<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended June 30, 2000 Commission file number: 33-70882
OR
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 [No Fee Required]
For the transition period from ______ to ______
USA TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2679963
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Plant Avenue, Wayne, PA. 19087
(Address of principal executive offices) (Zip Code)
(610)-989-0340
(Registrant's telephone number, including area code)
NONE
(Securities registered under Section 12(b) of the Exchange Act)
NONE
(Securities registered pursuant to Section 12(g) of the Exchange Act)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to for such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendments to
this Form 10-KSB. [X]
Transitional Small Business Disclosure Format Yes ___ No _X_
Registrant's total revenues for its most recent fiscal year..........$2,054,341.
As of September 21, 2000, there were outstanding 15,266,199 shares of Common
Stock, no par value, and 562,444 shares of Series A Convertible Preferred Stock,
no par value.
The Company's voting securities are traded on the Over the Counter (OTC)
Electronic Bulletin Board. The aggregate market value of the company's voting
securities held by non-affiliates of the Registrant was $19,937,668 on September
21, 2000 based upon the average bid and asked price of the Registrant's Common
Stock and Preferred Stock on that date.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I Page
------ ----
<S> <C> <C>
Item 1. Business 3
2. Properties 11
3. Legal Proceedings 11
4. Submission of Matters to a Vote of Security Holders 13
Part II
-------
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 14
6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
7. Financial Statements 20
8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 21
Part III
--------
Item 9. Directors and Executive Officers of the Registrant 21
10. Executive Compensation 23
11. Security Ownership of Certain Beneficial Owners
and Management 28
12. Certain Relationships and Related Transactions 31
Part IV
-------
Item 13. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 33
</TABLE>
<PAGE>
USA TECHNOLOGIES, INC.
PART I
Item 1. Business
USA Technologies, Inc., a Pennsylvania corporation (the "Company"), was
founded in January 1992. The Company is a leading provider and licensor of
automated, credit card activated control systems for the copying, debit card and
personal computer industries. The Company's devices make available credit card
payment technology in connection with the sale of a variety of products and
services. The Company generates its revenues from the direct sale of its control
systems and the resale of configured office products, from monthly
administrative fees paid by locations utilizing its control systems, and from
retaining a portion of the monies generated from all credit card transactions
conducted through its control systems.
The Company has developed an automated, credit card activated control
system to be utilized with photocopying machines, facsimile machines, computer
printers, and debit card purchase/revalue stations. The control systems allow
consumers to use credit cards to pay for use of these products.
The Company has also developed the Public PC(R), which is an automated
credit card activated control system to be used in connection with a personal
computer, including on-line services, such as the Internet. This product enables
locations to offer the use of personal computers to the public on an "as needed"
basis utilizing credit cards as a method of payment. In addition the Company
introduced to the university library market its Automated Print Payment
System(TM) (APPS). This system enables libraries to charge users via
credit/debit cards for the printed output from computer networks, thus providing
a new source of revenue to cover their increasing costs of operations.
During fiscal year 1997, the Company introduced the Business
Express(R), which is being marketed to the hospitality industry as an amenity to
the business traveler. The Business Express(R) combines the Company's existing
applications for computers, copiers, and facsimiles into a kiosk type
configuration. All services provided are credit card activated. The Business
Express(R) continues the Company's move toward the sale of the Company's
proprietary equipment to operators rather than the revenue sharing arrangements
employed in past years. The Company still retains all rights to software and
proprietary technology which it licenses to location operators for their
exclusive use. As of June 30, 2000, 378 Business Express(R) or MBE Business
Express(R) units are installed.
During the latter part of fiscal year 1999, the Company introduced a
product line extension to its flagship Business Express(R) product, called the
Business Express(R) Limited Service Series (LSS). The LSS has copier and fax
capabilities plus laptop printing, dataport capabilities and credit card
activated phone. The LSS is targeted to the heart of the hospitality industry,
which includes mid-market, limited service and economy properties. As of June
30, 2000, 69 LSS units are included in the total of 378 Business Express(R) or
MBE Business Express(R) units installed.
The Company generates its revenues from the sale of equipment utilizing
its control systems, from retaining a portion of the revenues generated from all
credit card transactions conducted through its control systems, and from monthly
administrative fees from each location utilizing its control systems. The
Company has entered into a joint marketing agreement with Minolta Corporation,
and has been designated as an authorized equipment reseller by International
Business Machines Corporation and Hewlett-Packard Company. The Company believes
that it benefits from the association of its control systems with the well-known
brands of business equipment manufactured by these companies.
3
<PAGE>
On September 24, 1997, the Company entered into a Joint Venture
Agreement ("JV") with Mail Boxes Etc. ("MBE"), in order to sell and market
automated, credit card activated business centers under the name MBE(TM)
Business Express(R) to the hospitality industry. The MBE(TM) Business Express(R)
bundles together the same components as the Business Express(R), but under the
MBE brand name. In addition, the MBE(TM) Business Express(R) includes a
dial-through service to a nearby MBE store making available the products and
services of the store. The Company terminated the JV in May 1999 and is
currently involved in legal proceedings with MBE. The Company continues to
service all field installations.
In 1998, Prime Hospitality Corp. ("Prime") entered into an agreement
with the MBE Joint Venture, pursuant to which Prime would purchase a minimum of
100 MBE(TM) Business Express(R) units for installation at Prime's owned and
managed hotels (primarily the AmeriSuites brand). As of June 30, 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 the Company has focused on developing a new
terminal, trademarked "e-Port". It contains all the functionality of the current
TransAct(TM) terminal for credit card processing, control and data management,
and in addition would offer capability for public access electronic commerce and
advertising using the Internet. With the development of e-Port(TM), USA
Technologies 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 the Company signed an agreement with International Business
Machines Corporation ("IBM") whereby IBM agreed to be the executional partner
for certain aspects of the Company's business, including project management
services, asset procurement, configuration and testing of equipment, site
preparation, installation, maintenance services, and asset management. This
agreement expanded an earlier JV 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 the Company design an enhanced
version of the network which will underlie all transaction processing for
e-port(TM), including advertising and e-commerce.
The Company 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 the Company's business center products
internally to its own hotels. The Company has also entered into a corporate
agreement with Promus Hotel Corporation (Embassy Suites, Hampton, and Doubletree
brands) which establishes itself as a preferred supplier of business center
products for those brands. In addition, the Company's Business Express(R) has
been approved and recommended as a solution for business center needs by
Marriott for its hotels.
4
<PAGE>
In March 2000, the Company and MeriStar H&R Operating Company, L.P., an
affiliate of MeriStar Hospitality Corporation ("MeriStar"), 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 the Company will supply its business center products to MeriStar
managed and MeriStar owned hotels. The Company will be listed as the only
business center provider in all purchasing guidebooks and purchasing web sites
of MeriStar. The Company will be the exclusive provider of business center
solutions to the 116 properties owned by MeriStar. MeriStar will recommend the
Company 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, business centers have been installed at four
MeriStar locations.
In March 2000, the Company was 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,
the Company expects to ensure compatibility of e-Port(TM) with emerging
communications protocols and be in a position to pursue partnerships and
alliances.
In April 2000, the Company signed an agreement with Wayport, Inc. of
Austin, Texas, a leading high speed Internet solutions provider. The agreement
could benefit the Company in three ways: broadening its business center offering
to include providing hotels with in-room high speed Internet access; providing
faster response times for its current Business Express(R) product; and giving
the Company a strategic partner to co-market its Business Express(R) product.
In April 2000, the Company announced it will sell its
TransAct(TM)credit card device and payment system as a standalone offering to
the world's leading office equipment manufacturers and distributors. The Company
established a TransAct(TM) Authorized Reseller Program to sign up various
independent and national dealers and distributors. As of June 30, 2000, 4
dealers have signed onto the program.
In May 2000, the Company announced at the @d:tech Internet Conference
its intentions to enter the interactive media market space through use of its
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, the Company
purchased a worldwide license from DoubleClick to use its AdServer software on
the e-Port(TM). The Company anticipates that this software would manage any
advertising and media campaigns on terminals throughout the world.
5
<PAGE>
On June 24, 2000 the Company entered into a Development and
Manufacturing Agreement ("DMA") 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 the Company. The DMA
can be terminated by either party upon thirty days notice. The Company believes
that it 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 the Company 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 the Company's 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, the Company 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 the option of the Company over a period not to exceed three years in
amounts and at prices based upon market conditions. The purchase by Swartz is
subject to an effective registration statement covering the shares of Common
Stock.
For the years ended June 30, 2000 and 1999, the Company has spent
approximately $554,000 and $198,000, respectively for the development of its
proprietary technology. These amounts include the expense of outside consultants
and contractors as well as compensation paid to certain of the Company's
employees and are reflected in compensation and general and administrative
expense in the accompanying consolidated financial statements.
As of June 30, 2000, the Company 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 the Company from these systems, although
growing, has not been sufficient to cover operating expenses.
The Company has been certified by PNC Merchant Services (a subsidiary
of First Data Corporation), a leading credit card processor in the United
States. PNC Merchant Services has extended to the Company a fixed rate
percentage processing charge in connection with the credit card transactions
conducted through the Company's control systems. This charge is payable by the
Company (not the locations) out of its share of the gross proceeds.
Industry Trends
With trends over the last twenty years indicating an ever increasing
customer reliance on the use of credit cards as a method of payment, the Company
believes the future of purchasing retail products and services is in credit
cards rather than cash. Consumers are constantly searching for ways to purchase
quality products and services in the most convenient manner. Examples of this
trend include the increasing use of unattended Automated Teller Machines (ATM's)
in banking transactions and the use of unattended, self-service gasoline pumps
with credit and debit card payment capabilities. Consumers are becoming more
accustomed to using credit cards in an ever increasing number of retail and
service settings. They increasingly use mail order, telephone and the Internet
to order goods and services and use credit cards to pay for them. There are over
a billion credit cards in the United States. The Company's products reflect this
overall trend and feature automated credit card control systems. To date, the
Company has focused its 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 for the Company:
6
<PAGE>
>> 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.
>> By the year 2001, consumer used pervasive computing devices/network
appliances will outship desktop PC shipments to homes - nearly 20 million
per year by 2001.
Credit Card Processing
Each of the Company's credit card activated control devices records and
transmits all transaction data to the Company, and the Company then forwards
such data to the credit card processor. After receiving transaction information
from the Company, the credit card processor electronically transfers the funds
(less the credit card processor's charge) to the Company. The Company then
forwards to the location its share of the funds.
The Company and each location have agreed on a percentage split of the
gross proceeds from the Company's device. The credit card processor's fees and
cost to forward the location's share of the gross proceeds are all paid for out
of the Company's portion of the gross revenue.
The Company currently retains a portion of the gross revenues from each
device. If the Company has sold the equipment to the location, the portion
retained is generally 5% of the gross revenues. In cases where the Company
continues to own the equipment, the portion retained can be as high as 90% of
gross revenues. In addition the Company charges a fixed monthly management fee
which is generally $20-$25 per control device.
Product Lines
The Business Express(R)
The hotel/motel hospitality industry continues to expand, but has
become more competitive as chains increase their efforts to attract the most
dominant and profitable customer: the business traveler. Business travelers and
conference attendees account for the majority of hotel occupancy, stay longer
and spend more per visit than the leisure traveler. For these reasons, hotels
have become very sensitive and responsive to the needs and preferences of the
business traveler. The Business Express(R) enables a hotel to address these
needs in a comprehensive and cost effective manner, while simultaneously
generating incremental revenue.
The Business Express(R) utilizes the Company's existing applications
for computers, copiers, and facsimile equipment, and combines them into a
branded product. The Business Express(R) bundles the Public PC(R) unit, the Copy
Express(TM) unit, and the Fax Express(TM) unit, into a functional kiosk type
work station. All devices are credit card activated, therefore eliminating the
need for an attendant normally required to provide such services.
The MBE(TM) Business Express(R)
The MBE(TM) Business Express(R) bundles together the same components as
the Business Express(R): Public PC(R), Copy Express(TM), and Fax Express(TM),
but under the MBE brand name. In addition, the MBE(TM) Business Express(R)
includes a dial-through service to a nearby MBE store making available the
products and services of the store. The Company terminated the JV in May 1999.
7
<PAGE>
The Copy Express(TM)
Traditionally, customers wishing to use a photocopying machine have
either used a prepaid, stored value card or cash. In most instances, this places
a burden on employees of the facility to provide a number of services unrelated
to their primary jobs, such as providing change and
collecting/counting/reloading coins. With the Copy Express(TM), the attendant no
longer needs to interact with the customers for these purposes.
The Copy Express(TM) provides a cashless method to pay for the use of
photocopying machines. The device is attached to the photocopying machine,
computer printer, or microfilm/fiche printer in a similar manner as attaching a
standard coin acceptor. The device can be attached to either existing or new
equipment. The control system enables customers to photocopy documents with the
use of a credit card.
The Debit Express(TM)
Many "closed" environments such as universities or hospitals utilize a
private card known as a debit or "stored value" card, to store cash value. The
system works by encouraging customers (by discounting the price of the products
or services) to transfer lump sum cash values onto a magnetic stripe or imbedded
chip card that can be used to activate equipment within the closed environment.
As the cardholder uses the card to purchase products or services the cash value
is deducted from the total value on the card. Typically, the cards are purchased
from attendants or from machines which accept coins or dollar bills.
The Company's Debit Express(TM) enables customers to purchase or
revalue their debit cards with the swipe of a credit card and eliminates the
need for cash or for an attendant to handle cash or provide change. The Debit
Express(TM) eliminates any reliance on cash by allowing customers to use a valid
credit card to purchase or place additional value on a debit card.
The Public PC(R)
The Company believes that the growing dependence on personal computers
has created an environment where there is a need for access to personal
computers by the general public on an "as needed" basis. To meet this need, the
Company has developed the Public PC(R). The device enables the public to utilize
personal computers and/or the services they offer on an "as-needed" basis. The
system is designed so that the computer cannot be used until a valid credit card
is swiped through the control system. Once the user is authorized to proceed,
the system has the ability to charge for time in use, printed output, and any
modem activity.
The Company believes that the personal computer is becoming an integral
part of how people access and utilize the information available to them. The
Company believes that the majority of libraries do not currently offer general
use personal computers to their patrons. The Company will pursue print shops,
cyber cafes, hotels, airports, convention and conference centers, and various
retail outlets as potential customers.
8
<PAGE>
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), the Company believes it has
positioned itself to claim a piece of two important market spaces within the new
"Internet" economy - electronic commerce and pervasive computing. e-Port(TM)
would enable e-commerce to be transacted away from the computer and would 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) would possibly give consumers the opportunity to engage in
interactive advertising and e-commerce while making routine purchases at
millions of points of sale - including our Business Express(R) locations,
vending machines, and convenience stores. The US markets for this device, and
approximate sizes, are estimated at: vending - 6 million locations; retail
points of sale - 7.5 million devices with expected shipments of 2 million
devices in year 2000; and the Company's credit card activated business
equipment.
TransAct(TM) as a Stand Alone Product
USA Technologies produced and patented TransAct(TM), a cashless
transaction terminal that enables secure, low cost credit transactions to take
place. As the nerve center for USA's Business Express(R) product line,
TransAct(TM) currently enables over 400 automated business center locations,
that benefit from TransAct's ability to provide 24/7 business center
accessibility, secure transaction settlements and voice and display instructions
for users. The installed locations of Business Express(R) indicates that
TransAct(TM) works effectively to transform a la carte office components into
automated, credit card-operated, revenue centers.
To effectively penetrate the "pay as you go" business service markets
within the retail, university, transportation and apartment communities, three
standardized TransAct(TM) packages have been developed, priced and launched to
office component dealers who already service these markets. The Company
anticipates that the development of a dealer channel to sell TransAct(TM) units
will increase the licensing and usage revenue streams that USA currently enjoys.
Marketing
As of June 30, 2000, the Company was marketing its products through its
full-time sales staff consisting of four salespeople, to hotel and retail
locations, either directly or through facility management companies servicing
these locations and directly to office component dealers. The Company believes
the agreements with Marriott, Choice Hotels International, Promus Hotel
Corporation and MeriStar are an important component of the Company's effort to
market the Business Express(R) to the hospitality industry because they provide
instant brand name recognition.
Procurement
The Company's control system devices consist of a card reader, printer,
amplifier, circuit board and micro chip in a specially designed housing. The
devices are currently being re-engineered to be internet capable and easily mass
producible, by an independent contract manufacturer, RadiSys. As of September
28, 2000, the Company has not yet placed any orders with RadiSys.
9
<PAGE>
The Company anticipates obtaining the other components of its 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 the Company. Many of these
businesses are well established, have substantially greater resources than the
Company and have established reputations for success in the development, sale
and service of high quality products. The Company is aware of businesses which
have developed an unattended, credit card activated control system to be used in
connection with vending machines. Any such increased competition may result in
reduced sales and/or lower percentages of gross revenues being retained by the
Company in connection with its licensing arrangements, or otherwise may reduce
potential profits or result in a loss of some or all of its customer base. The
Company is also aware of several businesses which make available use of the
Internet and use of personal computers to hotel guests in their hotel rooms.
Such services might compete with the Company's Business Express(R), and the
locations may not order the Business Express(R), or if ordered, the hotel guest
may not use it. The Company is aware that credit card activated personal
computer kiosks have been developed and are in the marketplace.
Patents, Trademarks and Proprietary Information
The Company received federal registration approval of its trademarks
Business Express(R), C3X(R), and Public PC(R), and has applied for federal
registration of its trademarks Copy Express(TM), e-Port(TM), and TransAct(TM).
Much of the technology developed or to be developed by the Company is
subject to trade secret protection. To reduce the risk of loss of trade secret
protection through disclosure, the Company has entered into confidentiality
agreements with its key employees. There can be no assurance that the Company
will be successful in maintaining such trade secret protection, that they will
be recognized as trade secrets by a court of law, or that others will not
capitalize on certain of the Company's technology.
As of June 30, 2000, the Company has thirty-four pending patent
applications as well as fourteen pending foreign patents. To date, eight United
States patents have been issued to the Company: 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", 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", U.S. Patent
No. D423,474 entitled "Dataport", U.S. Patent No. D415,742 entitled "Laptop
Dataport Enclosure", U.S. Patent No. D418,878 entitled "Sign Holder", U.S.
10
<PAGE>
Patent No. 6,056,194 entitled "System and Method for Networking and Controlling
Vending Machines", U.S. Patent No. D428,047 entitled "Electronic Commerce
Terminal Enclosure", and U.S. Patent No. D428,444 entitled "Electronic Commerce
Terminal Enclosure for a Vending Machine"; and, to date, one foreign patent has
been granted to the Company, Canadian Patent No. D87998 entitled "Sign Holder."
On September 19, 2000, the Company was granted 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" The Company has also
received a notice of allowance on a related patent "Credit and Bank Issued Debit
Card Operated System and Method for Controlling a Vending Machine."
Employees
As of June 30, 2000, the Company had twenty-nine full time employees.
Item 2. Properties
The Company leases its 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.
Item 3. Legal Proceedings
The Company 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 the
Company anticipates that a jury trial will commence in June 2001.
11
<PAGE>
The Company has alleged various claims against MBE, including that MBE
breached the Joint Venture Agreement by among other things, utilizing a
competitor of the Company in connection with MBE's in-store computer workstation
project ("ICW Project"), for which project the Company believes MBE was
obligated to purchase USA's terminals, that MBE breached a separate agreement
pursuant to which it had agreed to purchase USA terminals for use in the ICW
Project, that by attempting to revoke or cancel its written purchase orders with
the Company for in excess of 700 terminals, MBE breached its obligations under
these purchase orders, and that MBE misrepresented to the Company that MBE's
franchisees would be capable of selling the JV's products. The Company seeks
recovery from MBE of an unspecified amount of money damages in excess of $10
million dollars as well as punitive damages.
12
<PAGE>
MBE has alleged various claims against the Company, including that the
terminals purchased from the Company were defective, that the Company failed to
develop for MBE a working ICW Project as promised, that the Company owes MBE
monies under the Joint Venture Agreement, that the Company has breached the
Joint Venture Agreement, and that the Company's technology was not viable and
"public proof" as promised. MBE seeks recovery from the Company of an
unspecified amount of money damages in excess of $10 million dollars as well as
punitive damages.
The Company believes that the claims of MBE are without merit and that
it will prevail in this matter. Accordingly, there has been no provision
recorded for this action in the accompanying consolidated financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on June 29, 2000.
(b) Election of Directors
Each of the following individuals was elected as a director at the
Annual Meeting. The number of votes cast with respect to the election of the
directors was as follows:
For Withhold
George R. Jensen, Jr. 10,185,641 125,749
Stephen P. Herbert 10,185,841 125,549
Steven Katz 10,182,039 129,351
William W. Sellers 10,164,341 147,049
Henry B. duPont Smith 10,185,741 125,649
William L. Van Alen, Jr. 10,185,841 125,549
Douglas M. Lurio 10,185,841 125,549
Edwin R. Boynton 10,185,841 125,549
13
<PAGE>
(c) In addition to the election of directors, the following other
matter was also voted on and approved at the Annual Meeting:
Ratification of the appointment of Ernst & Young LLP
as independent public accountants for the Company
for its 2000 fiscal year.
Affirmative Votes 10,255,016
Negative Votes 16,277
Abstaining Votes 40,097
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Common Stock and Preferred Stock are currently traded on the OTC
Electronic Bulletin Board under the symbols USTT and USTTP, respectively.
The high and low bid prices on the OTC Electronic Bulletin Board for
the Common Stock were as follows:
Fiscal
------
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,
14
<PAGE>
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, the Company has filed a
registration statement under the Act and applicable state securities laws
covering all of the Common Stock underlying the options. All of the aforesaid
options have been issued by the Company to employees, Directors, officers and
consultants.
As of June 30, 2000, there were 67,300 shares of Common Stock issuable
upon exercise of the outstanding 1995 Warrants, which when and if issued would
be freely tradeable under the Act. As of June 30, 2000, there are 86,800 shares
of Common Stock issuable upon exercise of the outstanding 1996 Warrants, which
when and if issued would be freely tradeable under the Act. As of June 30, 2000,
there were 4,000 shares of Common Stock issuable upon exercise of the
outstanding 1996-B Warrants, which when and if issued would be freely tradeable
under the Act. As of June 30, 2000, there are 1,500 shares of Common Stock
issuable upon exercise of the outstanding 1997 Warrants, which when and if
issued would be freely tradeable under the Act. As of June 30, 2000, there were
100,000 shares of Common Stock issuable upon the exercise of outstanding
Warrants issued to affiliates and/or consultants to GEMA in connection with the
sale of Convertible Securities. As of June 30, 2000, there were 4,000 shares of
Common Stock issuable upon the exercise of the outstanding 1998-A Warrants,
which when and if issued would be freely tradeable under the Act. As of June 30,
2000, there were 5,000 shares of Common Stock issuable upon the exercise of the
outstanding 1998-B Warrants, which when and if issued would not be freely
tradeable under the Act. As of June 30, 2000, there were 14,000 shares of Common
Stock issuable upon the exercise of the outstanding 1999-A Warrants, which when
and if issued would not be freely tradeable under the Act. As of June 30, 2000,
there were 125,400 shares of Common Stock issuable upon exercise of the
outstanding Warrants issued to consultants in connection with services rendered.
As of June 30, 2000, there were 3,307,250 shares of Common Stock issuable upon
exercise of the outstanding 1999-B Warrants, which when and if issued would be
freely tradeable under the Act. As of June 30, 2000, there were 1,629,200 shares
of Common Stock issuable upon conversion of the outstanding Senior Notes, which
when and if issued would 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 of the Company may from time to time declare out of
funds legally available for payment of dividends. Through the date hereof, no
cash dividends have been declared on the Company's securities. No dividend may
be paid on the Common Stock until all accumulated and unpaid dividends on the
Preferred Stock have been paid. As of June 30, 2000, such accumulated unpaid
dividends amount to $3,871,639 and an additional $424,833 of dividends accrued
on August 1, 2000.
During fiscal year 2000, certain holders of the Company's 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 September 21, 2000, certain
holders of the Company's 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 September 21, 2000, certain holders of
717,350 of the Company's Warrants exercised them at $1.00 per warrant,
generating $717,350 in gross proceeds to the Company.
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 June 2000, the Company 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 Company
authorized the Chief Executive Officer to extend such date for up to ninety
additional days.
15
<PAGE>
In June 2000, the Company had 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, the Company
had not received any payment for the shares, and on such date, the Company
notified the investors that it had rescinded and canceled each of the
subscription agreements effective immediately.
On June 7, 1999, the Company effectuated a 1-for-10 reverse stock split
of all of its issued and outstanding Common Stock. Pursuant thereto, on the
effective date of the reverse stock split (i) each 10 shares of outstanding
Common Stock were reduced to one share of Common Stock; (ii) the number of
shares of Common Stock into which each outstanding warrant, purchase right or
option is exercisable was proportionately reduced on a 10-to-1 basis; (iii) the
exercise price of each outstanding warrant, purchase right, or option was
proportionately increased on a 1-to-10 basis; (iv) the number of shares of
Common Stock into which each share of Series A Preferred Stock is convertible
was reduced from 10 shares to 1 share; (v) the conversion rate of the accrued
and unpaid dividends on the Series A Preferred Stock was increased from $1.00 to
$10.00 per share of Common Stock; and (vi) each share of Series B Preferred
Stock was converted into 4 shares of Common Stock. All of the share numbers,
share prices, exercise prices, and all other similar items contained in this
Form 10-KSB have been properly adjusted, on a retroactive basis, to reflect all
of the foregoing.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements
This Form 10-KSB contains certain forward looking statements regarding,
among other things, the anticipated financial and operating results of the
Company. For this purpose, forward looking statements are any statements
contained herein that are not statements of historical fact and include, but are
not limited to, those preceded by or that include the words, "believes,"
"expects," "anticipates," or similar expressions. Those statements are subject
to known and unknown risks, uncertainties and other factors that could cause the
actual results to differ materially from those contemplated by the statements.
The forward looking information is based on various factors and was derived
using numerous assumptions. Important factors that could cause the Company's
actual results to differ materially from those projected, include, for example
(i) the ability of the Company to generate sufficient sales to generate
operating profits, or to sell products at a profit, (ii) the ability of the
Company to raise funds in the future through sales of securities, (iii) whether
the Company is able to enter into binding agreements with third parties to
assist in product or network development, (iv) the ability of the Company to
commercialize its developmental products, or if actually commercialized, to
obtain commercial acceptance thereof, (v) the ability of the Company to compete
with its competitors to obtain market share, or (vi) the ability of the Company
to obtain sufficient funds through operations or otherwise to repay its debt
obligations. Although the Company believes that the forward looking statements
contained herein are reasonable, it can give no assurance that the Company's
expectations will be met.
Introduction
The Company has incurred operating losses during the years ended June
30, 2000 and 1999 of $8,404,481 and $3,651,624, respectively, and anticipates
incurring operating losses through at least fiscal 2001.
16
<PAGE>
Results of Operations
Fiscal year ended June 30, 2000:
For the fiscal year ended June 30, 2000, the Company 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) or 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 the Company's 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 one time
expenses for relocation of personnel of $55,418. Offsetting these increases was
a decrease in trade show costs of $26,630, or 37%.
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 the Company.
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.
17
<PAGE>
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 Company had a net loss of
$3,651,624. The overall loss applicable to common shares of $4,654,077 or $1.07
per common share (basic and diluted) was derived by adding the $3,651,624 net
loss and the $1,002,453 of cumulative preferred and other adjustments and
dividing by the weighted average shares outstanding of 4,348,866.
Revenues for the fiscal year ended June 30, 1999 were $3,890,516, an
increase of $2,065,287 or 113% over the prior year, reflecting the continued
penetration of the Business Express(R) and the MBE Business ExpressTM into the
marketplace.
Operating expenses for the fiscal year ended June 30, 1999 were
$7,295,628, representing a $1,793,978 or 33% increase over the prior year. The
primary contributors to this increase were cost of equipment sales and general
and administrative expenses, as detailed below.
Cost of sales increased by $1,701,193 from the prior year, primarily
reflecting the increase in MBE(TM) Business Express(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%.
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
As of June 30, 2000, the Company had a total of 1,379 credit card
activated control systems installed in the field as follows: Business Express(R)
or MBE Business Express(R) 1,134, Business Express(R) Limited Service 112, Copy
Express(TM) 36, Debit Express(TM) 27, Public PC(R) 40, Fax/Printer Express(TM)
11, and TransAct(TM) 19. Through June 30, 2000 total license and transaction
fees earned by the Company from these systems were $640,341, an increase of
$192,022 or 43% over the prior year.
During the past year the Company has 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. The Company is working with RadiSys, a contract
manufacturer, whereby RadiSys is providing
18
<PAGE>
value added design, development, fulfillment and product warranty services for
the e-Port(TM). The goal is to provide the Company with shortened time to
market, product excellence, and a lower total cost of goods. The Company
anticipates 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 the end of the quarter ended March 31, 2001. As a complement to the
re-engineering of e-Port(TM), IBM is helping the Company to design an enhanced
version of the network which will underlie all transaction processing for
e-Port(TM), including advertising and e-commerce.
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, the Company 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, the Company 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).
During August and September 2000, shareholders have exercised an
aggregate of 717,350 Warrants for gross proceeds of $717,350.
On September 15, 2000, the Company 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 from the Company. The
purchases would be made at the option of the Company over a period not to exceed
three years in amounts and at prices based upon market conditions. The purchase
by Swartz is subject to an effective registration statement covering the shares
of Common Stock. The Company believes that this agreement should provide timely
financing and a reduction in financing costs incurred in connection with
repeated, separate, private placements.
On September 15, 2000, the Company accepted subscription agreements
from nine accredited investors to purchase 1,500,000 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.
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. The Company anticipates that for the year ending June 30, 2001 there
will be a negative cash flow from operations in
19
<PAGE>
excess of $3.0 million. Further, the Company has a stockholders' deficit of
$155,000 at June 30, 2000. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The Company's independent
auditors have included an explanatory paragraph in their report on the Company's
June 30, 2000 consolidated financial statements. The Company believes that the
funds available at June 30, 2000 combined with events anticipated to occur
including the anticipated revenues to be generated during fiscal year 2001, the
potential capital to be raised from the exercise of the Common Stock Purchase
Warrants, the anticipated receipt of $1,150,000 on account of the subscription
agreements received on September 15, 2000, the funds anticipated to be received
under the private equity line from Swartz, and the ability to reduce anticipated
expenditures, if required, will allow the Company to continue as a going
concern.
Commitments
The Company leases 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.
The Company has 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 of debt is outstanding under this arrangement.
20
<PAGE>
USA Technologies, Inc.
Consolidated Financial Statements
Years ended June 30, 2000 and 1999
Contents
Report of Independent Auditors..........................................F-1
Financial Statements
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>
USA Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
PART III
Item 9. Directors and Executive Officers of the Registrant
MANAGEMENT
Directors and Executive Officers
The Directors and executive officers of the Company, as of June 30,
2000, together with their ages and business backgrounds are 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
Each Director holds office until the next Annual Meeting of
shareholders and until his successor has been elected and qualified.
George R. Jensen, Jr., has been Chief Executive Officer and Director of
the Company since January 1992. Mr. Jensen is the founder, and was Chairman,
Director, and Chief Executive Officer of American Film Technologies, Inc.
("AFT") from 1985 until 1992. AFT was in the business of creating color imaged
versions of black-and-white films. From 1979 to 1985, Mr. Jensen was Chief
Executive Officer and President of International Film Productions, Inc. Mr.
Jensen was the Executive Producer of the twelve hour miniseries, "A.D.", a $35
million dollar production filmed in Tunisia. Procter and Gamble, Inc., the
primary source of funds, co-produced and sponsored the epic, which aired in
March 1985 for five consecutive nights on the NBC network. Mr. Jensen was also
the Executive Producer for the 1983 special for public television, "A Tribute to
Princess Grace". From 1971 to 1978, Mr. Jensen was a securities broker,
primarily for the firm of Smith Barney, Harris Upham. Mr. Jensen was chosen 1989
Entrepreneur of the Year in the high technology category for the Philadelphia,
Pennsylvania area by Ernst & Young LLP and Inc. Magazine. Mr. Jensen received
his Bachelor of Science Degree from the University of Tennessee and is a
graduate of the Advanced Management Program at the Wharton School of the
University of Pennsylvania.
21
<PAGE>
Stephen P. Herbert was elected a Director of the Company in April
1996, and joined the Company on a full-time basis on May 6, 1996. Prior to
joining the Company and since 1986, Mr. Herbert had been employed by Pepsi-Cola,
the beverage division of PepsiCo, Inc. From 1994 to April 1996, Mr. Herbert was
a Manager of Market Strategy. In such position he was responsible for directing
development of market strategy for the vending channel and subsequently the
supermarket channel for Pepsi-Cola in North America. Prior thereto, Mr. Herbert
held various sales and management positions with Pepsi-Cola. Mr. Herbert
graduated with a Bachelor of Science degree from Louisiana State University.
Haven Brock Kolls, Jr., joined the Company on a full-time basis in May
1994 and was elected an executive officer in August 1994. From January 1992 to
April 1994, Mr. Kolls was Director of Engineering for International Trade
Agency, Inc., an engineering firm specializing in the development of control
systems and management software packages for use in the vending machine
industry. Mr. Kolls was an electrical engineer for Plateau Inc. from 1988 to
December 1992. His responsibilities included mechanical and electrical
computer-aided engineering, digital electronic hardware design, circuit board
design and layout, fabrication of system prototypes and software development.
Mr. Kolls is a graduate of the University of Tennessee with a Bachelor of
Science Degree in Engineering.
Leland P. Maxwell joined the Company on a full-time basis on February
24, 1997 as Chief Financial Officer, Senior Vice President and Treasurer. Prior
to joining the Company, Mr. Maxwell was the corporate controller for Klearfold,
Inc., a privately-held manufacturer of specialty consumer packaging. From 1992
to 1996, Mr. Maxwell was the regional controller for Jefferson Smurfit/Container
Corporation of America, a plastic packaging manufacturer, and from 1986 to 1992
was the divisional accounting manager. Prior thereto, he held financial
positions with Safeguard Business Systems and Smithkline-Beecham. Mr. Maxwell
received a Bachelor of Arts degree in History from Williams College and a Master
of Business Administration-Finance from The Wharton School of the University of
Pennsylvania. Mr. Maxwell is a Certified Public Accountant.
Michael K. Lawlor joined the Company on a full-time basis in 1997 and
was promoted to Senior Vice President, Sales and Marketing in September 1999.
Prior to joining the Company, 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 the Company in May
1993. Mr. Sellers founded The Sellers Company in 1949 which has been nationally
recognized as the leader in the design and manufacture of state-of-the-art
equipment for the paving industry. Mr. Sellers has been awarded five United
States patents and several Canadian patents pertaining to this equipment. The
Sellers Company was sold to Mechtron International in 1985. Mr. Sellers is
Chairman of the Board of Sellers Process Equipment Company which sells products
and systems to the food and other industries. Mr. Sellers is actively involved
in his community. Mr. Sellers received his undergraduate degree from the
University of Pennsylvania.
Henry B. duPont Smith joined the Board of Directors of the Company in
May 1994. Since January 1992, Mr. Smith has been a Vice President of The
Rittenhouse Trust Company and since September 1991 has been a Vice President of
Rittenhouse Financial Services, Inc. From September 1991 to December 1992, he
was a registered representative of Rittenhouse Financial Securities, Inc. Mr.
Smith was an Assistant Vice President of Mellon Bank, N.A. from March 1988 to
July 1991, and an investment officer of Provident National Bank from March 1985
to March 1988. Mr. Smith received a Bachelor of Arts degree in Accounting in
1984 from Franklin & Marshall College.
William L. Van Alen, Jr., joined the Board of Directors of the Company
in May 1993. Mr. Van Alen is President of Cornerstone Entertainment, Inc., an
organization engaged in the production of feature films of which he was a
founder in 1985. Since 1996, Mr. Van Alen has been President and a Director of
The Noah Fund, a publicly traded mutual fund. Prior to 1985, Mr. Van Alen
practiced law in Pennsylvania for twenty-two years. Mr. Van Alen received his
undergraduate degree in Economics from the University of Pennsylvania and his
law degree from Villanova Law School.
22
<PAGE>
Steven Katz joined the Board of Directors in May 1999. He is President
of Steven Katz & Associates, Inc., a management consulting firm specializing in
strategic planning and corporate development for technology and service-based
companies in the health care, environmental, telecommunications and Internet
markets. Mr. Katz's prior experience includes five years with Price Waterhouse &
Co. in audit, tax and management advisory services; two years of corporate
planning with Revlon, Inc.; five years with National Patent Development
Corporation (NPDC) in strategic planning, merger and acquisition, technology
in-licensing and out-licensing, and corporate turnaround experience as President
of three NPDC subsidiaries; and two years as a Vice President and General
Manager of a non-banking division of Citicorp, N.A.
Douglas M. Lurio joined the Board of Directors of the Company in June
1999. Mr. Lurio is President of Lurio & Associates, P.C., attorneys-at-law,
which he founded in 1991. He specializes in the practice of corporate and
securities law. Prior thereto, he was a partner with Dilworth, Paxson LLP. Mr.
Lurio received a Bachelor of Arts Degree in Government from Franklin & Marshall
College, a Juris Doctor Degree from Villanova Law School, and a Masters in Law
(Taxation) from Temple Law School.
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.
Item 10. Executive Compensation
The following table sets forth certain information with respect to
compensation paid or accrued by the Company during the fiscal years ended June
30, 1998, June 30, 1999 and June 30, 2000 to each of the executive officers of
the Company named below. Except as set forth below, no individual who was
serving as an executive officer of the Company 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.
23
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Fiscal
Name and Principal Position Year Annual Compensation Long Term Compensation
--------------------------- ------ --------------------------------- ----------------------
Salary Bonus Other Anuual Restricted Stock
(1) Compensation Awards
------ ----- ------------- ----------------------
<S> <C> <C> <C> <C> <C>
George R. Jensen, Jr., 2000 $117,500 $0 -- $80,000 (2)
Chief Executive Officer, 1999 $100,000 $0 -- --
President 1998 $100,000 $0 -- --
------------------------------------------------------------------------------------------------------
Stephen P. Herbert, 2000 $107,500 $94,000 -- $80,000 (2)
President
------------------------------------------------------------------------------------------------------
Leland P. Maxwell, Chief 2000 $99,000 $29,000 -- --
Financial Officer,Treasurer
------------------------------------------------------------------------------------------------------
H. Brock Kolls, Senior Vice 2000 $105,000 $44,000 -- $80,000 (2)
President, Research &
Development
------------------------------------------------------------------------------------------------------
Michael K. Lawlor, Senior 2000 $83,200 $35,500 $43,000 (3) --
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 the Company 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 the Company of relocation expenses.
The following table sets forth information regarding stock options
granted during the fiscal year 2000 to the executive officers of the Company
named below:
OPTION GRANTS DURING FISCAL YEAR ENDED JUNE 30, 2000
Name Number of Percent of Exercise Expiration
Securities Total Options Price Date
Underlying Granted to Per
Options Employees in Share
Granted Fiscal Year
--------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------
Executive Employment Agreements
The Company has 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 the Company. 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. In determining whether to pay such a bonus, the Board would use its
subjective discretion. The Agreement requires Mr. Jensen to devote his full time
and attention to the business and affairs of the Company, and obligates him not
to engage in any investments or activities which would compete with the Company
during the term of the Agreement and for a period of one year thereafter. The
agreement provides that if Mr. Jensen is employed by the Company on June 30,
2002, the Company will issue to him 40,000 shares of Common Stock.
The agreement also grants to Mr. Jensen in the event a "USA
Transaction" (as defined below) occurs after the date thereof that number of
shares of Common Stock as shall when issued to him equal five percent (increased
in June 1999 to eight percent) of all the then issued and outstanding shares of
Common Stock (the "Rights"). Mr. Jensen is not required to pay any additional
24
<PAGE>
consideration for such shares. At the time of any USA Transaction, all of the
shares of Common Stock underlying the Rights are automatically deemed to be
issued and outstanding immediately prior to any USA Transaction, and are
entitled to be treated as any other issued and outstanding shares of Common
Stock in connection with such USA Transaction.
The term USA Transaction is defined as (i) the acquisition of fifty-one
percent or more of the then outstanding voting securities entitled to vote
generally in the election of Directors of the Company by any person, entity or
group, or (ii) the approval by the shareholders of the Company of a
reorganization, merger, consolidation, liquidation, or dissolution of the
Company, or the sale, transfer, lease or other disposition of all or
substantially all of the assets of the Company.
The Rights are irrevocable and fully vested, have no expiration date,
and will not be affected by the termination of Mr. Jensen's employment with the
Company for any reason whatsoever. If a USA Transaction shall occur at a time
when there not a sufficient number of authorized but unissued shares of Common
Stock, then the Company shall as a condition of such USA Transaction promptly
take any and all appropriate action to make available a sufficient number of
shares of Common Stock. In the alternative, the Company may structure the USA
Transactions so that Mr. Jensen would receive the same amount and type of
consideration in connection with the USA Transaction as any other holder of
Common Stock.
On January 21, 1999, Mr. Jensen purchased ten (10) units of the
recently completed private debt placement offering for $100,000. In full payment
for such Units, Mr. Jensen has agreed to forego any base salary otherwise
payable to him under his employment agreement during the period of time
commencing on April 1, 1999 and ending on June 30, 2000, or such longer period
of time as may be required based upon his monthly net base salary after all
applicable withholding taxes and other deductions. At June 30, 2000, $12,199 was
outstanding. Subsequent to year end, the $12,199 has been received in full.
The Company has entered into a one-year 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 the Company. 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 the Company
and obligates him not to engage in any investments or activities which would
compete with the Company during the term of the agreement and for a period of
one year thereafter. The agreement provides that if Mr. Herbert is employed by
the Company on June 30, 2002, the Company will issue to him 40,000 shares of
Common Stock.
Mr. Kolls has entered into a one-year employment agreement with the
Company which expires on April 30, 2002, and is automatically renewed from year
to year thereafter unless canceled by Mr. Kolls or the Company. The agreement
provides for an annual base salary of $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 the Company, and
obligates him not to engage in any investments or activities which would compete
with the Company during the term of his agreement and for a period of one year
thereafter. The agreement provides that if Mr. Kolls is employed by the Company
on June 30, 2002, the Company will issue to him 40,000 shares of Common Stock.
25
<PAGE>
Mr. Maxwell has entered into an employment agreement with the Company
which expires on June 30, 2001, and is automatically renewed from year to year
thereafter unless cancelled by Mr. Maxwell or the Company. The agreement
provides for an annual base salary of $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 the Company, and
obligates him not to engage in any investments or activities which would compete
with the Company during the term of the agreement and for a period of one year
thereafter.
Mr. Lawlor has entered into an employment agreement with the Company
which expires on June 30, 2001, and is automatically renewed from year to year
thereafter unless cancelled by Mr. Lawlor or the Company. 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 the Company, and obligates him
not to engage in any investments or activities which would compete with the
Company during the term of the agreement and for a period of one year
thereafter.
Director Compensation and Stock Options
Members of the Board of Directors do not currently receive any cash
compensation for serving on the Board of Directors or any Committee thereof.
In July 1993, the Company issued to each of Messrs. Kapourelos,
Sellers, and Van Alen fully vested options to purchase 10,000 shares of Common
Stock at an exercise price of $2.50 per share. In March 1998, the expiration
date of these options was extended from June 30, 1998 to June 30, 2000 and in
April 1998, the exercise price was reduced from $2.50 to $1.50.
In March 1995, the Company issued to Mr. Smith fully vested options to
purchase 10,000 shares of Common Stock, to Mr. Sellers fully vested options to
purchase 5,500 shares of Common Stock, to Mr. Kapourelos fully vested options to
purchase 7,000 shares of Common Stock, and to Mr. Van Alen fully vested options
to purchase 2,500 shares of Common Stock. The exercise price of these options is
$2.50 per share and they must be exercised on or before February 29, 2000. In
April 1998, the exercise price of these options was reduced from $2.50 to $1.50.
In March 1998, the Company extended the expiration date of the
following options to purchase shares of Common Stock from June 30, 1998 to the
close of business on June 30, 2000: Peter G. Kapourelos - 10,000 options;
William W. Sellers - 10,000 options; Keith L. Sterling - 10,000 options; and
William L. Van Alen, Jr. - 10,000 options.
In April 1998, the Company reduced from $2.50 to $1.50 the exercise
price of the following options to purchase Common Stock issued to the following
Directors of the Company: Peter G. Kapourelos - 17,000 options; William W.
Sellers - 15,500 options; William L. Van Alen, Jr. - 12,500 options; and Henry
B. duPont Smith - 10,000 options.
All of the Common Stock underlying the options held by all Directors
was registered by the Company under the Act, for resale by the holder thereof.
Such registration was at the Company's cost and expense.
26
<PAGE>
During June and July 1999, the Company granted 10,000 options to each
of the seven Directors who were not executive officers of the Company. Each
option is exercisable at $2.00 per share at any time for five years following
the vesting thereof.
The Board of Directors is responsible for awarding stock options. Such
awards are made in the subjective discretion of the Board. Other than the
repricing of the options by the Company in April 1998, the exercise price of all
the above options represents on the date of issuance of such options an amount
equal to or in excess of the market value of the Common Stock issuable upon the
exercise of the options. In connection with the April 1998 repricing of stock
options, the exercise prices of all these fully vested options were below the
fair market value on the date or repricing, therefore, the Company recorded a
charge to compensation expense during fiscal year 1998.
All of the foregoing options are non-qualified stock options and not
part of a qualified stock option plan and do not constitute incentive stock
options as such term is defined under Section 422 of the Internal Revenue Code,
as amended, and are not part of an employee stock purchase plan as described in
Section 423 thereunder.
Executive Stock Options
In June 1999, the Company granted an aggregate of 470,000 options to
the executive officers as follows: Mr. Jensen - 180,000 options; Mr. Herbert -
110,000; Mr. Kolls - 100,000 options; Mr. Maxwell - 40,000 options; Mr. Lawlor -
20,000 options; Mr. Donahue - 20,000 options. All of Mr. Jensen's options became
vested immediately. All of the other executive officers' options would vest as
follows: one-third immediately; one-third on June 17, 2000, and one-third on
June 17, 2001. Each option is exercisable at $2.00 per share at any time for
five years following vesting thereof.
In August 1999, the Company issued to an executive officer fully vested
options to acquire up to 20,000 shares of Common Stock at $2.00 per share. The
options are exercisable at any time within five years following issuance. The
Company issued the options pursuant to the exemption from registration set forth
in Section 4(2) of the Act. The Company registered for resale under the Act the
Common Stock underlying the options.
In November 1999, the Company issued fully vested options to purchase
an aggregate of 90,000 shares of Common Stock to its 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.
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.
27
<PAGE>
All of the foregoing options are non-qualified stock options and not
part of a qualified stock option plan and do not constitute incentive stock
options as such term is defined under Section 422 of the Internal Revenue Code,
as amended, and are not part of an employee stock purchase plan as described in
Section 423 thereunder.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Common Stock
The following table sets forth, as of June 30, 2000, the beneficial
ownership of the Common Stock of each of the Company's directors and executive
officers, as well as by the Company's directors and executive officers as a
group. Except as set forth below, the Company is not aware of any beneficial
owner of more than five percent of the Common Stock. Except as otherwise
indicated, the Company believes that the beneficial owners of the Common Stock
listed below, based on information furnished by such owners, have sole
investment and voting power with respect to such shares, subject to community
property laws where applicable.
28
<PAGE>
Number of Shares
Name and Address of Common Stock Percent
of Beneficial Owner Beneficially Owned(1) of Class(2)
------------------- --------------------- --------
George R. Jensen, Jr. 660,000 shares(3) 3.21%
16 Marlborough Road
Newtown Square, Pennsylvania 19073
Stephen P. Herbert 178,717 shares(4) *
536 West Beach Tree Lane
Strafford, Pennsylvania 19087
Haven Brock Kolls, Jr. 157,183 shares(5) *
1573 Potter Drive
Pottstown, PA 19464
Leland P. Maxwell 75,884 shares(6) *
401 Dartmouth Road
Bryn Mawr, Pennsylvania 19010
Michael K. Lawlor 51,717 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) 2.21%
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) 1,873,789 shares(14) 9.10%
---------
*Less than one percent (1%)
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and derives from either voting or investment
power with respect to securities. Shares of Common Stock issuable upon
conversion of the Preferred Stock, or shares of Common Stock issuable upon
exercise of options currently exercisable, or exercisable within 60 days of June
30, 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, 1999, 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
29
<PAGE>
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 136,667 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 103,333 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 43,334 shares of Common Stock issuable to Mr. Maxwell upon the
exercise of options.
(7) Includes 36,667 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
30
<PAGE>
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 the Company's directors and executive
officers, as well as by the Company's directors and executive officers as a
group. Except as set forth below, the Company is not aware of any beneficial
owner of more than five percent of the Preferred Stock. Except as otherwise
indicated, the Company believes that the beneficial owners of the Preferred
Stock listed below, based on information furnished by such owners, have sole
investment and voting power with respect to such shares, subject to community
property laws where applicable.
Number of Shares
Name and Address of of Preferred Stock Percent
Beneficial Owner Beneficially Owned of Class(l)
------------------- ------------------ ---------
Edwin R. Boynton
104 Leighton Avenue
Bryn Mawr, Pennsylvania 19010 5,500 *
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%
--------------
*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.
31
<PAGE>
Item 12. Certain Relationships and Related Transactions
On January 21, 1999, Mr. Jensen purchased ten units pursuant to the
Company's 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. Mr. Jensen
made full payment by June 30, 2000.
In June and July 1999, the Company issued options to purchase an
aggregate of 470,000 shares of Common Stock to its executive officers and an
aggregate of 70,000 shares of Common Stock to its directors who were not
executive officers. Each option is exercisable at $2.00 per share of Common
Stock. See "Management - Director Compensation and Stock Options" and "Executive
Stock Options".
In July 1999, the Company extended the expiration dates until June 30,
2001 of the options to acquire Common Stock held by the following directors,
officers, and employees: Adele Hepburn - 77,000 options; H. Brock Kolls - 20,000
options; Henry duPont Smith - 10,000 options; William Sellers - 15,500 options;
Peter Kapourelos - 17,000 otions; and William Van Alen - 12,500 options. All of
the foregoing options would have expired in the first two calendar quarters of
the year 2000 or the first calendar quarter of year 2001.
During the fiscal years ended June 30, 1999 and June 30, 2000, the
Company 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 the Company by such law firm.
In August 1999, the Company issued to Stephen P. Herbert, President of
the Company, an aggregate of 25,000 shares of Common Stock. Such Common Stock
was issued in exchange for services rendered or to be rendered to the Company by
Mr. Herbert. The shares of Common Stock were valued at $2.00 per share, the
closing bid price on the date of the grant. The Company has registered these
shares under the Act.
In August 1999, the Company agreed to issue to Leland P. Maxwell, Chief
Financial Officer of the Company, an aggregate of 10,500 shares of Common Stock.
Such Common Stock was issued in exchange for services rendered or to be rendered
to the Company by Mr. Maxwell. The shares of Common Stock were valued at $2.00
per share, the closing bid price on the date of the grant. The Company has
agreed to register these shares under the Act.
In August 1999, the Board of Directors authorized the Company to issue
to Michael Lawlor, Vice President of the Company, 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 the Company by Mr. Lawlor. The shares of Common
Stock were valued at $2.00 per share, the closing bid price on the date of the
grant. The Company has registered these shares under the Act.
In August 1999, the Company also issued to Mr. Lawlor fully vested
options to acquire up to 20,000 shares of Common Stock at $2.00 per share. The
options are exercisable at any time within five years following issuance. The
Company has agreed to register under the Act the Common Stock underlying the
options for resale by Mr. Lawlor.
32
<PAGE>
In August 1999, the Company issued to Joseph Donahue, a former Vice
President of the Company, an aggregate of 15,000 shares of Common Stock. Such
Common Stock will be issued in exchange for services to be rendered to the
Company by Mr. Donahue. The shares of Common Stock were valued at $2.00 per
share, the closing bid price on the date of the grant. The Company has agreed to
register these shares under the Act.
In August 1999, the Company 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 the
Company. The shares of Common Stock were valued at $2.00 per share, the closing
bid price on the date of the grant. The Company has registered these shares
under the Act.
In November 1999, the Company issued fully vested options to purchase
an aggregate of 90,000 shares of Common Stock to its 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. The
Company has agreed to register the Common Stock underlying these options for
resale under the Act.
During February 2000, the Company 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; 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. The Company has registered these shares under the Act.
In February 2000, in connection with his relocation to the
Philadelphia, Pennsylvania area, the Company agreed to pay the costs of
relocation for Michael Lawlor, Vice President of the Company. As of June 30,
2000, a total of approximately $43,000 has been paid for this purpose.
PART IV
Item 13. Exhibits, Consolidated Financial Statement Schedules and Reports
on Form 8-K
a. Consolidated Financial Statements filed herewith at Item 7 hereof
Include balance sheets at June 30, 2000 and 1999 and statements of
operations, shareholders' deficit, and cash flows, for the years ended
June 30, 2000 and 1999. All other schedules for which provision is
made in regulation S-B of the Commission are not required under the
related instruction or are not applicable and therefore have been
omitted.
b. During the last quarter of the fiscal year ended June 30, 2000, the
Company filed a Form 8-K on June 29, 2000 reporting an event under
Item 5.
33
<PAGE>
c. The Exhibits filed as part of, or incorporated by reference into this
Form 10-KSB are listed below.
Exhibit
Number Description
-------------------------------------------------------
3.1 Articles of Incorporation of Company filed on January
16, 1992 (Incorporated by reference to Exhibit 3.1 to
Form SB-2 Registration Statement No. 33-70992).
3.1.1 First Amendment to Articles of Incorporation of the
Company filed on July 17, 1992 (Incorporated by
reference to Exhibit 3.1.1 to Form SB-2 Registration
Statement No. 33-70992).
3.1.2 Second Amendment to Articles of Incorporation of the
Company filed on July 27, 1992 (Incorporated by
reference to Exhibit 3.1.2 to Form SB-2 Registration
Statement No. 33-70992).
3.1.3 Third Amendment to Articles of Incorporation of the
Company filed on October 5, 1992 (Incorporated by
reference to Exhibit 3.1.3 to Form SB-2 Registration
Statement No. 33-70992).
3.1.4 Fourth Amendment to Articles of Incorporation of the
Company filed on October 18, 1993 (Incorporated by
reference to Exhibit 3.1.4 to Form SB-2 Registration
Statement No. 33-70992).
3.1.5 Fifth Amendment to Articles of Incorporation of the
Company filed on June 7, 1995(Incorporated by
Reference to Exhibit 3.1 to Form SB-2 Registration
Statement No. 33-98808).
3.1.6 Sixth Amendment to Articles of Incorporation of the
Company filed on May 1, 1996 (Incorporated by
Reference to Exhibit 3.1.6 to Form SB-2 Registration
Statement No. 333-09465).
3.1.7 Seventh Amendment to Articles of Incorporation of the
Company filed on March 24, 1997 (Incorporated by
reference to Exhibit 3.1.7 to Form SB-2 Registration
Statement No. 333-30853).
3.1.8 Eighth Amendment to Articles of Incorporation
of the company filed on July 5, 1998
(Incorporated by reference to Exhibit 3.1.8
to Form 10-KSB for the fiscal year ended June
30, 1998).
3.1.9 Ninth Amendment to Articles of Incorporation of the
Company filed on October 1, 1998 (Incorporated by
reference to Exhibit 3.1.9 to Form SB-2 Registration
Statement No. 333-81591).
3.1.10 Tenth Amendment to Articles of Incorporation of the
Company filed on April 12, 1999 (Incorporated by
reference to Exhibit 3.1.10 to Form SB-2 Registration
Statement No. 333-81591).
3.1.11 Eleventh Amendment to Articles of Incorporation of the
Company filed on June 7, 1999 (Incorporated by reference
to Exhibit 3.1.11 to Form SB-2 Registration Statement No.
333-81591).
34
<PAGE>
3.2 By-Laws of the Company (Incorporated by reference to
Exhibit 3.2 to Form SB-2 Registration Statement No.
33-70992).
4.1 Warrant Agreement dated as of June 21, 1995 between the
Company and American Stock Transfer and Trust Company
(Incorporated by reference to Exhibit 4.1 to Form SB-2
Registration Statement N. 33-98808, filed October 31,
1995).
4.2 Form of Warrant Certificate (Incorporated by reference to
Exhibit 4.2 to Form SB-2 Registration Statement, No.
33-98808, filed October 31, 1995).
4.3 1996 Warrant Agreement dated as of May 1, 1996 between
the Company and American Stock Transfer and Trust Company
(Incorporated by reference to Exhibit 4.3 to Form SB-2
Registration Statement No. 333-09465).
4.4 Form of 1996 Warrant Certificate (Incorporated by
reference to Exhibit 4.4 to Form SB-2 Registration
Statement No. 333-09465).
4.5 Form of 1997 Warrant (Incorporated by reference to
Exhibit 4.1 to Form SB-2 Registration Statement No.
333-38593, filed February 4, 1998).
4.6 Form of 12% Senior Note (Incorporated by reference to
Exhibit 4.6 to Form SB-2 Registration Statement No.
333-81591).
4.7 Warrant Certificate of I. W. Miller Group, Inc.
(Incorporated by reference to Exhibit 4.7 to Form SB-2
Registration Statement No. 84513).
4.8 Warrant Certificate of Harmonic Research, Inc.
(Incorporated by reference to Exhibit 4.8 to Form SB-2
Registration Statement No. 333-84513).
10.1 Employment and Non-Competition Agreement between the
Company and Adele Hepburn dated as of January 1, 1993
(Incorporated by reference to Exhibit 10.7 to Form SB-2
Registration Statement No. 33-70992).
35
<PAGE>
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).
10.4 Employment and Non-Competition Agreement between the
Company and H. Brock Kolls dated as of May 1, 1994
(Incorporated by reference to Exhibit 10.32 to Form SB-2
Registration Statement No. 33-70992).
10.4.1 First Amendment to Employment and Non-Competition
Agreement between the Company and H. Brock Kolls dated as
of May 1, 1994 (Incorporated by reference to Exhibit
10.13.1 to Form SB-2 Registration Statement No.
333-09465).
10.4.2 Third Amendment to Employment and Non-Competition
Agreement between the Company 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 the
Company and Michael Lawlor dated June 7, 1996
(Incorporated by reference to Exhibit 10.28 to Form
SB-2 Registration Statement No. 333-09465).
10.7.1 First Amendment to Employment and Non-Competition
Agreement between the Company and Michael Lawlor dated
February 22, 2000 (Incorporated by reference to Exhibit
10.5 to Form S-8 Registration Statement No. 333-34106).
38
<PAGE>
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 the
Company and Stephen P. Herbert dated April 4, 1996
(Incorporated by reference to Exhibit 10.30 to Form
SB-2 Registration Statement No. 333-09465).
10.9.1 First Amendment to Employment and Non-Competition
Agreement between the Company and Stephen P. Herbert
dated February 22, 2000 (Incorporated by reference to
Exhibit 10.2 to Form S-8 Registration Statement No.
333-34106).
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 the
Company and Leland P. Maxwell dated February 24, 1997
(Incorporated by reference to Exhibit 10.39 to Form SB-2
Registration No. 33-98808)
10.14.1 Second Amendment to Employment and Non-Competition
Agreement between the Company 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 the Company and GEM Advisers, Inc. signed
May 15, 1997 (Incorporated by reference to Exhibit 10.1
to Form 8-K filed on May 22, 1997).
37
<PAGE>
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
the Company and Mail Boxes Etc. (Incorporated by
reference to Exhibit 10.47 to Form 10-KSB filed on
September 26, 1997).
10.21 Employment and Non-competition Agreement between the
Company and George R. Jensen, Jr. dated November 20, 1997
(Incorporated by reference to Exhibit 10.1 to Form 8-K
filed on November 26, 1997).
10.21.1 First Amendment to Employment and Non-Competition
Agreement between the Company and George R. Jensen, Jr.,
dated as of June 17, 1999.
10.21.2 Second Amendment to Employment and Non-Competition
Agreement between the Company 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 the Company 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 the Company and Choice Hotels
International, Inc. dated April 24, 1997 (Incorporated by
reference to Exhibit 10.50 to Form SB-2 Registration
Statement No. 333-38593, filed on February 4, 1998).
10.24 Agreement between the Company and PNC Merchant Services
dated July 18, 1997 (Incorporated by reference to Exhibit
10.51 to Form SB-2 Registration Statement No. 333-38593,
filed on February 4, 1998).
10.25 Separation Agreement between the Company and Keith L.
Sterling dated April 8, 1998 (Incorporated by reference
to Exhibit to Exhibit 10.1 to Form 10-QSB filed May 12,
1998).
38
<PAGE>
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 the
Company dated November 16, 1998 (incorporated by
Reference to Exhibit 28 to Registration Statement No.
333-67503 on Form S-8 filed on November 18, 1998).
10.28 Consulting Agreement between Mason Sexton and the Company
dated March 10, 1999 (incorporated by reference to
Exhibit 28 to Registration Statement No. 333-74807 on
Form S-8 filed on March 22, 1999).
10.29 Financial Public Relations Agreement between the Company
and I. W. Miller Group, Inc. dated August 1, 1999
(Incorporated by reference to Exhibit 10.38 to Form SB-2
Registration Statement No. 333-84513).
10.30 Consulting Agreement between Harmonic Research, Inc. and
the Company dated August 3, 1999 (Incorporated by
reference to Exhibit 10.39 to Form SB-2 Registration
Statement No. 333-84513).
10.31 Investment Agreement between the Company 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 the Company 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 the Company 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).
**27.1 Financial Data Schedule (Electronic Filing Only)
--------------------------------------------------------------------------------
** -- Filed herewith.
d. Schedules filed herewith include: Financial Data Schedule
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
USA TECHNOLOGIES, INC.
By: /s/ George R. Jensen, Jr.
-------------------------------
George R. Jensen, Jr., Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ George R. Jensen, Jr. Chairman of the Board of Directors, September 28, 2000
-------------------------- Chief Executive Officer
George R. Jensen, Jr. (Principal Executive Officer)
/s/ Leland P. Maxwell Vice President and Chief Financial September 28, 2000
-------------------------- Officer (Principal Accounting Officer)
Leland P. Maxwell
/s/ William W. Sellers Director September 28, 2000
--------------------------
William W. Sellers
/s/ Stephen P. Herbert President, Chief Operating September 28, 2000
-------------------------- Officer, Director
Stephen P. Herbert
/s/ William L. Van Alen, Jr. Director September 28, 2000
----------------------------
William L. Van Alen, Jr.
/s/ Douglas M. Lurio Director September 28, 2000
--------------------------
Douglas M. Lurio
Director September __, 2000
--------------------------
Steven Katz
Director September __, 2000
--------------------------
Henry B. duPont Smith
Director September __, 2000
--------------------------
Edwin R. Boynton
</TABLE>
40
