<PAGE>
As filed with the Securities and Exchange Commission on October 30, 2000
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
Registration Statement
Under
The Securities Act of 1933
USA TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 7359 23-2679963
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
200 Plant Avenue
Wayne, Pennsylvania 19087
(Address of principal executive offices and zip code)
George R. Jensen, Jr.
Chief Executive Officer
USA Technologies, Inc.
200 Plant Avenue
Wayne, Pennsylvania 19087
(610) 989-0340
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Douglas M. Lurio, Esquire
Lurio & Associates, P. C.
One Commerce Square
2005 Market Street, Suite 2340
Philadelphia, PA 19103-7015
(215) 665-9300
-----------------------------------
Approximate date of proposed sale to the public: From time to time
after this Registration Statement becomes effective.
If the only securities being registered on this Form are being
offered pursuant to dividend or interest reinvestment plans, check the
following box: [ ]
<PAGE>
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Title of each
class of Proposed Proposed
Securities Amount Maximum Maximum Amount of
to be to be Offering Price Aggregate Registration
Registered Registered Per Unit(1) Offering Price Fee
---------- ---------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
Common Stock,
no par value .......5,000,000 shares $1.31 $6,550,000 $1,729.20
Common Stock,
no par value(2).....1,700,000 shares $1.31 $2,227,000 $ 587.93
---------
Total...............6,700,000 shares..........................$8,777,000 $2,317.13
=========
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, as amended (the
"Act"), based on the average of the closing bid and asked prices for the
Registrant's common stock as reported on the OTC Electronic Bulletin Board on
October 25, 2000.
(2) Up to 1,200,000 shares are issuable upon the exercise of the commitment
warrants issued to Swartz, and up to 500,000 shares are issuable upon the
exercise of common stock purchase warrants to be issued to Swartz.
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission ("SEC") is effective. This prospectus is not
an offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
PROSPECTUS
USA TECHNOLOGIES, INC.
6,700,000 shares of Common Stock
THE OFFERING
The resale of up to 6,700,000 shares of common stock in the over-the-
counter market at the prevailing market price or in negotiated transactions.
o up to 5,000,000 shares are issuable to Swartz Private Equity, LLC
as put shares;
o 1,200,000 are issuable upon the exercise of the commitment
warrants issued to Swartz; and
o up to 500,000 shares are issuable upon the exercise of purchase
warrants issuable to Swartz.
We will receive no proceeds from the sale of the shares by Swartz.
However, we may receive proceeds from the sale of shares to Swartz and, if
exercised, will receive proceeds from the sale of shares issuable upon the
exercise of warrants by Swartz. Because Swartz will offer and sell the shares at
various times, we have not included in this prospectus information about the
price to the public of the shares or the proceeds to Swartz.
Our common stock is included for quotation on the over-the-counter
bulletin board under the symbol "USTT." The closing bid price for the common
stock on October 25, 2000 was $1.31 per share.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
PURCHASE SHARES ONLY IF YOU CAN AFFORD A COMPLETE LOSS.
Please refer to Risk Factors beginning on Page 4.
Neither the SEC nor any state securities commission has approved or
disapproved of the securities or passed on the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal offense.
The date of this prospectus is October 30, 2000.
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this prospectus and, if given or
made, such information or representation must not be relied upon as having been
authorized. This prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities other than the securities to
which the prospectus relates or an offer to sell or the solicitation of an offer
to buy such securities in any circumstances in which such offer or solicitation
is unlawful. Neither the delivery of this prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of USA since the date hereof or that the information
contained herein is current as of any time subsequent to its date.
TABLE OF CONTENTS
Prospectus Summary ....................................................... 1
Risk Factors ............................................................. 4
Use of Proceeds .......................................................... 12
Managements Discussion And Analysis of
Financial Condition And Results
of Operations .......................................................... 13
Business ................................................................. 19
Management ............................................................... 29
Principal Shareholders ................................................... 37
Certain Transactions ..................................................... 41
Selling Shareholder ...................................................... 43
Market for Common Stock .................................................. 49
Description of Securities ................................................ 51
Plan of Distribution ..................................................... 65
Legal Matters ............................................................ 66
Experts .................................................................. 66
Financial Statements ..................................................... F-1
<PAGE>
PROSPECTUS SUMMARY
OUR COMPANY
USA Technologies, Inc. was incorporated in Pennsylvania in 1992. We are
an owner and licensor of automated, credit card activated control systems for
use in connection with copying machines, debit card purchase/revalue stations,
facsimile machines, personal computers, and computer printers. Our customers are
hotels, university libraries, public libraries and retail locations. We generate
revenues primarily from the sale of equipment utilizing our control systems,
from retaining a percentage of the revenues generated from all credit card
transactions conducted through our control systems, and from monthly
administrative fees paid by various locations utilizing our control systems.
OUR PRODUCT
The control systems we have developed which are used in a variety of
products operate as follows:
o The consumer swipes a valid credit card through the control
system.
o The control system transmits the request to the credit card
processor.
o The credit card processor verifies that the credit card is valid
and authorizes the transaction.
o The control system activates the equipment for use by the
consumer.
o Once the consumer finishes using the equipment, the control system
transmits a record of the transaction to the credit card
processor.
o The credit card processor electronically transfers the proceeds
derived from the transaction, less the credit card processor's
charge, to us.
o Finally, we forward a check to each location representing its
share of the proceeds.
1
<PAGE>
As of June 30, 2000, we have 1,379 control systems installed in the
field as follows:
o 1,134 Business Express(R) or MBE Business Express(R) control
systems;
o 112 Business Express(R) Limited Service control systems;
o 36 Copy Express(TM) control systems;
o 27 Debit Express(TM) control systems;
o 11 Fax/Printer Express(TM) control systems;
o 40 Public PC(TM) control systems; and
o 19 TransAct(TM) control systems.
In addition, we are developing a new terminal known as "e-Port(TM)." In
addition to the functions of our other control systems, it would also offer
public access electronic commerce and advertising using the Internet.
Our executive offices are located at 200 Plant Avenue, Wayne,
Pennsylvania 19087. Our telephone number is (610) 989-0340. Our website is
located at http://www.usatech.com.
KEY FACTS
Shares being offered for resale
to the public: 6,700,000
Total shares of common stock outstanding prior
to the offering, as of June 30, 2000: 13,375,291
Total shares of common stock outstanding after
the offering: 20,075,291
Total shares of common stock outstanding after
the offering and exercise of all options/warrants: 27,369,856
Price per share to the public Market price at time
of resale
Total proceeds raised by offering None, however, up to
$20,000,000 may be
received from Swartz
under the investment
agreement and additional
amounts may be received
from the exercise of
warrants
Investment agreement Our investment agreement
with Swartz is included
as an exhibit to this
registration statement
Dividend policy No dividends expected
2
<PAGE>
ABOUT OUR INVESTMENT AGREEMENT
We have entered into an investment agreement with Swartz to raise up to
$20 million through a series of sales of our common stock. The dollar amount of
each sale is limited by our common stock's trading volume, and a minimum period
of time must elapse between each sale. Each sale will be to Swartz. In turn,
Swartz will either sell our stock in the open market, place our stock through
negotiated transactions with other investors, or hold our stock in their own
portfolio. This prospectus covers the resale of our stock by Swartz either in
the open market or to other investors.
3
<PAGE>
RISK FACTORS
An investment in our common stock is very risky. You should be aware
that you could lose the entire amount of your investment. Prior to making an
investment decision, you should carefully consider the following risk factors
and the other information contained in this prospectus.
1. We have a history of losses and our existence may be dependent on
our ability to raise capital and generate sufficient revenue from
operations.
We have experienced losses since inception. We expect to incur losses
as we expend substantial resources on sales, marketing, and research and
development of our products. From our inception over eight years ago through
June 30, 2000, we have incurred operating losses of $25 million. For our fiscal
years ended June 30, 2000 and 1999, we have incurred operating losses of
$8,404,481 and $3,651,624, respectively.
There is currently no basis upon which to assume that our business will
prove financially profitable or generate more than nominal revenues. From
inception, we have generated funds primarily through the sale of securities.
There can be no assurances that we will be able to continue to sell additional
securities. If we fail to generate increased revenues or fail to sell additional
securities you may lose all or a substantial portion of your investment.
Our auditors, Ernst and Young, LLP, have included an explanatory
paragraph in their report on our June 30, 2000 consolidated financial statements
indicating that as of June 30, 2000, there is substantial doubt about our
ability to continue as a going concern. We believe we have strengthened our
financial position since that time by receiving signed subscription agreements
for $1,150,000 in a private placement of securities in September 2000 and by
entering into the investment agreement with Swartz. However, it is possible that
in the future our capital expenditures and operating losses will limit our
ability to pay our liabilities in the normal course of business and that we may
not be able to continue as a going concern.
4
<PAGE>
2. We depend on our key personnel.
We are dependent on key management personnel, particularly the Chairman
and Chief Executive Officer, George R. Jensen, Jr. The loss of services of Mr.
Jensen or other executive officers would dramatically affect our business
prospects. Certain of our employees are particularly valuable to us because:
o they have specialized knowledge about our company and operations;
o they have specialized skills that are important to our operations;
or
o they would be particularly difficult to replace.
We have entered into an employment agreement with Mr. Jensen that
expires in June 2002. We have also entered into employment agreements with other
executive officers, each of which contain non-compete agreements. We have
obtained a key man life insurance policy in the amount of $2,000,000 on Mr.
Jensen, and a key man life insurance policy in the amount of $1,000,000 on our
Vice-President-Research and Development, Haven Brock Kolls, Jr.
We do not have and do not intend to obtain key man life insurance
coverage on any of our other executive officers. As a result, we are exposed to
the costs associated with the death of these key employees.
3. The commercial viability of our products has not been tested.
While a number of products or services such as gasoline and public
telephones are currently provided through unattended, credit card activated
terminals, the commercial viability of any of our products has not been
established. Although commercial production and installation of our products has
commenced on a very limited basis, there can be no assurance that:
o our products will be successful or become profitable;
o the demand for our products will be sufficient to enable us to
become profitable; or
o even if our products become commercially viable, they can evolve
or be improved to meet the future needs of the market place.
5
<PAGE>
In any such event, investors may lose all or substantially all of their
investment in USA.
4. USA's dependence on proprietary technology and limited ability to
protect our intellectual property may adversely affect our ability
to compete.
A successful challenge to our ownership of our technology could
materially damage our business prospects. Our technology may infringe upon the
proprietary rights of others. Our success is dependent in part on our ability to
obtain patent protection for our proprietary products, maintain trade secret
protection and operate without infringing the proprietary rights of others.
To date, we have pending patent applications, and intend to file
applications for additional patents covering our future products, although there
can be no assurance that we will do so. In addition, there can be no assurance
that we will maintain or prosecute these applications. The United States
Government granted us nine patents as of September 19, 2000. See "Business -
Patents, Trademarks and Proprietary Information." There can be no assurance
that:
o any of the remaining patent applications will be granted to us;
o we will develop additional products that are patentable or do not
infringe the patents of others;
o any patents issued to us will provide us with any competitive
advantages or adequate protection for our products;
o any patents issued to us will not be challenged, invalidated or
circumvented by others; or
o any of our products would not infringe the patents of others.
If any of the products are found to have infringed any patent, there
can be no assurance that we will be able to obtain licenses to continue to
manufacture and license such product or that we will not have to pay damages as
a result of such infringement. Even if a patent application is granted for any
of our products, there can be no assurance that the patented technology will be
a commercial success or result in any profits to us.
6
<PAGE>
5. Competition from others with greater resources could prevent USA
from increasing revenue and achieving profitability.
Competition from other companies which are well established and have
substantially greater resources may reduce our profitability. Many of our
competitors have established reputations for success in the development, sale
and service of high quality products. We face competition from the following
groups:
o companies offering automated, credit card activated control
systems in connection with facsimile machines, personal computers,
debit card purchase/revalue stations, and use of the Internet
and e-mail which directly compete with our products. See
"Business-Competition";
o companies which have developed unattended, credit card activated
control systems currently used in connection with public
telephones, prepaid telephone cards, gasoline dispensing machines,
or vending machines and are capable of developing control systems
in direct competition with USA; and
o businesses which provide access to the Internet and personal
computers to hotel guests. Although these services are not credit
card activated, such services would compete with USA's Business
Express(R).
Competition may result in lower profit margins on our products or may
reduce potential profits or result in a loss of some or all of our customer
base. To the extent that our competitors are able to offer more attractive
technology, our ability to compete could be adversely affected.
6. The termination of any of our relationships with third parties
upon whom we rely for supplies that are critical to our products
could adversely affect our business.
We depend on arrangements with third parties for a variety of component
parts used in our products. We have contracted with RadiSys Corporation to
assist us to develop and manufacture our proposed e-Port(TM) product. For other
components, we do not have supply contracts with any of our third-party
suppliers and we purchase components as needed from time to time. See
"Business-Procurement". If these business relationships are terminated, the
implementation of our business plan may be delayed until an alternative supplier
can be retained. If we are unable to find another source or one that is
comparable, the content and quality of our products could suffer and our
business, operating results and financial condition could be harmed.
7
<PAGE>
7. We do not expect to pay cash dividends in the foreseeable future.
The holders of our common stock and series A preferred stock are
entitled to receive dividends when, and if, declared by our board of directors.
Our board of directors does not intend to pay cash dividends in the foreseeable
future, but instead intends to retain any and all earnings to finance the growth
of the business. To date, we have not paid any cash dividends on the common
stock or series A preferred stock. Although we issued a special stock dividend
in August 1995 consisting of one-third of a share of common stock for each share
of outstanding series A preferred stock, there can be no assurance that cash
dividends will ever be paid on the common stock.
In addition, our articles of incorporation prohibit the declaration of
any dividends on the common stock unless and until all unpaid and accumulated
dividends on the series A preferred stock have been declared and paid. Through
June 30, 2000, the unpaid and cumulative dividends on the series A preferred
stock equal $3,871,639. The unpaid and cumulative dividends on the series A
preferred stock are convertible into shares of common stock at the rate of
$10.00 per share. Through June 30, 2000, $2,166,183 of unpaid and cumulative
dividends on the Series A preferred stock were converted into 246,695 shares
of common stock. See "Description of Securities-Series A Convertible Preferred
Stock."
8. We may fail to gain market acceptance of our products.
On June 30, 2000, we have installed 1,379 control devices at commercial
locations and revenues, although growing, have been limited. There can be no
assurance that demand for our products will be sufficient to enable us to become
profitable. Likewise, no assurance can be given that we will be able to install
the credit card activated control systems at enough locations or sell equipment
utilizing our control systems to enough locations to achieve significant
revenues or that our operations can be conducted profitably. Alternatively, the
locations which would utilize the control systems may not be successful
locations and our revenues would be adversely affected. We may in the future
lose locations utilizing our products to competitors, or may not be able to
install our products at competitor's locations. Even if our current products
would prove to be commercially viable, there can be no assurance that they can
evolve or be improved to meet the future needs of the market place.
8
<PAGE>
9. The lack of an established trading market may make it difficult to
transfer our stock.
Our common stock is traded on the OTC Bulletin Board. Although there is
limited trading in the common stock, there is no established trading market.
Until there is an established trading market, holders of the common stock may
find it difficult to dispose of, or to obtain accurate quotations for the price
of the common stock. See "Description of Securities - Shares Eligible For Future
Sale" and "Market For Common Stock."
10. There are rules governing low-priced stocks that may affect your
ability to resell your shares.
Our common stock is currently considered a "penny stock" under federal
securities laws since its market price is below $5.00 per share. Penny stock
rules generally impose additional sales practice and disclosure requirements on
broker-dealers who sell our shares to certain investors.
Broker-dealers who sell penny stock to certain types of investors are
required to comply with the SEC's regulations concerning the transfer of penny
stock. If an exemption is not available, these regulations require
broker-dealers to:
o make a suitability determination prior to selling penny stock to
the purchaser;
o receive the purchaser's written consent to the transaction; and
o provide certain written disclosures to the purchaser.
These rules may affect the ability of broker-dealers to make a market
in or trade our shares. This, in turn, may affect your ability to resell those
shares in the public market.
11. We are unable to predict the effect that future sales may have on
the market price of our common stock.
We are unable to predict the effect that sales may have on the market
price of our common stock prevailing at the time of such sales. See "Description
of Securities--Shares Eligible for Future Sale" and "Market for Securities".
9
<PAGE>
Number of Shares Issued and Outstanding
as of June 30, 2000 Transferability
--------------------------------------- ---------------
13,375,291 shares of common stock 11,912,117 are freely
transferable without
restriction or further
registration (other than
shares held by affiliates
of USA);
1,463,174 are restricted
securities and under
certain circumstances may
be sold without
registration; and
566,444 shares of preferred stock all 566,444 are freely
transferable without
restriction or further
registration (other than
shares held by affiliates
of USA).
As of June 30, 2000, there were:
o 67,300 shares of common stock issuable to the holders of the
1995 warrants;
o 86,800 shares of common stock issuable to the holders of the
1996 warrants;
o 4,000 shares of common stock issuable to the holders of the
1996-B warrants;
o 1,500 shares of common stock issuable to the holders of the
1997 warrants;
o 4,000 shares of common stock issuable to the holders of the
1998-A warrants;
o 984,767 shares of common stock issuable to the holders of the
management options;
o 100,000 shares of common stock issuable upon the exercise of the
GEM warrants;
o 1,629,200 shares issuable upon conversion of the senior notes;
o 125,400 shares issuable upon exercise of the consultant warrants;
o 3,307,250 shares issuable upon exercise of the 1999-B warrants;
o 5,000 shares of common stock issuable to the holders of the
1998-B warrants;
o 14,000 shares of common stock issuable to the holders of the
1999-A warrants; and
o 11,740 shares of common stock issuable to the holders of the
purchase rights.
10
<PAGE>
The common stock, if issued, will be freely tradeable under the Act.
See "Description of Securities".
12. We are obligated to make substantial principal and interest
payments to the holders of the senior notes.
As of June 30, 2000, $4,073,000 of unsecured senior notes which accrue
interest at the rate of twelve percent (12%) per year are payable on December
31, 2001. Currently, we are required to make quarterly interest payments
totaling $122,190, or $488,760 each year.
In an effort to reduce the debt payments, we authorized the voluntary
conversion of the senior notes into shares of common stock at the rate of $2.50
per share, at any time until December 31, 2001. If all of the remaining
$4,073,000 principal amount of the senior notes are converted, we will issue
1,629,200 shares of common stock. We have agreed to use our best efforts to
register for resale under the Act the shares of common stock into which the
senior notes are convertible. During fiscal year 2000, a total of $545,000 of
our senior notes were converted into 218,000 shares of common stock.
In the event that no additional senior notes are converted, on December
31, 2001, we are obligated to repay the $4,073,000 remaining principal amount
of senior notes. Until the senior notes have been paid by us, they will be
reflected as a liability on our financial statements, net of related discount.
Our ability to satisfy the debt obligations is dependent on
our future performance, the success of our product lines and on our
ability to raise capital. Our performance is also subject to financial, business
and market factors affecting our business and operations.
We anticipate that the senior notes will be paid from cash from
operations, as well as proceeds from securities offerings including the purchase
by Swartz of our common stock. However, there can be no assurance that we will
meet our obligations to pay quarterly interest on or the principal amount of the
senior notes at maturity.
The senior notes are unsecured and thus, in effect, will rank junior to
any senior indebtedness. See "Description of Securities - 12% senior notes." The
payment of the senior notes is subordinated to the prior payment in full of all
existing and future senior indebtedness. In the event of our liquidation,
dissolution, reorganization or similar proceedings, our assets will be available
to pay obligations on the senior notes only after all of the senior indebtedness
has been paid in full, and there can be no assurance that sufficient assets to
pay amounts due on the senior notes will remain.
11
<PAGE>
USE OF PROCEEDS
We expect to sell to Swartz Private Equity, LLC, subject to an
effective registration statement and applicable volume limitations, up to
$20,000,000 of common stock under the investment agreement. Additional amounts
may be received by us if the warrants to purchase common stock are exercised.
Net proceeds are determined after deducting all expenses of the offering. Our
expenses are estimated to be $40,000.
We intend, in the following order of priority, to use the net proceeds
from this offering (excluding proceeds from warrant exercises) as follows:
Expenses of Financing
Expenses of registration, issuance, and
distribution $40,000
Working Capital
Development of Network $2,500,000
Research and Development $1,500,000
Payment of 12% Senior Notes $4,100,000
maturing December 31, 2001
Marketing and advertising of e-Port(TM) $2,000,000
Other working capital needs $9,860,000
-----------
Total Proceeds $20,000,000
===========
12
<PAGE>
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
This prospectus contains certain forward looking statements regarding,
among other things, our anticipated financial and operating results. Forward
looking statements are statements that are not 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 our actual
results to differ materially from those projected, include, for example:
o our ability to generate sufficient sales to generate operating
profits, or to sell products at a profit;
o our ability to raise funds in the future through sales of
securities;
o whether we are able to enter into binding agreements with third
parties to assist in product or network development;
o our ability to commercialize our developmental products, or if
actually commercialized, to obtain commercial acceptance thereof;
o our ability to compete and obtain market share; or
o our ability to obtain sufficient funds through operations or
otherwise to repay our debt obligations.
Although we believe that the forward looking statements contained in
this prospectus are reasonable, we can give no assurance that our expectations
will be met.
13
<PAGE>
Introduction
We have incurred operating losses during the years ended June 30, 2000
and 1999 of $8,404,481 and $3,651,624, respectively, and anticipate incurring
operating losses through at least fiscal 2001.
Results of Operations
Fiscal year ended June 30, 2000:
For the fiscal year ended June 30, 2000, we had a net loss of
$8,404,481. The loss applicable to common shares of $9,334,559 or $.92 loss per
common share (basic and diluted) was derived by adding the $8,404,481 net loss
and the $930,078 of cumulative preferred dividends and dividing by the weighted
average shares outstanding of 10,135,905.
Revenues for the fiscal year ended June 30, 2000 were $2,054,341, a
decrease of $1,836,175 or 47% under the prior year, reflecting the large Prime
Hospitality rollout of the MBE Business Express(R) in fiscal year 1999.
Operating expenses for the fiscal year ended June 30, 2000 were
$8,874,342, representing a $1,578,714 or 22% increase over the prior year. The
primary contributors to this increase were general and administrative expenses
and compensation expense offset by a reduction in cost of equipment sales, as
detailed below.
Cost of sales decreased by $1,704,128 from the prior year, primarily
reflecting the decrease in the Business Express(R) and MBE Business Express(R)
centers sold. General and administrative expenses of $5,001,832 increased by
$2,314,088 or 86%. This increase is primarily due to legal expenses associated
with the pending MBE litigation, which amounted to approximately $1,600,000 an
increase of $1,000,000 over the prior year. All but approximately $150,000 of
these expenses were non-cash as the legal counsel was paid for services by the
issuance of our common stock. Other general and administrative expenses
increased by approximately $1,300,000. Components of this increase include an
increase in research and development costs of $356,280, increases in outside
marketing and operational services of $654,381, increased charges for consulting
and professional fees of $300,436 primarily to fund promotional programs in the
investor relations area, increases in costs related to the rental and
maintenance of the Company's corporate office of $98,496 and a one time expense
of $55,418 for relocation of personnel. Offsetting these increases was a
decrease in trade show costs of $26,630, or 37%.
14
<PAGE>
Compensation expense was $2,503,165, an increase of $949,976 or 61%
from the previous year. The increase was due to the non-cash expense of $293,700
relating to the compensation charge recorded for bonuses to employees for work
performed in fiscal year 2000, and increases in salaries of $656,276, or 42%,
which is due to increased personnel activities in all areas of USA. Other
expenses increased by $1,337,968. Of this increase, $976,380 was non-cash, due
to amortization of debt discount relating to the outstanding senior notes. Cash
interest expense accounted for an increase of $493,462 offset by an increase in
interest income of $82,707.
Depreciation expense of $110,551 increased by $18,778, which is
directly attributable to the increased depreciable asset base.
Fiscal year ended June 30, 1999:
For the fiscal year ended June 30, 1999, the we 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. 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 Express(TM) 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(R) 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%.
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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.
Plan of Operations
On June 30, 2000, we had 1,379 credit card activated control systems
installed in the field as follows:
o 1,134 Business Express(R) or MBE Business Express(R);
o 112 Business Express(R) Limited Service;
o 36 Copy Express(TM);
o 27 Debit Express(TM);
o 40 Public PC(R);
o 11 Fax/Printer Express(TM); and
o 19 TransAct(TM).
Through June 30, 2000 total license and transaction fees earned by the
us from these systems were $640,341, an increase of $192,022 or 43% over the
prior year.
During the past year we have focused on developing a new terminal known
as "e-Port(TM)". 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. RadiSys, a contract manufacturer, is working
with us to provide value added design, development, fulfillment and product
warranty services for the e-Port(TM). Our goal is to reduce the time to market
with a lower total cost of goods. We anticipate that the re-engineered, mass
producible, Internet ready e-Port(TM) will be delivered by the end of the
calendar year, and ready for mass production by March 31, 2001. As a complement
to the re-engineering of e-Port(TM), IBM is helping us to design an enhanced
version of the network which will underlie all transaction processing for
e-Port(TM), including advertising and e-commerce.
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Additional plans for the coming fiscal year include further activity in
the advertising and media arenas, cultivation of customers in the vending
industry, and development of strategic partnering relationships.
Liquidity and Capital Resources
During the fiscal year ended June 30, 2000, we completed several
financing transactions. Net proceeds of $5,641,295 were realized from private
placement offerings of common stock and $1,044,800 was realized from common
stock transactions, principally the exercise of common stock purchase warrants
and options. As of June 30, 2000, we had working capital of $2,018,994, which
included cash and cash equivalents of $1,859,360 and inventory of $992,980.
During the fiscal year ended June 30, 2000, net cash of $5,738,782 was
used by operating activities, primarily due to the net loss of $8,404,481,
offset by $1,696,846 of common stock and warrants issued for services in lieu of
cash payments, and $1,011,874 of non cash amortization of the equity component
of the senior notes. The net cash provided by financing activities of $6,255,962
was attributable primarily to net proceeds generated from the issuance of common
stock through private placements and the exercise of common stock purchase
warrants and options described in the prior paragraph, as well as the repayment
of $621,289 toward the line of credit from IBM Global Financing (see below).
From July 1, 2000 through October 27, 2000, shareholders have exercised
an aggregate of 1,178,350 warrants for gross proceeds of $1,177,350.
On September 15, 2000, we signed an investment agreement with Swartz
Private Equity, LLC, a private equity fund, pursuant to which Swartz agreed to
purchase up to $20,000,000 of our common stock. The purchases would be made at
our option over a three year period in amounts and at prices based upon market
conditions. The purchase by Swartz is subject to an effective registration
statement. We believe that this agreement should provide timely financing and a
reduction in financing costs incurred in connection with repeated, separate,
private placements. To date, Swartz has not purchased any of our common stock.
On September 15, 2000, we accepted subscription agreements from nine
accredited investors to purchase 1,150,000 shares of restricted common stock at
$1.00 per share. For each share purchased, the investor also received a warrant
to purchase one share of common stock at $1.00 at any time through January 31,
2001.
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We have incurred losses of $8.4 million and $3.7 million during each of
the fiscal years ending June 30, 2000 and 1999, respectively, and cumulative
losses from our inception through June 30, 2000 of approximately $25 million. We
anticipate that for the year ending June 30, 2001 there will be a negative cash
flow from operations in excess of $3.0 million. Further, we have a stockholders'
deficit of $155,000 at June 30, 2000. These factors raise substantial doubt
about our ability to continue as a going concern. Our independent auditors have
included an explanatory paragraph in their report on our June 30, 2000
consolidated financial statements. We believe that the following inflows of
capital will allow us to continue as a going concern:
o funds available at June 30, 2000 combined with events anticipated
to occur, including the anticipated revenues to be generated
during fiscal year 2001;
o the potential capital to be raised from the exercise of the common
stock purchase warrants;
o the anticipated receipt of $1,150,000 on account of the
subscription agreements signed on September 15, 2000; and
o the funds anticipated to be received under the private equity line
from Swartz.
We also believe that, if necessary, we have the ability to reduce
anticipated expenditures.
Commitments
We lease approximately 10,000 square feet in Wayne, Pennsylvania for a
monthly rental of $11,500 plus utilities and operating expenses. The lease
expires on June 30, 2002.
We have acquired inventory financing using IBM Global Financing. The
debt to IBM is secured primarily by the inventory being financed and bears an
annual interest rate of 10%, subject to adjustment if the outstanding balance is
outstanding greater than 180 days. As of June 30, 2000, $183,196 is outstanding
under this arrangement.
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BUSINESS
USA Technologies, Inc., was incorporated in Pennsylvania in 1992. We
are a leading provider and licensor of automated, credit card activated control
systems for the copying, debit card and personal computer industries. Our
devices make available credit card payment technology in connection with the
sale of a variety of products and services. We generate our revenues from:
o the direct sale of control systems;
o the resale of configured office products;
o monthly administrative fees paid by locations utilizing our
control systems; and
o retaining a portion of the monies generated from all credit card
transactions conducted through our control systems.
We have 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 purchases.
We have 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, we have introduced
to the university library market our 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, we 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 our existing applications for
computers, copiers, and facsimiles into a kiosk type configuration. All services
provided are credit card activated. The Business Express(R) continues our move
toward the sale of the our proprietary equipment to operators rather than the
revenue sharing arrangements employed in past years. We still retain all rights
to software and proprietary technology which we license to location operators
for their exclusive use. As of June 30, 2000, 378 Business Express(R) or MBE
Business Express(R) units are installed.
During the latter part of fiscal year 1999, we introduced a product
line extension to our 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, 2000, 69 LSS
units are included in the total of 378 Business Express(R) or MBE Business
Express(R) units installed.
We have entered into a joint marketing agreement with Minolta
Corporation, and have been designated as an authorized equipment reseller by
International Business Machines Corporation and Hewlett-Packard Company. We
benefit from the association of our control systems with the well-known brands
of business equipment manufactured by these companies.
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On September 24, 1997, we entered into a Joint Venture Agreement with
Mail Boxes Etc., 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. We terminated the
agreement in May 1999 and are currently involved in legal proceedings with MBE.
We continue to service all field installations.
In 1998, Prime Hospitality Corp. 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, 2000, all installations have
been completed, generating total revenues of approximately $1.9 million, almost
all of which occurred in the fiscal year ended June 30, 1999.
During the past fiscal year we have focused on developing a new
terminal, trademarked "e-Port(TM)". 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 hopes to position itself to claim a piece of two important
market spaces within the new "Internet" economy - electronic commerce and
pervasive computing. As of June 30, 2000 there is underway a pilot test of a
version of the e-Port(TM) with a Fortune 50 beverage company in two separate
geographic vending markets in the United States.
In May 1999, we signed an agreement with International Business
Machines Corporation whereby IBM agreed to be the executional partner for
certain aspects of the our business, including project management services,
asset procurement, configuration and testing of equipment, site preparation,
installation, maintenance services, and asset management. This agreement
expanded an earlier agreement from 1,000 to 5,000 locations, and expanded the
array of USA products which are eligible for IBM installation. IBM has also
signed a letter of intent to help USA design an enhanced version of the network
which will underlie all transaction processing for e-port(TM), including
advertising and e-commerce.
We 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. Since then,
Choice has promoted our business center products internally to its own hotels.
We have also entered into a corporate agreement with Promus Hotel Corporation
(Embassy Suites, Hampton, and Doubletree brands) which establishes us as a
preferred supplier of business center products for those brands. In addition,
our Business Express(R) has been approved and recommended as a solution for
business center needs by Marriott for its hotels.
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In March 2000, USA and MeriStar H&R Operating Company, L.P., an
affiliate of MeriStar Hospitality Corporation, entered into a Business Center
Solutions Supply Agreement. MeriStar is the largest independent hotel management
company in the United States, operating 225 hotels and resorts under such known
brand names as Hilton, Holiday Inn and Wyndham. The agreement provides that we
will supply our business center products to MeriStar managed and MeriStar owned
hotels. We will be listed as the only business center provider in all purchasing
guidebooks and purchasing web sites of MeriStar. We will be the exclusive
provider of business center solutions to the 116 properties owned by MeriStar.
MeriStar will recommend USA as the preferred provider of business center
products for the remaining 109 hotels which are managed but not owned by
MeriStar. The agreement expires in February 2002, and may be terminated by
either party prior thereto upon 60-days prior notice. As of June 30, 2000, four
business centers have been installed at MeriStar locations.
In March 2000, we were invited to join the Salutation Consortium, a
non-profit group of global information technology companies which includes IBM,
Xerox, Hewlett Packard, Hitachi and America Online. The Consortium focuses on
providing technologies that improve information exchange among multiple and
different pervasive computing devices. By joining the Consortium, we expect to
ensure compatibility of e-Port(TM) with emerging communications protocols and be
in a position to pursue partnerships and alliances.
In April 2000, we signed an agreement with Wayport, Inc. of Austin,
Texas, a leading high speed Internet solutions provider. The agreement could
benefit us in three ways: broadening our business center offerings to include
providing hotels with in-room high speed Internet access; providing faster
response times for our current Business Express(R) product; and giving us a
strategic partner to co-market our Business Express(R) product.
In April 2000, we announced we will sell our TransAct(TM)credit card
device and payment system as a standalone offering to the world's leading office
equipment manufacturers and distributors. We established a TransAct(TM)
Authorized Reseller Program to sign up various independent and national dealers
and distributors. As of June 30, 2000, four dealers have signed onto the
program.
In May 2000, we announced at the @d:tech Internet Conference our
intention to enter the interactive media market space through use of our
e-Port(TM) technology. The e-Port(TM) would function as an interactive
touchscreen Internet appliance which could allow advertisers the opportunity to
target consumers in high traffic locations such as vending and retail point of
sale. On June 30, 2000, in furtherance of this strategic initiative, we
purchased a worldwide license from DoubleClick to use its AdServer software on
the e-Port(TM). We anticipate that this software would manage any advertising
and media campaigns on terminals throughout the world.
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On June 24, 2000 we entered into a Development and Manufacturing
Agreement with RadiSys Corporation, a leading global designer and manufacturer
of building blocks enabling next generation Internet and communications systems.
Pursuant thereto, RadiSys will develop a reengineered version of the e-Port(TM)
for the Company. RadiSys will then exclusively manufacture the revised
e-Port(TM) product for USA. The agreement can be terminated by either party upon
thirty days notice. We believe that we would also benefit from RadiSys's
purchasing, order fulfillment and product warranty services. RadiSys has
significant design and manufacturing expertise in the embedded chip market and
is partially owned by Intel.
On June 28, 2000 USA and Xerox Corporation entered into a Strategic
Alliance Teaming Agreement pursuant to which Xerox would act as a non-exclusive
reseller and distribution entity for our Transact(TM) terminals in the United
States. Under the agreement, Xerox would be able to specify Transact(TM) as
another value added facet of its managed business center solution, and in
addition, would be able to sell Transact(TM) units through its manufacturer
representative sales team and through its dealer network. The agreement is a
non-exclusive arrangement for both parties and is terminable by either party
upon sixty days prior notice.
On September 15, 2000, we signed an Investment Agreement with Swartz
Private Equity, LLC, a private equity fund, pursuant to which Swartz agreed to
purchase up to $20,000,000 of common stock. The purchases would be made at our
option over a three year period in amounts and at prices based upon market
conditions. The purchase by Swartz is subject to an effective registration
statement. To date, Swartz has not purchased any of our common stock.
For the years ended June 30, 2000 and 1999, we have spent approximately
$554,000 and $198,000, respectively for the development of our proprietary
technology. These amounts include the expense of outside consultants and
contractors as well as compensation paid to certain of our employees and are
reflected in compensation and general and administrative expense in the
accompanying consolidated financial statements.
As of June 30, 2000, we had 1,134 Business Express(R) or MBE Business
Express(R) control systems, 112 Business Express(R) Limited Service control
systems, 36 Copy Express(TM) control systems, 27 Debit Express(TM) control
systems, 11 Fax/Printer Express(TM) control systems, 40 Public PC(R) control
systems and 19 TransActs(TM) located at various hotels and libraries throughout
the United States and Canada. Through June 30, 2000 total license and
transaction fee revenues received by us from these systems, although growing,
has not been sufficient to cover operating expenses.
We have 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 us a fixed rate percentage processing charge in
connection with the credit card transactions conducted through our control
systems. This charge is payable by us (not the locations) out of our share of
the gross proceeds.
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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, we believe
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. Our products reflect this overall
trend and feature automated credit card control systems. To date, we have
focused our efforts towards the personal computer, copier, and debit card
industries. However, with introduction of e-Port(TM), the following trends in
the space of electronic commerce and pervasive computing become encouraging
signs:
o 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
billion in 1998). This increased use would amount to two new users per
second.
o 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
Our credit card activated control devices record and transmit all
transaction data to the credit card processor. After receiving transaction
information, the credit card processor electronically transfers the funds (less
the credit card processor's charge) to us. We then forward to the location its
share of the funds.
We have agreed on a percentage split of the gross proceeds from our
devices with each location. The credit card processor's fees and costs to
forward the location's share of the gross proceeds are all paid for out of our
portion of the gross revenue.
We currently retain a portion of the gross revenues from each device.
If we have sold the equipment to the location, the portion retained is generally
5% of the gross revenues. In cases where we continue to own the equipment, the
portion retained can be as high as 90% of gross revenues. In addition we charge
a fixed monthly management fee which is generally $20-$25 per control device.
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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 our 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 joint venture
agreement in May 1999.
The Copy Express(TM)
Traditionally, customers wishing to use a photocopying machine have
either used a prepaid, stored value card or cash. In most instances, this places
a burden on employees of the facility to provide a number of services unrelated
to their primary jobs, such as providing change and collecting/counting/
reloading coins. With the Copy Express(TM), the attendant no longer needs to
interact with the customers for these purposes.
The Copy Express(TM) provides a cashless method to pay for the use of
photocopying machines. The device is attached to the photocopying machine,
computer printer, or microfilm/fiche printer in a similar manner as attaching a
standard coin acceptor. The device can be attached to either existing or new
equipment. The control system enables customers to photocopy documents with the
use of a credit card.
The Debit Express(TM)
Many "closed" environments such as universities or hospitals utilize a
private card known as a debit or "stored value" card, to store cash value. The
system works by encouraging customers (by discounting the price of the products
or services) to transfer lump sum cash values onto a magnetic stripe or imbedded
chip card that can be used to activate equipment within the closed environment.
As the cardholder uses the card to purchase products or services the cash value
is deducted from the total value on the card. Typically, the cards are purchased
from attendants or from machines which accept coins or dollar bills.
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Our 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)
We believe 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, we have developed
the Public PC(R). 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 personal computer is becoming an integral part of how people access
and utilize the information available to them. The majority of libraries do not
currently offer general use personal computers to their patrons. Potential
customers include print shops, cyber cafes, hotels, airports, convention and
conference centers, and various retail outlets.
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), we will position ourselves to
claim a piece of two important market spaces within the new "Internet" economy -
electronic commerce and pervasive computing. e-Port(TM) would enable e-commerce
to be transacted away from the computer and will offer 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 are
estimated as follows: vending - 6 million locations; retail points of sale - 7.5
million devices with expected shipments of 2 million devices in year 2000; and
our credit card activated business equipment.
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TransAct(TM) as a Stand Alone Product
USA produced and patented TransAct(TM), a cashless transaction terminal
that enables 24 hour, 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 voice and display instructions for users. The
installed locations of Business Express(R) indicates that TransAct(TM)
transforms various 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. We anticipate that
the development of a dealer channel to sell TransAct(TM) units will increase
licensing and usage revenue streams.
Marketing
As of June 30, 2000, we are marketing our products with a full-time
sales staff of four salespeople. They market our products to hotel and retail
locations and to office component dealers. Our agreements with Marriott, Choice
Hotels International, Promus Hotel Corporation and MeriStar are an important
component of our effort to market the Business Express(R) to the hospitality
industry because they provide instant brand name recognition.
Procurement
Our control system devices consist of a card reader, printer,
amplifier, circuit board and micro chip in a specially designed housing. Our
devices are currently being re-engineered to be internet capable and easily mass
producible, by an independent contract manufacturer, RadiSys. As of October 16,
2000, we have not yet placed any orders with RadiSys.
We anticipate obtaining the other components of our business center
(other than the control system) through CompuCom, a distributor of IBM products,
Hewlett Packard, and copier and fax manufacturers. Orders are regularly placed
for quantities required for expected orders several months in advance.
Competition
There are currently other businesses offering or announcing unattended,
credit card activated control systems for use in connection with copiers,
printers, personal computers, facsimile machines, Internet and e-mail access,
vending, retail point of sale, 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 USA. Many of these businesses
are well established, have substantially greater resources than us and have
established reputations for success in the development, sale and service of high
quality products. We are aware of businesses which have developed an unattended,
credit card activated control system to be used in connection with vending
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machines. Any such increased competition may result in reduced sales and/or
lower percentages of gross revenues being retained by us in connection with our
licensing arrangements, or otherwise may reduce potential profits or result in a
loss of some or all of our customer base. We are also aware of several
businesses which make available use of the Internet and personal computers to
hotel guests. Such services might compete with ours Business Express(R), and the
locations may not order the Business Express(R), or if ordered, the hotel guest
may not use it. We are aware that credit card activated personal computer kiosks
have been developed and are in the marketplace.
Patents, Trademarks and Proprietary Information
We received federal registration approval of our trademarks Business
Express(R), C3X(R), and Public PC(R), and have applied for federal registration
of Copy Express(TM), e-Port(TM), and TransAct(TM).
The technology we have developed is subject to trade secret protection.
To reduce the risk of loss of trade secret protection through disclosure, we
have entered into confidentiality agreements with our key employees. There can
be no assurance that we 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 our technology.
As of June 30, 2000, we have thirty-four pending patent applications as
well as fourteen pending foreign patents. Through September 19, 2000, nine
United States patents have been issued to us:
o U.S. Patent No. 5,619,024 entitled "Credit Card and Bank Issued
Debit Card Operating System and Method for Controlling and
Monitoring Access of Computer and Copy Equipment";
o U.S. Patent No. 5,637,845 entitled "Credit and Bank Issued Debit
Card Operating System and Method for Controlling a Prepaid Card
Encoding/Dispensing Machine";
o U.S. Patent No. D423,474 entitled "Dataport";
o U.S. Patent No. D415,742 entitled "Laptop Dataport Enclosure";
o U.S. Patent No. D418,878 entitled "Sign Holder";
o U.S.Patent No. 6,056,194 entitled "System and Method for
Networking and Controlling Vending Machines";
o U.S. Patent No. D428,047 entitled "Electronic Commerce Terminal
Enclosure";
o U.S. Patent No. D428,444 entitled "Electronic Commerce Terminal
Enclosure for a Vending Machine"; and
o U.S. Patent No. 6,119,934 entitled "Credit Card, Smart Card and
Bank Issued Debit Card Operated System and Method for Processing
Electronic Transactions".
In addition, one foreign patent, Canadian Patent No. D87998 entitled
"Sign Holder" has been issued to USA. We have also received a notice of
allowance from the United States government of a patent "Credit and Bank Issued
Debit Card Operated System and Method for Controlling a Vending Machine."
27
<PAGE>
Employees
On June 30, 2000, we had twenty-nine full-time employees.
Properties
We lease our principal executive offices, consisting of approximately
10,000 square feet, at 200 Plant Avenue, Wayne, Pennsylvania for a monthly
rental of $11,500 plus utilities and operating expenses. The lease expires on
June 30, 2002.
Legal Proceedings
USA and MBE are parties to litigation in the United States District
Court for the Southern District of California. These proceedings commenced in
September 1998. The litigation is in the discovery stage and we anticipate that
a jury trial will commence in June 2001.
We have alleged various claims against MBE, including that MBE breached
the Joint Venture Agreement by among other things, utilizing a competitor of
ours in connection with MBE's in-store computer workstation project ("ICW
Project"), for which project we believe MBE was obligated to purchase our
terminals, that MBE breached a separate agreement pursuant to which it had
agreed to purchase our terminals for use in the ICW Project, that by attempting
to revoke or cancel its written purchase orders with us for in excess of 700
terminals, MBE breached its obligations under these purchase orders, and that
MBE misrepresented to us that MBE's franchisees would be capable of selling the
joint venture's products. We seek recovery from MBE of an unspecified amount of
money damages in excess of $10 million dollars as well as punitive damages.
MBE has alleged various claims against us, including that the terminals
purchased from us were defective, that we failed to develop for MBE a working
ICW Project as promised, that we owe MBE monies under the Joint Venture
Agreement, that we breached the Joint Venture Agreement, and that our technology
was not viable and "public proof" as promised. MBE seeks recovery from us of an
unspecified amount of money damages in excess of $10 million dollars as well as
punitive damages.
We believe that the claims of MBE are without merit and that we will
prevail in this matter. Accordingly, there has been no provision recorded for
this action in the accompanying consolidated financial statements.
28
<PAGE>
Where to get more information
We file annual, quarterly and special reports and other information
with the SEC. You may read and copy any document we file with the SEC at the
SEC's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549. You
may obtain information on the operation of the public reference room by calling
the SEC at 1-800-SEC-0330. The same information may be obtained at the following
Regional Office of the SEC: 7 World Trade Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material can also be obtained from
the Public Reference Section of the SEC's Washington, D.C. office at prescribed
rates.
Our filings may also be accessed through the SEC's web site
(http://www.sec.gov). We will provide a copy of any or all documents
incorporated by reference herein (exclusive of exhibits unless such exhibits are
specifically incorporated by reference therein), without charge, to each person
to whom this prospectus is delivered, upon written or oral request to USA
Technologies, Inc., 200 Plant Avenue, Wayne, Pennsylvania 19087, Attn: George R.
Jensen, Jr., Chief Executive Officer (telephone (610) 989-0340).
We will furnish record holders of our securities with annual reports
containing financial statements audited and reported upon by our independent
auditors, quarterly reports containing unaudited interim financial information,
and such other periodic reports as we may determine to be appropriate or as may
be required by law.
MANAGEMENT
Directors and Executive Officers
Our Directors and executive officers, on June 30, 2000, together with
their ages and business backgrounds were as follows.
Name Age Position(s) Held
---- --- ----------------
George R. Jensen, Jr. 51 Chief Executive Officer,
Chairman of the Board of Directors
Stephen P. Herbert 37 President, Director
Haven Brock Kolls, Jr. 34 Vice President - Research and
Development
Leland P. Maxwell 53 Senior Vice President, Chief
Financial Officer, Treasurer
Michael K. Lawlor 39 Vice President - Marketing
and Sales
William W. Sellers (1)(2) 78 Director
Henry B. duPont Smith 38 Director
William L. Van Alen, Jr. (1)(2) 66 Director
Steven Katz (1) 51 Director
Douglas M. Lurio (2) 43 Director
Edwin R. Boynton 45 Director
(1) Member of Compensation Committee
(2) Member of Audit Committee
29
<PAGE>
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 our Chief Executive Officer and a
Director since our inception in 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 in April 1996, and joined USA
on a full-time basis on May 6, 1996. Prior to joining us 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.
Haven Brock Kolls, Jr., joined USA 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 USA on a full-time basis on February 24, 1997
as Chief Financial Officer, Senior Vice President and Treasurer. Prior to
joining us, 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.
30
<PAGE>
Michael K. Lawlor joined USA on a full-time basis in 1997 and was
promoted to Senior Vice President, Sales and Marketing in September 1999. Prior
to joining us, Mr. Lawlor worked with Aladdin Industries, a leading manufacturer
of promotional drinkware, as Director of Restaurant Sales. From 1986 to 1995,
Mr. Lawlor was employed in various sales capacities by Pepsi-Cola and was
National Accounts Sales Manager when he departed in 1995. Mr Lawlor received an
undergraduate degree in Marketing from the University of Texas.
William W. Sellers joined the Board of Directors of USA 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 USA in May 1994.
Since January 1992, Mr. Smith has been a Vice President of The Rittenhouse Trust
Company and since September 1991 has been a Vice President of Rittenhouse
Financial Services, Inc. From September 1991 to December 1992, he was a
registered representative of Rittenhouse Financial Securities, Inc. Mr. Smith
was an Assistant Vice President of Mellon Bank, N.A. from March 1988 to July
1991, and an investment officer of Provident National Bank from March 1985 to
March 1988. Mr. Smith received a Bachelor of Arts degree in Accounting in 1984
from Franklin & Marshall College.
William L. Van Alen, Jr., joined the Board of Directors of USA 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.
31
<PAGE>
Douglas M. Lurio joined the Board of Directors of USA 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.
Edwin R. Boynton joined the Board of Directors in July 1999. He is a
partner of Stradley Ronon Stevens & Young LLP, and is a member of and currently
the chair of the firm's estates department. Mr. Boynton received his bachelor of
arts degree from Harvard University in 1976 and his Juris Doctor degree from
Duke University in 1979.
Executive Compensation
The following table sets forth certain information with respect to
compensation paid or accrued by USA during the fiscal years ended June 30, 1998,
June 30, 1999 and June 30, 2000 to each of our executive officers named below.
Except as set forth below, no individual who was serving as an executive officer
of USA at the end of the fiscal years ended June 30, 1998, June 30, 1999 or June
30, 2000 received salary and bonus in excess of $100,000 in any such fiscal
year.
Summary Compensation Table
<TABLE>
<CAPTION>
Fiscal
Name and Principal Position Year Annual Compensation Long Term Compensation
--------------------------- ------ --------------------------------- ----------------------------------------------------
Salary Bonus Other Anuual Restricted Stock Securities
(1) Compensation Awards Underlying
($) Options
(#)
------ ----- ------------- ---------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
George R. Jensen, Jr., 2000 $117,500 $0 -- $80,000 (2) --
Chief Executive Officer 1999 $100,000 $0 -- -- 180,000
1998 $100,000 $0 -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Stephen P. Herbert, 2000 $107,500 $94,000 -- $80,000 (2) 45,000
President
------------------------------------------------------------------------------------------------------------------------------------
Leland P. Maxwell, Chief 2000 $99,000 $29,000 -- -- 45,000
Financial Officer, Treasurer
------------------------------------------------------------------------------------------------------------------------------------
H. Brock Kolls, Senior Vice 2000 $105,000 $44,000 -- $80,000 (2) 30,000
President, Research &
Development
------------------------------------------------------------------------------------------------------------------------------------
Michael K. Lawlor, Senior 2000 $83,200 $35,500 $43,000 (3) -- 20,000
Vice President, Sales and
Marketing
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents shares of common stock issued to the executive officers during
the fiscal year valued at $2.00 per share, the closing bid price on the
date of issuance. For Mr. Lawlor, the bonus also includes a $5,500 sales
commission.
(2) Represents shares of common stock to be issued to such executive officers
if employed by USA on June 30, 2002. The shares have been valued at $2.00
per share, the closing bid price on the date of grant.
(3) Represents payment by USA of relocation expenses.
32
<PAGE>
The following table sets forth information regarding stock options
granted to certain executive officers during the fiscal year 2000:
OPTION GRANTS DURING FISCAL YEAR ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Name Number of Percent of Exercise Expiration
Securities Total Options Price Date
Underlying Granted to Per
Options Employees in Share
Granted Fiscal Year
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Stephen P. Herbert 45,000 37.5% $2.00 November 23, 2004
--------------------------------------------------------------------------------
Leland P. Maxwell 15,000 12.5% $2.00 November 23, 2004
--------------------------------------------------------------------------------
H. Brock Kolls 30,000 25.0% $2.00 November 23, 2004
--------------------------------------------------------------------------------
Michael K. Lawlor 20,000 16.7% $2.00 August 5, 2004
--------------------------------------------------------------------------------
</TABLE>
Executive Employment Agreements
We have entered into an employment agreement with Mr. Jensen which
expires June 30, 2002. The agreement is automatically renewed from year to year
unless canceled by Mr. Jensen or USA. The agreement provides for an annual base
salary of $135,000 effective March 1, 2000. Mr. Jensen is entitled to receive
such bonus or bonuses as may be awarded to him by the Board of Directors. The
agreement requires Mr. Jensen to devote his full-time attention to the business
and affairs of USA, and obligates him not to engage in any investments or
activities which would compete with USA during the term of the agreement and for
a period of one year thereafter. The agreement provides that if Mr. Jensen is
employed by USA on June 30, 2002, we will issue to him 40,000 shares of common
stock.
33
<PAGE>
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 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 USA by any person, entity or group, or
(ii) the approval by the shareholders of USA of a reorganization, merger,
consolidation, liquidation, or dissolution of USA, or the sale, transfer, lease
or other disposition of all or substantially all of the assets of USA.
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 USA
for any reason whatsoever. If a USA Transaction shall occur at a time when there
is not a sufficient number of authorized but unissued shares of common stock,
then we 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, we 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. At June 30, 2000, $12,199 was
outstanding. Subsequent to year end, the $12,199 has been received by us.
We have entered into an employment agreement with Mr. Herbert which
expires on April 30, 2002. The agreement is automatically renewed from year to
year thereafter unless canceled by Mr. Herbert or USA. The agreement provides
for an annual base salary of $125,000 per year effective March 1, 2000. 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 USA and obligates him not to engage in
any investments or activities which would compete with USA during the term of
the agreement and for a period of one year thereafter. The agreement provides
that if Mr. Herbert is employed by USA on June 30, 2002, we will issue to him
40,000 shares of common stock.
34
<PAGE>
Mr. Kolls has entered into an employment agreement with USA which
expires on April 30, 2002, and is automatically renewed from year to year
thereafter unless canceled by Mr. Kolls or USA. The agreement provides for an
annual base salary of $120,000 per year effective March 1, 2000. 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 USA, and obligates him not to engage in
any investments or activities which would compete with USA during the term of
his agreement and for a period of one year thereafter. The agreement provides
that if Mr. Kolls is employed by USA on June 30, 2002, we will issue to him
40,000 shares of common stock.
Mr. Maxwell has entered into an employment agreement with USA which
expires on June 30, 2001, and is automatically renewed from year to year
thereafter unless cancelled by Mr. Maxwell or USA. The agreement provides for an
annual base salary of $108,000 per year effective March 1, 2000. 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 USA, and obligates him not to engage in
any investments or activities which would compete with USA during the term of
the agreement and for a period of one year thereafter.
Mr. Lawlor has entered into an employment agreement with USA which
expires on June 30, 2001, and is automatically renewed from year to year
thereafter unless cancelled by Mr. Lawlor or USA. The agreement provides for an
annual base salary of $100,000 per year effective March 1, 2000. Mr. Lawlor is
also entitled to receive such bonus or bonuses as the Board of Directors may
award to him. The agreement requires Mr. Lawlor to devote his full time and
attention to the business and affairs of USA, and obligates him not to engage in
any investments or activities which would compete with USA 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, we issued to each of Messrs. 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 April 1998, the exercise price was reduced from $2.50 to
$1.50.
35
<PAGE>
In March 1995, we 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, and to Mr. Van Alen fully vested options to
purchase 2,500 shares of common stock. The exercise price of these options was
$2.50 per share and in April 1998, the exercise price of these options was
reduced from $2.50 to $1.50.
During June and July 1999, we granted 10,000 options to each of the
Directors who were not executive officers of USA. Each option is exercisable at
$2.00 per share at any time for five years following the vesting thereof.
All of the common stock underlying the options held by all Directors
was registered by USA under the Act, for resale by the holder thereof. The
registration was at our cost and expense.
The Board of Directors is responsible for awarding stock options. Such
awards are made in the subjective discretion of the Board. Other than the
repricing of the options by us 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, we 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. The options do not constitute incentive
stock options as such term is defined under Section 422 of the Internal Revenue
Code, as amended, and are not part of an employee stock purchase plan as
described in Section 423 thereunder.
Executive Stock Options
In June 1999, we granted an aggregate of 450,000 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; and Mr.
Lawlor - 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.
36
<PAGE>
In August 1999, we issued to Michael 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. We issued the
options pursuant to the exemption from registration set forth in Section 4(2) of
the Act. We registered for resale under the Act the common stock underlying the
options.
In November 1999, we issued fully vested options to purchase an
aggregate of 90,000 shares of common stock to our executive officers as follows:
Stephen P. Herbert - 45,000 options; Haven Brock Kolls - 30,000 options; and
Leland Maxwell - 15,000 options. Each option is exercisable at $2.00 per share
at any time within five years following issuance.
All of the above common stock underlying the options held by the
executive officers was registered by USA under the Act, for resale by the holder
thereof. The registration was at our cost and expense.
In October 2000, we granted to Mr. Jensen fully vested options to
purchase up to 200,000 shares of common stock at $1.50 per share. The options
are exercisable at any time within two years following issuance. We agreed to
register the shares of common stock for resale under the Act.
The Board of Directors is responsible for awarding stock options. Such
awards are made in the subjective discretion of the Board. 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.
All of the foregoing options are non-qualified stock options and not
part of a qualified stock option plan. The options 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.
PRINCIPAL SHAREHOLDERS
Common Stock
The following table sets forth, as of June 30, 2000, the beneficial
ownership of the common stock of our directors and executive officers, both
individualy and as a group. Except as set forth below, we are not aware of any
beneficial owner of more than five percent of the common stock as of June 30,
2000. Except as otherwise indicated, we believe 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.
37
<PAGE>
<TABLE>
<CAPTION>
Number of Shares
Name and Address of Common Stock Percent
of Beneficial Owner Beneficially Owned(1) of Class(2)
------------------- --------------------- --------
<S> <C> <C>
George R. Jensen, Jr. 660,000 shares(3) 3.21%
16 Marlborough Road
Newtown Square, Pennsylvania 19073
Stephen P. Herbert 222,384 shares(4) 1.08%
536 West Beach Tree Lane
Strafford, Pennsylvania 19087
Haven Brock Kolls, Jr. 190,517 shares(5) *
1573 Potter Drive
Pottstown, PA 19464
Leland P. Maxwell 84,217 shares(6) *
401 Dartmouth Road
Bryn Mawr, Pennsylvania 19010
Michael K. Lawlor 58,384 shares(7) *
131 Lisa Drive
Paoli, PA 19301
Edwin R. Boynton 120,500 shares(8) *
104 Leighton Drive
Bryn Mawr, Pennsylvania 19010
Steven Katz 10,000 shares(9) *
20 Rebel Run Drive
East Brunswick, New Jersey 08816
Douglas M. Lurio 63,213 shares(10) *
2005 Market Street, Suite 2340
Philadelphia, Pennsylvania 19103
William W. Sellers 454,075 shares(11) 2.2%
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. 52,500 shares(13) *
Cornerstone Entertainment, Inc.
P.O. Box 727
Edgemont, Pennsylvania 19028
All Directors and Executive Officers
As a Group (11 persons) 1,965,790 shares(14) 9.55%
</TABLE>
---------
*Less than one percent (1%)
38
<PAGE>
(1) Beneficial ownership is determined in accordance with the rules of the SEC
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, 2000, are deemed to be beneficially
owned for purposes hereof.
(2) On June 30, 2000 there were 13,375,291 shares of common stock and 566,444
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 566,444 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, 2000 (or within
60-days of June 30, 2000) have been converted into 906,509 shares of common
stock. Of the 996,507 options or purchase rights to acquire common stock issued
as of June 30, 2000, 906,509 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 100,000 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; that all of the
consultant warrants have been exercised for 125,400 shares of common stock; that
all of the 1999-A warrants have been exercised for 14,000 shares of common
stock; that all of the 1999-B warrants have been exercised for 3,307,250 shares
of common stock; that all of the senior notes have been converted into 1,629,200
shares of common stock; and that all of the accrued and unpaid dividends on the
preferred stock as of June 30, 2000 have been converted, into 387,164 shares of
common stock. Therefore, for purposes of computing the percentages under this
table, there are 20,579,858 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, 80,000 shares issuable upon conversion of
senior notes, and 200,000 shares of common stock issuable upon the exercise of
the 1999-B 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 173,334 shares of common stock issuable to Mr. Herbert upon the
exercise of options, and 2,000 shares of common stock beneficially owned by his
child.
(5) Includes 136,667 shares of common stock issuable to Mr. Kolls upon the
exercise of options, 12,000 shares of common stock owned by his spouse, and
12,000 shares issuable to his spouse upon conversion of her senior note.
(6) Includes 56,667 shares of common stock issuable to Mr. Maxwell upon the
exercise of options.
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<PAGE>
(7) Includes 43,334 shares of common stock issuable to Mr. Lawlor upon exercise
of options.
(8) Includes 5,500 shares of common stock issuable upon conversion of the 5,500
shares of series A preferred stock. Includes 10,000 vested shares of common
stock issuable upon exercise of options, 20,000 shares issuable upon conversion
of his senior note, and 10,000 shares of common stock issuable upon exercise of
the 1999-B warrants. 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 10,000 shares of common stock issuable upon exercise of options.
(10) Includes 31,213 shares of common stock held jointly with Mr. Lurio's
spouse, 10,000 shares of common stock issuable upon exercise of options, 12,000
shares issuable upon conversion of senior notes, and 10,000 shares issuable upon
exercise of 1999-B 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, 28,000 shares issuable upon conversion of
senior notes, and 130,000 shares issuable upon exercise of 1999-B warrants.
(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 and 10,000 shares issuable upon conversion of 1999-B
warrants.
(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, 2000 the beneficial
ownership of the preferred stock by our directors and executive officers, both
individiually and as a group. Except as set forth below, we are not aware of any
beneficial owner of more than five percent of the preferred stock as of June 30,
2000. Except as otherwise indicated, we believe 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.
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<PAGE>
<TABLE>
<CAPTION>
Number of Shares
Name and Address of of Preferred Stock Percent
Beneficial Owner Beneficially Owned of Class(l)
------------------- ------------------ ---------
<S> <C> <C>
Edwin R. Boynton
104 Leighton Avenue
Bryn Mawr, Pennsylvania 19010 5,500 *
Henry B. duPont Smith
350 Mill Bank Road
Bryn Mawr, Pennsylvania 19010 12,000(2) 2.0%
All Directors and
Executive Officers
As a Group (11 persons) 17,500 3.1%
</TABLE>
--------------
*Less than one percent (1%)
(1) There were 566,444 shares of preferred stock issued and outstanding as of
June 30, 2000.
(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.
CERTAIN TRANSACTIONS
On January 21, 1999, Mr. Jensen purchased ten units pursuant to the our
private placement offering of senior notes for $100,000. In full payment, Mr.
Jensen has agreed to forgo 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 as required. At June 30, 2000,
$12,199 was outstanding. Subsequent to year end, the $12,199 has been received
by us.
In June and July 1999, we issued options to purchase an aggregate of
470,000 shares of common stock to our executive officers and an aggregate of
70,000 shares of common stock to our 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, we 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 years ended June 30, 1999 and June 30, 2000, we paid
Lurio & Associates, P.C., of which Mr. Lurio is President, professional fees of
approximately $155,000 and $196,000, respectively, for legal services rendered
to us by the law firm.
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<PAGE>
In August 1999, we issued to Stephen P. Herbert, President of USA, an
aggregate of 25,000 shares of common stock. Such common stock was issued in
exchange for services rendered or to be rendered to USA 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. We have registered these shares under the Act.
In August 1999, we agreed to issue to Leland P. Maxwell, Chief
Financial Officer of USA, an aggregate of 10,500 shares of common stock. The
common stock was issued in exchange for services rendered or to be rendered to
USA 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. We have registered these shares
under the Act.
In August 1999, the Board of Directors authorized us to issue to
Michael Lawlor, Vice President of USA, an aggregate of up to 25,000 shares of
common stock. Such common stock was issued in exchange for services rendered and
to be rendered to USA 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. We have
registered these shares under the Act.
In August 1999, we 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. We have registered
under the Act the common stock underlying the options for resale by Mr. Lawlor.
In August 1999, we issued to Joseph Donahue, a former Vice President,
an aggregate of 15,000 shares of common stock. Such common stock will be issued
in exchange for services to be rendered to USA 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. We have agreed to register these shares under the Act.
In August 1999, we issued to each of Stephen Herbert, President, Leland
Maxwell, Chief Financial Officer, and Haven Brock Kolls, Vice President Research
and Development, 2,000 shares of common stock. Such common stock was issued in
exchange for services rendered or to be rendered to USA. The shares of common
stock were valued at $2.00 per share, the closing bid price on the date of the
grant. We have registered these shares under the Act.
In November 1999, we issued fully vested options to purchase an
aggregate of 90,000 shares of common stock to our executive officers as follows:
Stephen P. Herbert - 45,000 options; Haven Brock Kolls - 30,000 options; and
Leland Maxwell - 15,000 options. Each option is exercised at $2.00 per share of
common stock at any time within five years following issuance. We have agreed to
register the common stock underlying these options for resale under the Act.
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<PAGE>
During February 2000, we issued an aggregate of 87,500 shares of common
stock to five executive officers: George Jensen - 25,000 shares; Stephen Herbert
- 20,000 shares; Haven Brock Kolls - 20,000 shares; Leland Maxwell - 12,500
shares; and Michael Lawlor - 10,000 shares. Such shares were issued as a bonus
for services rendered and to be rendered for the calendar year 2000. The shares
were valued at $2.00 per share, the closing bid price on the date of issuance.
We have registered these shares under the Act.
In February 2000, in connection with his relocation to the
Philadelphia, Pennsylvania area, we agreed to pay the costs of relocation for
Michael Lawlor, Vice President of USA. As of June 30, 2000, a total of
approximately $43,000 has been paid for this purpose.
SELLING SHAREHOLDER
The common stock covered by this prospectus consists of 1,200,000
shares of our common stock issuable upon exercise of commitment warrants issued
to Swartz, 5,000,000 shares of our common stock issuable upon exercise of our
put rights, and 500,000 shares of our common stock issuable upon exercise of
purchase warrants to be granted to Swartz in connection with the exercise of our
put rights.
The number of shares that may be actually sold by the selling
shareholder will be determined by the selling shareholder. Because the selling
shareholder may sell all, some or none of the shares of common stock that it
holds, and because the offering contemplated by this prospectus is not currently
being underwritten, no estimate can be given as to the number of shares of our
common stock that will be held by the selling shareholder upon termination of
the offering.
The following table sets forth information as of October 30, 2000,
regarding the selling shareholder. The actual number of shares of our common
stock issuable upon exercise of the warrants and our put rights is subject to
adjustment and could be materially less or more than the amount set forth in the
table below, depending on factors which we cannot predict at this time,
including, among other factors, the future price of our common stock.
The selling shareholder is not currently an affiliate of ours, and has
not had a material relationship with us during the past three years, other than
as a holder of our securities and the negotiation of the investment agreement.
Swartz is controlled by Eric S. Swartz.
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<PAGE>
<TABLE>
<CAPTION>
Amount and Percent
of Common Stock
Maximum Number Beneficially Owned
Number of Shares of Shares of After the Offering(1)
Beneficially Owned Common Stock ---------------------
Selling Shareholder Prior to the Offering(4) Offered for Sale Number Percent
------------------- --------------------- ---------------- ------ -------
<S> <C> <C> <C> <C>
Swartz Private Equity, LLC 1,700,000 1,700,000(2) 0 *
Swartz Private Equity, LLC 5,000,000 5,000,000(3) 0 *
--------- ---------
Total 6,700,000 6,700,000
========= =========
</TABLE>
* Less than one percent (1%)
(1) Assumes that the selling shareholder will sell all of the shares of common
stock offered hereby. We cannot assure you that the selling shareholder
will sell all or any of the shares offered hereunder.
(2) These shares of common stock are issuable upon exercise of outstanding
commitment warrants and shares issuable upon exercise of purchase warrants
to be granted in connection with our put rights.
(3) Represents up to 5,000,000 shares of our common stock that we may sell to
Swartz pursuant to the investment agreement.
(4) These shares would not be deemed beneficially owned within the meaning of
Sections 13(d) or 13(g) of the Exchange Act before their acquisition by
Swartz. It is expected that Swartz will not beneficially own more than 9.9%
of our outstanding common stock at any time.
INVESTMENT AGREEMENT
OVERVIEW. On September 15, 2000, we entered into an investment
agreement with Swartz Private Equity, LLC. The investment agreement entitles us
to issue and sell our common stock for up to an aggregate of $20 million from
time to time during a three-year period following the effective date of this
registration statement. This is also referred to as a put right.
PUT RIGHTS. In order to invoke a put right, we must have an effective
registration statement on file with the SEC registering the resale of the common
shares which may be issued as a consequence of the invocation of that put right.
Additionally, we must give at least ten but not more than twenty business days
advance notice to Swartz of the date on which we intend to exercise a particular
put right and we must indicate the number of shares of common stock we intend to
sell to Swartz. At our option, we may also designate a maximum dollar amount of
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<PAGE>
common stock (not to exceed $2 million) which we will sell to Swartz during the
put and/or a minimum purchase price per common share at which Swartz shall
purchase shares during the put. The number of shares of common stock sold to
Swartz in a put may not exceed the lesser of (i) 1,500,000 shares of our common
stock, (ii) the maximum put amount set forth in our advance put notice, (iii)
$2,000,000 worth of common stock, (iv) 15% of the aggregate daily reported
trading volume of our common shares, excluding block trades of 20,000 or more
shares of our common stock, during the 20 business days after the date of our
put notice, excluding any trading days in which the common stock trades below a
minimum price, if any, that we specify in our put notice; (v) 15% of the
aggregate daily reported trading volume of our common shares, excluding block
trades of 20,000 or more shares of our common stock, during the 20 business days
before the put date, or (vi) a number of shares that, when added to the number
of shares acquired by Swartz under the investment agreement during the 31 days
preceding the put date, would not exceed 9.99% of our total number of shares of
common stock outstanding (as calculated under Section 13(d) of the Securities
Exchange Act of 1934).
For each share of common stock, Swartz will pay us the lesser of the
market price for each share, minus $0.075, or 91% of the market price for each
share. However, Swartz may not pay us less than the designated minimum per share
price, if any, that we indicate in our notice.
Market price is defined as the lowest closing bid price for the common
stock during the applicable pricing period which consists of twenty consecutive
business days following the date notice of the put was provided to Swartz.
However, the market price may not be less than the designated minimum per share
price, if any, that we indicated in our notice.
WARRANTS
COMMITMENT WARRANTS. On August 29, 2000 we issued and delivered to
Swartz a warrant to purchase 1,200,000 shares of common stock. The warrants are
currently exercisable at $1.00 per share and have a term of ten years. The
exercise price of the warrant is subject to semi-annual reset provisions.
PURCHASE WARRANTS. Within five business days after the end of each
pricing period, we are required to issue and deliver to Swartz a warrant to
purchase a number of shares of common stock equal to 10% of the common shares
issued to Swartz in the applicable put. Each warrant will initially be
exercisable at the market price for the applicable put, and will have
semi-annual reset provisions. Each warrant will be immediately exercisable and
have a term beginning on the date of issuance and ending ten years thereafter.
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<PAGE>
LIMITATIONS AND CONDITIONS PRECEDENT TO OUR PUT RIGHTS. Swartz is not
required to acquire and pay for any common shares with respect to any particular
put between the advance put notice date and the date the particular put closes
for which:
o we have announced or implemented a subdivision or combination,
including a reverse split of our common stock;
o we have paid a common stock dividend or made any other
distribution of our common stock;
o we have made a distribution of all or any portion of our assets or
evidences of indebtedness to the holders of our common stock; or
o we have consummated a major transaction. A major transaction
includes:
o a change of control of USA;
o a sale or transfer of $2 million or more of our assets outside
of the ordinary course of business;
o the purchase of $2 million or more of assets by us not in the
ordinary course of business; or
o a purchase, tender or exchange offer valued in excess of $5
million made to the holders of outstanding shares of common
stock.
SHORT SALES. Swartz and its affiliates are prohibited from engaging in
short sales of our common stock unless they have received a put notice and the
amount of shares involved in a short sale does not exceed the number of shares
specified in the put notice.
CANCELLATION OF PUTS. We must cancel a particular put between the date
of the advance put notice and the last day of the pricing period if:
o we discover an undisclosed material fact relevant to Swartz's
investment decision;
o the registration statement registering resales of the common stock
becomes ineffective; or
o our common stock is delisted from the then primary exchange.
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<PAGE>
However, we will be required to issue common shares equal to the lesser
of:
o 1,500,000 shares of common stock;
o 15% of the daily reported trading volume of our common stock
(excluding any block trades of 20,000 or more shares of common
stock) during the pricing periods up to the applicable put
cancellation date;
o the number of shares of common stock put to Swartz which when
multiplied by the applicable put share price equals the designated
maximum dollar amount for the put; or
o an amount of shares which, when added to the number of shares
acquired by Swartz during the thirty-one days preceding the day we
invoke the put right, would not exceed 9.9% of the total amount of
our common stock outstanding.
SHAREHOLDER APPROVAL. We may currently issue more than 20% of our
outstanding shares. If we become listed on the NASDAQ Small Cap Market or NASDAQ
National Market, then we must get shareholder approval to issue more than 20% of
our outstanding shares. Since we are currently an over-the-counter bulletin
board company, we do not need shareholder approval.
TERMINATION OF INVESTMENT AGREEMENT. We may terminate our right to
initiate further puts or terminate the investment agreement by providing Swartz
with notice of such intention to terminate; however, any such termination will
not affect any other rights or obligations we have concerning the investment
agreement or any related agreement.
RESTRICTIVE COVENANTS. During the term of the investment agreement and
for a period of sixty days after the agreement is terminated, we are prohibited
from engaging in certain transactions without first obtaining the approval of
Swartz. These include:
o the issuance of any debt or equity securities convertible into or
which carry the right to receive additional shares of common
stock, for cash in a private transaction;
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<PAGE>
o entering into a private equity line agreement similar to the
Investment Agreement; or
o the issuance of equity securities at a price which is discounted
20% or more below market price.
RIGHT OF FIRST REFUSAL. Swartz has a right of first refusal to purchase
any equity securities offered by us in any private transaction which closes on
or prior to sixty days after the termination of the investment agreement.
SWARTZ'S RIGHT OF INDEMNIFICATION. We are obligated to indemnify Swartz
(including their stockholders, officers, directors, employees, and direct or
indirect investors and any of the foregoing person's agents) from all actions,
liability and losses, including attorney's fees resulting from:
o any material misrepresentations or breaches we made in connection
with the investment agreement, our registration rights agreement,
other related agreements, or the registration statement; or
o any cause of action or claim by a stockholder of USA based on a
breach or alleged breach by us or our officers or directors of our
fiduciary duty to the stockholders.
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<PAGE>
MARKET FOR COMMON STOCK
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
------
1999 High Low
---- ---- ---
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 30, 1999) $ 2.94 $1.63
Second Quarter (through December 31, 1999) $ 6.56 $1.63
Third Quarter (through March 31, 2000) $ 4.50 $2.19
Fourth Quarter (through June 30, 2000) $ 3.38 $1.31
Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
At June 30, 2000, there are 984,767 shares of common stock issuable
upon exercise of outstanding options, and 11,740 shares of common stock issuable
upon exercise of outstanding purchase rights. Of the 984,767 options, 5,000 are
exercisable at $.50 per share, 117,100 are exercisable at $1.50 per share,
656,167 are exercisable at $2.00 per share, 110,000 are exercisable at $2.50 per
share, 81,500 are exercisable at $4.50 per share, and 15,000 are exercisable at
$5.00 per share. In connection with the above options and outstanding purchase
rights to acquire up to 996,507 shares of common stock, we have 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 us to employees, Directors, officers and
consultants.
As of June 30, 2000, there were:
o 67,300 shares of common stock issuable upon exercise of the 1995
warrants:
o 86,800 shares of common stock issuable upon exercise of the 1996
warrants;
o 4,000 shares of common stock issuable upon exercise of the 1996-B
warrants;
o 1,500 shares of common stock issuable upon exercise of the 1997
warrants;
o 100,000 shares of common stock issuable upon the exercise of
warrants issued to affiliates and/or consultants to GEMA in
connection with the sale of convertible securities;
o 4,000 shares of common stock issuable upon the exercise of the
1998-A warrants;
o 5,000 shares of common stock issuable upon the exercise of the
1998-B warrants;
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<PAGE>
o 14,000 shares of common stock issuable upon the exercise of the
1999-A warrants;
o 125,400 shares of common stock issuable upon exercise of the
warrants issued to consultants in connection with services
rendered;
o 3,307,250 shares of common stock issuable upon exercise of the
1999-B warrants; and
o 1,629,200 shares of common stock issuable upon conversion of the
senior notes;
The common stock, if issued, will be freely tradeable under the Act.
On June 30, 2000 there were 765 record holders of the common stock and
618 record holders of the preferred stock.
The holders of the common stock are entitled to receive such dividends
as the Board of Directors may declare out of funds legally available for payment
of dividends. Through the date hereof, no cash dividends have been declared on
our 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, 2000, such accumulated unpaid dividends amount to $3,871,639 and an
additional $424,833 of dividends accrued on August 1, 2000.
As of June 30, 2000, there were 566,444 shares of common stock issuable
upon conversion of the outstanding preferred stock and 387,164 shares issuable
upon the conversion of cumulative preferred dividends, which when and if issued
would be freely tradeable under the Act.
During fiscal year 2000, certain holders of our preferred stock
converted 74,133 shares into 74,133 shares of common stock. Certain of these
shareholders also converted cumulative preferred dividends of $386,880 into
38,688 shares of common stock.
Subsequent to June 30, 2000 and through October 17, 2000, certain
holders of our preferred stock converted 4,000 shares into 4,000 shares of
common stock. Certain of these shareholders also converted cumulative preferred
dividends of $33,000 into 3,300 shares of common stock.
From July 1, 2000 through October 27, 2000, certain holders of
1,178,350 of the Company's warrants exercised them at $1.00 per warrant,
generating $1,177,350 in gross proceeds.
During June 2000, we reduced the exercise price of certain warrants to
$1.50 per share and in July 2000 further reduced the exercise price to $1.00 per
share through September 30, 2000. During August 2000, the we authorized the
Chief Executive Officer to extend such date for up to ninety additional days.
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<PAGE>
DESCRIPTION OF SECURITIES
General
We are authorized to issue up to 62,000,000 shares of common stock, no
par value, and 1,800,000 shares of undesignated preferred stock. As of the date
hereof, 900,000 shares have been designated as series A convertible preferred
stock, no par value, and 350,000 shares have been designated as series B equity
participating preferred stock, no par value.
As of June 30, 2000, there were 13,375,291 shares of common stock
issued and outstanding and 566,444 shares of series A preferred stock issued and
outstanding which are convertible into 566,444 shares of common stock. Through
June 30, 2000, a total of 544,706 shares of preferred stock have been converted
into 621,169 shares of common stock and $2,166,183 of accrued and unpaid
dividends thereon have been converted into 246,695 shares of common stock.
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<PAGE>
On June 7, 1999 we effectuated a 1-for-10 reverse stock split of all of
our issued and outstanding common stock. Pursuant thereto, on the effective date
of the reverse stock split:
o each 10 shares of outstanding common stock were reduced to one
share of common stock;
o 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;
o the exercise price of each outstanding warrant, purchase right, or
option was proportionately increased on a 1-to-10 basis;
o 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;
o the conversion 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
o 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 prospectus have been properly adjusted, on a
retroactive basis, to reflect the foregoing.
In June 2000, we received and accepted subscription agreements from
five investors to purchase 2,200,000 shares of restricted common stock at $1.50
per share. During July 2000, the purchase price was reduced to $1.00 per share.
Pursuant to the agreements, full payment for the shares was to be made on or
before August 31, 2000. Through September 15, 2000, we had not received any
payment for the shares, and on such date, we notified the investors that we had
rescinded and canceled each of the subscription agreements effective
immediately.
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<PAGE>
In June 2000, we reduced the exercise price of all of the outstanding
common stock purchase warrants (other than the 1999-A warrants) to $1.50 per
share through July 31, 2000. In July 2000, we authorized the Chairman of USA to
extend such date for up to sixty additional days or until September 30, 2000. In
July 2000, the exercise price of all of the common stock purchase warrants
(other than the 1999-A warrants) was reduced to $1.00 through September 30, 2000
and in August 2000, our Chairman was authorized to extend the date for up to
ninety additional days.
During September 2000 we received signed subscription agreements for
the sale of 11.5 units at $100,000 each, for an aggregate of $1,150,000. Each
unit consisted of 100,000 shares of common stock and 100,000 common stock
purchase warrants. The offering was sold to 12 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. Through
October 26, 2000, we have received cash proceeds of $625,000 on account of these
subscription agreements.
On September 15, 2000, we signed an Investment Agreement with Swartz
Private Equity, LLC, a private equity fund, pursuant to which Swartz agreed to
purchase up to $20,000,000 of common stock. The purchases would be made at our
option over a three year period in amounts and at prices based upon market
conditions. The purchase by Swartz is subject to an effective registration
statement. To date, Swartz has not purchased any of our common stock.
Consultant Warrants
We entered into a consulting agreement with Harmonic Research, Inc.
pursuant to which we issued to Harmonic fully vested warrants to acquire up to
150,000 shares of common stock at $2.50 per share. The warrants are exercisable
at any time for two years following issuance. The warrants were issued to
Harmonic pursuant to Rule 506 under the Act, and the shares of common stock
underlying the warrants will be issued to Harmonic pursuant to such exemption.
Pursuant to the consulting agreement, we retained Harmonic as a consultant for a
three month period ending December 1, 1999, and agreed to pay Harmonic a fee of
$5,000 per month. During February 2000, Harmonic exercised warrants for 34,000
shares at $2.50 per share. In April, 2000, we permanently reduced the exercise
price of the remaining warrants to $1.00 per share.
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<PAGE>
We have at our expense registered for resale under the Act all of the
common stock underlying the consultant warrants.
Management Options
As of June 30, 2000, we had issued to our employees and consultants
options to acquire up to:
o 15,000 shares of common stock at $5.00 per share;
o 81,500 shares of common stock at $4.50 per share;
o 110,000 shares of common stock at $2.50 per share;
o 656,167 shares of common stock at $2.00 per share;
o 117,100 shares of common stock at $1.50 per share; and
o 5,000 shares of common stock at $.50 per share.
During October 2000, we issued to Mr. Jensen additional options to purchase
200,000 shares of common stock at $1.50 per share. See "Management--Executive
Stock Options", and "Management - Director Compensation and Stock Options." We
have also issued purchase rights to acquire up to 11,740 shares of common stock
at $10.00 per share. In June 2000, the exercise price of the purchase rights was
reduced to $1.50 through July 31, 2000 and in July 2000, we further reduced the
exercise price to $1.00 through September 30, 2000, and in August 2000
authorized our Chairman to extend such date for ninety additional days. In
connection with the management options, we have, at our cost and expense, filed
a registration statement under the Act covering the resale of all the common
stock underlying the options.
Common Stock
The holder of each share of common stock:
o is entitled to one vote on all matters submitted to a vote of the
shareholders of USA, including the election of directors. There is
no cumulative voting for directors;
o does not have any preemptive rights to subscribe for or purchase
shares, obligations, warrants, or other securities of USA; and
o is entitled to receive such dividends as the Board of Directors
may from time to time declare out of funds legally available for
payment of dividends.
No dividend may be paid on the common stock until all accumulated and
unpaid dividends on the series A preferred stock have been paid. Upon any
liquidation, dissolution or winding up of USA, holders of shares of common stock
are entitled to receive pro rata all of the assets of USA available for
distribution, subject to the liquidation preference of the series A preferred
stock of $10.00 per share and any unpaid and accumulated dividends on the series
A preferred stock.
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Series A Convertible Preferred Stock
The holders of shares of series A preferred stock:
o have the number of votes per share equal to the number of shares
of common stock into which each such share is convertible (i.e., 1
share of series A preferred stock equals 1 vote);
o are entitled to vote on all matters submitted to the vote of the
shareholders of USA, including the election of directors; and
o are entitled to an annual cumulative cash dividend of $1.50 per
annum, payable when, as and if declared by the Board of Directors.
The record dates for payment of dividends on the series A preferred
stock are February 1 and August 1 of each year. Any and all accumulated and
unpaid cash dividends on the series A preferred stock must be declared and paid
prior to the declaration and payment of any dividends on the common stock. Any
unpaid and accumulated dividends will not bear interest. As of June 30, 2000 the
accumulated and unpaid dividends were $3,871,639.
Each share of series A preferred stock is convertible at any time into
1 share of fully issued and non-assessable common stock. Accrued and unpaid
dividends earned on shares of series A preferred stock being converted into
common stock are also convertible into common stock at the rate $10.00 per share
of common stock at the time of conversion and whether or not such dividends have
then been declared by USA. As of June 30, 2000, a total of 544,706 shares of
series A preferred stock have been converted into common stock and accrued and
unpaid dividends thereon have been converted into 246,695 shares of common
stock. The conversion rate of the series A preferred stock (and any accrued and
unpaid dividends thereon) will be equitably adjusted for stock splits, stock
combinations, recapitalizations, and in connection with certain other issuances
of common stock by USA. Upon any liquidation, dissolution, or winding-up of USA,
the holders of series A preferred stock are entitled to receive a distribution
in preference to the common stock in the amount of $10.00 per share plus any
accumulated and unpaid dividends.
We have the right, at any time, to redeem all or any part of the issued
and outstanding series A preferred stock for the sum of $11.00 per share plus
any and all unpaid and accumulated dividends thereon. Upon notice by USA of such
call, the holders of the series A preferred stock so called will have the
opportunity to convert their shares and any unpaid and accumulated dividends
thereon into shares of common stock. The $11.00 per share figure was the
redemption price approved by the Directors and shareholders of USA at the time
the series A preferred stock was created and first issued. We currently have no
plans to redeem the preferred stock.
We issued a special stock dividend consisting of one-third of a share
of common stock for each share of series A preferred stock issued and
outstanding on August 1, 1995. The stock dividend consisted of an aggregate of
190,860 shares of common stock.
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12% Senior Notes
The principal amount of each 12% senior note which is not voluntarily
converted shall be payable on December 31, 2001, at which time any unpaid and
accrued interest shall also become due. Interest shall accrue at the rate of 12%
per annum from and after the date of issuance and shall be payable quarterly in
arrears on December 31, March 31, June 30, and September 30 of each year until
December 31, 2001. The senior notes are senior to all existing equity securities
of USA, including the series A preferred stock.
During October 1999, the Company's Board of Directors authorized
voluntary conversion of all or any part of the 12% senior notes into shares of
common stock at the rate of $2.50 per share, at any time until the maturity date
of December 31, 2001. If all of the $4,618,000 principal amount of the notes are
converted, the we would issue 1,847,200 shares of common stock. We have
registered for resale under the Act the shares of common stock into which the
senior notes are convertible. Through and during the year ended June 30, 2000,
an aggregate principal amount of $545,000 of the senior notes have been
converted into 218,000 shares of common stock.
In September 2000, we granted to each holder of the senior notes the
option to elect to extend the maturity date of the holder's senior note to
December 31, 2002, and, if so elected, the conversion rate of the senior note
would be reduced from $2.50 to $2.00 per share.
The indebtedness evidenced in the senior note is subordinated to the
prior payment when due of the principal of, premium, if any, and interest on all
"Senior Indebtedness", as defined herein, of USA as follows: Upon any
distribution of its assets in a liquidation or dissolution of USA, or in
bankruptcy, reorganization, insolvency, receivership or similar proceedings
relating to USA, the Lender shall not be entitled to receive payment until the
holders of Senior Indebtedness are paid in full. Until a payment default occurs
with respect to any Senior Indebtedness, all payments of principal and interest
due to Lender under the senior note shall be made in accordance with this senior
note. Upon the occurrence of any payment default with respect to any Senior
Indebtedness then, upon written notice thereof to USA and Lender by any holder
of such Senior Indebtedness or its representative, no payments of principal or
interest on the senior note shall be made by USA until such payment default has
been cured to the satisfaction of the holder of such Senior Indebtedness or
waived by such holder, provided, however, that if during the 180 day period
following such default, the holder of Senior Indebtedness has not accelerated
its loan, commenced foreclosure proceedings or otherwise undertaken to act on
such default, then USA shall be required to continue making payments under the
senior note, including any which had not been paid during such 180 day period.
In the event that any institutional lender to USA at any time so requires, the
Lender shall execute, upon request of USA, any intercreditor or subordination
agreement(s) with any such institutional lender on terms not materially more
adverse to the Lender then the subordination terms contained in this senior
note.
The term "Senior Indebtedness" shall mean (a) all direct or indirect,
contingent or certain indebtedness of any type, kind or nature (present or
future) created, incurred or assumed by USA with respect to any future bank or
other financial institutional indebtedness of USA or (b) any indebtedness
created, incurred, or assumed, by USA secured by a lien on any of our assets.
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Notwithstanding anything herein to the contrary, Senior Indebtedness
does not include:
o unsecured accounts payable to trade creditors of USA incurred in
the ordinary course of business;
o any debt owed by USA to any officer, director or stockholder of
USA;
o any obligation of Borrower issued or contracted for as payment in
consideration of the purchase by USA of the capital stock or
substantially all of the assets of another person or in
consideration for the merger or consolidation with respect to
which USA was a party;
o any operating lease obligations of USA;
o any other indebtedness which by its terms is subordinated to the
senior note; or
o any "other indebtedness" which is subordinated to all indebtedness
to which the senior note is subordinated in substantially like
terms as the senior note; which such "other indebtedness" shall be
treated as equal with the indebtedness evidenced by the senior
note.
Series B Equity Participating Preferred Stock
Pursuant to the senior note private placement offering conducted by USA
from September 1998 through June 1999, we 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 1,867,200 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.
Convertible Securities and GEM Warrants
During June 1997, we issued an aggregate of $500,000 of convertible
securities pursuant to an agreement with Gem Advisors Inc. ("GEM") which
provided GEM with the exclusive right to place the convertible securities with
qualified purchasers. Through December 31, 1997, the holders of all $500,000 of
convertible securities converted their securities into 191,574 shares of common
stock at an average price of $2.60 per share. The convertible securities were
issued by USA pursuant to Regulation S promulgated under the Act.
Affiliates and/or consultants to GEM received non-redeemable warrants
to purchase up to 200,000 shares of our common stock at a price of $2.00 per
share at any time prior to June 23, 2002 ("GEM warrants"). These warrants have
been issued by USA pursuant to Regulation S. Through June 30, 2000, 100,000 GEM
warrants had been exercised, leaving a balance of 100,000 GEM warrants.
1999-A Common Stock Purchase Warrants
Each 1999-A warrant entitles its holder to immediately purchase one
share of common stock. The exercise price is $1.00 per share, except that
through January 31, 2000, the exercise price has been reduced to $.50 per share.
The 1999-A warrants are exercisable at any time on or prior to December 31,
2001, or such later date as may be determined by USA. As of June 30, 2000, an
aggregate of 14,000 1999-A warrants remain outstanding.
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We have, at our expense, registered for resale the common stock
underlying the 1999-A warrants. We will also seek to have the resale of the
common stock by non-affiliates of USA exempted from registration in applicable
states.
The 1999-A warrants have been issued pursuant to a warrant agreement by
and between USA and American Stock Transfer & Trust Company, the warrant agent,
and will be evidenced by warrant certificates.
The exercise price of the 1999-A warrants and the number of shares of
common stock issuable upon exercise of the 1999-A warrants are subject to
adjustment in certain circumstances, including a stock split of, stock dividend
on, or a subdivision, combination or recapitalization of the common stock. Upon
the merger, consolidation, sale of substantially all of the assets of the USA,
or other similar transaction, the warrant holders shall, at the option of USA,
be required to exercise the warrants immediately prior to the closing of the
transaction, or such warrants shall automatically expire. Upon such exercise,
the warrant holders shall participate on the same basis as the holders of common
stock in connection with the transaction.
The 1999-A warrants do not confer upon the holder any voting or any
other rights of a shareholder of USA. Upon notice to the 1999-A warrant holders,
USA has the right, at any time and from time to time, to reduce the exercise
price or to extend the expiration date of the 1999-A warrants.
1999-B Common Stock Purchase Warrants
Each 1999-B warrant entitles its holder to immediately purchase one
share of common stock. The exercise price is $2.00 per share. The 1999-B
warrants are exercisable at any time on or prior to March 31, 2000, or such
later date as may be determined by USA. As of June 30, 2000, 3,307,250 1999-B
warrants remain outstanding. In January 2000, USA extended the expiration date
of the 1999-B warrants until June 1, 2000; provided, however, that if a holder
of the 1999-B warrants shall have exercised at least one-half of such holder's
1999-B warrants on or prior to June 1, 2000, the expiration date for such
holder's remaining 1999-B warrants shall be November 1, 2000. In May 2000, the
June 1, 2000 expiration date referred to above was extended until June 30, 2000.
In June 2000, the exercise price of the 1999-B warrants was temporarily reduced
to $1.50 and the expiration date of June 30, 2000 was extended to July 31, 2000.
In July 2000, the expiration date of November 1, 2000 referred to above was
extended until March 31, 2001. In July 2000, the exercise price was reduced to
$1.00 through September 30, 2000, and in August 2000 we authorized our Chairman
to extend such date for ninety additional days.
USA has, at its expense, registered for resale the common stock
underlying the 1999-B warrants. USA will also seek to have the resale of the
common stock held by non-affiliates of USA exempted from registration in
applicable states.
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The 1999-B warrants have been issued pursuant to a warrant agreement by
and between USA and American Stock Transfer & Trust Company, the warrant agent,
and will be evidenced by warrant certificates.
The exercise price of the 1999-B warrants and the number of shares of
common stock issuable upon exercise of the 1999-B warrants are subject to
adjustment in certain circumstances, including a stock split of, stock dividend
on, or a subdivision, combination or recapitalization of the common stock. Upon
the merger, consolidation, sale of substantially all of the assets of the USA,
or other similar transaction, the warrant holders shall, at the option of USA,
be required to exercise the warrants immediately prior to the closing of the
transaction, or such warrants shall automatically expire. Upon such exercise,
the warrant holders shall participate on the same basis as the holders of common
stock in connection with the transaction.
The 1999-B warrants do not confer upon the holder any voting or any
other rights of a shareholder of USA. Upon notice to the 1999-B warrant holders,
USA has the right, at any time and from time to time, to reduce the exercise
price or to extend the expiration date of the 1999-B warrants.
1998-B Common Stock Purchase Warrants
Each 1998-B warrant entitles its holder to immediately purchase one
share of common stock. The exercise price is $4.00 per share, subject to
reduction at any time by USA. In January 2000, the exercise price was
temporarily reduced to $2.00 through June 1, 2000 and in May 2000 the expiration
date was extended until June 30, 2000. In June 2000, the exercise price was
reduced to $1.50 through July 31, 2000, and in July 2000, USA further reduced
the exercise price to $1.00 through September 30, 2000, and in August 2000 we
authorized our Chairman to extend such date for ninety additional days. The
1998-B warrants are exercisable at any time prior to August 17, 2003, or such
later date as may be determined by USA.
The 1998-B warrants have been issued pursuant to a warrant agreement
dated July 1, 1998 by and between USA and American Stock Transfer & Trust
Company, the transfer agent. As of June 30, 2000, 5,000 1998-B warrants remain
outstanding.
USA has at its expense, registered for resale the common stock
underlying the 1998-B warrants under the Act, and exempted from registration
such common stock for resale by non-affiliates of USA, in those states in which
the holders of the 1998-B warrants are located.
The exercise price of the 1998-B warrants and the number of shares of
common stock issuable upon exercise of the 1998-B warrants are subject to
adjustment in certain circumstances, including a stock split of, stock dividend
on, or a subdivision, combination or recapitalization of the common stock. Upon
the merger, consolidation, sale of substantially all of the assets of USA, or
other similar transaction, the warrant holders shall, at the option of USA, be
required to exercise the warrants immediately prior to the closing of the
transaction, or such warrants shall automatically expire. Upon such exercise,
the warrant holders shall participate on the same basis as the holders of common
stock in connection with the transaction.
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The 1998-B warrants do not confer upon the holder any voting or any
other rights of a shareholder of USA. Upon notice to the 1998-B warrant holders,
USA has the right, at any time and from time to time, to reduce the exercise
price or to extend the expiration date of the 1998-B warrants.
1998-A Common Stock Purchase Warrants
Each 1998-A warrant entitles its holder to immediately purchase one
share of common stock. The exercise price is $4.00 per share, subject to
reduction at any time by USA. In January 2000, the exercise price was
temporarily reduced to $2.00 through June 1, 2000 and in May 2000 the expiration
date was extended until June 30, 2000. In June 2000, the exercise price was
reduced to $1.50 through July 31, 2000, and in July 2000, USA further reduced
the exercise price to $1.00 through September 30, 2000, and in August 2000 we
authorized our Chairman to extend such date for ninety additional days. The
1998-A warrants are exercisable at any time prior to March 5, 2003 or such later
date as may be determined by USA.
The 1998-A warrants have been issued pursuant to a warrant agreement
dated as of January 28, 1998 by and between USA and American Stock Transfer &
Trust Company, the warrant agent. As of June 30, 2000, 4,000 1998-A Warrants
remain outstanding.
We have, at our expense, registered for resale the common stock
underlying the 1998-A warrants under the Act, and exempted from registration
such common stock for resale by non-affiliates of USA in those states in which
the holders of the 1998-A warrants are located.
The exercise price of the 1998-A warrants and the number of shares of
common stock issuable upon exercise of the 1998-A warrants are subject to
adjustment in certain circumstances, including a stock split of, stock dividend
on, or a subdivision, combination or recapitalization of, the common stock. Upon
the merger, consolidation, sale of substantially all of the assets of USA, or
other similar transaction, the warrant holders shall, at the option of USA, be
required to exercise the warrants immediately prior to the closing of the
transaction, or such warrants shall automatically expire. Upon such exercise,
the warrant holders shall participate on the same basis as the holders of common
stock in connection with the transaction.
The 1998-A warrants do not confer upon the holder any voting or any
other rights of a shareholder of USA. Upon notice to the 1998-A warrant holders,
we have the right, at any time and from time to time, to reduce the exercise
price or to extend the expiration date of the 1998-A warrants.
1997 Common Stock Purchase Warrants
Each 1997 warrant entitles its holder to immediately purchase one share
of common stock. The exercise price is $4.00 per share, subject to reduction at
any time by USA. In January 2000, the exercise price was temporarily reduced to
$2.00 per share through June 1, 2000 and in May 2000 the expiration date was
extended until June 30, 2000. In June 2000, the exercise price was reduced to
$1.50 through July 31, 2000, and in July 2000, USA further reduced the exercise
price to $1.00 through September 30, 2000, and in August 2000 we authorized our
Chairman to extend such date for ninety additional days. The 1997 Warrants are
exercisable at any time prior to July 3, 2002, or such later date as may be
determined by USA.
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The 1997 warrants have been issued pursuant to a warrant agreement (the
"1997 Warrant Agreement") dated as of April 8, 1997 by and between USA and
American Stock Transfer & Trust Company, the warrant agent. As of June 30, 2000,
158,500 1997 warrants have been exercised and 1,500 remain outstanding.
We have, at our expense, registered for resale the common stock
underlying the 1997 warrants under the Act, and have exempted from registration
such common stock for resale by non-affiliates of USA in those states in which
the holders of the 1997 warrants are located.
The exercise price of the 1997 warrants and the number of shares of
common stock issuable upon exercise of the 1997 warrants are subject to
adjustment in certain circumstances, including a stock split of, stock dividend
on, or a subdivision, combination or recapitalization of the common stock. Upon
the merger, consolidation, sale of substantially all of the assets of USA, or
other similar transaction, the warrant holders shall, at the option of USA, be
required to exercise the warrants immediately prior to the closing of the
transaction, or such warrants shall automatically expire. Upon such exercise,
the warrant holders shall participate on the same basis as the holders of common
stock in connection with the transaction. The 1997 warrants do not confer upon
the holder any voting or any other rights of a shareholder of USA. Upon notice
to the 1997 warrant holders, USA has the right, at any time and from time to
time, to reduce the exercise price or to extend the expiration date of the 1997
warrants.
1996-B Common Stock Purchase Warrants
Each 1996-B warrant entitles its holder to immediately purchase one
share of common stock. The exercise price is $3.00 per share, subject to
reduction at any time by USA. In January 2000, the exercise price was
temporarily reduced to $2.00 per share through June 1, 2000 and in May 2000 the
expiration date was extended until June 30, 2000. In June 2000, the exercise
price was reduced to $1.50 through July 31, 2000, and in July 2000, USA further
reduced the exercise price to $1.00 through September 30, 2000, and in August
2000 we authorized our Chairman to extend such date for ninety additional days.
The 1996-B warrants are exercisable at any time prior to February 28, 2002 or
such later date as may be determined by USA.
The 1996-B warrants have been issued pursuant to a warrant agreement
dated as of December 27, 1996 by and between USA and American Stock Transfer &
Trust Company, the warrant agent. As of June 30, 2000, 33,400 1996-B warrants
were exercised and 4,000 remain outstanding.
We have, at our expense, registered for resale the common stock
underlying the 1996-B warrants under the Act, and have exempted from
registration such common stock for resale by non-affiliates of USA in those
states in which the holders of the 1996-B warrants are located.
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The exercise price of the 1996-B warrants and the number of shares of
common stock issuable upon exercise of the 1996-B warrants are subject to
adjustment in certain circumstances, including a stock split of, stock dividend
on, or a subdivision, combination or recapitalization of the common stock. Upon
the merger, consolidation, sale of substantially all of the assets of USA, or
other similar transaction, the warrant holders shall, at the option of USA, be
required to exercise the warrants immediately prior to the closing of the
transaction, or such warrants shall automatically expire. Upon such exercise,
the warrant holders shall participate on the same basis as the holders of common
stock in connection with the transaction.
The 1996-B warrants do not confer upon the holder any voting or any
other rights of a shareholder of USA. Upon notice to the 1996-B warrant holders,
USA has the right, at any time and from time to time, to reduce the exercise
price or to extend the expiration date of the 1996-B warrants.
1996 Common Stock Purchase Warrants
Each 1996 warrant entitles its holder to immediately purchase one share
of common stock. The exercise price is $5.00, or such lower price as may be
determined by USA from time to time. In January 2000, the exercise price was
temporarily reduced to $2.00 per share through June 1, 2000 and in May 2000 the
expiration date was extended until June 30, 2000. In June 2000, the exercise
price was reduced to $1.50 through July 31, 2000, and in July 2000, USA further
reduced the exercise price to $1.00 through September 30, 2000, and in August
2000 we authorized our Chairman to extend such date for ninety additional days.
The 1996 warrants are exercisable at any time through May 31, 2001, or such
later date as may be determined by USA.
The 1996 warrants have been issued pursuant to a 1996 warrant agreement
dated as of May 1, 1996, by and between USA and American Stock Transfer & Trust
Company, the warrant agent. As of June 30, 2000, 433,200 1996 warrants were
exercised and 86,800 remain outstanding.
We have, at our expense, registered for resale the common stock
underlying the 1996 warrants under the Act, and have exempted from registration
such common stock for resale by non-affiliates of USA in those states in which
the holders of the 1996 warrants are located.
The exercise price of the 1996 warrants and the number of shares of
common stock issuable upon exercise of the 1996 warrants are subject to
adjustment in certain circumstances, including a stock split of, stock dividend
on, or a subdivision, combination or recapitalization of the common stock. Upon
the merger, consolidation, sale of substantially all the assets of USA, or other
similar transaction, the 1996 warrant holders shall, at the option of the USA,
be required to exercise the 1996 warrants immediately prior to the closing of
the transaction, or such 1996 warrants shall automatically expire. Upon such
exercise, the 1996 warrant holders shall participate on the same basis as the
holders of common stock in connection with the transaction.
The 1996 warrants do not confer upon the holder any voting or any other
rights of a shareholder of USA. Upon notice to the 1996 warrant holders, USA has
the right, at any time and from time to time, to reduce the exercise price or to
extend the 1996 warrant termination date.
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1995 Common Stock Purchase Warrants
Each 1995 warrant entitles its holder to immediately purchase one share
of common stock. The exercise price is $5.00, or such lower exercise price as
may be determined by USA from time to time. In January 2000, the exercise price
was temporarily reduced to $2.00 per share through June 1, 2000 and in May 2000
the expiration date was extended until June 30, 2000. In June 2000, the exercise
price was reduced to $1.50 through July 31, 2000, and in July 2000, USA further
reduced the exercise price to $1.00 through September 30, 2000, and in August
2000 we authorized our Chairman to extend such date for ninety additional days.
The 1995 warrants are exercisable at any time through January 31, 2001, or such
later date as may be determined by USA.
The 1995 warrants have been issued pursuant to a 1995 warrant agreement
dated as of June 21, 1995, by and between USA and American Stock Transfer &
Trust Company, the warrant agent. As of June 30, 2000, 442,700 1995 Warrants
were exercised and 67,300 remain outstanding.
We have registered for resale the common stock underlying the 1995
warrants under the Act, and have registered or exempted from registration such
common stock for resale by non-affiliates of USA in those states in which the
holders of the 1995 warrants are located.
The exercise price of the 1995 warrants and the number of shares of
common stock issuable upon exercise of the 1995 warrants are subject to
adjustment in certain circumstances, including a stock split of, stock dividend
on, or a subdivision, combination or recapitalization of the common stock. Upon
the merger, consolidation, sale of substantially all the assets of USA, or other
similar transaction, the 1995 warrant holders shall, at the option of USA, be
required to exercise the 1995 warrants immediately prior to the closing of the
transaction, or such warrants shall automatically expire. Upon such exercise,
the 1995 warrant holders shall participate on the same basis as the holders of
common stock in connection with the transaction.
The 1995 warrants do not confer upon the holder any voting or any other
rights of a shareholder of USA. Upon notice to the 1995 warrant holders, USA has
the right, at any time and from time to time, to reduce the exercise price or to
extend the 1995 warrant termination date.
Shares Eligible for Future Sale
Of the 13,375,291 shares of common stock issued and outstanding on June
30, 2000, 11,912,117 are freely transferable without registration under the Act
(other than shares held by "affiliates" of USA), and the remaining 1,463,174 are
"restricted securities". As of June 30, 2000, there were 566,444 shares of
preferred stock issued and outstanding, all of which are freely transferable
without further registration under the Act (other than shares held by
"affiliates" of USA). The 566,444 shares of preferred stock issued and
outstanding as of June 30, 2000 are convertible into 566,444 shares of common
stock all of which would be fully transferrable without further registration
under the Act (other than shares held by "affiliates" of USA).
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As set forth in the prior paragraph, there were 1,463,174 shares of
common stock which are "restricted securities" and cannot be resold without
registration. All of such shares would become eligible for sale during calendar
year 2000 without further registration under the Act pursuant to Rule 144
promulgated thereunder.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated), including any affiliate of USA, who
beneficially owns "restricted securities" for a period of at least one year is
entitled to sell within any three-month period, shares equal in number to the
greater of (i) 1% of the then outstanding shares of the same class of shares, or
(ii) the average weekly trading volume of the same class of shares during the
four calendar weeks preceding the filing of the required notice of sale with the
SEC. The seller must also comply with the notice and manner of sale requirements
of Rule 144, and there must be current public information available about USA.
In addition, any person (or persons whose shares must be aggregated) who is not,
at the time of sale, nor during the preceding three months, an affiliate of the
USA, and who has beneficially owned restricted shares for at least two years,
can sell such shares under Rule 144 without regard to the notice, manner of
sale, public information or the volume limitations described above.
Limitation of Liability; Indemnification
As permitted by the Pennsylvania Business Corporation Law of 1988
("BCL"), our By-laws provide that Directors will not be personally liable, as
such, for monetary damages for any action taken unless the Director has breached
or failed to perform the duties of a Director under the BCL and the breach or
failure to perform constitutes self-dealing, willful misconduct or recklessness.
This limitation of personal liability does not apply to any responsibility or
liability pursuant to any criminal statute, or any liability for the payment of
taxes pursuant to Federal, State or local law. The By-laws also include
provisions for indemnification of our Directors and officers to the fullest
extent permitted by the BCL. Insofar as indemnification for liabilities arising
under the Act may be permitted to Directors, officers and controlling persons of
USA pursuant to the foregoing provisions, or otherwise, we have been advised
that in the opinion of the SEC such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our stock and warrants is American
Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005.
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PLAN OF DISTRIBUTION
Swartz is free to offer and sell its common shares at such times, in
such manner and at such prices as it may determine. The types of transactions in
which the common shares are sold may include transactions in the
over-the-counter market (including block transactions), negotiated transactions,
the settlement of short sales of common shares, or a combination of such methods
of sale. The sales will be at market prices prevailing at the time of sale or at
negotiated prices. Such transactions may or may not involve brokers or dealers.
Swartz has advised us that they have not entered into any agreements,
understandings or arrangements with any underwriters or broker-dealers regarding
the sale of their securities. Swartz does not have an underwriter or
coordinating broker acting in connection with the proposed sale of the common
shares.
Swartz may effect such transactions by selling common stock directly to
purchasers or through broker-dealers, which may act as agents or principals.
Such broker-dealers may receive compensation in the form of discounts,
concessions, or commissions from Swartz. They may also receive compensation from
the purchasers of common shares for whom such broker-dealers may act as agents
or to whom they sell as principal, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions).
Swartz is, and any broker-dealer that acts in connection with the sale
of common shares may be deemed to be, an "underwriter" within the meaning of
Section 2(11) of the Securities Act. Any commissions received by such
broker-dealers and any profit on the resale of the common shares sold by them
while acting as principals might be deemed to be underwriting discounts or
commissions. Because Swartz is an "underwriter" within the meaning of Section
2(11) of the Securities Act, it is subject to prospectus delivery requirements.
We have informed Swartz that the anti-manipulation rules of the SEC,
including Regulation M promulgated under the Securities and Exchange Act, may
apply to its sales in the market and we have provided Swartz with a copy of such
rules and regulations.
Swartz also may resell all or a portion of the common shares in open
market transactions in reliance upon Rule 144 under the Securities and Exchange
Act, provided they meet the criteria and conform to the requirements of such
Rule. We have agreed to bear all the expenses (other than selling commissions)
in connection with the registration and sale of the common stock covered by this
prospectus.
65
<PAGE>
LEGAL MATTERS
The validity of the common stock has been passed upon for us by Lurio &
Associates, P.C., Philadelphia, Pennsylvania 19103.
EXPERTS
The consolidated financial statements of USA Technologies, Inc. at June
30, 2000 and 1999, and for each of the two years in the period ended June 30,
2000 appearing in this prospectus and registration statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
(which contains an explanatory paragraph describing conditions that raise
substantial doubt about our ability to continue as a going concern as described
in Note 2 to the consolidated financial statements) appearing elsewhere herein,
and are in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
66
<PAGE>
INDEX TO FINANCIAL STATEMENTS
USA TECHNOLOGIES, INC.
Report of Independent Auditors F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Shareholders' Deficit F-4
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
<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, 2000 and 1999, and the related consolidated
statements of operations, shareholders' deficit, and cash flows for each of the
two years in the period ended June 30, 2000. 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 auditing standards generally accepted
in the United States. 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 financial statements referred to above present fairly, in
all material respects, the financial position of USA Technologies, Inc. at June
30, 2000 and 1999, and the consolidated results of its operations and its cash
flows for each of the two years in the period ended June 30, 2000, in conformity
with accounting principles generally accepted in the United States.
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, 2000, 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.
Philadelphia, Pennsylvania
September 20, 2000
F-1
<PAGE>
USA Technologies, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30
2000 1999
---------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,859,360 $ 1,665,016
Accounts receivable, less allowance for uncollectible
accounts of $50,000 and $69,555 in 2000 and 1999,
respectively
603,171 361,463
Inventory 992,980 1,255,836
Prepaid expenses and other current assets 300,607 42,746
Deposits 192,000 -
Subscriptions receivable 12,199 178,873
---------------------------------------
Total current assets 3,960,317 3,503,934
Property and equipment, at cost, net 384,847 143,670
Software development costs, at cost 149,304 -
Other assets 14,740 10,250
---------------------------------------
Total assets $ 4,509,208 $ 3,657,854
=======================================
Liabilities and shareholders' deficit
Current liabilities:
Accounts payable $ 1,194,391 $ 963,488
Accrued expenses 554,243 452,201
Equipment line of credit 183,196 804,485
Current obligations under capital leases 9,493 4,393
---------------------------------------
Total current liabilities 1,941,323 2,224,567
Senior Note, net of unamortized discount 2,688,402 2,054,232
Obligations under capital leases, less current portion 34,965 22,584
---------------------------------------
Total liabilities 4,664,690 4,301,383
Shareholders' deficit:
Preferred Stock, no par value:
Authorized shares - 1,800,000
Series A Convertible Preferred - Authorized shares -
900,000
Issued and outstanding shares - 566,444 and 640,577 at
June 30, 2000 and 1999, respectively (liquidation
preference of $ 9,536,079 at June 30, 2000) 4,012,266 4,537,128
Common Stock, no par value:
Authorized shares - 62,000,000
Issued and outstanding shares - 13,375,291 and 6,191,097 at
June 30, 2000 and 1999, respectively 24,204,050 14,277,763
Deferred compensation (206,000) -
Subscriptions receivable - (83,983)
Accumulated deficit (28,165,798) (19,374,437)
---------------------------------------
Total shareholders' deficit (155,482) (643,529)
---------------------------------------
Total liabilities and shareholders' deficit $ 4,509,208 $ 3,657,854
=======================================
</TABLE>
See accompanying notes.
F-2
<PAGE>
USA Technologies, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended June 30
2000 1999
---------------------------------------
<S> <C> <C>
Revenues:
Equipment sales $ 1,414,000 $ 3,442,197
License and transaction fees 640,341 448,319
---------------------------------------
Total revenues 2,054,341 3,890,516
Operating expenses:
Cost of equipment sales 1,258,794 2,962,922
General and administrative 5,001,832 2,687,744
Compensation 2,503,165 1,553,189
Depreciation 110,551 91,773
---------------------------------------
Total operating expenses 8,874,342 7,295,628
---------------------------------------
(6,820,001) (3,405,112)
Other income (expense):
Interest income 91,054 8,347
Interest expense (1,610,113) (135,505)
Other (65,421) (119,354)
---------------------------------------
Total other income (expense) (1,584,480) (246,512)
---------------------------------------
Net loss (8,404,481) (3,651,624)
Cumulative preferred dividends (930,078) (1,002,453)
---------------------------------------
Loss applicable to common shares $ (9,334,559) $ (4,654,077)
=======================================
Loss per common share (basic and diluted) $ (0.92) $ (1.07)
=======================================
Weighted average number of common shares
outstanding (basic and diluted) 10,135,905 4,348,866
=======================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
USA Technologies, Inc.
Consolidated Statements of Shareholders' Deficit
<TABLE>
<CAPTION>
Series A
Convertible
Preferred Subscriptions Accumulated
Stock Common Stock Receivable Deficit Total
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1998 $ 4,538,114 $ 11,223,213 $ - $ (15,606,152) $ 155,175
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 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) -
Exercise of 134,000 Common Stock warrants
- at $1.00 per share - 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>
F-4
<PAGE>
USA Technologies, Inc.
Consolidated Statements of Shareholders' Deficit (continued)
<TABLE>
<CAPTION>
Series A
Convertible
Preferred Common Deferred Subscriptions Accumulated
Stock Stock Compensation Receivable Deficit Total
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of 210,523 shares of Common Stock
to employees as compensation $ - $ 505,746 $ - $ - $ 505,746
Issuance of 578,000 shares of Common Stock
in exchange for consulting services - 1,156,000 - - 1,156,000
Conversion of 74,133 shares of Preferred
Stock to 74,133 shares of Common Stock (524,862) 524,862 - - -
Conversion of $386,880 of cumulative
preferred dividends into 38,688 shares
of Common Stock at $10.00 per share - 386,880 - (386,880) -
Deferred compensation - employee stock
awards - 120,000 shares at $2.00 per share - 240,000 $(240,000) - - -
Compensation expense related to deferred
stock awards - - 34,000 - - 34,000
Exercise of 911,600 Common Stock warrants
- at $.50 per share - 455,800 - - 455,800
Exercise of 252,750 Common Stock warrants
- at $1.00 per share - 252,750 - - 252,750
Exercise of 110,000 Common Stock
Consultant warrants - at $2.00 per share - 220,000 - - 220,000
Exercise of 34,000 Common Stock warrants -
at $2.50 per share - 85,000 - - 85,000
Exercise of 10,000 Common Stock options -
at $1.50 per share - 15,000 - - 15,000
Exercise of 6,500 Common Stock options -
at $2.50 per share - 16,250 - - 16,250
Issuance of 250,000 Common Stock warrants
in exchange for professional services - 99,000 - - 99,000
Issuance of 218,000 shares of Common Stock
from the conversion of $545,000 of the
12% Senior Notes - 352,881 - - 352,881
Issuance of 1,200,000 shares of Common Stock
at $2.00 per share in connection
with the 2000-A Private Placement, net
of offering costs of $222,647 - 2,177,353 - - 2,177,353
Issuance of 3,560,000 shares of Common Stock
at $1.00 per share in connection
with the 1999-B Private Placement, net
of offering costs of $96,058 - 3,463,942 - - 3,463,942
Reduction of 20,000 shares of Common Stock
and 10,000 warrants issued in
connection with the cancellation of
$50,000 Senior Notes issued in 1999 - (25,177) - - (25,177)
Subscriptions receivable collected - - 83,983 - 83,983
Net loss - - - (8,404,481) (8,404,481)
---------------------------------------------------------------------------------------
Balance, June 30, 2000 $4,012,266 $ 24,204,050 $(206,000) $ - $(28,165,798) $ (155,482)
=======================================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
USA Technologies, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended June 30
2000 1999
---------------------------------------
<S> <C> <C>
Operating activities
Net loss $ (8,404,481) $ (3,651,624)
Adjustments to reconcile net loss to net cash used in
operating activities:
Compensation charges incurred in connection with stock
awards and the issuance of Common Stock and Common Stock
Purchase Warrants 1,696,846 169,320
Depreciation 110,551 91,773
Interest amortization relating to Senior Note Offering 1,011,874 35,494
Provision for (recovery from) allowance for
uncollectible accounts (19,555) 45,791
Changes in operating assets and liabilities:
Accounts receivable (222,153) (184,511)
Inventory 131,642 (832,685)
Prepaid expenses, deposits, and other assets (376,451) (22,231)
Accounts payable 230,903 386,701
Accrued expenses 102,042 21,558
---------------------------------------
Net cash used in operating activities (5,738,782) (3,940,414)
Investing activities
Purchase of property and equipment (173,532) (40,141)
Increase in software development costs (149,304)
---------------------------------------
Net cash used in investing activities (322,836) (40,141)
Financing activities
Net proceeds from issuance of Common Stock and
exercise of Common Stock Purchase Warrants and Options 6,686,095 182,540
Net (repayment of) proceeds from equipment line of
credit agreement (621,289) 804,485
Receipt of subscriptions receivable 200,657 -
Repayment of principal on capital lease obligations (9,501) (27,078)
Net proceeds from issuance of Senior Notes - 4,106,440
Net proceeds from issuance of Convertible Preferred Stock - 254,360
---------------------------------------
Net cash provided by financing activities 6,255,962 5,320,747
---------------------------------------
Net increase in cash and cash equivalents 194,344 1,340,192
Cash and cash equivalents at beginning of year 1,665,016 324,824
---------------------------------------
Cash and cash equivalents at end of year $ 1,859,360 $ 1,665,016
=======================================
Supplemental disclosures of cash flow information:
Conversion of Convertible Preferred Stock to
Common Stock $ 524,862 $ 235,471
=======================================
Conversion of Cumulative Preferred Dividends to
Common Stock $ 386,880 $ 116,661
=======================================
Prepaid stock expenses through issuance of Common Stock $ 77,900 $ -
=======================================
Subscriptions receivable $ - $ 262,856
=======================================
Conversion of Senior Notes to Common Stock $ 352,881 $ -
=======================================
Cancellation of Senior Notes $ 50,000 $ -
=======================================
Cash paid during the year for interest $ 593,472 $ 95,089
=======================================
Transfer of inventory to property and equipment $ 131,214 $ 13,820
=======================================
Capital lease obligations incurred $ 26,982 $ 29,576
=======================================
Property and equipment acquired with the issuance of
Common Stock $ 20,000 $ -
=======================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements
June 30, 2000
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 its control systems and configured business 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) and
Business Express(R) Limited Service (LSS) principally to the hospitality
industry. The Business Express(R) and Business Express(R) Limited Service (LSS)
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 losses of $8.4 million and $3.7 million
during each of the fiscal years ending June 30, 2000 and 1999, respectively, and
cumulative losses from its inception through June 30, 2000 amounting to $25
million. Losses have continued through September 2000. Further, the Company has
a stockholders' deficit of $155,000 at June 30, 2000. 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 anticipated to occur 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.
Reclassification
Certain amounts from the prior year financial statements have been reclassified
to conform with the current year presentation.
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, 2000 and 1999.
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States 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 generally over three years, computer
equipment and software, which are depreciated using the straight-line method
over three years, leasehold improvements, which are depreciated using the
straight-line method over the term of the lease, 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.
F-8
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
2. Accounting Practices (continued)
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.
Software Development Costs
The Company capitalizes software development costs after technological
feasibility of the software is established and through the product's
availability for general release to the Company's customers. All costs incurred
in the research and development of new software and costs incurred prior to the
establishment of technological feasibility are expensed as incurred. Such
research and development costs expensed amounted to approximately $554,000 and
$198,000 for the years ended June 30, 2000 and 1999, respectively. These costs
are included in general and administrative and compensation in the accompanying
financial statements. During the year ended June 30, 2000, $149,304 of costs
incurred after technological feasibility had been reached were capitalized as
software development costs in connection with the Company's development of the
e-Port, a new terminal that would offer capability for public access electronic
commerce and advertising using the Internet. Amortization of such costs will
commence when the software becomes available for general release and licensing
to the Company's customers, which is anticipated for fiscal year 2001.
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 Statement ("SFAS") No. 123, Accounting for
Stock-Based Compensation, 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 pro forma basis in Note 12.
F-9
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (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 2000 or 1999 because the assumed exercise of these securities
would be antidilutive.
Impact of Recent Accounting Pronouncements
The Financial Accounting Standards Board recently issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which requires
that companies recognize all derivatives as either assets or liabilities in the
balance sheet at fair value. Under SFAS No. 133, accounting for changes in fair
value of a derivative depends on its intended use and designation. SFAS 133 is
effective for fiscal years beginning after June 15, 2000. As the Company does
not plan to enter into any derivative arrangements, this standard is not
expected to have any impact on the financial position or results of operations
of the Company.
Fair Value of Financial Instruments
The carrying value of 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.
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
F-10
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
3. Joint Venture (continued)
sale would receive 75% of the gross profit and the other partner would receive
25% of the gross profit. All revenues and expenses of the Joint Venture are
shared equally by the partners. The Company has managed the operations of the
Joint Venture and handled all of its administrative matters. The Joint Venture
Agreement 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 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. During the years ended June 30, 2000 and
1999, 2 and 98, respectively, of the installations were completed. Revenues
generated in connection with this agreement represented 2% and 49%,
respectively, of the fiscal year 2000 and 1999 consolidated revenues.
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. 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. Discovery is to be completed by March
20, 2001 and a jury trial is scheduled to commence on June 18, 2001. 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, 2000 and 1999, the Joint Venture recorded accounts payable to MBE of
approximately $128,000 and $64,000, respectively, which principally represents
amounts payable for inventory and other expenditures paid by MBE on behalf of
the Joint Venture.
F-11
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
4. Property and Equipment
Property and equipment consist of the following:
June 30
2000 1999
---------------------------------
Control systems $ 535,505 $ 410,983
Furniture and equipment 170,398 105,286
Computer software 47,762 -
Leasehold improvements 86,628 -
Vehicles 10,258 10,258
---------------------------------
850,551 526,527
Less accumulated depreciation 465,704 382,857
---------------------------------
$ 384,847 $ 143,670
=================================
Depreciation expense was approximately $111,000 and $92,000 for the years ended
June 30, 2000 and 1999, respectively.
5. Accrued Expenses
Accrued expenses consist of the following:
June 30
2000 1999
--------------------------
Accrued professional fees $ 186,808 $ 101,000
Accrued software license and support costs 159,268 60,312
Accrued compensation and related sales commissions 91,592 88,135
Accrued product warranty costs 56,684 117,300
Accrued other 55,150 64,484
Advanced customer billings 4,741 20,970
--------------------------
$ 554,243 $ 452,201
==========================
6. Related Party Transactions
At June 30, 2000 and 1999, approximately $19,000 and $22,000, respectively, of
the Company's accounts payable were due to a Board member for legal services
performed. During the years ended June 30, 2000 and 1999, the Company incurred
approximately $193,000 and $170,000, respectively, for these services.
F-12
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
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 an original
agreement entered into with the Joint Venture 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. At June 30, 2000, $398,353 of accounts
receivable from IBM is outstanding in connection with this arrangement. Such
amount is included in accounts receivable in the accompanying balance sheet
at June 30, 2000. 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. The outstanding balance is secured by the
underlying inventory. Interest accrues on the outstanding balance at 10% per
annum, subject to adjustment if the outstanding balance is outstanding
greater than 180 days. The weighted average interest rate for fiscal year
2000 was 10.64%. At June 30, 2000 and 1999, respectively, $183,196 and
$804,485 was outstanding under this agreement.
o In connection with an employment agreement, expiring June 30, 2002, the
Company's Chief Executive Officer has been granted in the event of a "USA
Transaction," as defined, which among other events includes a change in
control of the Company, irrevocable and fully vested rights equal to that
number of shares of Common Stock that when issued to him equals eight percent
of all the then issued and outstanding shares of the Company's Common Stock.
The Chief Executive Officer is not required to pay any consideration 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. Rent expense under such arrangements was approximately $140,000 and
$83,000 during the years ended June 30, 2000 and 1999, respectively. During
the year ended
F-13
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
o 7. Commitments (continued)
June 30, 2000, the Company entered into agreements to lease $26,982 of
equipment that was accounted for as capital leases. This computer equipment
is included in equipment in the accompanying consolidated financial
statements. Lease amortization of $8,097 and $25,076 is included in
depreciation expense for the years ended June 30, 2000 and 1999,
respectively.
Future minimum lease payments subsequent to June 30, 2000 under capital and
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-----------------------------------
<S> <C> <C> <C>
2001 $ 16,417 $ 138,000
2002 16,417 135,000
2003 16,417 132,000
2004 11,689 126,000
2005, thereafter - 126,000
-----------------------------------
Total minimum lease payments 60,940 $ 657,000
==================
Less amount representing interest 16,482
-----------------
Present value of net minimum lease payments 44,458
Less current obligation under capital leases 9,493
-----------------
Obligation under capital leases, less current portion $ 34,965
=================
</TABLE>
8. Income Taxes
At June 30, 2000 and 1999, the Company had Federal net operating loss
carryforwards of approximately $23,481,000 and $15,115,000, respectively, to
offset future taxable income expiring through 2019. At June 30, 2000 and 1999,
the Company recorded a deferred tax asset of $9,373,700 and $6,013,100,
respectively, which were reduced by a valuation allowance of the same amount as
the realization of these deferred tax assets are not certain.
The timing and extent in which the Company can utilize future tax deductions in
any year may be limited by provisions of the Internal Revenue Code regarding
changes in ownership of corporations.
F-14
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
8. Income Taxes (continued)
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
2000 1999
--------------------------------------
<S> <C> <C>
Deferred tax asset:
Net operating loss carryforwards $ 8,895,000 $ 5,530,000
Compensation expense on stock option re-pricing 170,500 207,000
Deferred research and development costs 216,400 143,000
Other temporary differences 91,800 133,100
--------------------------------------
9,373,700 6,013,100
Valuation allowance (9,373,700) (6,013,100)
--------------------------------------
Deferred tax asset, net $ - $ -
======================================
</TABLE>
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. During fiscal year 1999, the Company's Board
of Directors authorized several increases to the allowable size of the Senior
Note Offering resulting in 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. 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
F-15
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
9. Senior Note Offering (continued)
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. Each 1999-A
Common Stock purchase warrant entitled the holder to purchase one share of
Common Stock for $1.00 at any time through December 31, 2001. During January
1999 and January 2000, respectively, 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 and January 31, 2000, respectively. During the
year ended June 30, 2000, 911,600 1999-A Common Stock purchase warrants were
exercised generating gross proceeds of $455,800.
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, 2000 and 1999, $12,199 and $84,296 of this amount is
included in subscriptions receivable. The $12,199 was re-paid to the Company
subsequent to year-end and, accordingly, is reflected as a current asset at June
30, 2000.
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 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, 2000 and
1999 was $1,047,368 and $35,494, respectively.
During October 1999, the Company's Board of Directors authorized the voluntary
conversion of all or any part of the 12% Senior Notes into shares of restricted
Common Stock at the rate of $2.50 per share, at any time until the maturity date
of December 31, 2001. During fiscal year 2000, $545,000 of the Senior Notes were
converted into 218,000 shares of Common Stock (Note 14). Additionally, five
units of the Senior Notes were cancelled at $50,000, resulting in the reduction
of the previously issued 10,000 1999-A Warrants and 20,000 shares of Common
Stock.
F-16
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
10. Series A 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.
Each share of Common Stock entitles the holder to one voting right. Series A
Preferred Stock provides for an annual cumulative dividend of $1.50 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, 2000 and 1999 amounted to
$3,871,639 and $3,328,442, respectively. Cumulative unpaid dividends are
convertible into common shares at $10.00 per common share at the option of the
shareholder. During the years ended June 30, 2000 and 1999, certain holders of
the Preferred Stock converted 74,133 and 3,326 shares, respectively, into 74,133
and 3,326 shares of Common Stock, respectively. Certain of these shareholders
also converted cumulative preferred dividends of $368,880 and $116,661,
respectively, into 38,688 and 11,666 shares of Common Stock during the years
ended June 30, 2000 and 1999, 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,
2000. 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
During June 2000, the Company's Board of Directors authorized a $2,200,000
private placement offering to accredited investors to sell 2,200,000 shares of
restricted Common Stock at $1.50 per share (subsequently reduced to $1.00 per
share in July 2000). The subscription agreements required the investors to remit
payment for their shares to the Company by August 30, 2000. Through September
15, 2000, the Company did not receive any such payments and as a result, the
Company formally notified the investors that it rescinded and cancelled the
subscription agreements. Such cancellation has been retroactively reflected in
the accompanying financial statements as of June 30, 2000.
During February 2000, the Company's Board of Directors awarded 120,000 shares of
the Company's Common Stock, at $2.00 per share, to certain executive officers.
Pursuant to their employment agreements, these officers will be issued the
Common Stock if employed by the Company on June 30, 2002. During fiscal year
2000, the Company recorded deferred compensation of $240,000 in connection with
these awards. Compensation expense of $34,000 has been recorded to reflect the
amortization of the shares earned through June 30, 2000.
F-17
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
11. Common Stock (continued)
During January 2000, the Company's Board of Directors authorized a $2,000,000
private placement offering of 1,000,000 shares of restricted Common Stock at
$2.00 per share to accredited investors (the "2000-A" offering). This offering
was later amended to 1,300,000 shares. During fiscal year 2000, 1,200,000 shares
were sold, generating net proceeds to the Company of $2,177,353 ($2,400,000 less
offering costs of $222,647).
During October 1999, the Company's Board of Directors authorized a private
placement offering (the "1999-B" offering) to accredited investors of 150 units
(later increased to 356 units by the Board of Directors) at a unit price of
$10,000. Each unit of the $3,560,000 Offering consists of 10,000 shares of
restricted Common Stock at $1.00 per share, and 10,000 1999-B Common Stock
purchase warrants. During fiscal year 2000 all 356 units were sold, resulting in
net proceeds of $3,463,942 ($3,560,000 less offering costs of $96,058) to the
Company. Each 1999-B Common Stock purchase warrant entitled the holder to
purchase one share of restricted Common Stock for $2.00 at any time through
March 31, 2000. The 1999-B Common Stock purchase warrants were modified several
times between January 2000 and August 2000 reducing their exercise price to
$1.00 per share and extending the expiration date of the warrants to December
31, 2000. Additionally, those 1999-B Common Stock purchase warrant holders who
exercised their purchase warrants on or before December 31, 2000 were granted a
further extension of the warrants' expiration date to March 31, 2001. As a
result of these reductions in the exercise price, the Company's Board of
Directors authorized the refunding of the $1 reduction per warrant to those
investors who exercised their warrants prior to the exercise price reduction.
During fiscal year 2000, 252,750 shares of Common Stock were issued upon the
exercise of the 1999-B Common Stock purchase warrants resulting in net proceeds,
after refunds, of $252,750. At June 30, 2000, 3,307,250 1999-B Common Stock
purchase warrants are outstanding.
During July 1999, the Board of Directors granted fully vested warrants to
purchase 250,000 shares of the Company's Common Stock to two consultants. These
warrants were issued in exchange in exchange for financial and public relations
consulting services and resulted in consulting expense of $99,000. The warrants
are exercisable for two years from date of issuance. Of the total, 50,000
warrants are exercisable at $2.00 per share, 50,000 at $3.00 per share and
150,000 at $2.50 per share. On October 21, 1999, the exercise price of the
50,000 warrants exercisable at $3.00 per share was reduced to $2.00 through
January 31, 2000. On April 14, 2000, the exercise price of the warrants
exercisable at $2.50 per share was reduced to $1.00 per share. During fiscal
year 2000, the Company issued 34,000 shares of Common Stock upon the exercise
of these warrants at $2.50 per share and 100,000 shares of Common Stock upon the
exercise of these warrants at $2.00 per share, resulting in gross proceeds of
$285,000.
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.
F-18
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
11. Common Stock Transactions (continued)
In connection with a July 1998 private placement offering, the Company issued
139,000 1998-B Common Stock purchase warrants at an exercise price of $1.50
through January 1, 1999 and $4.00 per warrant thereafter. 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 2000,
the Company's Board of Directors authorized the reduction in the exercise price
of the 1998-B Common Stock purchase warrants to $2.00 through June 30, 2000.
During June 2000, the Company's Board of Directors further reduced the exercise
price of the 1998-B Common Stock purchase warrants to $1.50 through July 31,
2000. During fiscal year 1999, 134,000 warrants were exercised generating gross
proceeds of $134,000. At June 30, 2000, 5,000 1998-B Common Stock purchase
warrants are outstanding.
In connection with a January 1998 private placement offering, the Company issued
375,000 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. During fiscal
year 2000, the Company's Board of Directors authorized the reduction in the
exercise price of the 1998-A Common Stock purchase warrants to $2.00 through
June 30, 2000. During June 2000, the Company's Board of Directors further
reduced the exercise price of the 1998-A Common Stock purchase warrants to $1.50
through July 31, 2000. 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, 2000, 4,000 1998-A Common Stock purchase warrants are
outstanding.
In connection with a June 1997 a private placement offering of Convertible
Debentures, certain affiliates of the placement agent 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. During fiscal year 2000, the Company's Board of Directors
authorized the reduction in the exercise price of these Common Stock purchase
warrants to $2.00 through June 30, 2000. During June 2000, the Company's Board
of Directors further reduced the exercise price of these Common Stock purchase
warrants to $1.50 through July 31, 2000. During the years ended June 30, 2000
and 1999, respectively, 10,000 and 90,000 of these warrants were exercised
generating gross proceeds aggregating $200,000. At June 30, 2000, 100,000 of
these purchase warrants are outstanding.
F-19
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
11. Common Stock Transactions (continued)
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. During fiscal year 2000, the Company's Board of Directors
authorized the reduction in the exercise price of the 1997 Common Stock purchase
warrants to $2.00 through June 30, 2000. During June 2000, the Company's Board
of Directors further reduced the exercise price of the 1997 Common Stock
purchase warrants to $1.50 through July 31, 2000. Through June 30, 2000, 158,500
warrants were exercised at $2.00 per warrant generating gross proceeds of
$317,000. At June 30, 2000, 1,500 of the 1997 Common Stock purchase warrants are
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. During fiscal year 2000, the Company's Board of
Directors authorized the reduction in the exercise price of the 1996-B Common
Stock purchase warrants to $2.00 through June 30, 2000. During June 2000, the
Company's Board of Directors further reduced the exercise price of the 1996-B
Common Stock purchase warrants to $1.50 through July 31, 2000. Through June 30,
2000, 33,400 warrants were exercised at $2.00 per warrant generating gross
proceeds of $66,800. At June 30, 2000, 4,000 of the 1996-B Common Stock purchase
warrants are 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. During
fiscal year 2000, the Company's Board of Directors authorized the reduction in
the exercise price of the 1996 Common Stock purchase warrants to $2.00 through
June 30, 2000. During June 2000, the Company's Board of Directors further
reduced the exercise price of the 1996 Common Stock purchase warrants to $1.50
through July 31, 2000. Through June 30, 2000, 433,200 warrants were exercised
generating gross proceeds of $922,900. At June 30, 2000, 86,800 1996 Common
Stock purchase warrants are 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. During
fiscal year 2000, the Company's Board of Directors authorized the reduction in
the exercise price of the 1995 Common Stock purchase warrants to $2.00 through
June 30, 2000. During June 2000, the Company's Board of Directors further
reduced the exercise price of the 1995 Common Stock purchase warrants to $1.50
through July 31, 2000. Through June 30,
F-20
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
11. Common Stock Transactions (continued)
2000, warrants were exercised at $2.50 per warrant generating gross proceeds of
$185,250. At June 30, 2000, 67,300 1995 Common Stock purchase warrants are
outstanding.
At June 30, 2000 and 1999, the Company had outstanding 11,740 Common Stock
purchase rights. 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 and,
accordingly, 3,540 purchase rights were exercised generating gross proceeds of
$3,540. During July and August 2000, the Company's Board of Directors authorized
a reduction in the exercise price from $10.00 per share to $1.00 per share
through December 31, 2000.
As of June 30, 2000, the Company reserved 7,294,565 shares of its Common Stock
for future exercises of Common Stock options, Common Stock purchase warrants and
the conversions of its Preferred Stock, Cumulative Preferred Stock dividends and
the Senior Notes.
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.
F-21
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
12. Stock Options (continued)
The following table summarizes all stock option activity:
Common
Shares Under Exercise
Options Price
Granted Per Share
-------------------------------------
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
Granted 120,000 $ 2.00
Canceled or expired (35,833) $ 1.50-$4.50
Exercised (16,500) $ 1.50-$2.50
-------------------------------------
Balance at June 30, 2000 984,767 $ .50-$5.00
=====================================
The price range of the outstanding and exercisable common stock options at June
30, 2000 is as follows:
<TABLE>
<CAPTION>
Weighted
Average Weighted
Option Remaining Weighted Average
Exercise Options Contract Life Exercise Options Exercise
Prices Outstanding (Yrs.) Price Exercisable Price
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.50 5,000 1.00 $ 0.50 5,000 $ 0.50
$ 1.50 117,100 .98 $ 1.50 117,100 $ 1.50
$ 2.00 656,167 4.01 $ 2.00 566,169 $ 2.00
$ 2.50 110,000 .73 $ 2.50 110,000 $ 2.50
$ 4.50 81,500 1.54 $ 4.50 81,500 $ 4.50
$ 5.00 15,000 1.53 $ 5.00 15,000 $ 5.00
----------------- ----------------------- -----------------
984,767 $ 0.50-$5.00 894,769
================= ======================= =================
</TABLE>
F-22
<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:
June 30
2000 1999
------------------------------
Net loss applicable to common shares
as reported under APB 25: $(9,334,559) $ (4,654,077)
Stock option expense per SFAS 123 (329,062) (620,236)
------------------------------
Pro forma net loss $(9,663,621) $ (5,274,313)
==============================
Loss per common share as reported $ (.92) $ (1.07)
Pro forma net loss per common share $ (.95) $ (1.21)
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 2000 and 1999; risk-free interest
rate of 6.0%; 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 1.332 and 1.364,
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.
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
F-23
<PAGE>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
13. Retirement Plan (continued)
discretion, Company contributions to the Plan. During fiscal years 2000 and
1999, there were no contributions made to the Plan by the Company. At the
beginning of fiscal year 2001, the Company amended the Plan to include a Company
matching contribution for up to 10% of an employee's compensation.
14. Subsequent Events
During July and August 2000, the Company's Board of Directors reduced the
exercise price of the 1995, 1996, 1996-B, 1997, 1998A and 1998B Common Stock
purchase warrants and the Common Stock purchase rights to $1.00 through December
31, 2000. As a result, certain holders of 717,350 Common Stock purchase warrants
exercised warrants generating gross proceeds of $717,350.
During August 2000, the Company's Board of Directors authorized a $1,150,000
private placement of up to 1,150,000 shares of restricted Common Stock at $1.00
per share to a limited number of accredited investors. For each share purchased,
the Company will issue a Common Stock purchase warrant to purchase one share of
restricted Common Stock at $1.00 until January 31, 2001. As of September 15,
2000, the Company received signed subscription agreements in the amount of
$1,150,000.
During September 2000, the Board of Directors ratified and approved an
Investment Agreement with an investment company for an equity line of up to $20
million over a period not to exceed 3 years. Investments are determined monthly
based on the current market prices of the Company's Common Stock in accordance
with the terms of the Agreement. The purchase price per share for the investment
company would equal 91% of the market price of the Common Stock at the time of
purchase; additional warrants can be granted up to 10% of the number of shares
actually purchased; the investment company will receive 1,200,000 Commitment
Warrants at an initial exercise price of $1.00, adjusted to lower market pricing
if applicable; and additions to these Commitment Warrants will be granted, if
required, to keep the investment company's ownership percent equal to 5%
(decreasing over time) of the outstanding Common Stock of the Company on a fully
diluted basis.
During September 2000, the Company's Board of Directors granted each holder of
the Senior Notes the option to elect to extend the maturity date of the holder's
Senior Note to December 31, 2002 from December 31, 2001. Upon such election, the
conversion rate for the holder's Senior Note will be reduced from $2.50 per
share to $2.00 per share through the note's maturity.
F-24
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 24. Indemnification of Officers and Directors.
Section 1746 of the Pennsylvania Business Corporation Law of 1988, as
amended ("BCL"), authorizes a Pennsylvania corporation to indemnify its
officers, directors, employees and agents under certain circumstances against
expenses and liabilities incurred in legal proceedings involving such persons
because of their holding or having held such positions with the corporation and
to purchase and maintain insurance of such indemnification. Our By-laws
substantively provide that we will indemnify our officers, directors, employees
and agents to the fullest extent provided by Section 1746 of the BCL.
Section 1713 of the BCL permits a Pennsylvania corporation, by so
providing in its By-laws, to eliminate the personal liability of a director for
monetary damages for any action taken unless the director has breached or failed
to perform the duties of his office and the breach or failure constitutes
self-dealing, willful misconduct or recklessness. In addition, no such
limitation of liability is available with respect to the responsibility or
liability of a director pursuant to any criminal statute or for the payment of
taxes pursuant to Federal, state or local law. Our By-laws eliminate the
personal liability of the directors to the fullest extent permitted by Section
1713 of the BCL.
Item 25. Other Expenses of Issuance and Distribution.
The following is an itemized statement of the estimated amounts of all
expenses payable by the Registrant in connection with the registration of the
common stock, other than underwriting discounts and commissions.
Securities and Exchange Commission - Registration Fee . $ 2,317.13
Printing and Engraving Expenses . . . . . . . . . . . . $ 2,682.87
Accounting Fees and Expenses. . . . . . . . . . . . . . $17,500.00
Legal Fees and Expenses . . . . . . . . . . . . . . . . $17,500.00
----------
Total . . . . . . . . . . . . . . . . . . . . . $40,000.00
==========
Item 26. Recent Sales of Unregistered Securities.
During the three years immediately preceding the date of the filing of
this registration statement, the following securities were issued by USA without
registration under the Securities Act of 1933, as amended ("Act"):
II-1
<PAGE>
I. Private Placements.
During July and August 1998, we sold 27.8 units at $10,000. Each unit
consisted of 2,000 shares of preferred stock and 5,000 1998-B common stock
purchase warrants. An aggregate of 55,600 shares of preferred stock and 139,000
1998-B common stock purchase warrants were sold to 20 accredited investors. The
offering was sold only to accredited investors, involved no general solicitation
or advertising, and was therefor exempt from registration under Rule 506 of
Regulation D promulgated under the Act.
From September 1998 through June 23, 1999, we sold 461.8 units at
$10,000 each, for an aggregate of $4,618,000. 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 222 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.
In June 1999, pursuant to the terms of the series B preferred stock,
each share of series B preferred stock was exchanged for 4 shares of common
stock, or an aggregate of 1,867,200 shares of common stock. Such exchange was
exempt from registration under the Act pursuant to Section 3(a)(9) of the Act.
The 1,867,200 shares of common stock are restricted securities as defined under
Rule 144 promulgated under the Act.
In June 1999, we issued 43,400 shares of common stock to Harmonic
Research, Inc., a broker-dealer, as part of its compensation in connection with
its assisting us to raise monies in a private placement offering. We also issued
to Harmonic Research, Inc. 9,400 1999-A common stock purchase warrants. The
shares and warrants are restricted securities as such term is defined in Rule
144 promulgated under the Act and were issued pursuant to Section 4(2) thereof.
In June 1999, we issued to Robert Flaherty 4,000 shares of common stock
in connection with public relations services rendered to us. Such shares were
exempt from registration under Section 4(2) promulgated under the Act.
In June 1999, we issued 10,000 shares of common stock to Rick Joshi in
consideration of consulting services performed on behalf of USA. The shares were
esxempt from registration pursuant to Section 4(2) promulgated under the Act.
In July 1999, we issued to I. W. Miller Group, Inc. fully vested
warrants to acquire up to 100,000 shares, 50,000 of which are exercisable at
$2.00 per share and 50,000 of which are exercisable at $3.00 per share. The
warrants are exercisable at any time for two years following issuance. The
warrants were issued to Miller pursuant to Rule 506 under the Act, and the
shares of common stock underlying the warrants will be issued pursuant to such
exemption.
In July 1999, we issued to Harmonic Research, Inc. fully vested
warrants to acquire up to 150,000 shares of common stock at $2.50 per share. The
warrants are exercisable at any time for two years following issuance. The
warrants were issued pursuant to Rule 506 under the Act, and the shares of
common stock underlying the warrants will be issued pursuant to such exemption.
II-2
<PAGE>
In August 1999, we issued 3,000 shares of common stock to Robert
Flaherty in consideration of public relations services performed on behalf of
USA. The shares were exempt from registration under Rule 701 promulgated under
the Act.
During October, November and December, 1999, we sold 356 units at
$10,000 each, for an aggregate of $3,560,000. Each unit consisted of 10,000
shares of common stock and 10,000 1999-B common stock purchase warrants. The
offering was sold to 196 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.
During February, March and April 2000, we sold an aggregate of
1,200,000 shares of common stock at $2.00 per share for a total of $2,400,000.
The offering was sold to 22 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. Through October 26,
2000 we have received $625,000 in cash proceeds on account of these subscription
agreements.
During September 2000 we received signed subscription agreements for
the sale of 11.5 units at $100,000 each, for an aggregate of $1,150,000. Each
unit consisted of 100,000 shares of common stock and 100,000 common stock
purchase warrants. The offering was sold to 12 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.
On September 15, 2000, we signed an Investment Agreement with Swartz
Private Equity, LLC, a private equity fund, pursuant to which Swartz agreed to
purchase up to $20,000,000 of common stock. The purchases would be made at our
option over a three year period in amounts and at prices based upon market
conditions. The purchase by Swartz is subject to an effective registration
statement.
II. Stock Options
In December 1997, we issued to Joseph Donahue options to purchase up to
5,000 shares of common stock at $4.50 per share.
In December 1997, we issued Phillip A. Harvey options to purchase up to
5,000 shares of common stock at $4.50 per share.
In April 1998, we issued to Stephen Herbert options to purchase up to
5,000 shares of common stock at $4.50 per share.
In April 1998, we issued to Haven Brock Kolls options to purchase up to
5,000 shares of common stock at $4.50 per share.
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<PAGE>
In April 1998, we issued to Leland P. Maxwell options to purchase up to
5,000 shares of common stock at $4.50 per share.
In June 1999, we issued options to purchase an aggregate of 470,000
shares of common stock at $2.00 per share to our executive officers, as follows:
George R. Jensen, Jr. - 180,000 options; Stephen P. Herbert - 110,000 options;
Haven Brock Kolls - 100,000 options; Leland Maxwell - 40,000 options; Michael
Lawlor - 20,000 options; and Joseph Donahue - 20,000 options.
In June and July 1999, we issued options to purchase an aggregate of
70,000 shares of common stock at $2.00 per share to our outside directors, as
follows; Steven Katz - 10,000 options; Edwin R. Boynton - 10,000 options; Peter
Kapourelos - 10,000 options; William Sellers - 10,000 options; Henry Smith -
10,000 options; William Van Alen, Jr. - 10,000 options; and Douglas M. Lurio -
10,000 options.
In June 1999, we issued options to purchase an aggregate of 12,000
shares of common stock at $2.00 per share to six employees as follows: Margaret
Broadwell - 5,000 options; Cecil Ledesma - 2,000 options; Amy Thigpen - 2,000
options; Vivian Stroud - 1,000 options; Jim Tierney - 1,000 options; and Dave
DeMedio - 1,000 options.
In August 1999, we issued to Michael Lawlor options to purchase an
aggregate of 20,000 shares of common stock at $2.00 per share.
In November 1999, we issued fully vested options to purchase an
aggregate of 90,000 shares of common stock to our executive officers as follows:
Stephen P. Herbert - 45,000 options; Haven Brock Kolls - 30,000 options; and
Leland Maxwell - 15,000 options. Each option is exercisable at $2.00 per share.
In September 2000, we issued to Swartz Private Equity, LLC, a warrant
to purchase up to 1,200,000 shares at a purchase price of $1.00 per share. The
number of shares subject to the option and the exercise price are subject to
adjustment.
In October 2000, we issued to George R. Jensen, Jr., options to
purchase up to 200,000 shares of our common stock at $1.50 per share.
The issuance of all of the foregoing options was made in reliance upon
the exemption provided by Section 4(2) of the Act as all of the options were
issued to officers, directors, employees or consultants of USA, each of such
issuances were separate transactions not part of any plan, and none of the
issuances involved any general solicitation or advertising.
III. Common Stock-For Cash.
In December 1999, warrants to purchase 100,000 shares of common stock
at $2.00 per share were exercised by the holder thereof.
In February 2000, warrants to purchase 34,000 shares of common stock at
$2.50 per share were exercised by the holder thereof.
In February 2000, options to purchase 10,000 shares of common stock at
$1.50 per share were exercised by the holder thereof.
In February 2000, options to purchase 6,500 shares of common stock at
$2.50 per share were exercised by the holders thereof.
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<PAGE>
All of the foregoing issuances were made in reliance upon the exemption
provided by Section 4(2) of the Act as all of the issuances were to existing
securityholders of USA, the securities issued contained restrictive legends, and
the issuance did not involve any general solicitation or advertising.
Item 27. Exhibits.
Exhibit
Number Description
-------------------------------------------------------
3.1 Articles of Incorporation of USA 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 USA 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 USA
filed on July 27, 1992 (Incorporated by reference to
Exhibit 3.1.2 to Form SB-2 Registration Statement No.
33-70992).
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<PAGE>
3.1.3 Third Amendment to Articles of Incorporation of USA 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 USA
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 USA 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 USA 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 USA
filed on March 24, 1997 (Incorporated by reference to
Exhibit 3.1.7 to Form SB-2 Registration Statement No.
333-30853).
3.1.8 Eighth Amendment to Articles of Incorporation of USA
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 USA 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 USA 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 USA
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 USA (Incorporated by reference to Exhibit 3.2
to Form SB-2 Registration Statement No. 33-70992).
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<PAGE>
4.1 Warrant Agreement dated as of June 21, 1995 between USA
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
USA 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).
**5.1 Opinion of Lurio & Associates, P.C.
10.1 Employment and Non-Competition Agreement between USA 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 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).
10.3 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).
II-7
<PAGE>
10.4 Employment and Non-Competition Agreement between USA 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).
10.4.1 First Amendment to Employment and Non-Competition
Agreement between USA 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).
10.4.2 Third Amendment to Employment and Non-Competition
Agreement between USA and H. Brock Kolls dated February
22, 2000 (Incorporated by reference to Exhibit 10.3 to
Form S-8 Registration Statement No. 333-341006).
10.5 H. Brock Kolls Common Stock Options dated as of May 1,
1994 (Incorporated by reference to Exhibit 10.42 to
Form SB-2 Registration Statement No. 33-70992).
10.5.1 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)
10.6 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).
10.7 Employment and Non-Competition Agreement between USA and
Michael Lawlor dated June 7, 1996 (Incorporated by
reference to Exhibit 10.28 to Form SB-2 Registration
Statement No. 333-09465).
10.7.1 First Amendment to Employment and Non-Competition
Agreement between USA and Michael Lawlor dated February
22, 2000 (Incorporated by reference to Exhibit 10.5 to
Form S-8 Registration Statement No. 333-34106).
10.8 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).
10.9 Employment and Non-Competition Agreement between USA and
Stephen P. Herbert dated April 4, 1996 (Incorporated by
reference to Exhibit 10.30 to Form SB-2 Registration
Statement No. 333-09465).
10.9.1 First Amendment to Employment and Non-Competition
Agreement between USA and Stephen P. Herbert dated
February 22, 2000 (Incorporated by reference to Exhibit
10.2 to Form S-8 Registration Statement No. 333-34106).
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<PAGE>
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 Employment and Non-Competition Agreement between USA and
Leland P. Maxwell dated February 24, 1997 (Incorporated
by reference to Exhibit 10.39 to Form SB-2 Registration
No. 33-98808)
10.14.1 Second Amendment to Employment and Non-Competition
Agreement between USA and Leland P. Maxwell dated
February 22, 2000 (Incorporated by reference to Exhibit
10.4 to Form S-8 Registration Statement No. 333-34106)
10.15 Leland P. Maxwell Common Stock Option Certificate dated
February 24, 1997 (Incorporated by reference to Exhibit
10.40 to Form SB-2 Registration No. 33-98808).
10.16 Letter between USA and GEM Advisers, Inc. signed May 15,
1997 (Incorporated by reference to Exhibit 10.1 to Form
8-K filed on May 22, 1997).
10.17 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).
10.18 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).
10.19 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).
10.20 Joint Venture Agreement dated September 24, 1997 between
USA and Mail Boxes Etc. (Incorporated by reference to
Exhibit 10.47 to Form 10-KSB filed on September 26,
1997).
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<PAGE>
10.21 Employment and Non-competition Agreement between USA 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).
10.21.1 First Amendment to Employment and Non-Competition
Agreement between USA and George R. Jensen, Jr., dated as
of June 17, 1999.
10.21.2 Second Amendment to Employment and Non-Competition
Agreement between USA and George R. Jensen, Jr. dated
February 22, 2000 (Incorporated by reference to Exhibit
10.1 to Form S-8 Registration Statement No. 333-34106).
10.22 Agreement between USA 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).
10.23 Agreement between USA 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).
10.24 Agreement between USA 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).
10.25 Separation Agreement between USA 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).
10.26 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).
10.27 Consulting Agreement between Ronald Trahan and USA 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).
10.28 Consulting Agreement between Mason Sexton and USA 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).
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<PAGE>
10.29 Financial Public Relations Agreement between USA 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).
10.30 Consulting Agreement between Harmonic Research, Inc. and
USA dated August 3, 1999 (Incorporated by reference to
Exhibit 10.39 to Form SB-2 Registration Statement No.
333-84513).
10.31 Investment Agreement between USA and Swartz Private
Equity, LLC dated September 15, 2000 (incorporated by
reference to Exhibit 10.1 to Form 8-K dated September 21,
2000).
10.32 Commitment Warrant issued to Swartz Private Equity LLC
dated August 23, 2000 (incorporated by reference to
Exhibit 10.2 to Form 8-K dated September 21, 2000).
10.33 Warrant Anti-Dilution Agreement between USA and Swartz
Private Equity, LLC dated September 15, 2000
(incorporated by reference to Exhibit 10.3 to Form 8-K
dated September 21, 2000).
10.34 Registration Rights Agreement between USA and Swartz
Private Equity dated September 15, 2000 (incorporated by
reference to Exhibit 10.4 to Form 8-K dated September 21,
2000).
10.35 Agreement for Wholesale Financing and Addendum for
Scheduled Payment Plan with IBM Credit Corporation dated
May 6, 1999 (incorporated by reference to Exhibit 10.40
to Form 10-KSB for the fiscal year ended June 30, 1999).
**23.1 Consent of Ernst & Young LLP.
**24.1 Power of Attorney
--------------------------------------------------------------------------------
** -- Filed herewith.
Item 28. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
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<PAGE>
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high and of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if
the information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
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<PAGE>
For purposes of determining any liability under the Securities Act of
1933, each filing of the registrant's annual report pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 that is incorporated by reference
in this registration statement shall be deemed to be a new registration
statement relating to the securities offered herein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing this Form SB-2 and has duly caused this
registration statement on Form SB-2 to be signed on its behalf by the
undersigned, thereunto duly authorized, in Wayne, Pennsylvania, on October 30,
2000.
USA TECHNOLOGIES, INC.
By: /s/ George R. Jensen, Jr.
------------------------------------
George R. Jensen, Jr.,
Chairman and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints George R. Jensen, Jr. and Leland P.
Maxwell, and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the SEC, granting unto such attorneys-in-fact and agents, full
power and authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or either of them or their or his
substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been duly signed below by the following persons
in the capacities and dates indicated.
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<PAGE>
Signatures Title Date
---------- ----- ----
/s/ George R. Jensen, Jr. Chairman of the Board, October 30, 2000
---------------------------- and Chief Executive
George R. Jensen, Jr. Officer (Principal
and Chief Executive
Officer) Director
/s/ Leland P. Maxwell Vice President, Chief October 30, 2000
---------------------------- Financial Officer
Leland P. Maxwell Treasurer (Principal
Accounting Officer)
/s/ Stephen P. Herbert President, Chief October 30, 2000
---------------------------- Operating Officer,
Stephen P. Herbert Director
/s/ William W. Sellers Director October 30, 2000
---------------------------
William W. Sellers
Director October __, 2000
----------------------------
Henry B. duPont Smith
/s/ William L. Van Alen, Jr. Director October 30, 2000
----------------------------
William L. Van Alen, Jr.
Director October __, 2000
----------------------------
Steven Katz
/s/ Douglas M. Lurio Director October 30, 2000
----------------------------
Douglas M. Lurio
Director October __, 2000
----------------------------
Edwin R. Boynton
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<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
5.1 Opinion of Lurio & Associates
23.1 Consent of Independent Auditors
24.1 Power of Attorney (appears as part of signature page)
----------------
II-15
