were $1,550,387 compared to $368,049 from the previous year's
fiscal quarter. This $1,182,338 or 321% improvement reflects the success of the
Company's sales efforts and the increasing marketplace acceptance of the
Company's products. Of the total revenues, equipment sales totaled $1,445,090,
an increase of $1,135,679 or 367% over the same period last year. License fees
increased to $105,297 from $58,638 for the same period during the prior year, an
increase of 80%. Despite these gains, revenue is still well below the level
required for the Company to be profitable.
Cost of equipment sales for the period included labor and equipment of
$1,268,380 which represented an increase of $1,011,883 over the same period
during the prior year, and is directly attributable to the increase in equipment
sales described above.
General and administrative expenses of $544,918 increased by $54,138 or
11% from the same quarter last year. The principal reasons were increases in
legal costs of $137,697 to pay for activities described in Part II, Item 1
(Legal Proceedings); increases in manufacturing overhead to prepare for
increased operations of $36,237; charges for warranty cost coverage of $37,390;
and increases in promotions and trade show expenses of $24,870, offset by
reductions in consultant and professional fees of $44,893 and reductions in
travel and entertainment of $65,239.
Compensation expense of $349,000 increased slightly by 2% due to
permanent and higher personnel requirements in all areas of the Company.
Depreciation and amortization expense increased nominally from $25,497 to
$27,220.
Accounts payable has increased substantially from June 30, 1998 due
to the increased activity resulting from increased operations and increased
expenses. Inventory and accounts payable both increased due to preparation for
continued increased activity anticipated in the third quarter of fiscal year
1999.
The six month period ended December 31, 1998 resulted in a net
operating loss of $1,380,137 compared to a net loss of $1,403,496 for the
comparable period ended December 31, 1997. Revenues were $2,342,846 compared to
$730,379, a $1,612,467 or 221% improvement. Of the total revenues, equipment
sales totaled $2,157,384, an increase of $1,534,745 or 246%. Cost of sales of
$1,891,558 represented an increase of $1,342,421, and is directly attributable
to the increase in equipment sales. General and administrative expenses of
$998,338 increased by $107,845 or 12%. The principal reasons were increases in
legal costs of $140,204 to pay for activities described in Part II, Item 1,
(Legal Proceedings); increases in manufacturing overhead to prepare for
increased operations of $64,797; and charges for warranty cost coverage of
$59,866, offset by reductions in consultant and professional fees of $90,127 and
reductions in travel and entertainment of $59,108. Compensation expense of
$688,480 increased by 6% due to permanent and higher personnel requirements in
all areas of the Company.
Plan of Operations
As of December 31, 1998, the Company had an installed base of a total
of 1,045 control systems, distributed as follows: 894 Business Express(TM) or
MBE Business Express(TM) control systems, 45 Copy Express(TM) control systems,
33 Debit Express(TM) control systems, 9 Fax/Printer Express(TM) control systems,
and 64 Public PC(TM) control systems located at various hotels and libraries
throughout the United States and Canada. The total license fee revenues received
by
8
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the Company from these systems has been increasing but is still well below
the level required to achieve profitability.
The Company has continued to emphasize the resale of equipment
utilizing the Company's control systems rather than the revenue sharing
arrangements previously employed. The Company still retains all rights to
software and proprietary technology which it licenses to location operators for
their exclusive use. This shift in approach reduces the Company's dependency on
licensing revenues and simultaneously reduces the Company's capital asset
requirements.
The Company is marketing its products through its full-time sales staff
consisting of five persons, either directly to customer locations or through
management companies servicing these locations. A director of marketing was
hired in December to generate additional sales opportunities to drive the
Company to profitability.
On June 19, 1998, Prime Hospitality Corp. ("Prime") declared that the
trial of 6 MBE Business Express(TM) installations was successful and that it
would install the additional 94 MBE Business Express(TM) units at Prime's owned
and managed hotels. The agreement provides for a purchase price of approximately
$1.9 million for all 100 units. During the quarter ending December 31, 1998, 56
units have been installed, generating revenues of approximately $1,070,000.
Liquidity and Capital Resources
For the six month period ended December 31, 1998, there was a net
decrease in cash of $40,756. This was attributable to using $642,385 for
operating activities, partially offset by net proceeds of $368,206 raised
through the issuance of 12% Senior Notes, $19,875 raised through the exercise of
Common Stock purchase warrants, and net proceeds of $234,485 raised through the
issuance of Series A Preferred Stock. As of December 31, 1998, total cash on
hand was $284,068, and the working capital deficit was $755,101 of which
$894,707 was invested in inventory.
During September 1998, the Company's Board of Directors authorized
a $2,000,000 private placement offering (the "Offering") of 200 units at a unit
price of $10,000. Each unit of the Offering consists of a 12% Senior Note in the
principal amount of $10,000, 15,000 1998-C Common Stock purchase warrants and
1,000 shares of Series B Equity Participating Preferred Stock. Each 1998-C
Common Stock purchase warrant entitles the holder to purchase 1 share of common
stock for $.10 at any time through December 31, 2001. Each share of Series B
Preferred Stock is automatically convertible into 40 shares of Common Stock at
the time of a "USA Transaction," as defined. In connection with this Offering,
the Board of Directors also authorized the creation of 200,000 shares of a new
Series B Equity Participating Preferred Stock. The offering commenced on
September 28, 1998. As of December 31, 1998, 43.5 units have been sold, at
$10,000 per unit, resulting in net proceeds of $368,206 to the Company, after
deducting costs.
In connection with the Senior Note described above, in January, 1999
the Board of Directors approved a commitment by the President to purchase 10
units for $100,000. The President will pay for the units by foregoing payroll
from April 1, 1999 through June 30, 2000.
The Company believes that existing and future proceeds from the Senior
Notes, together with funds available from the potential exercise of outstanding
warrants and options, plus inventory financing from IBM and increased revenues
from its business would be sufficient to fund
9
<PAGE>
operations until at least through the quarter ended June 30, 1999. There can be
no assurance that any such additional sales of securities could be made by the
Company or that increased revenues would result from its business activities. In
such event, the Company may cease to be a going concern or may have to reduce
its operations. Since the cash received from sales of Senior Notes does not add
to shareholder equity, a shareholder deficit has arisen while long term
liabilities reflects the cash infusion. The Company plans call for improved
operating results and exercise of warrants or options to turn the current
deficit into positive shareholder equity.
Year 2000 Compliance
The company is in the process of completing a study of its business in
order to determine whether its computer systems are in compliance with Year 2000
issues. In this regard, many existing computer programs use only two digits to
identify a year in the date field. These programs were designed and developed
without considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous results by
or at the Year 2000.
In connection with its study, the Company is concentrating on
five areas of its business: (i) its control system terminals; (ii) its office
computers; (iii) its credit card processing systems and related systems; (iv)
its back-up, off-site recovery system and (v) its non-Information Technology
("IT") systems. The study should be completed on or before March 31, 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. In reference to item (ii) above, the
Company has already found all but two office computers to be compliant. These
two computers will be replaced with Year 2000 compliant computers in fiscal year
1999.
The Company is in the process of obtaining written assurances
of compliance from all material third parties whose products may affect the
Company's operations.
The worst case scenario for the Company would be if the
control systems in the field were all found to contain a Year 2000 problem which
caused defective transmissions into the Company's main processing software.
Preliminary analysis indicated the probability of this scenario actually
happening is very low (because the technology of the control units does not
involve use or transmission of two digit year data). If however it did happen,
the Company would utilize the services of IBM Global Services to replace all
defective units. The Company anticipates the cost of such services to be
approximately $150,000.
Part II - Other information
Items 3, 4, 5, and 6 are not applicable.
Item 1. Legal Proceedings
As set forth in the Company's Form 10-KSB for the fiscal year ended
June 30, 1998, the Company had commenced arbitration proceedings against MBE,
and MBE had also commenced a legal action against the Company which was
subsequently removed by the Company to the United States District Court for the
Southern District of California. In December 1998, the parties agreed that the
arbitration proceedings would be terminated, and the Company would proceed to
respond to the pending Federal Court complaint of MBE.
10
<PAGE>
As further set forth in the Company's Form 10-KSB, MBE's Federal Court
complaint alleges that the 195 terminals purchased by MBE from the Company in
September 1997 were defective, and seeks a refund of the purchase price in the
amount of $141,260 as well as lost profits claimed to be several hundred
thousand dollars. In addition, the complaint seeks a declaratory judgment that
MBE is not obligated to purchase the 600 terminals ordered from the Company in
April 1998.
In December 1998, pursuant to the agreement of the parties, the Company
filed an Answer and Counterclaim to the Complaint of MBE. The answer denies the
allegations of MBE's complaint and denies that MBE is entitled to any of the
relief requested in the complaint.
The Counterclaim of the Company alleges 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 must purchase USA's terminals. The
counterclaim also alleges that by attempting to cancel its written purchase
order with the Company for 600 terminals, MBE has breached such purchase order.
The counterclaim seeks recovery from MBE of monetary damages caused by MBE's
actions, including lost profits, consequential and/or incidental damages, and
punitive damages. The Company has also requested a declaration that MBE is
required to use the Company in connection with its ICW Project and prohibiting
MBE from continuing to breach the Joint Venture Agreement. As of the date
hereof, no discovery has been taken in the Federal Court action and no trial
date has been scheduled.
In addition to the legal proceedings referred to above, on February 4,
1999, the Company again notified MBE by letter that MBE was in breach of the
Joint Venture Agreement. The Joint Venture Agreement provides that it may be
terminated by the non-breaching party if any breach is not cured within sixty
days. As of the date hereof, neither MBE nor the Company has terminated the
Joint Venture Agreement.
Item 2. Changes in Securities
During the quarter ended December 31, 1998, the Company issued
50,000 shares of Common Stock to a consultant as compensation for services. Such
shares contained a restrictive legend under the Act, and were issued pursuant to
the exemption from registration set forth in Section 4(2) of the Act. Also
during this quarter, the Company issued 19,050 shares of Common Stock upon the
conversion of 1,905 shares of Series A Preferred Stock and issued 9,999 shares
of Common Stock upon the conversion of $9,999 of cumulative dividends accrued
and unpaid on the aforesaid shares of Preferred Stock. Such shares of Common
Stock were issued pursuant to the exemption from registration set forth in
Section 3(a)(9) of the Act.
11
<PAGE>
Signatures
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
USA TECHNOLOGIES, INC.
Date: February 16, 1999 _________________________________________________________
George R. Jensen, Jr., President, Chief Executive Officer
Date: February 16, 1999 _________________________________________________________________
Leland P. Maxwell, Senior Vice President, Chief Financial Officer
</TABLE>
12
<TABLE> <S> <C>
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<CIK> 0000896429
<NAME> USA TECHNOLOGIES, INC
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<S> <C>
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0
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