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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1996
Commission File Number 0-18938
U.S. ALCOHOL TESTING OF AMERICA, INC.
(Exact name of registrant as specified in its Charter)
Delaware
(State or other jurisdiction of incorporation or organization)
22-2806310
(I.R.S. Employer Identification No.)
10410 Trademark Street
Rancho Cucamonga, California 91730
(909) 466-8378
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01, and Preferred "A" Stock, par value $.01
(Registered on the American Stock Exchange);
Preferred "B" Stock, par value $.01
Securities registered pursuant to Section 12(g) of the Act: None
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 period
that the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days:
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
As of June 13, 1996, there were 35,309,210 shares of Common
Stock outstanding.
The Registrant has only one class of voting stock outstanding,
the Common Stock, and, as of June 13, 1996, the aggregate market value of the
Common Stock, held by non-affiliates was $92,758,424 based on the closing sale
price of such stock on that date.
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PART I
ITEM 1. BUSINESS OF THE COMPANY
GENERAL
U.S. Alcohol Testing of America, Inc. ("USAT") was incorporated under
the laws of Delaware on April 15, 1987 to design, manufacture and market
instruments which measure blood alcohol concentration by breath sample and
analyzation. USAT subsequently expanded its business operations through the
following acquisitions or the creation of new subsidiaries:
1. On January 24, 1992, USAT and the United States Navy ("USN") entered
into a ten-year non-assignable agreement granting USAT a partial exclusive
patent license to products for drug testing in the United States and certain
foreign countries. Effective January 1993, USAT granted a sole and exclusive
sublicense to U.S. Drug Testing, Inc. ("U.S. Drug"), then a newly-incorporated
wholly-owned subsidiary of USAT, which subsidiary assumed all of USAT's rights
and obligations under the foregoing license. However, because the USN refused to
grant a novation of the license agreement, the USN looks only to USAT for
performance thereunder. In October and November 1993, U.S. Drug had a public
offering of the its Common Stock, $.001 par value (the "U.S. Drug Common
Stock"). As of March 31, 1996, USAT owned 67.0% of the U.S. Drug Common Stock.
2. In June 1988, Good Ideas Enterprises, Inc. ("Good Ideas"), then a
Texas corporation ("Texco"), began the manufacture and shipment of toys. In May
1992, a subsidiary of USAT acquired a 55% interest in Texco. In December 1993,
Good Ideas reincorporated in Delaware and acquired Texco, of which USAT
thereafter continued to own 86% until Good Ideas had a public offering of the
Good Ideas Common Stock, $.001 par value (the "Good Ideas Common Stock"), in
March and April 1994. As of March 31, 1996, USAT owned 60.8% of the Good Ideas
Common Stock.
3. In September 1995, ProActive Synergies, Inc. ("ProActive"), a
wholly-owned subsidiary incorporated in June 1995, entered the human resource
provider business.
4. In May 1996, USAT acquired Robert Stutman & Associates, Inc.
("RSA"), a provider of substance abuse testing/background screening policy
manuals and a consultant on programs relating to alcohol and drug abuse.
5. In March 1995, USAT acquired Alconet, Inc.("Alconet"), a company
engaged in the computer software networking business which has developed an
alcohol testing network to upload test results and information from various
alcohol breath testing devices.
6. In November 1992, U.S. Rubber Recycling, Inc. ("USRR"), then a
newly-incorporated wholly-owned subsidiary of USAT, acquired the assets of an
unaffiliated company and began to manufacture and market floor covering products
for office and industrial use from used truck and bus tires. Such operations
were discontinued on April 30, 1996 when the assets of USRR were sold.
See the section "Subsidiaries" under this caption "Business of the Company" for
further information as to U.S. Drug, Good Ideas, ProActive, RSA, Alconet and
USRR.
USAT and its subsidiaries are collectively referred to herein as the
"Company."
ALCOHOL TESTING MARKET
USAT manufactures, markets and distributes alcohol testing detection
equipment directly to law enforcement and correctional facilities, various
industrial companies, medical and clinical facilities, alcohol treatment centers
and emergency rooms, as well as individual consumers. Its current product line
encompasses three distinct alcohol testing techniques for degrees of accuracy
and admissibility in court proceedings.
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<TABLE>
<CAPTION>
Percentage of Revenues
USAT's Products and Services Derived During Each of the
Last Three Fiscal Years
---------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
(1) Evidential Quality Devices 12% 55% 23%
(2) Screening (or "Non-Evidential")
Devices 23% 8% 14%
(3) Alcohol and Drug Testing Services 59% 37% 63%
</TABLE>
Evidential quality equipment, with the exception of the Mobile
Alcohol Collection System ("MACS"), which is discussed under the subsequent
section "Alcohol Testing Products" under this caption "Business of the Company,"
is approved by the United States Department of Transportation (the "DOT") for
use by law enforcement agencies and industry. The information derived from the
equipment is used in court trials.
Alcohol screening devices are used by correctional facilities,
industrial companies, hospitals, nuclear agencies, companies in the maritime
industry and law enforcement agencies to gather human data on blood alcohol
levels. Although such data (from breath) is not generally admissible as court
evidence, it is used to indicate alcohol presence. These screening devices
determine the presence of alcohol and its approximate blood level. They are less
accurate and reliable than evidential quality devices, which are useable in
legal proceedings in contrast to the screening devices.
USAT purchases the raw materials and parts for its products from
various suppliers which deliver them to USAT for assembly, packaging and
distribution. These raw materials are primarily glass, plastic containers and
certain mechanical parts, all of which are readily available from many
suppliers.
ALCOHOL TESTING PRODUCTS
USAT's product line includes evidential and screening devices and
testing services which are marketed and sold in various ways. See the section
"Alcohol Testing Marketing" under this caption "Business of the Company."
(1) EVIDENTIAL DEVICES
Alco-Analyzer
USAT designed and developed this product as a gas chromatograph
alcohol testing device that determines blood alcohol levels by use of breath
samples with precision and accuracy to be used as evidence in legal proceedings.
USAT's three models have been approved by the DOT as evidential breath alcohol
testing instruments; however, only one, the Model 2100, is currently
manufactured by USAT. Such model is used to analyze blood, breath and urine
specimens to determine levels of ethyl alcohol and is described as follows:
Model 2100 - Enhanced electronics and software create an easy to use
instrument which can be networked to a central location for down loading data.
Testing information and results are displayed on a color computer monitor and
are printed on a multi-part carbonless form.
USAT, to management's knowledge, is the only manufacturer of a gas
chromatograph breath testing device designed specifically for ethyl alcohol
determinations using an inert carrier gas. Management believes that gas
chromatography is recognized as the ideal, convenient and reliable method for
determining and identifying chemical substances within a compound.
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Mobile Alcohol Collection System (MACS)
USAT manufactures a Mobile Alcohol Collection System ("MACS") device
used to collect a breath sample for future analysis. The MACS device contain a
silica gel compound within a glass vial accompanied by collection and waste bags
which insure the gathering of a proper sample flow through the vial. The vial is
then sent to an independent certified laboratory where the alcohol is extracted
from the silica gel and analyzed on a gas chromatograph to determine the exact
blood alcohol content. Management is unaware of any product which currently
competes with the MACS device.
(2) SCREENING DEVICES
Screening devices are designed to determine the presence and
approximate level of alcohol in a person's blood via his or her breath and
whether further testing is warranted.
The Alco-Breath Tubes ("ABT") are disposable alcohol breath glass
vial testers containing yellow bands comprised of silica gel treated with a
reagent solution. Testing begins with breath blown into a balloon which is then
attached to the glass vial into which the sample flows. If alcohol is present
within the subject's breath, a chemical reaction occurs within the gel changing
the yellow bands to green. Measurement results are determined by the extent of
color change. USAT manufactures four variations of the Alco-Breath Tubes
specifically designed for various applications of alcohol breath testing.
(3) CALIBRATION DEVICES
USAT manufactures two devices which are used to calibrate and check
alcohol testing instruments made by both the Company and its competitors for
continued accuracy. The devices are designed to simulate the breath of a person
who has been drinking alcohol. The standard alcohol solutions used in these
calibration devices are produced by USAT in its own certified laboratory.
(a) Alco-Simulator and Alco-Simulator 2000
The Alco-Simulator and its newer 2000 model are approved by the DOT
as calibrating devices for evidential breath testing instruments.
(b) Alco-Equilibrator
The Alco-Equilibrator operates on the same general principle as the
Alco-Simulator, but is less accurate and may only be used for calibrating
non-evidential breath testing instruments.
ALCOHOL TESTING MARKETING
Sales are made directly by USAT's sales representatives. USAT
markets its products at trade shows, conventions and through print
advertisements.
USAT currently segments its merchandise into four market areas:
Law Enforcement/Correctional
Industrial
Medical/Clinical Facilities
Alcohol and Drug Testing Services
(1) LAW ENFORCEMENT/CORRECTIONAL
USAT markets and sells the Alco-Analyzer and the MACS to law
enforcement agencies for evidential testing purposes.
ABT are generally used for roadside screening to determine probable
cause for further breath testing by evidentiary quality testing equipment.
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USAT markets and sells breath alcohol screening devices to the
correctional and institutional market, which includes probation and prison work
release programs.
(2) INDUSTRIAL
USAT markets and sells both evidential quality and screening devices
to several companies for blood alcohol testing of employees.
In February 1994, the DOT published its final rule implementing the
federal act which mandates alcohol testing within the transportation industry.
The final rule requires alcohol testing solely through the use of breath
samples. These enactments have a direct bearing on the USAT's gas chromatography
products, which the DOT had previously approved as evidential breath alcohol
testing instruments. USAT has designed the Alco-Analyzer 2100 to specifically
meet the needs of this market. Its marketing strategy includes sales, leases and
placements of the instrument with a cost per test charge.
USAT, as part of its current business strategy, intends to
capitalize upon the DOT's rules for mandatory alcohol testing within the
transportation industry. The final rule, which became effective in January 1995
as to the larger transportation companies and, in January 1996, as to the
balance, affected nearly 8,000,000 employees who are engaged in safety-sensitive
positions in the transportation industry by requiring them to be tested for
alcohol on DOT-approved breath testing devices. Mandatory pre-employment
screening, however, is not required by the DOT rule. USAT's Alco-Analyzer series
and, in particular, its Model 2100 meet the DOT's standard. In December 1994,
USAT entered into two agreements with major testing laboratories, Corning
Clinical Laboratories Inc., formerly Metpath Inc., and Laboratory Corporation of
America ("Lab Corp."), formerly National Healthcare Laboratories Incorporated,
for placement of approximately 700 units of its Model 2100 at the respective
laboratory's collection sites with remuneration to USAT on a per test basis.
These two agreements, copies of which agreements are filed (by incorporation by
reference) as Exhibits to this Report and are incorporated herein by this
reference, as well as others with smaller customers, have terms ranging from
three to five years.
USAT has also sold its ABT and MACS devices to the maritime industry
which must conform to government regulations established to test alcohol blood
levels of ship operators. Its testing devices and equipment have been purchased
by other private and public companies which include alcohol testing in their
substance abuse testing programs.
USAT also intends to pursue the non-regulated market for alcohol
testing where approximately 93% of the American work force is employed.
Management is of the opinion that the Mobile Alcohol Collection System ("MACS")
and the Alco-Breath Tubes ("ABT") can increasingly be sold to commercial
companies which, recognizing the adverse impact of alcohol abuse on the
productivity of their employees, wish to institute on-site testing programs. In
order to implement this program, management believes that the ABTs must be
reformatted and DOT approval be obtained for both the MACS and the ABTs.
Although management believes that the non-regulated market is a market with
great potential, there can be no assurance that USAT will derive significant
revenues from this market.
(3) MEDICAL/CLINICAL FACILITIES
USAT sells its alcohol screening devices to the medical and clinical
markets for testing of patients in alcohol treatment facilities and those who
are brought to hospital emergency rooms under suspected influence of alcohol.
USAT continues to expand its sales of screening devices and the gas
chromatograph into this market to provide instantaneous and accurate on-site
testing procedures for breath alcohol analysis.
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(4) ALCOHOL AND DRUG TESTING SERVICES
Biochemical Toxicology Laboratories ("Biotox") operates as a
division of USAT and also services the needs of U.S. Drug, USAT's drug testing
subsidiary. Biotox is certified as a Clinical Laboratory by the State of
California and also possesses specific state licenses for alcohol and methadone
analysis. Biotox is engaged in alcohol and drug testing for many area police
departments, detoxification centers, coroners departments and corporations and
functions within USAT's facilities maintaining state of the art instrumentation.
Management is of the opinion that, if Biotox obtained certain regulatory
approvals, it could be used by the alcohol testing, the drug testing and the
human resource provider operations of the Company to a greater extent and,
thereby enable the Company to realize greater revenues. There can be no
assurance that these governmental approvals will be obtained or that the Company
will derive greater revenues as a result of the efforts of Biotox.
LIABILITY INSURANCE
USAT maintains liability insurance of $1,000,000, together with an
umbrella policy providing coverage of $3,000,000, to protect the Company against
legal actions related to injury resulting from product failure, whether such
product is offered by USAT or a subsidiary thereof.
COMPETITION
Alcohol Testing
The substance abuse detection equipment industry is highly
competitive. Although USAT's Alco Analyzer 2100 is, to management's knowledge,
the only DOT-approved evidential alcohol breath testing instrument utilizing gas
chromatography, it still competes with other substance abuse detection
techniques developed by other companies. USAT competes with small companies
which also offer alcohol testing equipment such as CMI Inc., Intoximeters, Inc.
and Lifeloc, Inc. Although all of these competitors are believed currently to
have greater revenues than USAT from sales of alcohol testing devices,
management is of the opinion that only CMI, Inc., which is a subsidiary of
MPD/MPH, may have greater financial resources than USAT. In addition, several
companies, including Hoffman-La Roche, Inc. ("Roche") and STC, Inc., offer an
on-site screening saliva based alcohol test. Roche has, and several of these
companies may have, greater revenues and financial resources than the Company.
Although USAT believes that its product and service quality, combined with its
experienced personnel, will offer it a competitive edge in marketing its
products and services, there can be no assurance that USAT will be able to
compete successfully with larger companies which have greater financial
resources available to them to develop and offer an array of substance abuse
detection products, nor is there any assurance that other companies will not
enter the marketplace and present additional competition for USAT and its
products.
Drug Testing
The Company has not received any revenues from U.S. Drug because its
products are still in the developmental stage. U.S. Drug had previously been
developing two products which screen for the presence of drugs of abuse, one
which utilizes flow immunosensor technology with urine samples as a medium of
testing and another which utilizes flow immunosensor technology with saliva
samples as a medium of testing. Only the saliva sampling system is currently
being developed; however, if this product is successfully developed, U.S. Drug
intends to use the technology to complete the urine sample system. The
technology in development will specifically test for five commonly used drugs of
abuse: cocaine, opiates (heroin, morphine and codeine), phencyclidine (PCP),
amphetamines (including methamphetamine) and tetrahydrocannabinol (THC,
marijuana). When the drug testing product is developed, as to which there can be
no assurance, U.S. Drug will compete with many of the companies of varying size
that already exist or may be founded in the future which utilize urine samples
as a medium of testing. U.S. Drug will face competition from at least eight
major companies providing substance abuse screening methods: (1)
enzyme-multiplied immunoassay technique (EMIT) manufactured and distributed by
Syntex Corporation ("Syva"); (2) radioimmunoassay (RIA) manufactured and
distributed by Roche and others; (3) thin layer chromatography (TLC)
manufactured and distributed by Marion Laboratories, Inc.; (4) a fluorescence
polarization
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immunoassay (FPIA) manufactured by Abbott Laboratories, Inc.("Abbott"), and
other immunoassay tests provided by (5) Editek, Inc. ("Editek"); (6) Hycor
Biomedical, Inc. ("Hycor"); (7) Princeton Biotech, Inc. ("Princeton"), and (8)
Biosite, Inc. ("Biosite"). Almost all of these companies (i.e., Syva, Roche,
Marion, Abbott, Editek, Hycor, Princeton and Biosite) have substantially greater
financial resources available to them than does the Company to develop and to
market their products.
Management believes that saliva sample testing is unique in that, to
management's knowledge, no company is currently offering a drug of abuse
detection method using saliva samples as a medium on an "on-site" basis.
However, U.S. Drug has been advised that such a product is under development by
other companies and, accordingly, there can be no assurance that such a product
will not be offered by a competitor. In addition, even if no such product is
developed, U.S. Drug anticipates, as indicated above, competition from other
substance abuse detection methods such as Syva's EMIT, Roche's RIA, Marion's
TLC, Abbott's FPIA methods, and other immunoassay tests provided by Editek,
Hycor, Princeton and Biosite. U.S.s Drug's market research to date has indicated
a greater market potential for a saliva sample portable testing instrument for
use in detecting drugs of abuse by law enforcement agencies, correctional
facilities, hospitals and other medical facilities than a urine sample
instrument. However, because of the expected limited life cycle of a saliva
specimen, the use of this product in other potential markets may be limited.
If U.S. Drug successfully develops both the urine sample and saliva
sample testing methods, as to which there can be no assurance, it is not certain
whether U.S. Drug will have the financial resources to compete successfully with
other companies which have greater financial resources available to them.
Depending on the progress in the drug testing research and development program
(including the current feasibility study), U.S. Drug may at a later date seek a
major company to assist in the development program and, depending on the
financial arrangements to be negotiated, such development partner may seek
marketing rights to the products when and if successfully developed. Although
such a partner may reduce certain current expenditures, it may later, by
assuming marketing rights, reduce prospective revenues to U.S. Drug. Because of
the stage of development of the product and the fact that no search or
negotiations are currently being conducted, management believes that it is
currently too speculative to anticipate U.S. Drug's competitive position based
on the presence of a development and/or marketing partner.
U.S. Drug's management currently anticipates that U.S. Drug will
submit its five-panel screening assay to the Food and Drug Administration (the
"FDA") late in 1997 at the earliest and that U.S. Drug will commence marketing
its products six months to a year later. There can be no assurance as to when
U.S. Drug will submit such assay to the FDA, if at all, as to when the FDA will
give its approval and as to when marketing will commence.
Human Resource Provider
ProActive is a single source service provider, meaning that it is a
provider of both substance abuse testing services and background screening
services. A single source service provider is a relatively new concept.
Additionally, the Company, through the recent acquisition of RSA, can also
provide customized loss prevention services specifically designed to reduce the
negative effect of workplace substance abuse. The competition from single source
providers which ProActive currently encounters is primarily from small local and
regional companies. To management's knowledge, currently there is no single
source provider on a national level, which is what ProActive hopes to become and
there are no providers of customized programs and policies. However, Lab Corp.,
through Med-Express, is currently offering background screening services to
corporations on a limited basis. Although, ProActive has experienced personnel
in both the drug testing and investigative arena, there is no assurance that
ProActive will become successful in marketing its services as a single source
provider on a national level. In addition, ProActive will face competition from
other companies which provide each of these services separately such as the
companies mentioned in the preceding subsections of this section "Competition"
under this caption "Business of the Company" as it relates to substance abuse
testing providers (including the laboratories which are vendors to ProActive),
and local or regional investigative firms or private investigators (including
vendors to ProActive) as it relates to background investigative services.
Assuming that the combined RSA/ProActive operations
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achieve national status as a single source provider, there can be no assurance
that existing or new companies will not enter the national marketplace to
compete with the combined RSA/ProActive operations.
RESEARCH AND DEVELOPMENT
During the fiscal year ended March 31, 1996 ("fiscal 1996"), the
Company spent approximately $1,006,000 on research and development, including
$851,000 expended on development of the drug testing technology of U.S. Drug. In
the fiscal year ended March 31, 1995 ("fiscal 1995"), the Company spent
approximately $1,249,000 on research and development, including $886,000
expended on development of the technology of U.S. Drug. In the fiscal year ended
March 31, 1994 ("fiscal 1994"), the Company spent approximately $948,000 on
research and development, including $728,000 expended on development of the
technology by U.S. Drug.
PATENTS AND TRADEMARKS
U.S. Drug has rights under three patents, in addition to its rights
to use the USN patent under its sublicense from USAT. USAT and its other
subsidiaries currently have no patents on the other products of the Company. The
term of the USN patent is set forth in the section "Subsidiaries-U.S. Drug
Testing, Inc." under the caption "Business of the Company" and the terms of the
U.S. Drug patents are 17 years from the date of issuance as set forth in that
section, subject to renewal. Termination of the Licensing Agreement for the USN
patent, which would occur only on a default by USAT or an invalidation of the
USN patent, would end the Company's rights to develop drug testing products.
Termination of the other patents or licenses to use the same would require USAT
to make changes to its products which could further delay development and
marketing thereof.
The Company has obtained tradenames for its major products. The
following are the registered trademarks of the Company and have been published
by the U.S. Patent and Trademark Office (the "PTO"): Alco-Equilibrator(TM),
Sobriety Checkpoint(TM), ABT(TM), Alco- Analyzer(TM), Final Call(TM),
Alco-Equilbrator(TM) and Drug Won't Work Here(TM). On April 12, 1995, the
Company abandoned the following trademarks: Mobile Alcohol Collection, MACS,
Alco- Report; Alco-Breath Tubes, Alco-Link and Alco-Simulator. Good Ideas has
registered the trademarks Good Ideas(TM) and Big Bill's Bric Builders(TM) and
the same are published by the PTO. The Company believes these tradenames afford
adequate protection. However, there can be no assurance that infringement claims
will not be asserted against the Company in the future.
SUBSIDIARIES
(1) U.S. DRUG TESTING, INC.
In October and November 1993, USAT's then wholly-owned subsidiary
U.S. Drug completed an initial public offering of the U.S. Drug Common Stock,
which security trades on the Pacific Stock Exchange. As of March 31, 1996, USAT
owned 3,500,000 of the 5,221,900 outstanding shares of the U.S. Drug Common
Stock or 67.0% thereof.
The Company has not received any revenues from U.S. Drug because its
products are still in the developmental stage. U.S. Drug is developing
proprietary systems that test for drug use, specifically the following five
commonly used Drugs of Abuse: cocaine, opiates (heroin, morphine and codeine),
phencyclidine hydrochloride (PCP), amphetamines (including methamphetamines),
and tetrahydrocannabinol (THC, marijuana). Its line of products under
development are based on its sub-license from USAT for Drug of Abuse detection
utilizing the USN patent for flow immunosensor technology. U.S. Drug is
developing its own proprietary "Immunoassay Chemistry" for these five drugs
which work with the USN developed technology. U.S. Drug has received six FDA
marketing approvals covering its Model 9000 Flow Immunoassay System and the
attendant assays for each of the five Drugs of Abuse listed above, using urine
as the test medium. However, additional development work would be required
before the urine based testing product can be marketed.
U.S. Drug, based on its review of current market
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conditions, has decided to defer completion of the calibrators and the other
elements required to be completed in order to market the urine medium testing
product until it can complete the assays for a saliva medium testing product
and, as a result, has produced no revenues through March 31, 1996. U.S. Drug has
commenced research using saliva as a testing medium in connection with the flow
immunosensor technology, is currently conducting a feasibility study as to such
product and, assuming a successful conclusion with respect to such study and
subsequent success in the remainder of the development program, currently
expects to submit its five-panel screening assay to the FDA in late 1997. Until
FDA approval is obtained of the saliva medium product, no revenues from product
sales are likely to be produced. U.S. Drug's management expects marketing of
U.S. Drug products to commence six months to a year later, but there can be no
assurance as to when the submission will be made to the FDA, if at all, as to
when FDA approval will be given or as to when marketing will commence.
U.S. Drug spent approximately $2,556,000 on research and development
during the period from October 1992 through March 31, 1996.
The following material contracts relate to the drug testing
operations now conducted by the subsidiary:
(a) On January 24, 1992, USAT and the USN entered into a ten-year non-assignable
agreement granting USAT a partial exclusive patent license to products for drug
testing in the United States and certain foreign countries. The license applies
to the U.S. Government owned invention described in U.S. Patent Application
Serial No. 07486024, "Flow Immunosensor Method and Apparatus" filed February 23,
1990. The technology covered by the patent application is designed to test and
detect minute and large amounts of drugs contained in body fluids rapidly and
efficiently. In November 1994, the license agreement was revised to provide for
minimum annual royalties to be paid to the USN of $375,000 for 1995, $600,000
for 1996 and $1,000,000 for 1997 and thereafter. In June 1995, the license
agreement with the USN was renegotiated and amended to provide for minimum
annual royalties to be paid to the USN of $100,000 per year commencing October
1, 1995 and terminating September 30, 2005. Additional royalties will be paid
pursuant to a schedule based upon sales of products. By an amendment dated June
16, 1995, the term of the exclusive right under the License Agreement was
extended to terminate ten years from June 27, 1995 and USAT has a nonexclusive
right to use the technology thereafter for the balance of the patent term,
unless the License Agreement is terminated sooner because of USAT's default. By
letter dated May 15, 1995, the USN notified USAT that, because the expiration
date of the USN patent had been extended to February 23, 2010 under the GATT/WTO
treaty, the expiration date of the License Agreement was extended to February
23, 2010.
(b) On April 16, 1992, USAT entered into a 12-month cooperative development
research agreement ("CRDA") with the Naval Research Laboratory section of the
USN to further develop the licensing technology of the "Flow Immunosensor".
(c) Effective January 1993, USAT granted a sole and exclusive sublicense to U.S.
Drug which assumed all of USAT's rights and obligations under the License
Agreement. However, the USN refused to grant, as requested, a novation of the
License Agreement so that the USN looks to USAT for performance thereunder. In
the event of a default by U.S. Drug under its sublicense from USAT, all rights
of U.S. Drug under the License Agreement would terminate and USAT as the
licensee can continue to exercise all rights, and be subject to all obligations,
thereunder without any claim by U.S. Drug. USAT simultaneously assigned to U.S.
Drug all of its rights under the CRDA. USAT transferred all of its assets and
intellectual property rights related to drug testing operations in exchange for
3,500,000 shares of the U.S. Drug Common Stock.
(d) On April 1, 1993, USAT and U.S. Drug entered into a five-year management
agreement (the "U.S. Drug Management Agreement") which obligated U.S. Drug to
pay USAT $300,000 annually plus ten percent of its product sales in exchange for
USAT's administrative management services, including management, administrative,
accounting and other financial services and advice, including, without
limitation, the services currently performed by Gary S. Wolff as the Treasurer
of U.S. Drug, for which he is not directly compensated by U.S. Drug; services
relating to U.S. Drug's financial and banking relationships; services relating
to the
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preparation of financial statements, budgets, forecasts and cash flow
projections; cash management advice; and other miscellaneous services and
advice. In July 1993, the parties amended the U.S. Drug Management Agreement
retroactive to April 1, 1993, changing U.S. Drug's annual management fee
obligation to $420,000 plus three percent of its gross revenues.
Copies of the License Agreement (including all amendments), the
cooperative research agreement with CRDA (and the assignment thereof to U. S.
Drug), the sublicense (and the USN's consent thereto) and the U.S. Drug
Management Agreement (including the amendment thereto) are filed (some by
incorporation by reference) as exhibits to this Report and are incorporated
herein by this reference.
U.S. Drug has rights under three patents, in addition to its rights
to use the USN patent under its sublicense from USAT. These patents are as
follows:
U.S. Patent No. 5,183,740, "Flow Immunosensor Method and Apparatus,"
issued on February 2, 1993. Unless extended, the Company's license under this
patent expires on February 23, 2010. The Flow Immunosensor provides a method of
detecting drugs of abuse or other target molecules by flowing a solution
containing the analyte through the immunosensor. The technology relies on the
displacement of fluorescent-labeled antigen from a solid phase immobilized
antibody and measuring the released labeled antigen in the immunosensor effluent
with a detection apparatus.
U.S. Patent No. 5,066,859, "Hematocrit and Oxygen Saturation Blood
Analyzer," issued on November 19, 1992. Unless extended, the Company's license
under this patent expires on February 23, 2010. The patented device is used to
measure hematocrit and oxygen saturation levels in blood and compensates for the
effects of oxygen saturation, pH, and temperature.
U.S. Patent No. 5,249,584, "Hematocrit and Oxygen Saturation Blood
Analyzer," issued on November 5, 1993. Unless extended, the Company's license
under this patent expires on November 5, 2010. The device is a low cost
disposable syringe which has a single optical window that is inserted into a
tubular barrel.
U.S. Patent No. 5,354,654, "Lyophilized Ligand-Receptor Complexes
for Assay and Senors" issued on October 11, 1994. Unless extended, the Company's
license under this patent expires on July 16, 2013. This patented process allows
for the freeze-drying of ready-to-use immunoassay chemistry or reagents which is
then indefinitely preserved.
During May 1996, USAT filed a Registration Statement on Form S-4,
File No. 333-4790 (the "U.S. Drug Registration Statement"), under the Securities
Act of 1933, as amended (the "Securities Act"), to register shares of USAT's
Common Stock, $.01 par value (the "USAT Common Stock"), to be issued to the
minority stockholders of U.S. Drug upon the consummation of a merger of U.S.
Drug with and into a newly formed wholly-owned subsidiary of USAT. The USAT
Board of Directors has concluded that the value of the USAT Common Stock could
best be maximized if the Company concentrated its operations on the USAT alcohol
testing business, U.S. Drug's drug testing business and the related human
resource provider business of ProActive and operated the three as if one
corporation. The U.S. Drug Registration Statement is not yet effective and,
accordingly, no offer has been made to the minority stockholders of U.S. Drug.
(2) PROACTIVE SYNERGIES, INC./ROBERT STUTMAN & ASSOCIATES, INC.
ProActive, which is a wholly-owned subsidiary of USAT that commenced
operations in September 1995, provides single source services to assist
corporations in their hiring practices ranging from substance abuse testing and
background screening services to total program management. ProActive's substance
abuse testing services include specimen collections, laboratory testing and
medical review officer services. Medical review officers review drug test
results to verify that chain-of-custody procedures were followed and determine
if there is an alternative medical explanation for a positive test result.
ProActive's background investigative services include criminal history checks,
employment verifications, credit checks, reference checks, driving record
checks, workers' compensation history checks, and social security number,
educational and professional license verifications. ProActive's services also
include physicals and employee assistance programs.
10
<PAGE> 11
Its total program management services include establishing a substance abuse
policy with corporations and conducting program audits to ensure regulatory
compliance with such policy. ProActive's hiring solutions to corporations
include the use of its proprietary computer software which provides ProActive
with access to immediate on-line information.
On December 14, 1995, USAT and ProActive entered into an agreement
with RSA and Robert Stutman, personally, pursuant to which (1) USAT and
ProActive engaged Mr. Stutman to be their expert spokesman and a consultant with
respect to their drug and alcohol testing businesses; (2) ProActive agreed to
refer customers to RSA for the purpose of RSA providing its services to such
customers, including writing drug testing/background screening policy manuals;
and (3) RSA agreed to refer customers to ProActive. Prior to forming RSA, Mr.
Stutman was Special Agent in charge of the United States Drug Enforcement
Administration's New York office. He also currently serves as special consultant
on substance abuse for the CBS News Division. On December 14, 1995, pursuant to
the agreement, USAT agreed to issue to Mr. Stutman and RSA three-year Common
Stock purchase warrants, each to purchase 200,000 shares of the USAT Common
Stock at $2.00 per share, which was the market price on the date of grant. These
warrants were issued on December 14, 1995 and April 1, 1996. The agreement,
which had a term of ten years (except the term for the consulting and
spokesperson services by Mr. Stutman was three years), provided for payment of
fees to ProActive based on referrals to RSA and an initial $100,000 payment by
ProActive and varying monthly fees thereafter to RSA. A copy of the Consulting
Agreement dated as of December 14, 1995 by and between USAT, ProActive, RSA and
Robert Stutman is filed (by incorporation by reference) as an exhibit to this
Report and is incorporated herein by this reference.
On April 18, 1996, Mr. Stutman was elected as the Chairman of the
Board and a director of USAT and designated as its Chief Executive Officer. See
the section "Recent Developments under this caption "Business of the Company".
USAT also agreed in principle to acquire RSA. On May 21, 1996, the Company
completed its acquisition of RSA and RSA became a 100% owned subsidiary of USAT.
USAT paid $2,100,000 to the RSA stockholders for their 30 shares of RSA
(including $1,078,920 paid to Mr. Stutman for his 52.8% of the RSA shares and
$721,080 paid to Brian Stutman, son of Mr. Stutman and now Director of Sales and
Marketing of USAT, for his 35.3% of the RSA shares and issued to the RSA holders
an aggregate of 500,000 shares of the USAT Common Stock (including 263,750
shares issued to Mr. Stutman and 176,250 shares to Brian Stutman) registered
under the Securities Act as Acquisition Shares in USAT's Registration Statement
on Form S-1, File No. 33-43337 (the "January 1992 Registration Statement"), and
USAT Common Stock purchase warrants expiring May 20, 1999 to purchase an
aggregate of 900,000 shares of the USAT Common Stock (including a warrant to
purchase 474,750 shares issued to Mr. Stutman and a warrant to purchase 317,250
shares issued to Brian Stutman). USAT also issued two promissory notes
aggregating $400,000 in principal amount (the "RSA Notes") to two RSA
stockholders (one of whom is Mr. Stutman who received a RSA Note for $239,760
and Brian Stutman received a note for the balance). The RSA Notes bear interest
at the rate of 7.5% per annum and become due in one year from the May 21, 1996
closing date. USAT is required to prepay the RSA Notes if the gross proceeds
received by USAT from the exercises of the USAT Common Stock purchase warrants
after April 17, 1996 exceeds $7,000,000. The RSA Notes are secured by all of
USAT's tangible and intangible personal property except the following: (1)
USAT's cash and cash equivalents; (2)USAT's securities, including the stock of
its subsidiaries; and (3) certain contracts, including the license with the USN.
Copies of the Stock Purchase Agreement dated as of May 21, 1996, the Secured
Promissory Note dated May 21, 1996, the Security Agreement dated May 212, 1996,
the Common Stock purchase warrant expiring May 20, 1999 and Registration Rights
Agreement dated as of May 21, 1996, all related to the acquisition of RSA, are
filed (by incorporation by reference) as exhibits to this Report and, by this
reference, are incorporated herein. As a result of the acquisition of RSA, the
Consulting Agreement described in the preceding paragraph terminated; however,
the Common Stock purchase warrants described therein remain outstanding, except
that the RSA warrant was distributed to its shareholders.
ProActive entered into a lease for office space in Savannah,
Georgia. See the caption "Property" under the caption "Business of the Company."
11
<PAGE> 12
(3) ALCONET, INC.
In March 1995, USAT acquired 100% of the issued and outstanding
common stock of Alconet and all the membership interests of Dakotanet, L.L.C. As
consideration, USAT issued 782,321 shares of the USAT Common Stock registered
under the Securities Act as Acquisition Shares in the January 1992 Registration
Statement and valued at $1,564,642. The acquisitions have been accounted for as
a purchase in the financial statements of the Company. A copy of the Stock
Purchase Agreement relating to the Alconet acquisition is filed (by
incorporation by reference) as an exhibit to this Report and is incorporated
herein by this reference. In March 1996, USAT settled a dispute with two
officers of Alconet for an aggregate payment of $250,000 and the assignment of
certain software to one of the officers, both of whom then resigned. Alconet is
engaged in the computer software/networking business. Alconet has developed an
alcohol testing network to upload test results and information from various
alcohol breath testing devices. As a cost reduction action, USAT may seek to
consolidate or integrate the Alconet operations with other operations of the
Company; however, there can be no assurance as to the timing or the effect of
such a program.
(4) GOOD IDEAS ENTERPRISES, INC.
In February and April 1994, Good Ideas completed an initial public
offering of Good Ideas Common Stock, which security trades on the Pacific Stock
Exchange. As of March 31, 1996, USAT owned 2,400,000 of the 3,948,680
outstanding shares of the Good Ideas Common Stock or 60.8% thereof.
Good Ideas has designed, marketed and distributed a variety of
traditional toy products for children of various ages. Its sales historically
have been derived from a line of traditional wooden construction toys. Good
Ideas' strategy has been to design and develop enduring traditional lines of
toys and to create enhancements to, and extensions of, these toy lines which
were intended to maximize product line sales while minimizing development and
advertising expenses for new and enhanced products.
Good Ideas' principal product line, wooden construction toys,
includes classic interlocking log sets marketed under the trademark Paul Bunyan
Log Builders(TM), themed playsets such as General Custer's Fort Apache(TM),
building block sets marketed under the trademark Paul Bunyan Bloc' Builders(TM)
and brightly-painted, multi-colored combination log and block sets marketed
under the trademark Paul Bunyan Wood Builders(TM). In addition to its line of
wooden construction toys, it marketed one other line of traditional toys. Since
March 1993, it has sold a line of equestrian toys comprising of various styles
and sizes of flocked plastic horses and related accessories marketed under the
trademark Black Beauty and Friends(TM).
Good Ideas has sold its products to over 100 customers, almost all
of whom are located in the United States. Since it first commenced business in
June 1988, its principal customers have been mass merchandisers, such as Toys R
Us, Inc. ("Toys R Us"), Wal-Mart Stores, Inc., and J.C. Penney Company, Inc.,
and wholesale clubs, such as Price Costco Wholesale Corporation, and BJ's
Wholesale Club, Inc. Its domestic distribution network also expanded to include
high-end specialty retailers, such as F.A.O. Schwartz and Imaginarium. During
fiscal 1996, fiscal 1995 and fiscal 1994, Toys R Us accounted for 51.7%, 59.2%
and 57.4%, respectively, of Good Ideas' sales. During fiscal 1996, fiscal 1995
and fiscal 1994, Costco accounted for 3.3%, 20.9% and 10.0%, respectively, of
Good Ideas' sales. No other customer accounted for 10.0% or more of Good Ideas'
sales during such three-year period.
Toys R Us, the major customer of Good Ideas, has not been placing
orders for Good Ideas' toy products. The customer has attributed its reduction
in orders to its large inventories and declining sales and customer traffic.
Management believes that other manufacturers in the toy industry are currently
facing those same problems - their distributors or retailers to which they sell
have large inventories of products and declining sales and customer traffic. In
addition, management believes that many retailers are minimizing their number of
vendors, which has the result of squeezing out the smaller companies with their
limited product lines. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Good Ideas Enterprises, Inc." for further
discussion.
12
<PAGE> 13
Since July 1992, USAT has provided, and continues to provide,
certain management and administrative services to Good Ideas. These services
included management and financial advice; maintenance of financial books and
records and preparation of financial statements, budgets, forecasts and cash
flow projections; services relating to banking relationships; payment of
accounts payable and payroll; collection of accounts receivable and credit
analysis; order processing; import processing; cash management; and other
miscellaneous services and advice. From July 1992 through March 1993, the fee
payable to USAT for these services was computed on a fixed monthly charge of
$25,000. In April 1993, Good Ideas and USAT entered into a formal management
agreement, pursuant to which the fee for such services was computed at ten
percent of annual net sales.
In December 1993, Good Ideas and USAT entered into a management
services agreement (the "Management Services Agreement"), effective
retroactively to October 1, 1993, pursuant to which the fee for management and
administrative services provided by USAT was computed on a fixed monthly fee of
$25,000, plus five percent of annual gross sales in excess of $5,000,000. A copy
of the Management Services Agreement is filed (by incorporation by reference) as
an exhibit to this Report and is incorporated herein by this reference. The fee
charged by USAT for its management services was determined arbitrarily by its
Board of Directors after taking into consideration the anticipated diversion of
USAT resources required to provide such services, both in terms of employee time
and allocated overhead costs. Pursuant to the Agreement, the term, which
initially was to expire on September 30, 1994, has been automatically renewed so
that it is now scheduled to expire on September 30, 1996. The Agreement,
however, provides for automatic one-year renewals unless terminated by Good
Ideas upon six months' notice prior to the commencement of any renewal term or
by USAT at least 12 months prior to the commencement of any renewal term. In
view of the USAT Board's decision on February 26, 1996 to sell or liquidate Good
Ideas (see the succeeding paragraph), the Board suspended management fees to
USAT retroactive to January 1, 1996.
USAT has filed a Registration Statement on Form S-4, File No.
333-3734 (the "Good Ideas Registration Statement"), under the Securities Act to
register shares of the USAT Common Stock to be issued to the minority
stockholders of Good Ideas upon the consummation of a merger of a newly formed
wholly-owned subsidiary of USAT with and into Good Ideas. The Good Ideas
Registration Statement is not yet effective and, accordingly, no offer has been
made to the minority stockholders of Good Ideas. The USAT Board of Directors has
concluded that the value of the USAT Common Stock could best be maximized if the
Company concentrated its operations on the USAT alcohol testing business, the
U.S. Drug testing business and the related human resource provider business of
ProActive and operated the three as if one corporation. The USAT directors have
concluded that, because of the history of losses in Good Ideas and what they
perceive to be the problems generally in the toy industry as described in the
third preceding paragraph, it would be difficult to make Good Ideas' operations
profitable within what they considered an acceptable time frame, assuming that
such result could be achieved at all, as to which there can be no assurance. On
February 26, 1996, for both of these reasons, the USAT Board authorized
management to seek offers from prospective purchasers of Good Ideas. There can
be no assurance that an acceptable offer to purchase Good Ideas will be received
or that the terms of any such offer will be acceptable. If no acceptable offer
is received, the USAT Board will liquidate Good Ideas by December 31, 1996.
Accordingly, Good Ideas has been presented under the caption "Discontinued
Operations" in the accompanying financial statements.
(5) U.S. RUBBER RECYCLING, INC.
In November 1992, USAT purchased all the assets of Adflo
International, Inc. for its then newly formed wholly-owned subsidiary, USRR,
which then began to manufacture floor covering products for office and
industrial use from used truck and bus tires. These tires were delivered to
USRR's then Rancho Cucamonga plant and to an off-site storage facility, where
they were recycled by splitting and cutting the tires and reassembling the
recycled parts into finished products. Sales were made nationwide through
manufacturer's representatives and distributors. All manufacturing was performed
in the Rancho Cucamonga facility. USRR ceased operations on April 30, 1996 when
substantially all of its assets were sold as described in the second succeeding
paragraph.
13
<PAGE> 14
USAT acquired the assets of Adflo International, Inc. for a total
consideration of 185,000 shares of the USAT Common Stock valued at $196,563.
These shares were registered under the Securities Act as Acquisition Shares in
the January 1992 Registration Statement. The transaction was accounted for as a
purchase in the financial statements of the Company.
On April 30, 1996, USRR sold substantially all of its assets to an
unaffiliated buyer for $450,000, $150,000 of which was paid at the closing and
the balance by the delivery of a $300,000 promissory note. The purchaser also
paid approximately $80,000 in accounts payable of USRR and assumed certain other
liabilities, including USRR's lease. The sale resulted in a loss of
approximately $88,000. The promissory note is payable in six annual installments
of $50,000, together with interest at a rate of 7% per annum. In addition to the
annual installments, the promissory note will be prepaid in an amount equal to
12-1/2% of the buyer's annual gross sales of USRR products in excess of
$1,400,000. The promissory note is secured by a first priority security interest
in all of the buyer's assets. USRR is required to agree, however, to subordinate
its security interest to up to $1,000,000 of institutional financing for the
buyer. Because of the sale subsequent to fiscal year end, USRR has been
presented under the caption of "Discontinued Operations" in the accompanying
financial statements.
Copies of the Asset Acquisition Agreement relating to the
acquisition of assets by USSR and of the Asset Purchase Agreement relating to
the sale of USRR assets are filed (by incorporation by reference) as exhibits to
this Report and are incorporated herein by this reference.
EMPLOYEES
As of March 31, 1996, the Company had 69 full time employees other
than its officers, 27 engaged in manufacturing, 7 in sales, 7 technical, 6
scientists and 22 in clerical administrative jobs. The Company has no collective
bargaining agreement with its employees. Eighteen of these employees work for
the operations treated as discontinued in the March 31, 1996 financial
statements.
RECENT DEVELOPMENTS
In mid-May 1995, as a result of communications among certain
stockholders of USAT relating to their dissatisfaction with the performance of
the management of USAT in maximizing the value of USAT, Lee S. Rosen, Michael S.
McCord, Arthur Schwartz, Morris B. Black and Stuart S. Greenberg (the then
Chairman of Baraban Securities Corporation) formed a stockholders' committee
later named "The Committee for Maximizing Stockholder Value of U.S. Alcohol
Testing of America, Inc." (the "Committee") to make recommendations to the
management of USAT. On July 5, 1995, Mr. Black resigned from the Committee for
personal reasons and, on July 19, 1995, Peter M. Mark joined the Committee.
Between May 12, 1995 and August 17, 1995, the Committee or affiliated
stockholders took certain actions, including the formulation of certain
recommendations by the Committee which it attempted to communicate to
management.
On August 17, 1995, the Committee determined to seek consents
(1) to remove and replace incumbent directors with its own nominees; (2) to
amend the by-laws of USAT to delete the provision that establishes three classes
of directors on USAT's Board of Directors; and (3) to amend the by-laws of USAT
to fix the number of directors at seven instead of five and to require that a
majority of the directors be independent. On September 11, 1995, the Committee,
acting through Georgeson & Company Inc. as its solicitation agent, first
delivered and mailed definitive consent solicitation material pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), to brokers and certain stockholders of record of USAT. USAT
thereafter initiated an action in the Delaware District Court alleging that the
Committee had violated Section 14 of the Exchange Act, sent out a "stop, look
and listen letter" and filed its preliminary consent revocation statement.
On September 26, 1995, as reported in USAT's Current Report on
Form 8-K filed on October 2, 1995, the following events occurred:
1. the Committee and USAT settled the above litigation;
14
<PAGE> 15
2. the number of directors of USAT was increased from five to
seven;
3. incumbent directors Glenn A. Bergenfield, William DiTuro
and Gary S. Wolff resigned as directors of USAT; however, they continued to
serve as directors of U.S. Drug and Good Ideas (Mr. Bergenfield and Dr. DiTuro
subsequently resigned as directors of both subsidiaries on November 15, 1995);
4. Alan I. Goldman, a nominee of the Committee, Peter M. Mark,
a member of the Committee, and Lee S. Rosen, a member of the Committee and also
a Committee nominee, were elected as directors of USAT;
5. John C. Lawn and Linda H. Masterson were elected as
directors of USAT; and
6. James C. Witham, Chairman of the Board, President and Chief
Executive Officer, and Karen B. Laustsen, Executive Vice President, continued to
serve USAT in such capacities and as directors (see second succeeding
paragraph), while Gary S. Wolff remained as Chief Financial Officer on an
interim basis and will serve USAT in other capacities after a new Chief
Financial Officer is appointed.
At the Annual Meeting of Stockholders held on February 7,
1996, Mr. Witham and Ms. Laustsen were elected to serve for a one-year term,
Messrs. Goldman and Mark were elected to serve for a two-year term and Messrs.
Lawn and Rosen and Ms. Masterson were elected to serve for a three-year term.
On April 18, 1996, Mr. Witham and Ms. Laustsen resigned their
officerships and directorships in USAT; however, they remained as employees of
USAT to assist in the transition and other matters until May 31,1996. They
continued to serve as directors of U.S. Drug and Good Ideas until May 28, 1996
in the case of Ms. Laustsen and May 31, 1996 in the case of Mr. Witham. The
resignations of Mr. Witham and Ms. Laustsen were voluntary and relationships
have continued on a cordial, cooperative basis since April 18th.
Recognizing that RSA could bring potential revenues to the
Company in what the USAT Board deemed to be the Company's core businesses,
especially if RSA were part of the Company and not just a consultant, and that
Mr. Stutman was a recognized authority in the area of substance abuse prevention
programs, four of the independent directors of USAT negotiated with Mr. Stutman
the terms for a possible acquisition of RSA. When Mr. Witham joined the
discussions, he favored naming Mr. Stutman as Chief Executive Officer of USAT
and offered to resign so that there would be no question as to Mr. Stutman's
authority, believing that this would be in the best interests of the Company and
all USAT stockholders. Ms. Laustsen subsequently also offered to resign for the
same reason. Recognizing that, as a result of these offers, USAT would lose two
of its principal executive officers, the remaining directors and Mr. Stutman
then negotiated with Ms. Masterson the terms of her becoming President and Chief
Operating Officer of USAT.
On April 18, 1996, Robert Stutman was elected as Chairman of
the Board and a director of USAT and designated as its Chief Executive Officer.
On the same day, but effective May 13, 1996, Ms. Masterson, a director, was
elected as the President of USAT and designated as its Chief Operating Officer.
Mr. Stutman and Ms. Masterson were, on May 31, 1996, elected as directors of
Good Ideas and U.S. Drug, as was Michael S. McCord, a former member of the
Committee, a consultant to USAT's Board of Directors, and a stockholder of each
of USAT, Good Ideas and U.S. Drug.
On April 18, 1996, USAT agreed in principle to acquire RSA, a
provider of corporate drug-free work place programs and of which Mr. Stutman was
President and founder. As indicated above, the terms of the acquisition were
negotiated with Mr. Stutman by four independent directors of USAT. Since January
1996, RSA has been designing policies and programs for the ProActive subsidiary.
The acquisition of RSA was completed on May 21, 1996. (See the section
"Subsidiaries - ProActive Synergies, Inc./Robert Stutman & Associates, Inc."
under this caption "Business of the Company" and Note 16 to the Financial
Statements included elsewhere in the Report.)
15
<PAGE> 16
ITEM 2. PROPERTY
USAT occupies approximately 20,000 square feet office and factory
facilities in Rancho Cucamonga, California under a lease expiring January 31,
1997, which premises are shared with two of its subsidiaries. This lease
includes the option of extending its term for two consecutive five-year periods.
USAT's subsidiary ProActive occupies approximately 1,640 square feet of office
space in Savannah, Georgia under a lease expiring January 2, 1999. The Alconet
subsidiary occupies approximately 1,200 square feet of office space in Bismark,
North Dakota under a lease expiring March 31, 1997.
Effective August 1, 1996, USAT will sublease approximately 8,500
square feet of office space in Fort Lauderdale, Florida, under a lease expiring
November 30, 2001, which lease grants the tenant a right to renew for an
additional five-year term. The space will be utilized as headquarters for Robert
Stutman, Chairman of the Board and Chief Executive Officer of USAT, RSA and
ProActive. RSA's landlord for space in Dedham, Massachusetts has agreed to a
cancellation of RSA's lease. ProActive is attempting to sublease the office
space described in the preceding paragraph. USAT may seek to sublet up to 1,000
square feet of the new space pending utilization thereof.
Good Ideas previously occupied approximately 22,000 square feet of
office and factory space in Fort Worth, Texas under a lease which expired
December 31, 1995. Good Ideas currently subleases warehouse space on a month to
month basis. Until April 30, 1996, USAT's subsidiary USRR occupied approximately
17,000 square feet of office and factory space in Rancho Cucamonga, California
under a lease expiring June 30, 1999. Pursuant to the sale of USRR's assets (see
the section "Subsidiaries-U.S. Rubber Recycling, Inc." in Item 1 to this
Report), the purchaser assumed the foregoing lease, but the landlord did not
release USRR from its obligations.
In addition to rent, the leases provide for payment of real estate
taxes and other occupancy costs. For information as to the aggregate rentals
paid during the past three fiscal years and anticipated to be paid in the
ensuing three fiscal years, see Note 12 to the Company's Financial Statements
elsewhere in this Annual Report.
Management is of the opinion that the leased facilities are
currently adequate and suitable for the Company's needs.
Copies of the above leases are filed (some by incorporation by
reference) as exhibits to this Report and are incorporated herein by this
reference.
ITEM 3. LEGAL MATTERS
The Company is not a party to any material litigation and is not
aware of any pending litigation that could have a material adverse effect on the
Company's business, results of operations or financial condition.
16
<PAGE> 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) An annual meeting of the stockholders of USAT was held on February 27, 1996.
(b) The following directors were elected at the meeting:
James C. Witham (1)
Karen B. Laustsen (1)
Peter M. Mark
Alan I. Goldman
Linda H. Masterson
Lee S. Rosen
John C. Lawn
-----------------
(1) See the section "Recent Developments" in Item 1 to this Report.
(c) The following matters were voted on at the meeting:
<TABLE>
<CAPTION>
Shares Voted
-------------------------------------------
For Against/Abstain
--------------------- ---------------
<S> <C> <C>
Election of Directors 23,812,702-24,055,749 794,089-551,042
Ratification of Ernst
& Young, LLP as independent
auditors 24,376,244 230,547
</TABLE>
17
<PAGE> 18
PART II
ITEM 5. MARKET DATA FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
MARKET DATA
Since January 2, 1992, the USAT Common Stock has traded on the American
Stock Exchange ("AMEX") under the symbol "AAA." The following table sets forth
the high and low sales prices for the shares of the USAT Common Stock during the
periods indicated:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
FISCAL 1995
Quarter Ended
June 30, 1994 $2.5625 $1.75
September 30, 1994 $4.25 $2.1875
December 31, 1994 $5.625 $3.1875
March 31, 1995 $3.75 $1.875
FISCAL 1996
Quarter Ended
June 30, 1995 $2.1875 $1.625
September 30, 1995 $2.9375 $1.875
December 31, 1995 $2.25 $1.875
March 31, 1996 $3.375 $1.8125
</TABLE>
On June 21, 1996, the closing sales price of the USAT Common Stock was
$2.5625 per share.
HOLDERS
The holders of record of the USAT Common Stock on March 31, 1996 were
1,123 and USAT estimates, based on the number of proxies mailed in connection
with the 1996 Annual Meeting of Stockholders, that it has approximately 8,200
stockholders, including holders in street name.
DIVIDENDS
No dividends on the USAT Common Stock have been declared by USAT's
Board of Directors through March 31, 1996 and, in view of the Company's cash
requirements and history of operational losses, USAT's Board of Directors has no
current intention to declare or pay dividends on the USAT Common Stock in the
foreseeable future. Dividends on the Class A Preferred Stock are payable
semi-annually cumulative from December 17, 1990 and all dividends have been paid
timely.
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<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected financial data of the Company
for the five fiscal years ended March 31, 1996. This selected financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Financial
Statements and related notes thereto included elsewhere in this Report.
<TABLE>
<CAPTION>
For the Years Ended March 31,
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected Consolidated Income Statement Data:
CONTINUING OPERATIONS:
Sales - Net $ 1,165,661 $1,695,215 $ 442,728 $ 611,739 $ 688,412
------------ ----------- ------------ ----------- -----------
Costs and Expenses:
Cost of Sales
(Exclusive of
Depreciation
Shown Below) 1,208,726 1,397,034 389,830 464,103 545,594
Selling, General &
Administrative Exp.
(Exclusive of
Depreciation
Shown Below) 5,720,592 5,284,405 3,759,858 4,647,943 2,549,367
Research &
Development 1,005,832 1,248,962 947,811 1,067,381 156,817
Interest 81,450 46,069 1,534 24,116 73,311
Depreciation and
Amortization 1,017,534 695,367 380,676 191,414 61,907
Loss from Settlement
of Class Action
Litigation -- -- 4,600,000 -- --
Loss from Settlement
of Litigation 1,137,914 -- 50,000 652,625 582,338
Buy-out of Consulting
Agreement -- -- -- -- 400,000
------------ ----------- ------------ ----------- -----------
Total Cost
and Expenses 10,172,048 8,671,837 10,129,709 7,047,582 4,369,334
------------ ----------- ------------ ----------- -----------
Loss from
Operations (9,006,387) (6,976,622) (9,686,981) (6,435,843) (3,680,922)
Other Income
(Expense) - Net 408,876 (499,137) (473,241) (1,187,772) 137,770
------------ ----------- ------------ ----------- -----------
Loss Before Minority
Interest in Net
Loss (Income) of
Subsidiary (8,597,511) (7,475,759) (10,160,222) (7,623,615) (3,543,152)
Minority Interest
in Net Loss (Income)
of Subsidiary 541,466 769,632 464,083 (360,477) 53,128
------------ ----------- ------------ ----------- -----------
Loss from Continuing
Operations (8,056,045) (6,706,127) (9,696,139) (7,623,615) (3,490,024)
------------ ----------- ------------ ----------- -----------
DISCONTINUED OPERATIONS:
Loss from Discontinued
Operations before
Minority Interest, Net
of Subsidiary Preferred
Stock Dividends Paid (1,545,457) (857,575) (242,451) (173,118) --
Minority Interest, net of
Subsidiary Preferred Stock
Dividends Paid 467,183 327,306 (127,445) (200,520) --
Loss on Disposal, net of
Minority Interest of
$143,671 (1,326,267) -- -- -- --
------------ ----------- ------------ ----------- -----------
Loss on Discontinued
Operations (2,404,541) (530,296) (369,896) (373,638) --
------------ ----------- ------------ ----------- -----------
Net Loss ($10,460,586) ($7,236,396) ($10,066,035) ($7,997,253) ($3,490,024)
============ =========== ============ =========== ===========
</TABLE>
19
<PAGE> 20
SELECTED CONSOLIDATED INCOME STATEMENT DATA (CONTINUED)
<TABLE>
<CAPTION>
For the Years Ended March 31,
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Weighted Average
Common Shares
Outstanding 29,834,502 25,691,674 22,027,068 12,317,743 5,938,747
============ =========== ============ =========== ===========
Loss Applicable to
Common Stock:
Net Loss ($10,460,586) ($7,236,396) ($10,066,035) ($7,997,253) ($3,490,024)
Preferred Stock
Dividend-Class "A" (28,810) (39,179) (26,358) (39,992) (199,362)
Preferred Stock
Dividend-Class "B" -- (2,425) (13,826) (331,767) (227,083)
------------ ----------- ------------ ----------- -----------
Loss Applicable to
Common Stock ($10,489,396) ($7,278,000) ($10,106,219) ($8,369,012) ($3,916,469)
============ =========== ============ =========== ===========
Per Common Share (1):
Loss from Continuing
Operations ($.27) ($.26) ($.44) ($.65) ($.66)
Loss from Discontinued
Operations (.08) (.02) (.02) (.03) --
------------ ----------- ------------ ----------- -----------
Net Loss ($.35) ($.28) ($.46) ($.68) ($.66)
============ =========== ============ =========== ===========
</TABLE>
(1) Adjusted to reflect all common stock splits.
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected Consolidated Balance Sheet Data:
Working Capital $ 1,685,583 $ 4,634,665 $ 7,489,655 $3,172,817 $11,778,216
=========== =========== =========== ========== ===========
Total Assets $ 6,952,284 $14,097,548 $16,848,773 $6,300,602 $12,904,801
=========== =========== =========== ========== ===========
Long-Term Debt -
Less Current
Portion $ 42,962 $ 79,008 $ 81,521 $ 2,886 $ --
========== =========== ========== ========== ===========
Minority Interest $ 1,478,508 $ 2,723,502 $ 3,705,120 $3,676,068 $ 4,090,109
=========== =========== ========== ========== ===========
Shareholders' Equity $ 4,032,330 $ 7,693,942 $ 6,844,375 $1,482,943 $ 8,301,977
=========== =========== ========== ========== ===========
</TABLE>
20
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EFFECT OF MERGER -- U.S. DRUG TESTING, INC.
During May 1996, USAT filed the U.S. Drug Registration Statement to
register shares of the USAT Common Stock to be issued to the minority
stockholders of U.S. Drug upon consummation of a proposed merger of U.S. Drug
with and into a wholly owned subsidiary of USAT. The effects of the proposed
merger (the "U.S. Drug Merger") are discussed below.
Although consummation of the U.S. Drug Merger will result in the
cancellation of the indebtedness from USAT to U.S. Drug ($282,000 outstanding as
of March 31, 1996 and due June 30, 1996), USAT will still have to invest at
least $4,500,000 to $5,000,000 in the drug testing operations during the next
two years in order to complete the development of the drug testing products. The
foregoing estimate does not reflect an additional $2,000,000 to $2,500,000
required for manufacturing line start-up expenses. Because no revenues from
sales are currently expected from the drug testing operations for at least 20 to
30 months, assuming U.S. Drug Acquisition Corp., as the successor to U.S. Drug
by merger, meets the current product development schedule, as to which there can
be no assurance, the drug testing operations will operate at a loss for at least
the next two fiscal years, requiring the Company to seek to generate revenues
from the combined RSA/ProActive business and from its alcohol testing operation,
assuming that the sale of Good Ideas is effected. Although USAT management is
optimistic about the Company achieving a significant amount of revenues from the
alcohol testing and the combined RSA/ProActive operations, there can be no
assurance that management's expectations will be achieved and in the time frame
that management contemplates. Management believes that the combined
RSA/ProActive operations can also increase the revenues from the alcohol testing
products and, when its products are developed and marketable, those of the drug
testing subsidiary. Although the sale of the rubber recycling operation and the
desired sale of the toy operation, as to which there can be no assurance that
the latter sale will be consummated or, if sold, as to when and for what
purchase price the sale will be effected, will eliminate a substantial portion
of the Company's operating losses, such sales will also substantially reduce the
Company's revenues (the toy and rubber recycling operations constituted 79.9% of
the Company's revenues in fiscal 1995 and 67.3% in fiscal 1996). Accordingly, in
order to meet the Company's cash requirements, particularly those relating to
its drug testing operation, the Company must develop new sources of revenues -
as to which the combined RSA/ProActive operation is the most likely source, seek
additional financing and/or secure additional exercises of outstanding USAT
Common Stock purchase warrants and stock options. There can be no assurance that
any of these sources of cash will produce sufficient amounts required for the
Company's operations, including U.S. Drug's, although USAT management believes,
as discussed below under "Liquidity and Capital Resources," that, as the result
of the recently completed private placement, the recent exercises of Common
Stock purchase warrants and other potential sources of funds, the Company
expects to meet its cash requirements for at least the next 12 months. There is,
of course, no assurance that management's expectations will be realized.
If the U.S. Drug Merger is not effected, an infusion of equity will be
necessary for U.S. Drug to maintain its listing of the U.S. Drug Common Stock on
the Pacific Stock Exchange because U.S. Drug, based on its balance sheet as of
March 31, 1996, did not meet such Exchange's assets and stockholders' equity
maintenance requirements. Similarly, U.S. Drug would not meet the entry
requirements of the American Stock Exchange or the National Association of
Securities Dealers Automated Quotation ("NASDAQ") System. Even if the current
maintenance problem is resolved by an infusion of equity, because of the
anticipated continuing losses, U.S. Drug will probably have the same compliance
problem for at least 20 to 30 months (i.e., the necessity to infuse capital to
offset operational losses). Any delisting from the Pacific Stock Exchange and
inability to list on another exchange or the NASDAQ System will adversely affect
U.S. Drug's ability to raise additional equity financing. In such event, the
burden to seek financing for the drug testing operation would fall solely on
USAT, which owns 67.0% of U.S. Drug and holds the license to the USN technology.
21
<PAGE> 22
EFFECT OF MERGER -- GOOD IDEAS
During April 1996, USAT filed the Good Ideas Registration Statement to
register shares of the USAT Common Stock to be issued to the minority
stockholders of Good Ideas upon consummation of a proposed merger of a wholly
owned subsidiary of USAT with and into Good Ideas. The effects of the proposed
merger (the "Good Ideas Merger") are discussed below.
Management believes that, during the past three years, manufacturers in
the toy industry have faced the problem that distributors or retailers have been
requesting that the manufacturers maintain the inventory, thereby increasing
manufacturers' expenses, and have been minimizing the number of vendors which
sell to them, which has the effect of squeezing out the smaller companies like
Good Ideas with their limited product lines. Because of these problems which
management believe are characteristic of the toy industry generally and Good
Ideas' declining sales and increasing losses, the USAT Board of Directors
concluded on February 26, 1996 that Good Ideas was not likely to reverse the
trend of increasing losses during the next 12 months. The Board believed that,
whether or not the Good Ideas Merger was consummated, the only way to improve
operational results was to secure new toy products, whether through licensing
arrangements or otherwise; however, this type of program, even if successful, as
to which there can be no assurance, would require substantial cash investments,
which is contrary to the Board's conclusion that the Company's best opportunity
at maximizing revenues and securing profitability was by concentrating on its
alcohol and drug testing and human resource provider operations as its core
businesses. Accordingly, on February 26, 1996, the USAT Board authorized seeking
a purchaser for Good Ideas. In addition, the USAT Board suspended management
fees to USAT retroactive to January 1, 1996. The Board, believes that, pending
receipt of an acceptable offer, as to which there can be no assurance, Good
Ideas' cash resources and expected cash flow from operations, coupled with its
cost reduction actions (such as not renewing the lease for office and warehouse
facilities), will be sufficient to meet Good Ideas' cash requirements for the
next 12 months if such time is required to sell or liquidate. However, there can
be no assurance that additional funds may not be required. The USAT Board
believes that liquidation of Good Ideas by no later than December 31, 1996 would
be preferable than investing at that time substantial additional funds in Good
Ideas, other than repaying USAT's indebtedness to Good Ideas due June 30, 1996.
The Good Ideas Merger would terminate USAT's obligation to make such repayment.
If the Good Ideas Merger is not consummated, the Good Ideas Board could
consider whether the expenditure of funds to secure new products was preferable
to a sale or liquidation. However, for the reasons set forth in the preceding
paragraph, the answer will probably be in the negative.
LIQUIDITY AND CAPITAL RESOURCES
Although the Company has a history of operating losses through March
31, 1996, management believes that the Company will have the cash resources
available to meet all of its operating requirements for the ensuing 12 months.
Management bases its belief on the following:
Discontinued Businesses. Good Ideas and USRR have produced significant operating
losses over the last several years. Both operations were treated as discontinued
operations in the financial statements for fiscal 1996. USRR was sold April 30,
1996. Good Ideas' operations have been substantially suspended and the Company
is seeking a buyer for its assets. If no satisfactory offers are received, the
operation will be liquidated prior to December 31, 1996.
Nonrecurring Losses. Fiscal 1996 included $1,137,914 in losses from the
settlement of litigation. Management is not aware of any litigation or claims
which would cause this type of loss to recur in the fiscal year ending March 31,
1997 ("fiscal 1997"), although there can be no assurance that such claims will
not arise.
Operational Sources. Management believes that cash flow from operations will be
increased in fiscal 1997 through the addition of the RSA revenues and by
developing the ProActive human resource business, neither of which were
significant contributors in fiscal 1996. Management
22
<PAGE> 23
also believes that increased emphasis can be made on selling its Mobile Alcohol
Collection System ("MACS") and Alco-Breath Tubes ("ABT") for use in industrial
companies and thereby increase the revenues in the alcohol testing operation. By
unifying its sales force to on sell both the RSA/ProActive "product" and these
alcohol testing products and changing the marketing emphasis, management
believes that increased revenues can be developed in fiscal 1997. Management
will also continue to emphasize the cost reduction programs previously
instituted. If the feasibility study as to saliva based testing product
currently being conducted by U.S. Drug indicates further development is
desirable, the Company can seek to have a major company help in the development
program, which would reduce current expenditures, but would also reduce future
revenues to the extent marketing rights are demanded by such "development
partner." To the extent that the feasibility study indicates insurmountable
problems with respect to further development, then the anticipated further
research and development expenses can be avoided. There can be no assurance that
the Company's operational programs will produce an increased cash flow from
operations or, if it does, when such result will be achieved.
Equity Sources. From December 1995 to February 1996, USAT completed a private
placement of USAT Common Stock pursuant to Regulation D under the Securities Act
in which it realized gross proceeds of $3,750,000. Because of USAT's past
history of successfully raising funds privately, management believes that this
source can be "tapped" in the future if required; however, management would
prefer not to use this method of financing because of the substantial dilution
to current stockholders which it causes and because, absent a stockholder
authorization of additional shares, the number of unreserved shares of the USAT
Common Stock is currently limited. There can be, of course, no assurance that
USAT will be able to consummate any future financings on a timely and favorable
basis in the amount necessary to meet the Company's cash requirements should any
such financing be necessary.
Between April 1, 1996 and June 5, 1996, warrants and options
were exercised to purchase 2,353,449 shares of the USAT Common Stock generating
$4,242,000 in cash. Outstanding unexercised USAT Common Stock purchase warrants
as of June 5, 1996 could generate approximately $15,348,000 of new capital to
the Company. Outstanding stock options could generate proceeds of approximately
$1,040,000 if exercised. USAT will have to update or file registration
statements under the Securities Act to make these exercises more attractive to
the holders. There can be, of course, no assurance that any of the remaining
warrants or options will be exercised.
In the event that the Company is unable to generate sufficient
cash flow from operations or from sources other than those described above
(which event, in management's opinion, is not likely to occur based upon past
experience; however, there is no assurance that management will be successful in
any future financing efforts), then the Company may have to provide for
additional reductions in operating costs, thereby not only resulting in less
cash from operations currently, but also delaying future revenue growth. In such
event the market price of the USAT Common Stock is likely to drop, not only
discouraging the future exercises of the USAT Common Stock purchase warrants and
the stock options and possibly discouraging potential new investors, but also
increasing the risk that a current investor in USAT may lose the value of his,
her or its investment.
Because USAT offers its alcohol testing products, and U.S.
Drug will offer, when the research and development program is successfully
consummated, as to which there can be no assurance, its drug testing products,
in the substance abuse industry which is noted for its scientific developments
and rapidly changing technology, each faces the risk that new or modified
products of competitors may make USAT's or U.S. Drug's products not competitive,
either from an obsolescence or a pricing point of view. In addition, these
developments may require USAT and U.S. Drug to expend substantial funds on
research and development to remain competitive, possibly at times when such
funds may not be available.
23
<PAGE> 24
CHANGES IN FINANCIAL CONDITION
During fiscal 1996, the Company's investments in trading
securities were sold and the Company realized proceeds of $3,610,000. The REMIC
bonds were sold for $3,286,000 and a brokerage loan payable in the amount of
$2,570,000 was repaid. In addition, the Company sold its 288,400 share
investment in the common stock of Marquest Medical Products, Inc. ("Marquest"),
realizing proceeds of $324,000. The sales of these investments resulted in a net
gain of $302,000 over their carrying value on the March 31, 1995 balance sheet.
The Company realized a loss on sale of marketable securities in fiscal 1996 of
$1,889,000. Management will make no further investments in any high risk trading
securities.
The Company's investment policy on a prospective basis,
assuming the availability of funds not required for immediate use in the
operations of the business, will require such funds to be invested in
certificates of deposit, money market accounts, government securities and high
quality commercial paper where the principal will be substantially protected
from market fluctuations.
OPERATING CASH FLOWS
Cash used for operations was $8,711,000 for fiscal 1996. The
net loss for the period was $10,461,000 and the difference between the net loss
and the net cash used by operating activities was $1,750,000. Components of this
difference included:
<TABLE>
<CAPTION>
Increases Decreases
--------- ---------
<S> <C> <C>
Accounts Receivable $ 151,000
Inventory 552,000
Minority Share $1,009,000
Accounts Payable 848,000
Unrealized Gain 302,000
Depreciation/Amortization 1,311,000
Accrued Expenses 236,000
Loss on Disposal of Discontinued
Operations 1,326,000
Other Components, net -- 333,000
---------- ----------
Total $2,159,000 $3,909,000
2,159,000
----------
Net Decrease $1,750,000
==========
</TABLE>
INVESTING CASH FLOWS
Cash provided from investing activities was $3,428,000 for
fiscal 1996. $3,610,000 was generated from the sales of trading securities as
described above and $220,000 was used for the purchase of property and
equipment. Other net sources of funds amounted to $38,000.
FINANCING CASH FLOWS
Cash provided from financing activities was $4,937,000 during
the fiscal 1996. The Company provided cash from the sale of securities in two
private placements in the aggregate gross amount of $6,788,000, from the
exercise of warrants in the amount of $167,000 and from demand loans, secured by
U.S. Drug's REMIC bonds, in the amount of $1,000,000. Cash from the sale of the
REMIC bonds included as an investing activity was used to pay off brokerage
loans in the amount of $2,570,000. Expenses of raising the $6,955,000 from the
placements and warrants were $363,000. Net payments of long term debt and
payment of dividends on the Preferred "A" Stock used cash of $85,000.
Cash resources will be more than adequate, in management's
opinion, to meet the Company's commitments which include lease obligations,
royalty obligations and development of products for at least the next 12 months.
There are currently no unfunded commitments for capital expenditures.
24
<PAGE> 25
RESULTS OF OPERATIONS
FISCAL 1996 VS. FISCAL 1995
Revenues from continuing operations for fiscal 1996 were
$1,166,000, a decrease of $529,000 or 31.2% from revenues of $1,695,000 reported
for fiscal 1995. Revenues from the sale of alcohol breath analyzing equipment
decreased by $750,000, which decrease was attributable to an unusually high
volume of alcohol breath analyzing machines sold in the third quarter of the
prior year and a reduction in sales effort as the sales force was reassigned to
the ProActive startup. Sales of the Biotox division decreased $227,000,
reflecting the end of a contract performing methadone tests. These decreases
were offset by an increase in cost per test revenue from the alcohol breath
analyzing equipment of $185,000, miscellaneous sales of supplies of $42,000 and
revenues of $203,000 from Alconet, which was acquired March 31, 1995, and the
human resource provider business which, while still in a start up mode, produced
revenues of $18,000.
Cost of sales for the fiscal 1996 on a continuing operations
was 100.4% of revenues as compared to 82.4% of revenues for fiscal 1995 as a
result of lower sales volumes, increased labor and supply costs relating to the
cost per test business and an inventory write-off of $193,000 during fiscal
1996.
Selling, general and administrative expenses were $5,721,000
for fiscal 1996, representing an increase of $437,000 or 8.3% from the
$5,284,000 of such expenses incurred for the comparable period of the prior
year. The expenses for fiscal 1996 included $397,000 of expenses incurred by a
newly acquired subsidiary, Alconet, not included in the comparable numbers for
the prior year.
Research and development expenses were $1,006,000 for fiscal
1996, representing a decrease of $243,000 or 19.5% from the expenses in the
prior year. Research and development expenses in connection with USAT's alcohol
testing machine decreased by $215,000 during fiscal 1996 from such expenses in
the prior year, which decrease was attributable to the fact that the machines
were placed in service in the fourth quarter of the prior year. U.S. Drug's
research and development expenses decreased $35,000 as compared with such
expenses in the prior year.
Loss from the settlement of litigation for fiscal 1996
included nonrecurring legal and other expenses in the amount of $888,000 which
were incurred by USAT in connection with its settlement with the Committee of
the consent solicitation litigation. Additionally, a non-recurring settlement
of $250,000 was paid to two former owners of Alconet, Inc. relating to a dispute
over the terms of their employment contracts.
Depreciation and amortization was $1,018,000 for fiscal 1996,
representing an increase of $322,000 or 46.3% over depreciation and amortization
in fiscal 1995, which increase was attributable primarily to depreciation on
USAT's alcohol testing machines placed in testing sites in connection with the
cost per test agreements with major laboratories. The majority of these machines
were placed in service in the fourth quarter of fiscal 1995. These machines
represented an increase in depreciation expense of $514,000 for fiscal 1996 as
compared to the expense in the prior year based on a full year's depreciation in
fiscal 1996.
The Company's operating loss of $9,006,000 for fiscal 1996
increased by $2,029,000 over its operating loss of $6,977,000 for the prior
year. The increased operating loss can be attributed to: the lower level of
revenues generated from the alcohol testing business attributable to an
unusually high volume of alcohol breath analyzing machines sold in the third
quarter of the prior year; negative gross margins for fiscal 1996 resulting from
higher labor and supply costs necessary to support the start up of the cost per
test business; increased selling, general and administrative expenses and
nonrecurring losses from settlement of litigation in the amount of $1,138,000,
operating losses of $576,000 incurred by Alconet, a newly acquired subsidiary
not included in the prior year numbers; and increased depreciation cost relating
to the cost per test business.
Other income, net of other expenses, for fiscal 1996 was
$409,000 as compared to an expense of $499,000 reported for fiscal 1995. The
trading securities sold by the Company in
25
<PAGE> 26
fiscal 1996 generated a profit of $302,000 over their carrying value in the
March 1995 balance sheet. During fiscal 1995, these securities generated a loss
of $155,000 and an unrealized loss of $598,000. Interest income decreased by
$134,000 for fiscal 1996 as compared to the interest income in the prior year.
Management is of the opinion that it is too speculative to
project at this time when the Company will turn profitable because of the
Company's history of operational losses, the delay in completing and then
marketing its urine sample drug testing product in order to wait until a saliva
sample drug testing product is available, the fact that its human resource
provider program is in its early marketing stages and the discontinued
operations of the toy subsidiary.
U.S. DRUG TESTING, INC. (SUBSTANCE ABUSE TESTING)
During fiscal 1996, the Company continued as a development
stage enterprise with no revenues. Selling, general and administrative expenses
were $417,000 in fiscal 1996 as compared with $850,000 in fiscal 1995 or a
decrease of $433,000, resulting primarily from a $325,000 reduction in the
royalty payments on the USAT license with the USN from $375,000 in fiscal 1995
to $50,000 in fiscal 1996. Other selling, general and administrative expenses
for fiscal 1996 were comprised of royalty expenses of $62,000, rent, utilities
and telephone charges of $97,000, insurance expenses of $35,000, marketing
research expenses of $44,000, legal and auditing services of $33,000, directors'
fees of $10,000, travel expenses of $24,000 and other expenses of $112,000.
Research and development expenditures totaled $851,000 in fiscal 1996 as
compared with $886,000 in fiscal 1995. The 1996 expenditures consisted of
payroll and fringe benefits of $593,000, outside consulting services of $184,000
and other costs of $74,000. Depreciation expense decreased $19,000 from $163,000
in fiscal 1995 to $144,000 in fiscal 1996 as some assets became fully
depreciated during the year. Management fees paid to USAT were $420,000 in both
fiscal 1996 and fiscal 1995. For a description of the services rendered under
the management agreement relating to these fees, see the section
"Subsidiaries-U.S. Drug Testing, Inc." in Item 1 to this Report. Interest
expenses on brokerage loans were $72,000 during fiscal 1996 as compared with
$42,000 during fiscal 1995 or an increase of $30,000 resulting from increased
borrowings during fiscal 1996. Other income (expense) resulted in net income of
$263,000 in fiscal 1996 as compared with net income of $31,000 in the prior year
or an increase of $232,000. Fiscal 1996 other income (expense) is comprised of a
gain of $76,000 on the sale of REMIC bonds over their earnings value at March
31, 1995, interest income primarily relating to the REMIC bonds of $105,000 and
interest income on loans to USAT of $82,000. In fiscal 1995 other income
(expense) was comprised of interest income, primarily on the REMIC bond of
$245,000, interest income from USAT of $20,000 and an unrealized loss on the
market value of the REMIC bonds caused by generally higher interest rates.
As of March 31, 1996, U.S. Drug did not anticipate generating
revenues from product sales during fiscal 1997 and, accordingly, anticipated
that operating losses would continue for at least a 12 to 24-month period. USAT
will need to provide the funding necessary to complete the development of the
U.S. Drug products and bring them to market.
DISCONTINUED OPERATIONS
GOOD IDEAS ENTERPRISES, INC. (TOY)
Net sales for fiscal 1996 were $1,508,000, a decrease of
$3,098,000 or 67.3% from the net sales in the prior year. Of this decrease,
$1,994,000 or 64.4% was attributable to Toys R Us, the major customer of Good
Ideas, not placing orders for Good Ideas' toy products. The customer attributed
its reduction in orders to its large inventories and declining sales and
customer traffic. Management believes that other manufacturers in the toy
industry are currently facing these same problems - their distributors or
retailers to which they sell have large inventories of products and declining
sales and customer traffic. In addition, management believes that many retailers
are minimizing their number of vendors and reducing the number of items carried
in inventory which has the result of squeezing out the smaller companies with
their limited product lines.
26
<PAGE> 27
Gross profit for fiscal 1996 was $163,000 or 10.8% of net
sales as compared with $1,324,000 or 28.7% of net sales for the prior year. The
decrease in gross profit as a percentage of net sales was primarily due to a
writeoff of inventory in the amount of $192,000.
Selling, general and administrative expenses for fiscal 1996
decreased to $1,279,000 from $1,924,000 for the comparable period in fiscal
1995, which decrease was attributable to reductions in payroll and related costs
during fiscal 1996.
Management fees paid to USAT were $225,000 for fiscal 1996,
representing a decrease of $80,000 from the $305,000 of fees paid for fiscal
1995. The decrease resulted from USAT's suspension of the management fee
retroactive to January 1, 1996.
Good Ideas recognized interest income of $158,000 from its
loans to related parties during fiscal 1996, as compared with $68,000 in the
prior year due to increased loan balances. Good Ideas also recognized interest
income from money market investments of $3,500 and $44,000 during fiscal 1996
and fiscal 1995, respectively.
The net loss for Good Ideas was $1,566,000 for fiscal 1996,
representing an increase of $768,000 from the net loss of $798,000 reported for
fiscal 1995. The increase in the net loss was due to the decreases in sales and
gross profit offset by the decreases in selling, general and administrative
expenses and management fees, all as described in the preceding paragraphs. The
net loss for the current year was also increased by the writedown of assets in
the amount of $258,000 and the projected costs through sale or liquidation in
the amount of $110,000.
Unless Good Ideas were to add new products to its line, as to
which there can be no assurance, and there were a stronger demand for toy
products in the industry generally, management does not believe that a
turnaround in Good Ideas' operations would occur during the next 12 months, if
not at a later date. Although management of Good Ideas had in the past
considered plans to expand the product line, it was reluctant to implement these
plans absent a change in the industry conditions described above. On February
26, 1996, the USAT Board determined to sell or liquidate Good Ideas, a
conclusion concurred with by the Good Ideas Board. As a result of the above
decision, the assets of Good Ideas are included in the consolidated balance
sheet at management's estimate of liquidation value and the results of
operations of Good Ideas are presented on a discontinued basis.
U.S. RUBBER RECYCLING, INC. (RECYCLED RUBBER PRODUCTS)
Net sales of USRR for fiscal 1996 were $892,000, a decrease of
$1,244,000 or 58.2% as compared with sales of $2,136,000 in the prior year. This
decrease was attributable to the continuing effects of the cancellation of an
agreement with a distributor (Matworks, Inc.) by USRR in October 1994 because of
significant breaches of the contract by the distributor relating to its use of
competitors' flooring products in violation of a contractual requirement to use
only USRR's products. USAT does not intend to institute any legal action against
the distributor because USRR does not want to incur the protracted legal
expenses involved in litigation.
Gross margin for fiscal 1996 was $419,000 or 47.0% of net
sales, up from a gross margin of 41.8% of net sales for fiscal 1995. The
increase in gross margin was attributable to an increase in the selling price of
USRR's product to its customers. This offset an inventory write off of floor
tiles which became non-repairable during the six months ended September 30,
1995. Floor tiles not meeting quality control standards are segregated in the
inventory for future repairs to correct the flaws and those not repairable are
discarded. During fiscal 1995, USRR worked a double shift to meet the production
demand created by the agreement with the distributor. Inexperienced labor
resulted in an increase in tiles not initially suitable for shipments.
Selling, general and administrative expenses were $605,000 for
fiscal 1996, representing a decrease of $214,000 from such expenses in fiscal
1995. Of this amount, $162,000 represented a decrease in commissions and freight
related to the decline in sales revenue.
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<PAGE> 28
Management fees paid to USAT were $89,000 for fiscal 1996,
representing a decrease of $124,000 from such fees in the prior year.
Depreciation expense was $99,000 for fiscal 1996, representing
an increase of $40,000 over such expense in the comparable prior year, which
increase was attributable to the commencement of depreciation on additional
manufacturing equipment built in contemplation of potential expansion.
Interest expense was $123,000 for fiscal 1996 as compared with
a $112,000 expense in the comparable period in 1995 as a result of borrowings
from affiliates.
The operating loss of $492,000 for fiscal 1996 represented a
decrease of approximately $131,000 from an operating loss of $623,000 for fiscal
1995. The decrease was primarily attributable to the increased percentage of
gross margin and the decrease in selling, general and administrative expenses
incurred during fiscal 1996.
The USAT Board, on February 26, 1996, concluded that the
Company should concentrate on alcohol and drug testing and ProActive's human
resource provider operations as its core businesses and, accordingly, authorized
seeking a purchaser for USRR. A sale of substantially all of the assets of USRR
was consummated on April 30, 1996. The net loss for fiscal 1996 included a
$88,000 loss on disposal of USRR's assets.
FISCAL 1995 VS. FISCAL 1994
Revenues from continuing operations for fiscal 1995 were
$1,695,000, an increase of $1,252,000 or 282.6% over the revenues of $443,000
reported for fiscal 1994. This sales increase was attributable to sales of
USAT's Alco Analyzer 2100.
Cost of sales for fiscal 1995 was 82.4% of revenues as
compared to 88.1% of revenues for the prior year. This increase was attributable
to the higher than projected costs involved in building the initial alcohol
testing machines that were sold in fiscal 1995.
Selling, general and administrative expenses were $5,284,000
for fiscal 1995, representing an increase of $1,524,000 over the $3,760,000 in
such expenses reported for fiscal 1994. The Company incurred $1,230,000 of
development marketing and training costs in connection with the alcohol testing
machine during fiscal 1995.
Research and development expenses were $1,249,000 for fiscal
1995, representing an increase of $301,000 over the expenses reported for fiscal
1994. Of the total expenditures in fiscal 1995, $886,000 represented research
and development by U.S. Drug in connection with technology licensed to USAT from
the USN for drugs of abuse, representing an increase of $158,000 over the fiscal
1994 expenditures. The Company incurred research and development expenditures of
$363,000 during fiscal 1995 in connection with the development of its alcohol
testing machine, representing an increase of $143,000 over the expenditures for
fiscal 1994.
Depreciation and amortization was $695,000 for fiscal 1995,
representing an increase of $314,000 over the $381,000 in depreciation and
amortization reported for fiscal 1994, primarily attributable to depreciation of
the alcohol testing machines.
Losses from settlement of class action and other litigation
were $4,650,000 for fiscal 1994. The Company incurred no similar costs during
fiscal 1995.
Operating losses of $6,977,000 for fiscal 1995 decreased by
$2,710,000 from the losses of $9,687,000 reported for fiscal 1994, primarily
attributable to the litigation losses of $4,650,000 incurred for fiscal 1994.
Other income (expense) for fiscal 1995 and 1994 included
charges for unrealized losses on marketable securities of $598,000 and $388,000,
respectively. A primary cause of these charges was the decline in the market
value of the Company's investments in REMIC bonds issued by the Federal Home
Loan Mortgage Corporation and the Federal National Mortgage Association. The
Company originally invested in the REMIC bonds on the advice of a registered
broker-dealer which recommended these bonds as an investment with high interest
28
<PAGE> 29
rates and low market risk. The Company, through inexperience in dealing with
this type of investment, did not enter into any hedging transactions to mitigate
these losses and held the bonds in anticipation of increases in their market
value. Upon such increases in market value, the Company sold the bonds,
partially recovering its previously recorded unrealized losses. Since December
1993, no additional investments of this type have been made and none are
contemplated in the future. Interest income was $250,000 for fiscal 1995,
representing an increase of $156,000 over the $94,000 in interest income
reported for fiscal 1994, which increase was attributable to an increase in
interest earned for fiscal 1995 by U.S. Drug of $159,000 by virtue of having the
excess proceeds from its initial public offerings, completed during fiscal 1994,
invested for a full twelve months.
U.S. DRUG TESTING, INC. (SUBSTANCE ABUSE TESTING)
During fiscal 1995, U.S. Drug, a development stage enterprise
with no revenues, spent $886,000 on research and development as compared with
$728,000 in such expenses in the prior year. During fiscal 1995, U.S. Drug also
spent $850,000 on selling, general and administrative expenses as compared with
$604,000 in the prior year.
U.S. Drug paid management fees to USAT of $420,000 in both
fiscal 1995 and fiscal 1994. During fiscal 1995, the loss from operations of
$2,363,000 also reflected interest expense of $44,000 and depreciation and
amortization of $163,000. During fiscal 1994, the loss from operations of
$1,876,000 also reflected interest and depreciation of $124,000.
U.S. Drug's operating loss was $2,363,000 in fiscal 1995 as
compared to an operating loss of $1,876,000 in fiscal 1994. These operating
losses were attributable to the fact that U.S. Drug was expending funds for
research and development and selling, general and administrative expenses as
indicated in the second preceding paragraph, as well as incurring a management
fee to USAT and the other expenses as described in the preceding paragraph,
while not realizing any revenues.
DISCONTINUED OPERATIONS
GOOD IDEAS ENTERPRISES, INC. (TOY)
Net sales of Good Ideas for fiscal 1995 were $4,606,000, a
decrease of $938,000 or 16.9% from the sales in the prior year. Net sales from
Good Ideas' wooden construction toy category for fiscal 1995 were $2,841,000, a
decrease of $733,000 or 20.5% from the sales in fiscal 1994, which decrease was
attributable to a decline in this category sales by Toys R Us, Good Ideas' major
customer, resulting in a reduction of orders placed by such customer. The
customer attributed its reduction in orders to its large inventories and
declining sales and customer traffic. At March 31, 1995, management believed
that other manufacturers in the toy industry were facing these same problems -
their distributors or retailers to which they sold had large inventories of
products and declining sales and customer traffic.
Gross profit for fiscal 1995 was $1,324,000 or 28.7% of net
sales as compared to $1,487,000 or 26.8% of net sales for fiscal 1994. The
increase in gross profit as a percentage of net sales was primarily due to Good
Ideas' effort to increase its gross margins on product sold by either raising
selling prices or adjusting the quantity of parts in its playsets.
Selling, general and administrative expenses for fiscal 1995
increased to $1,924,000 or 41.8% of net sales from $1,487,000 or 27.6% of net
sales for fiscal 1994. This increase was the result of two factors. First, the
fixed overhead was spread over a decreased sales volume. Second, Good Ideas
experienced increased legal and other public company expenses of $127,000,
increased payroll costs of $86,000 resulting from additional employees hired and
increased travel and promotion expenses in the amount of $97,000 resulting from
Good Ideas' efforts to expand its business base.
Pursuant to the Good Ideas Management Agreement, USAT's fees
for management and administrative services provided to Good Ideas during fiscal
1995 were $305,000, representing a decrease of $120,000 from the fees in fiscal
1994. This decrease was the result of two
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<PAGE> 30
factors. First, during fiscal 1994, USAT's fees were computed at ten percent of
net sales through September 30, 1993, while such fees were computed based on a
flat monthly charge of $25,000 on the first $5,000,000 of net sales during
fiscal 1995. Second, the decline in net sales volume for fiscal 1995 kept the
management fee from becoming subject to a five percent surcharge on all sales
over $5,000,000.
Good Ideas had a loss from operations of $905,000 in fiscal
1995 as compared with a loss from operations of $426,000 in fiscal 1994, an
increase of $479,000 or 112.4%. The increase in operating loss was due to the
decrease in sales and the increase in selling, general and administrative
expenses, offset by the decrease in the management fee, as described in the
preceding paragraphs.
U.S. RUBBER RECYCLING, INC. (RECYCLED RUBBER PRODUCTS)
USRR's net sales of $2,136,000 for fiscal 1995 increased by
$941,000 or 78.7% over the net sales of $1,195,000 in fiscal 1994, which
increase was attributable to a new agreement with a distributor for product
placed in a major retailer. The agreement was canceled by USRR in October 1994
because of significant breaches of the contract by the distributor relating to
its use of competitors' flooring products in violation of a contractual
requirement to use only USRR's products. USRR does not intend to institute any
legal action against the distributor because USRR does not want to incur the
protracted legal expenses involved in litigation.
Gross margin for fiscal 1995 was $581,000 or 27.2% of net
sales, a decrease from $460,000 or 38.5% of net sales for fiscal 1994. The
decrease in gross margin was attributable to manufacturing inefficiencies,
resulting from running a double shift which was necessitated by the increase in
product demand arising from the agreement with the distributor (Matworks, Inc.).
As a result of the double shift, an increase in the number of tires was required
to supply the second shift, resulting in additional costs to USRR to purchase
tires to maintain an adequate inventory, to remove waste from the increased
volume of tires processed and an increase in the number of irregular tiles
produced causing additional repair labor cost because of the training required
for the new labor force to staff the second shift.
Selling, general and administrative expenses were $819,000 for
fiscal 1995, representing an increase of $151,000 over the $668,000 of expenses
for fiscal 1994. Of this amount, $131,000 represented additional payroll and
consulting fees resulting from an expansion of the business.
Management fees paid to USAT were $213,000 for fiscal 1995,
representing an increase of $94,000 over the $119,000 reported for fiscal 1994,
which increase was related to the increase in sales.
Depreciation expense was $59,000 for fiscal 1995, representing
an increase of $18,000 over such expense in the fiscal 1994, which increase was
attributable to the commencement of depreciation on additional manufacturing
equipment built in contemplation of potential expansion.
Interest expense was $2,000 for fiscal 1995 as compared with
no such expense in fiscal 1994.
The operating loss of $511,000 for fiscal 1995 increased by
$143,000 or 38.9% over the operating loss of $368,000 in fiscal 1994. The
increase was attributable primarily to payroll and related costs incurred
because of USRR's anticipation of opening a second manufacturing location.
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<PAGE> 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 of this Report for an index to the Financial Statements and
Supplementary Data.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
On November 3, 1995, USAT named Ernst & Young LLP ("E&Y") as
USAT's new independent auditors for fiscal 1996 instead of Wolinetz, Gottlieb &
Lafazan, P.C. ("Wolinetz"), which firm had served as USAT's independent auditors
since USAT's inception.
The reports of Wolinetz on the financial statements of the
Company for fiscal 1994 and fiscal 1995 did not contain an adverse opinion or a
disclaimer of opinion, nor was either report qualified as to uncertainty, audit
scope or accounting principles. There had been no disagreements between USAT and
Wolinetz in fiscal 1994 and fiscal 1995 and any subsequent interim period
preceding the engagement of E&Y as the principal auditors on any matter of
accounting principles or practice, financial statement disclosure, auditing
scope or procedures.
Wolinetz has filed a letter to the Commission stating that it
agreed with the above statements.
USAT did not consult E&Y, prior to its engagement, regarding
the application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
USAT's financial statements, nor was a written report or oral advice provided to
USAT that E&Y concluded was an important factor considered by USAT in reaching a
decision as to an accounting, auditing or financial reporting issue.
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<PAGE> 32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table contains information concerning the current
directors and executive officers of USAT as of May 31, 1996:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Robert Stutman 53 Chairman, Chief Executive Officer and a Director
Linda H. Masterson 45 President and Chief Operating Officer and a
Director
Gary S. Wolff 58 Treasurer, Chief Financial Officer and Chief
Accounting Officer
Alan I. Goldman 58 Director
John C. Lawn 60 Director
Peter M. Mark 50 Director
Lee S. Rosen 41 Director
</TABLE>
A director will be generally elected for a classified term of three
years or until his or her successor is elected and shall have qualified, which
classification of directors was initiated at the Annual Meeting of Stockholders
held on February 7, 1996. Each of the above directors other than Mr. Stutman
(who was first elected on April 18, 1996) was first elected as a director on
September 26, 1995 and was re-elected at the Annual Meeting of Stockholders held
on February 7, 1996, with Messrs. Goldman and Mark to serve for a two-year term
and Messrs. Lawn and Rosen and Ms. Masterson to serve for a three-year term. Mr.
Stutman will serve until the next Annual Meeting of Stockholders, at which time
he will have to be designated to a class as a precondition to be nominated for
reelection. At the Annual Meeting of Stockholders on February 7, 1996, James C.
Witham and Karen B. Laustsen were each elected for a one-year term, but resigned
on April 18, 1996. Each officer of USAT is elected by the Board of Directors to
serve at the discretion of the directors. Mr. Wolff has an employment agreement
which expires December 31, 1996 (see the section "Employment Agreements" under
this caption). There can be no assurance that this agreement will be renewed.
BUSINESS HISTORY
ROBERT STUTMAN was elected Chairman of the Board and a director of USAT
on April 18, 1996 and designated as its Chief Executive Officer. For more than
five years prior thereto, he has been serving as the President of RSA, a
provider of corporate "Drug-Free Workplace" programs. Prior to forming RSA, he
was Special Agent in charge of the New York office of the Drug Enforcement
Administration (the "DEA"). He also currently serves as a special consultant in
substance abuse for the CBS News Division. USAT acquired RSA on May 21, 1996
(See the section "Subsidiaries -- ProActive Synergies, Inc./Robert Stutman &
Associates, Inc." in Item 1 to this Report.
LINDA H. MASTERSON has had substantial experience in marketing, sales
and business development in the medical diagnostics, healthcare and
biotechnology fields. Effective May 13, 1996, she became the President and Chief
Operating Officer of USAT. Until such date, she was employed as the Executive
Vice President of Cholestech, Inc., a start-up diagnostic company, for which she
developed and restructured the company business strategy. In 1994, Ms. Masterson
founded Masterson & Associates, a company of which she is the President and
owner, engaged in the business of providing advice to start-up companies
including the preparation of technology and market assessments and the
preparation of strategic and five-
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year business plans for biotech, medical device, pharmaceutical and software
applications companies. From 1992 to 1993, Ms. Masterson was employed as the
Vice President of Marketing and Sales of BioStar, Inc., a start-up biotech
company focused on the commercialization of a new detection technology
applicable to both immunoassay and hybridization based systems. From 1989 to
1992, she was employed as Senior Vice President of Marketing, Sales and Business
Development by Gen-Probe, Inc., a specialized genetic probe biotechnology
company focused on infectious diseases, cancer and therapeutics. Prior to 1989,
Ms. Masterson was employed for 12 years in various domestic and international
marketing and sales positions at Johnson & Johnson, Inc., Baxter International
Inc. and Warner Lambert Co. Ms. Masterson has a BS in Medical Technology from
the University of Rhode Island, a MS in Microbiology/Biochemistry from the
University of Maryland and attended the Executive Advanced Management Program at
the Wharton School of Business at the University of Pennsylvania.
GARY S. WOLFF was USAT's controller and a director from its inception
through December 1988. He became USAT's Chief Financial Officer, Chief
Accounting Officer and a director in September 1990 and became its Treasurer in
March 1991. He has been a director, Chief Financial Officer and Chief Accounting
Officer of U.S. Drug since October 1992 and a director, Treasurer, Chief
Financial Officer and Chief Accounting Officer of Good Ideas since June 1992. He
resigned as a director of USAT on September 26, 1995. He is licensed as a
Certified Public Accountant in the States of New York and New Jersey and
maintains an office in New Jersey as a self-employed sole practitioner. He
devotes about 75% of his time to the affairs of the Company.
ALAN I. GOLDMAN has had over 35 years of experience in corporate
finance, investment banking, commercial banking and central banking. From
February 1985 to the present, Alan I. Goldman has been engaged in investment
banking and consulting on financial and management matters, specializing in
mergers and acquisitions, private placements and business and organization
consulting. From October 1986 to July 1990, he was a consultant to Goldmark
Partners Ltd., an investment banking firm specializing in mergers and
acquisitions. From June 1987 to March 1988, he was also the President of
Goldmark Capital, Ltd., a private investment firm. From May 1975 to January
1985, Mr. Goldman held the position of Senior Vice President, Finance and Chief
Financial Officer of Management Assistance Inc. ("MAI"), then a $450 million
multinational computer manufacturing, marketing and maintenance company listed
on the New York Stock Exchange. In January 1985, MAI discontinued its operations
when it sold its Sorbus Service Division to a subsidiary of Bell Atlantic
Corporation and its Basic Four Computer Division to a corporation now called MAI
Systems, Inc. From June 1970 to May 1974, he was Vice President, Finance,
Treasurer and Chief Financial Officer of Interway Corporation, then a New York
Stock Exchange-listed, $200 million international company engaged in piggy-back
trailer and containing leasing and fleet management and now a part of
Transamerica Corporation. From 1969 to 1970, he was at Lehman Brothers where he
participated in investment banking and corporate finance activities; from 1962
to 1969, he was at Bankers Trust Company, where he managed several offices; and
from 1958 to 1962, he served in various positions at the Federal Reserve Bank of
New York. Mr. Goldman currently serves as a director of Productivity Technologic
Corporation, a public company in the production systems business.
From December 8, 1994 to date, JOHN C. LAWN has been serving as the
Chairman and Chief Executive Officer of The Century Council ("Century"), which
is a national not-for-profit organization dedicated to fighting alcohol abuse
which is supported by more than 800 concerned brewers, vintners, distillers and
wholesalers. From 1990 to 1994, Mr. Lawn served as Vice President and Chief of
Operations of the New York Yankees. From 1985 to 1990 he served as Chief
Administrator at the DEA, having previously served as Deputy Administrator from
1982 to 1985, and was awarded the President's Medal, the highest honor for
civilian service. Prior to joining the DEA, Mr. Lawn served with the Federal
Bureau of Investigation from 1967 to 1982.
In December 1994 PETER M. MARK formed Mark Energy Capital Group, Ltd.
("MECG"), a private investment group for which through a wholly-owned
corporation he served as the General Partner from December 1994 to the present.
The primary interest of MECG is to acquire proven producing oil and gas
properties in the United States. In April 1981, he formed Mark Resources
Corporation, a private oil and gas company whose operations were primarily
located in the Appalachian Basin, and served as its President, its Chief
Executive Officer and a
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<PAGE> 34
director from April 1981 until December 1993 when it was sold to Lomak
Petroleum, Inc. ("Lomak"). Mr. Mark then served as a director and the Vice
Chairman of Lomak until December 1994 when he formed MECG. Between 1976 and
1991, Mr. Mark organized and managed 30 limited partnerships and numerous joint
ventures which explored and developed approximately 700 wells for oil and gas.
LEE S. ROSEN has been a financial consultant with registered
broker-dealer firms for the past six and a half years. He is currently employed
by Donald & Co. Securities Inc., which firm he joined in July 1995. From April
1994 until June 1995, he was employed by Kidder Peabody & Co., Incorporated
("Kidder") or, after Kidder was acquired by PaineWebber Incorporated
("PaineWebber") in January 1995, by PaineWebber. Prior to working for Kidder,
from April 1993 until April 1994, Mr. Rosen was employed by Shearson, Lehman,
Hutton & Co., Inc. ("Shearson") or, after Shearson was acquired by Smith Barney,
Inc. ("Smith Barney") in September 1993, by Smith Barney. From September 1991
until April 1993, he was employed by Raymond James & Associates, Inc. From
February 1989 until September 1991, Mr. Rosen worked for A.G. Edwards, Co., Inc.
FAMILY RELATIONSHIPS
There are no family relationships among the directors and executive
officers of USAT.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based only upon a review of Forms 3, 4 and 5 filed under Section 16(a)
of the Exchange Act, USAT is aware of the following: Alan I. Goldman, John C.
Lawn, Peter M. Mark, Linda H. Masterson, Lee S. Rosen and Robert Stutman, all of
whom are directors of USAT and Ms. Masterson and Mr. Stutman are currently also
executive officers of USAT, each failed to file reports on a timely basis as
required by Section 16(a) of the Exchange Act during fiscal 1996. Each of these
individuals is in the process of, or has already completed, filing the requisite
Forms. Additionally, USAT has instituted procedures to ensure that all filings
are made on a timely basis in the future. For fiscal 1996, Mr. Goldman filed one
late report and one transaction was not reported on a timely basis. For fiscal
1996, Mr. Lawn filed one late report and one transaction was not reported on a
timely basis. For fiscal 1996, Mr. Mark filed three late reports and six
transactions were not reported on a timely basis. For fiscal 1996, Ms. Masterson
filed one late report and one transaction was not reported on a timely basis.
For fiscal 1996, Mr. Rosen filed one late report and four transactions were not
reported on a timely basis. For fiscal 1996, Mr. Stutman filed one late report
and three transactions were not reported on a timely basis.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the cash compensation and certain other
components of the compensation of James C. Witham, the Chairman, President and
Chief Executive Officer of USAT until April 18, 1996, and the only two other
executive officers of USAT who received compensation in excess of $100,000 in
fiscal 1996:
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
--------------------------------- ----------------------
Other All
Name and Annual Securities Other
Principal Compen- Underlying Compen-
Position Year Salary Bonus sation Options sation
--------- ---- ------ ----- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
James C. Witham (1) 1996 $412,500(2) $50,000 -- -- --
Chairman, President and 1995 $301,154 $50,000 -- 180,000(3) --
Chief Executive Officer 1994 $244,327 $50,000 -- -- --
Gary S. Wolff (1) 1996 $203,077(2) $25,000 -- -- --
Treasurer and Chief 1995 $160,615 $25,000 -- 80,000(3) --
Financial Officer 1994 $112,769 $25,000 -- -- --
</TABLE>
34
<PAGE> 35
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
--------------------------------- ----------------------
Other All
Name and Annual Securities Other
Principal Compen- Underlying Compen-
Position Year Salary Bonus sation Options sation
--------- ---- ------ ----- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Karen B. Laustsen (1) 1996 $159,923(2) $25,000 -- 100,000(3) --
Executive Vice 1995 $120,461 $15,000 -- 100,000(3) --
President 1994 $89,396 $25,000 -- -- --
</TABLE>
(1) USAT has three-year employment agreements with these officers which
terminate on December 31, 1996 and which provide minimum aggregate
salaries for the three officers amounting to $638,000 per year plus
reimbursement for related business expenses. On April 18, 1996, James
C. Witham and Karen B. Laustsen resigned their officerships and
directorships in USAT; however, they continued to serve USAT as
employees until May 31, 1996. See the section "Employment Agreements"
under this caption."
(2) The amounts shown in the table exceed the salary amounts shown below in
the caption "Employment Agreements" as a result of March 1996
company-wide payments of several years of unused vacation accruals, of
which $95,192.25, $33,846.20 and $32,999.98 was paid to Mr. Witham, Mr.
Wolff and Ms. Laustsen, respectively.
(3) In August 1994, USAT granted non-qualified stock options expiring
August 1, 2002 (the "USAT Options") under the 1990 Restricted Stock,
Non-Qualified and Incentive Stock Option Plan (the "1990 Option Plan")
to purchase an aggregate of 450,000 shares of the USAT Common Stock as
follows: James C. Witham - 180,000 shares, Gary S. Wolff - 80,000
shares, Karen B. Laustsen - 100,000 shares, Glenn Bergenfield - 12,500
shares, William DiTuro - 12,500 shares, Michael J. Witham - 60,000
shares and George Berger - 5,000 shares. At the date of grant, all of
the foregoing optionees were directors and/or officers of USAT. All of
the USAT Options are exercisable at $2.375 per share. USAT terminated
the 1990 Option Plan subsequent to the grants. All of the options,
except for Mr. Bergenfield's which has been exercised, will expire on
the later of (a) 30 days after the effective date of a post-effective
amendment to a registration statement under the Securities Act relating
to the underlying shares of the USAT Common Stock or (b) 90 days after
(i) the optionee's employment terminated or terminates or (ii), if the
optionee is not an employee, the directorship terminated.
AGGREGATE OPTION EXERCISES IN FISCAL YEAR 1996
AND OPTION VALUES AT MARCH 31, 1996
The following table sets forth certain information concerning stock
option exercises by the three individuals named in the Cash Compensation Table
during fiscal 1996. In addition, this table includes the number of shares
covered by exercisable options as of March 31, 1996. Also reported are the
values for "in-the-money" options which represent the positive spread between
the exercise price of any such existing stock options and the closing market
price of the USAT Common Stock at March 31, 1996.
<TABLE>
===============================================================================================
Number of
Shares Value Unexercised Value of
Acquired Realized Options Unexercised In-
On March 31, The-Money Options
Name Exercise 1996 At March 31, 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James C. Witham - 0 - - 0 - 677,500 $1,197,388
- -----------------------------------------------------------------------------------------------
Gary S. Wolff - 0 - - 0 - 105,000 $ 114,688
- -----------------------------------------------------------------------------------------------
Karen B. Laustsen - 0 - - 0 - 235,000 $ 376,075
===============================================================================================
</TABLE>
35
<PAGE> 36
OTHER COMPENSATION
USAT currently has no pension plan in effect and has no stock option
plan, restricted stock plan, stock appreciation rights nor any other long-term
incentive plan under which grants or awards may be made in fiscal 1997 or
thereafter. The Board is, however considering adoption of a stock option plan
for directors, officers and key employees of the Company.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements (the "Employment
Agreements") with each of James C. Witham, Karen B. Laustsen and Gary S. Wolff
providing for a three-year term commencing January 1, 1994 and terminating
December 31, 1996. On April 18, 1996, Mr. Witham and Ms. Laustsen resigned their
directorships and officerships, but continued to serve USAT as employees until
May 31, 1996. Copies of the Employment Agreements and the employment agreement
with Michael J. Witham described in the third succeeding paragraph are filed (by
incorporation by reference) as exhibits to this Report and are incorporated
herein by this reference.
Pursuant to his Employment Agreement, Mr. Witham was employed as the
President and Chief Executive Officer of USAT at an annual base salary of
$330,000. Pursuant to her Employment Agreement, Ms. Laustsen was employed as an
Executive Vice President of USAT at an annual base salary of $132,000. Pursuant
to his Employment Agreement, Mr. Wolff is employed as the Treasurer and Chief
Financial Officer of USAT at an annual base salary of $176,000 per year. Each of
such salaries reflects a 10% increase effective July 1, 1995, which increase was
the first in 18 months. Mr. Witham and Ms. Laustsen were each required to devote
substantially all of his or her time to the business of USAT, while Mr. Wolff is
only required to devote a majority of his time.
The Employment Agreements contain standard provisions for participation
by the executive in USAT's benefit programs, whether relating to the USAT Common
Stock, bonuses or medical, life and disability insurance or otherwise. Mr.
Witham and Ms. Laustsen were each provided with a company car, which have been
returned to USAT. The Employment Agreements also provide for termination in the
event of disability for six or more consecutive months and termination "for
cause" which means conviction for embezzlement, theft or other criminal act
constituting a felony or failure to comply with the terms and conditions of the
Agreement if such breach is not cured within seven days after written notice is
given to the executive by the Board of Directors.
Michael J. Witham, who is the son of James C. Witham and who was the
Vice President of Manufacturing of USAT, had an employment agreement similar to
the Employment Agreements providing for an annual base salary of $115,500.
Effective September 26, 1995, Michael J. Witham agreed to terminate his
employment agreement in consideration of a payment to him of $50,000 and an
assignment to him of a company car. He resigned as an executive officer of USAT,
as a director of U.S. Drug and no longer serves the Company in any capacity.
Effective April 18, 1996, Robert Stutman, the President and a principal
shareholder of RSA, became the Chief Executive Officer of USAT. Mr. Stutman's
annual base salary is $225,000. He will receive a cash bonus of $100,000 if the
Company breaks even in fiscal 1997 and an additional $150,000 if the Company has
net earnings of $2,000,040 in fiscal 1997. Cash bonuses will be discretionary in
subsequent years. He will also receive a one-time cash bonus of $50,000 upon
ProActive satisfying certain performance standards. In the event that Mr.
Stutman is terminated without cause (to be defined) during the first three years
that he is employed by USAT, he shall receive severance pay in an amount equal
to the base salary that would have been paid to him after the date of
termination had Mr. Stutman not been terminated and had he been employed by USAT
for a period of three years.
Effective May 13, 1996, Linda H. Masterson, a member of USAT's Board of
Directors, was employed as the President and Chief Operating Officer of USAT.
Ms. Masterson's annual base salary is $175,000. Ms. Masterson was granted a
warrant to purchase 600,000 shares of the USAT Common Stock. If USAT adopts a
stock option plan, then the Common Stock purchase warrant will be converted to a
stock option subject to such plan. In either case, the
36
<PAGE> 37
exercise price is $3.125 per share and the option or warrant became exercisable
over a four-year period as follows: 50,000 shares upon commencement of the term
of employment, 100,000 shares at the end of the first year, 150,000 shares at
the end of the second year, 150,000 shares at the end of the third year and
150,000 shares at the end of the fourth year. The expiration dates of the stock
option will be in accordance with the terms of the stock option plan and the
expiration dates of the warrant will be four years from the respective dates on
which the warrant becomes exercisable. A discretionary cash and/or stock bonus
may be paid commencing with the fiscal year after the fiscal year in which the
Company first has positive earnings. A bonus in the form of stock options
pursuant to an employee stock option plan or warrants, if no such plan is
adopted, shall be granted in respect of fiscal 1997 as follows: 33,000 shares if
the Company breaks even in fiscal 1997 and an additional 50,000 shares if the
Company has net earnings of $2,000,040 for fiscal 1997. In the event that Ms.
Masterson is terminated without cause (as defined), she shall be paid severance
equal to her annual base salary.
No employment agreements will be executed with Mr. Stutman or Ms.
Masterson, however, written agreements have been or will be prepared evidencing
the severance provisions. A copy of the severance agreement with Mr Stutman is
filed (by incorporation by reference) as an exhibit to this Report and is
incorporated herein by this reference.
DIRECTORS' COMPENSATION
Prior to the change on September 26, 1995 in the composition of the
Board, directors of USAT who were not employees of the Company were eligible to
receive 10,000 shares of the USAT Common Stock in the current fiscal year, in
addition to be reimbursed for their travel and other expenses. On September 26,
1995, 10,000 shares of the USAT Common Stock were granted to each of Glenn
Bergenfield and William DiTuro, then directors.
On November 16, 1995, as modified on December 11, 1995, the Board
approved the following compensation arrangements for directors who are not
employees of the Company: (1) each year the director will receive a USAT Common
Stock purchase warrant to purchase 10,000 shares of the USAT Common Stock
exercisable at the closing sales price on the date of grant (USAT Common Stock
purchase warrants were granted to five directors (i.e., Alan I. Goldman, John C.
Lawn, Peter M. Mark, Linda H. Masterson and Lee S. Rosen to purchase an
aggregate of 50,000 shares at $1.9375, the closing sales price on November 16,
1995); (2) an annual payment of $10,000 and (3) a quarterly payment of $2,500
provided that the director attends at least 75% of the meetings during the year.
The Board also authorized an annual payment of $1,000 for a director serving as
the Chairman of a Board committee and $500 for serving as a member of a Board
committee. The Board approved the following compensation for all directors: the
issuance of a USAT Common Stock purchase warrant to purchase 10,000 shares of
the USAT Common Stock for each $1.00 rise over the closing sales price of the
USAT Common Stock on November 16th of each year (which would be $1.9375 for
November 16, 1995), the rise to be calculated on the basis of the average of the
closing sales prices during the 90-day period preceding the 30th day after the
date on which the results of operations for the fiscal year are announced either
through a press release or the filing of the Annual Report on Form 10-K under
Section 13 of the Exchange Act.
37
<PAGE> 38
PERFORMANCE TABLES
TOTAL SHAREHOLDER RETURNS
Dividends Reinvested
<TABLE>
<CAPTION>
ANNUAL RETURN PERCENTAGE
Years Ending
Company Name/Index Mar 92 Mar 93 Mar 94 Mar 95 Mar 96
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U S ALCOHOL TESTING 307.76 -62.07 63.64 -11.11 68.75
S&P 500 INDEX 11.04 15.23 1.47 15.57 32.10
PEER GROUP 3.07 -2.14 22.03 -0.76 80.70
</TABLE>
<TABLE>
<CAPTION>
INDEXED RETURNS
Years Ending
Base
Period
Company Name/Index Mar 91 Mar 92 Mar 93 Mar 94 Mar 95 Mar 96
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U S ALCOHOL TESTING 100 407.75 154.67 253.09 224.97 379.64
S&P 500 INDEX 100 111.04 127.95 129.84 150.05 198.22
PEER GROUP 100 103.07 100.86 123.08 122.15 220.72
</TABLE>
<TABLE>
<CAPTION>
Peer Group Companies:
- ---------------------------------------------------------------------------------
<S> <C>
ANDROS INC MEDIA LOGIC INC
IMO INDUSTRIES INC MODERN CONTROLS INC
INPUT/OUTPUT INC MTS SYSTEMS CORP
INSTRON CORP NDC AUTOMATION INC
LIBERTY TECHNOLOGIES INC RHEOMETRICS SCIENTIFIC INC
MEASUREMENT SPECIALTIES INC U S ALCOHOL TESTING
</TABLE>
Prepared by Standard & Poor's Compustat - Custom Business Unit - 6/28/96
<PAGE> 39
TOTAL SHAREHOLDER RETURNS
Dividends Reinvested
<TABLE>
<CAPTION>
Mar 91 Mar 92 Mar 93 Mar 94 Mar 95 Mar 96
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <S> <C> <C>
US ALCOHOL TESTING $100 $408 $155 $253 $225 $380
S&P 500 INDEX $100 $111 $128 $130 $150 $198
PEER GROUP $100 $103 $101 $123 $122 $221
</TABLE>
Prepared by Standard & Poor's Compustat - Custom Business Unit - 6/28/96
<PAGE> 40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information, as of May
31, 1996, with respect to (1) any person who owned beneficially more than 5% of
the USAT Common Stock; (2) each director of USAT; (3) the Chief Executive
Officer of USAT as of May 31, 1996; (4) each executive officer of USAT
(including the then Chief Executive Officer) who was paid more than $100,000 in
fiscal 1996, whether or not he or she was still an executive officer on May 31,
1996; and (5) all directors and executive officers as a group. Each beneficial
owner has advised USAT that he or she has sole voting and investment power as to
the shares of the USAT Common Stock reported in the table, except that the
Common Stock purchase warrants and stock options described in the notes below do
not have any voting power until exercised and may not be sold or otherwise
transferred except in compliance with the Securities Act.
Number of Shares
Name and Address Beneficially Owned Percentage(1)
- ---------------- ------------------ -------------
Robert Stutman (2) 971,500(3) 2.7%
c/o Robert Stutman & Associates,
Inc
450 Washington Street
Dedham, MA 02026
Linda H. Masterson (4) 610,000(5) 1.7%
10410 Trademark Street
Rancho Cucamonga, CA 91730
Gary S. Wolff (6) 249,226(7) nil
190 Sylvan Avenue
Englewood Cliffs, NJ 07632
James C. Witham (8) 1,058,500(9) 3.0%
27 La Costa Drive
Rancho Mirage, CA 92270
Karen B. Laustsen (10) 204,500(11) nil
3000 C La Paz Lane
Diamond Bar, CA 91765
Alan I. Goldman (12) 10,000(13) nil
497 Ridgewood Avenue
Glen Ridge, NJ 07028
John C. Lawn (12) 10,000(13) nil
c/o The Century Council
550 South Hope Street
Suite 1950
Los Angeles, CA 90071-2604
Peter M. Mark (12) 567,600(13) 1.6%
5531 Sugar Hill
Houston, TX 77056
Lee S. Rosen (12) 1,528,648(14) 4.2%
Donald & Co. Securities, Inc.
5200 Tower Center Circle
Boca Center, Suite 207
Boca Raton, FL 33486
38
<PAGE> 41
Number of Shares
Name and Address Beneficially Owned Percentage(1)
- ---------------- ------------------ -------------
All directors and 3,946,974(3)(5)(7) 10.4%
executive officers (13)(14)
as a group (seven
persons)
- -------------------
(1) The percentages computed in this column of the table are based upon
35,296,210 shares of the USAT Common Stock outstanding on May 31, 1996
and effect being given, where appropriate, pursuant to Rule 13d-3(d)(1)
under the Exchange Act, to shares issuable upon the exercise of USAT
Common Stock purchase warrants and stock options which are currently
exercisable or exercisable within 60 days of May 31, 1996.
(2) Mr. Stutman was elected Chairman of the Board and a director of USAT
and designated as its Chief Executive Officer on April 18, 1996.
(3) The shares reported in the table include those issuable upon the
exercise of a USAT Common Stock purchase warrant, Mr. Stutman's
ownership portion of the USAT Common Stock purchase warrant to purchase
200,000 shares of the USAT Common Stock originally issued to RSA, and
include the USAT Common Stock purchase warrant issued to him in
exchange for his ownership interest in RSA.
(4) Ms. Masterson, a director of USAT, became its President and Chief
Operating Officer effective May 13, 1996.
(5) The shares reported in the table reflect a USAT Common Stock purchase
warrant to purchase 10,000 shares of the USAT Common Stock issued to
the holder as a director of USAT and a Common Stock purchase warrant to
purchase 600,000 shares of the USAT Common Stock issued pursuant to Ms.
Masterson's terms of employment.
(6) Mr. Wolff is the Treasurer, Chief Financial Officer and Chief
Accounting Officer of USAT.
(7) The shares reported in the table include 25,000 shares issuable upon
the exercise of Common Stock purchase warrants and 80,000 shares
issuable upon the exercise of a stock option.
(8) Mr. Witham was the Chairman, the President, the Chief Executive Officer
and a director of USAT until April 18, 1996.
(9) The shares reported in the table include 180,000 shares issuable upon
the exercise of a stock option.
(10) Ms. Laustsen was an Executive Vice President and a director of USAT
until April 18, 1996.
(11) The shares reported in the table include 100,000 shares issuable upon
the exercise of a stock option.
(12) A director of USAT.
(13) The shares reported in this table include or reflect a Common Stock
purchase warrant to purchase 10,000 shares of the USAT Common stock
issued to the holder as a director of USAT who is not employed by USAT
or any subsidiary thereof.
(14) The shares reported in the table include (a) a USAT Common Stock
purchase warrant to purchase 10,000 shares of the USAT Common Stock
issued to Mr. Rosen on the same basis as those described in note (13)
to this table; (b) three other USAT Common Stock
39
<PAGE> 42
purchase warrants to purchase an aggregate of 700,000 shares of the
USAT Common Stock issued to Mr. Rosen as consideration for his
services, including those relating to a private placement, (two of
which warrants as to an aggregate of 100,000 shares of the USAT Common
Stock may be forfeited if none of the warrants issued to the purchasers
in such private placement are exercised and which may be reduced in
number of shares pro rata to such exercises); and (c) a USAT Common
Stock purchase warrant to purchase 350,000 shares of the USAT Common
Stock issued to Mr. Rosen as consideration for assisting in the
exercise of Common Stock purchase warrants. See Item 14 to this Report.
As indicated elsewhere in this Report (see Item 1), U.S. Drug and Good
Ideas are the only subsidiaries of USAT which are not wholly-owned.
The following table reports, as of May 31, 1996, the number of shares
of the U.S. Drug Common Stock beneficially owned by a director or executive
officer of USAT as of such date:
<TABLE>
<CAPTION>
Number of Shares
Name Beneficially Owned Percentage(1)
- ---- ------------------ -------------
<S> <C> <C>
Gary S. Wolff 30,000(2) nil
Peter M. Mark 15,500 nil
</TABLE>
(1) The percentages computed in this column of the table are based upon
5,221,900 shares of the U.S. Drug Common Stock outstanding on May 31,
1996 and effect being given where appropriate, pursuant to Rule
13d-3(d)(1) under the Exchange Act, to shares issuable upon the
exercise of U.S. Drug stock options and common stock purchase warrants
which are currently exercisable or exercisable within 60 days of May
31, 1996. No person named in the table owns a U.S. Drug Common Stock
purchase Warrant.
(2) The shares reported in the table reflect those issuable upon the
exercise of a stock option; however, the option is currently
exercisable or exercisable within 60 days of May 31, 1996 only as to
one fourth of the shares shown in the table. If the U.S. Drug Merger is
consummated, the holder has agreed to cancel the option.
The following table reports, as of May 31, 1996, the number of shares
of the Good Ideas Common Stock beneficially owned by a director or executive
officer of USAT as of such date:
<TABLE>
<CAPTION>
Number of Shares
Name Beneficially Owned Percentage(1)
- ---- ------------------ -------------
<S> <C> <C>
Gary S. Wolff 7,500 (2) nil
</TABLE>
- -----------------------
(1) The percentage computed in this column of the table are based upon
3,948,680 shares of the Good Ideas Common Stock outstanding on May 31,
1996 and effect being given where appropriate, pursuant to Rule
13d-3(d)(1) under the Exchange Act, to shares issuable upon the
exercise of the Good Ideas stock options which are currently
exercisable or exercisable within 60 days of May 31, 1996. The person
named in the table does not own a Good Ideas Common Stock purchase
warrant.
(2) The shares reported in the table reflect those issuable upon the
exercise of a Good Ideas stock option which is currently exercisable.
If the Good Ideas Merger is consummated, the holder has agreed to
cancel the option.
40
<PAGE> 43
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On October 12, 1995, the Board of Directors appointed Michael S.
McCord, a stockholder of USAT (as of March 31, 1996, he beneficially owned
403,808 shares of the USAT Common Stock) and a former member of the Committee,
as a consultant to USAT to serve at the discretion of the Board. For such
services he was granted on November 16, 1995 a USAT Common Stock purchase
warrant to purchase 10,000 shares of the USAT Common Stock at $1.9375, the
closing sales price on the date of grant. He is also to receive an annual
payment of $10,000 in quarterly installments of $2,500 assuming he is still
rendering services as a consultant. On May 31, 1996, Mr. McCord was elected as a
director of Good Ideas and U.S. Drug.
In February 1996, Lee S. Rosen, a director of USAT, received $100,000
and warrants to purchase 700,000 shares of the USAT Common Stock for services
performed in connection with USAT's offering of shares of the USAT Common Stock
pursuant to Regulation D under the Securities Act. During May and June 1996, Mr.
Rosen received an additional $400,000 for services rendered to USAT in
connection with the exercise of outstanding USAT Common Stock purchase warrants
(See Note 14 to the Financial Statements). The payments to Mr. Rosen have been
charged to Additional Paid-In Capital. Mr. Rosen has also received a Common
Stock purchase warrant to purchase 350,000 shares of the USAT Common Stock.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The Company's financial statements appear in a separate section of this
Report commencing on the pages referenced below:
Page
----
Report of the Independent Auditors F-1
Report of the Independent Certified Public Accountants F-2
Consolidated Balance Sheets at March 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the years ended
March 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Stockholders Equity for the
years ended March 31, 1996, 1995, and 1994 F-5
Consolidated Statements of Cash Flows for the years ended
March 31, 1996, 1995 and 1994 F-8
Notes to Consolidated Financial Statements F-10
2. Financial Statement Schedules
Financial Statement Schedules are omitted as they are not required, are
inapplicable, or the information is included in the financial statements or
notes thereto.
3. Exhibits
All of the following exhibits designated with a footnote reference are
incorporated herein by reference to a prior registration statement filed by USAT
under the Securities Act or a periodic report filed by USAT pursuant to Section
13 or 15(d) of the Exchange Act. If no footnote reference is made, the exhibit
is filed with this Report.
Number Exhibit
- ------ -------
2(a) Copy of Exchange of Stock Agreement and Plan of Reorganization dated
May 7, 1992 between Good Ideas, U.S. Alcohol & Drug Testing
International N.V. and David Brooks. (1)
41
<PAGE> 44
Number Exhibit
- ------ -------
2(b) Form of Agreement and Plan of Merger dated as of April 23, 1996 by and
among USAT, U.S. Drug Acquisition Corp. and U.S. Drug. (2)
2(c) Form of Agreement and Plan of Merger dated as of April 12, 1996 by and
among USAT, Good Ideas Acquisition Corp. and Good Ideas. (3)
3(a) Copy of Certificate of Incorporation of USAT as filed in Delaware on
April 15, 1987. (4)
3(a)(1) Copy of Amendment to the Certificate of Incorporation as filed in
Delaware on July 10, 1989. (4)
3(a)(2) Copy of Amendment to the Certificate of Incorporation as filed in
Delaware on September 25, 1989. (4)
3(a)(3) Copy of Amendment to the Certificate of Incorporation as filed in
Delaware on October 5, 1990. (4)
3(a)(4) Copy of Amendment to the Certificate of Incorporation as filed in
Delaware on December 26, 1990. (5)
3(a)(5) Copy of Amendment to the Certificate of Incorporation as filed in
Delaware on November 1, 1991. (5)
3(a)(6) Copy of Amendment to the Certificate of Incorporation as filed in
Delaware on May 20, 1992. (6)
3(b) Copy of By-Laws of USAT. (4)
4(a) Specimen of Common Stock certificate of USAT. (4)
4(b) Specimen of Class "A" Cumulative and Convertible Preferred Stock
certificate of USAT. (4)
4(c) Specimen of Class "B" Non-Voting Preferred Stock certificate of USAT.
(6)
10(a) Form of USAT's Indemnification Agreement with Officers and Directors.
(4)
10(b) Copy of Employment Agreement dated December 13, 1993 between USAT and
James C. Witham. (7)
10(c) Copy of Employment Agreement dated December 13, 1993 between USAT and
Karen B. Laustsen. (7)
10(d) Copy of Employment Agreement dated December 13, 1993 between USAT and
Gary S. Wolff. (7)
10(e) Copy of Employment Agreement dated December 13, 1993 between USAT and
Michael J. Witham. (7)
10(f) Copy of License Agreement dated January 24, 1992 by and between USN and
USAT. (Confidential Treatment Requested for Exhibit) (8)
10(f)(1) Copy of Amendment dated March 15, 1994 to License Agreement filed as
Exhibit 10(f) hereto. (2)
10(f)(2) Copy of Amendment dated June 16, 1995 to License Agreement filed as
Exhibit 10(f) hereto. (2)
10(f)(3) Copy of Letter dated May 15, 1995 from the USN to USAT. (2)
42
<PAGE> 45
Number Exhibit
- ------ -------
10(g) Copy of Assignment dated as of January 1, 1993 between USAT and U.S.
Drug of Licensing Agreement filed as Exhibit 10(f) hereto. (8)
10(g)(1) Copy of Amended Sublicense Agreement dated September 23, 1993
superseding the Assignment filed as Exhibit 10(g) hereto. (2)
10(g)(2) Copy of Approval dated September 24, 1993 by USN of Amended Sublicense
Agreement filed as Exhibit 10(i) hereto. (2)
10(h) Copy of Cooperative Research Agreement (the "CRDA Agreement") dated
April 16, 1992 by and between Naval Research Laboratory Section, United
States Department of the Navy, and USAT. (8)
10(h)(1) Copy of Assignment of CRDA Agreement dated as of January 1, 1993 by and
between U.S. Drug and USAT. (8)
10(i) Copy of Management Agreement dated April 1, 1993 by and between U.S.
Drug and USAT. (8)
10(i)(1) Copy of Amendment dated July 20, 1993 to Management Agreement filed as
Exhibit 10(k) hereto. (8)
10(j) Copy of Management Services Agreement dated December 29, 1993 by and
between Good Ideas and USAT. (1)
10(k) Copy of Equipment, Licensing, Servicing and Maintenance Agreement dated
as of December 13, 1994 by and between USAT and METPATH, Inc. (7)
10(l) Copy of Equipment, Licensing, Servicing and Maintenance Agreement dated
as of December 22, 1994 by and between USAT and National Health
Laboratories Incorporated. (7)
10(m) Copy of Lease expiring January 31, 1997 by and between Rancho Cucamonga
Business Park as landlord and USAT as tenant. (7)
10(m)(1) Copy of Lease Modification Agreement to Lease filed as Exhibit 10(m)
hereto. (6)
10(m)(2) Copy of Sub-Lease Agreement dated as of January 1, 1993 by and between
USAT as sublandlord and U.S. Drug as subtenant. (8)
10(n) Copy of Lease dated December 9, 1992 by and between Melvin E. Evans as
landlord and Good Ideas as tenant. (1)
10(o) Copy of Lease expiring June 30, 1999 by and between Rancho Cucamonga
Business Park as landlord and U.S. Rubber Recycling, Inc. ("USRR") as
tenant. (7)
10(p) Copy of Asset Purchase Agreement dated June 20, 1988 between Luckey
Laboratories, Inc. and USAT. (4)
10(p)(1) Copy of Consulting and Royalty Agreement dated June 20, 1988 between
Manley Luckey and USAT. (4)
10(p)(2) Copy of Amendment dated August 1990 to Consulting and Royalty Agreement
filed as Exhibit 10(p)(1) hereto. (4)
10(q) Copy of Investment Banking Agreement dated July 1, 1991, as revised
October 1, 1991, between Jeffrey Brooks Securities, Inc. and USAT. (4)
10(r) Copy of Asset Purchase Agreement dated November 2, 1992 by and between
Adflo International, Inc. and USAT. (9)
43
<PAGE> 46
Number Exhibit
- ------ -------
10(s) Copy of Stock Purchase Agreement dated March 30, 1995 between Alconet,
Inc., Dakotanet, L.L.C. and USAT. (10)
10(t) Copy of Asset Purchase Agreement dated April 30, 1996 by and between
USRR, USAT and Reclamation Resources, Inc. (11)
10(u) Copy of Agreement made as of December 14, 1995 by and between USAT,
ProActive Synergies, Inc., RSA and Robert Stutman. (12)
10(v) Copy of Stock Purchase Agreement dated as of May 21, 1996 by and among
USAT, Robert Stutman, Brian Stutman, Sondra DeBow, Michael Rochelle and
Kimberly Rochelle. (11)
10(v)(1) Form of Secured Promissory Note dated May 21, 1996 is Exhibit A to
Exhibit 10(v) hereto.
10(v)(2) Form of Security Agreement dated May 21, 1996 by and among USAT, Robert
Stutman and Brian Stutman is Exhibit C to Exhibit 10(v) hereto.
10(v)(3) Form of USAT Warrant expiring May 20, 1999 is Exhibit B to Exhibit
10(v) hereto.
10(v)(4) Form of Registration Rights Agreement dated as of May 21, 1996 by and
between USAT, Robert Stutman, Brian Stutman, Michael Rochelle, Kimberly
Rochelle and Sondra DeBow is Exhibit D to Exhibit 10(v) hereto.
10(w) Copy of Severance Agreement dated May 21, 1996 by and between USAT and
Robert Stutman. (11)
10(x) Copy of Severance Agreement dated May 21, 1996 by and between USAT and
Brian Stutman. (11)
10(y) Form of Warrant Agreement dated December 17, 1990 between J. Gregory &
Company Inc. and USAT. (4)
10(z) Form of Underwriter's Warrant expiring December 17, 1997 of USAT. (4)
10(aa) Form of Common Stock purchase warrant expiring October 31, 1996 of
USAT. (6)
10(bb) Form of Common Stock purchase warrant. (5)
USAT's Common Stock purchase warrants expiring August 28, 1996,
September 1, 1996, September 16, 1996, September 30, 1996, October 31,
1996, May 17, 1997, September 16, 1997, November 1, 1997, December 17,
1997, December 31, 1997, February 28, 1998, April 15, 1998, July 17,
1998, August 27, 1998, September 1, 1998, November 1, 1998, November
15, 1998, December 13, 1998, December 20, 1998, December 27, 1998,
January 2, 1999, January 31, 1999, February 26, 1999, February 28,
1999, March 31, 1999, April 14, 1999, May 12, 1999, July 17, 1999, July
19, 1999, August 11, 1999, December 31, 1999, January 29, 2000, October
19, 2000, December 31, 2000 and December 31, 2001 are substantially
identical to the form of Common Stock purchase warrant filed (by
incorporation by reference) as Exhibit 10(aa) hereto except as to the
name of the holder, the expiration date and the exercise price and,
accordingly, pursuant to Instruction 2 to Item 601 of Regulation S-K
under the Securities Act are not individually filed.
10(cc) Copy of Restricted Stock, Non-Qualified Option and Incentive Stock
Option Plan of USAT. (4)
10(cc)(1) Form of Stock Option expiring August 1, 2004 issued pursuant to
Exhibit 10(cc) hereto. (5)
44
<PAGE> 47
Number Exhibit
- ------ -------
10(dd) Form of Common Stock purchase warrant expiring December 17, 1999. (13)
16 Letter dated November 16, 1995 from Wolinetz, Gottlieb & Lafazan, P.C.
to the Securities and Exchange Commission. (14)
21 Subsidiaries of USAT. (7)
- --------------------
1. Filed as an exhibit to the Registration Statement on Form S-1, File No.
33-73494, of Good Ideas and incorporated herein by this reference.
2. Filed as an exhibit to U.S. Drug's Annual Report on Form 10-K for the
fiscal year ended March 31, 1996 and incorporated herein by reference.
3. Filed as an exhibit to Good Ideas' Annual Report on Form 10-K for the
fiscal year ended March 31, 1996 and incorporated herein by reference.
4. Filed as an exhibit to USAT's Registration Statement on Form S-18, File No.
33- 29718, and incorporated herein by this reference.
5. Filed as an exhibit to USAT's Registration Statement on Form S-1, File No.
33-43337, and incorporated herein by this reference.
6. Filed as an exhibit to USAT's Registration Statement on Form S-1, File No.
33-47855, and incorporated herein by this reference.
7. Filed as an exhibit to USAT's Annual Report on Form 10-K for the fiscal
year ended March 31, 1995 and incorporated herein by this reference.
8. Filed as an exhibit to U.S. Drug's Registration Statement on Form SB-2,
File No. 33-61786, and incorporated herein by this reference.
9. Filed as an exhibit to USAT's Current Report on Form 8-K filed on November
2, 1992 and incorporated herein by this reference.
10. Filed as an exhibit to USAT's Current Report on Form 8-K dated April 12,
1995 and incorporated herein by this reference.
11. Filed as an exhibit to USAT's Current Report on Form 8-K dated May 21, 1996
and incorporated herein by this reference.
12. Filed as an exhibit to USAT's Registration Statement on Form S-8, File No.
333-2188, and incorporated herein by this reference.
13. Filed as an exhibit to USAT's Registration Statement on Form S-8, File No.
333-1920, and incorporated herein by this reference.
14. Filed as an exhibit to USAT's Current Report on Form 8-K/A filed on
November 22, 1995 and incorporated herein by this reference.
45
<PAGE> 48
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on June , 1996.
U.S. ALCOHOL TESTING OF AMERICA, INC.
(Registrant)
By:/s/ Robert Stutman
------------------------------------
Robert Stutman
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on June , 1996.
Signature Title
--------- -----
/s/ Robert Stutman Principal Executive Officer
- ---------------------------- and Director
Robert Stutman
/s/ Gary S. Wolff Principal Financial and
- ---------------------------- Accounting Officer
Gary S. Wolff
/s/ Alan I. Goldman Director
- ----------------------------
Alan I. Goldman
/s/ John C. Lawn Director
- ----------------------------
John C. Lawn
/s/ Peter M. Mark Director
- ----------------------------
Peter M. Mark
/s/ Linda H. Masterson Director
- ----------------------------
Linda H. Masterson
/s/ Lee S. Rosen Director
- ----------------------------
Lee S. Rosen
46
<PAGE> 49
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
U.S. Alcohol Testing of America
We have audited the accompanying consolidated balance sheet of U.S. Alcohol
Testing of America Inc. and subsidiaries (the "Company") as of March 31, 1996,
and the statements of operations, stockholders' equity, and cash flows for year
then ended. 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 audit. The financial statements of the Company for the
years ended March 31, 1995 and 1994, were audited by other auditors whose report
dated May 26, 1995, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1996 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company and
subsidiaries at March 31, 1996, and the consolidated results of their operations
and their cash flows for the year ended March 31, 1996, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
/s/ ERNST & YOUNG LLP
---------------------
Riverside, California
May 20, 1996
F-1
<PAGE> 50
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
U.S. Alcohol Testing of America, Inc.
Rancho Cucamonga, California
We have audited the accompanying consolidated balance sheet of
U.S. Alcohol Testing of America, Inc. and subsidiaries as of March 31, 1995, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the two years in the period ended March 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
U.S. Alcohol Testing of America, Inc. and subsidiaries as of March 31, 1995, and
the results of their operations and their cash flows for each of the two years
in the period ended March 31, 1995 in conformity with generally accepted
accounting principles.
WOLINETZ, GOTTLIEB & LAFAZAN, P.C.
/s/ WOLINETZ, GOTTLIEB & LAFAZAN, P.C.
--------------------------------------
Rockville Centre, New York
May 26, 1995
F-2
<PAGE> 51
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
---------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 1,286,520 $ 1,633,098
Trading Securities -- 3,307,543
Accounts Receivable (Net of Allowance For Bad
Debts of $187,703 at March 31, 1996 and
$125,149 at March 31, 1995) 488,776 771,107
Other Receivables 1,850 69,378
Inventories 1,041,261 2,212,566
Prepaid Expenses 265,660 242,069
------------ ------------
Total Current Assets 3,084,067 8,235,761
------------ ------------
Property and Equipment (Net of Accumulated Depreciation of
$2,060,568 at March 31, 1996 and $1,081,606 at March 31, 1995) 2,997,066 3,742,986
------------ ------------
Other Assets:
Goodwill (Net of Accumulated Amortization of $ 93,912 at March 31,
1995 and $229,216 at March 31, 1995) 797,393 2,008,592
Patents (Net of Accumulated Amortization of $2,619 at March 31,
1996 and $1,317 at March 31, 1995) 35,214 20,830
Other Non-Current Assets 38,544 89,379
------------ ------------
Total Other Assets 871,151 2,118,801
------------ ------------
Total Assets $ 6,952,284 $ 14,097,548
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 649,835 $ 1,498,322
Accrued Expenses and Taxes 708,620 472,253
Current Portion of Long-Term Debt 32,827 53,727
Brokerage Loan Payable -- 1,569,592
Preferred Stock Dividend Payable 7,202 7,202
------------ ------------
Total Current Liabilities 1,398,484 3,601,096
Long-Term Debt--Net of Current Portion 42,962 79,008
Total Liabilities 1,441,446 3,680,104
------------ ------------
Commitments and Contingencies (See Note 13)
Minority Interest 1,478,508 2,723,502
------------ ------------
Stockholders' Equity:
Preferred Stock, Class "A", $.01 Par Value; 500,000 Shares
Authorized, Issued and Outstanding 41,157 Shares at March 31,
1996 and at March 31, 1995 (Liquidation Preference of
$205,785 at March 31, 1996 and at March 31, 1995) 412 412
Preferred Stock, Class "B", $.01 Par Value; 1,500,000 Shares
Authorized, Issued and Outstanding -0- Shares at March 31, 1996
and March 31, 1995 -- --
Common Stock, $.0l Par Value; 50,000,000 Shares Authorized, Issued
and Outstanding 32,480,000 Shares at March 31, 1996 and
28,141,041 Shares at March 31, 1995 324,800 281,411
Additional Paid-In Capital 45,176,619 38,421,034
Accumulated Deficit (41,469,501) (31,008,915)
------------ ------------
Total Stockholders' Equity 4,032,330 7,693,942
------------ ------------
Total Liabilities and Stockholders' Equity $ 6,952,284 $ 14,097,548
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 52
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For The Years Ended
March 31,
--------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Continuing Operations:
Net Sales $ 1,165,661 $ 1,695,215 $ 442,728
------------ ------------ ------------
Costs and Expenses:
Cost of Sales
(Exclusive of Depreciation Shown Below) 1,208,726 1,397,034 389,830
Selling, General and Administrative Expenses
(Exclusive of Depreciation Shown Below) 5,720,592 5,284,405 3,759,858
Research and Development 1,005,832 1,248,962 947,811
Interest 81,450 46,069 1,534
Depreciation and Amortization 1,017,534 695,367 380,676
Loss from Settlement of Class Action Litigation -- -- 4,600,000
Loss From Settlement of Litigation 1,137,914 -- 50,000
------------ ------------ ------------
Total Costs and Expenses 10,172,048 8,671,837 10,129,709
------------ ------------ ------------
Loss From Operations (9,006,387) (6,976,622) (9,686,981)
------------ ------------ ------------
Other Income (Expense):
Interest Income 116,075 250,486 94,443
Loss on Sale of Marketable Securities (1,889,216) (154,707) --
Unrealized Gain (Loss) on Marketable Securities 2,190,721 (579,991) (387,746)
Loss on Write-Down of Note Receivable (177,600)
Other Losses (8,704) (14,925) (2,338)
------------ ------------ ------------
Total Other Income (Expense) 408,876 (499,137) (473,241)
------------ ------------ ------------
Loss Before Minority Interest in Net Loss (Income)
of Subsidiaries (8,597,511) (7,475,759) (10,160,222)
Minority Interest in Net Loss (Income) of
Subsidiaries, Net of Subsidiary Preferred Stock
Dividends Paid 541,466 769,632 464,083
------------ ------------ ------------
Loss from Continuing Operations (8,056,045) (6,706,127) (9,696,139)
------------ ------------ ------------
Discontinued Operations:
Loss from Operations before Minority Interest (1,545,457) (857,575) (242,451)
Minority Interest in Net Loss 467,183 327,306 (127,445)
Loss on Disposal, Net of Minority Interest of $143.671 (1,326,267) -- --
------------ ------------ ------------
Loss from Discontinued Operations (2,404,541) (530,269) (369,896)
------------ ------------ ------------
Net Loss $(10,460,586) $ (7,236,396) $(10,066,035)
============ ============
Weighted Average Common Shares Outstanding 29,834,502 25,691,674 22,027,068
============ ============ ============
Loss Applicable to Common Stock:
Net Loss $(10,460,586) $ (7,236,396) $(10,066,035)
Preferred Stock Dividend--Class "A" (28,810) (39,179) (26,358)
Preferred Stock Dividend--Class "B" -- (2,425) (13,826)
------------ ------------ ------------
Loss Applicable to Common Stock $(10,489,396) $ (7,278,000) $(10,106,219)
============ ============ ============
Loss Per Common Share:
Loss from Continuing Operations $ (.27) $ (.26) $ (.44)
Loss from Discontinued Operations (.08) (.02) (.02)
------------ ------------ ------------
Net Loss $ (.35) $ (.28) $ (.46)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 53
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
CLASS "A" CLASS "B" ADDITIONAL
PREFERRED PREFERRED COMMON PAID-IN ACCUMULATED
STOCK STOCK STOCK CAPITAL DEFICIT TOTAL
--------- --------- ------ ---------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance--April 1, 1993 $502 $ 1,358 $168,407 $ 15,019,160 $(13,706,484) $ 1,482,943
Issuance of 571,500 Shares
of Common Stock Upon
Conversion of 127,000
Shares of Class "B"
Preferred Stock -- (1,270) 5,715 (4,445) -- --
Issuance of 4,444,469
Shares of Common Stock
Upon Conversion of
Class "A" Preferred
Shares of N.V
Subsidiary--Net -- -- 44,445 3,738,544 -- 3,782,989
Issuance of 780,621
Shares of Common Stock
Upon Exercise of
Warrants--Net -- -- 7,806 1,230,174 -- 1,237,980
Dividend on Class "A"
Preferred Stock -- -- -- (26,358) -- (26,358)
Dividend on Class "B"
Preferred Stock -- -- -- (13,826) -- (13,826)
Issuance of 429,800
Shares of Common
Stock Upon Exercise
of Warrants in
Connection With a
Settlement with a
Former Consultant -- -- 4,298 1,068,202 -- 1,072,500
Issuance of 493,590
Shares of Common Stock
Upon Exercising of
Placement Agent's Option
in the N.V. Subsidiary and
Conversion to Common
Shares of the Company
in Connection With
Settlement With a
Former Consultant -- -- 4,936 572,564 -- 577,500
Additional Paid in
Capital Arising From
Investment in U.S. Drug
Testing, Inc. by
Minority Interest -- -- -- 4,756,288 -- 4,756,288
Additional Paid in
Capital Arising From
Investment in Good
Ideas Enterprises,
Inc. by Minority Interest -- -- -- 2,841,162 -- 2,841,162
Issuance of 7,077 Shares
of Common Stock in
Payment of Class "B"
Preferred Stock Dividend -- -- 70 13,756 -- 13,826
Issuance of 74,360
Shares of Common Stock
in Payment of Dividend
on Class "A" Preferred
Shares of the N.V
Subsidiary -- -- 745 194,255 -- 195,000
Issuance of 10,000 Shares
of Common Stock to
Directors For Directors' Fees -- -- 100 21,150 -- 21,250
Issuance of 400,000 Shares
of Common Stock Upon
Conversion of N.V
Subsidiary Common Stock--Net -- -- 4,000 965,156 -- 969,156
Net Loss For The Year
Ended March 31, 1994 -- -- -- -- (10,066,035) (10,066,035)
---- ------- -------- ------------ ----------- -----------
Balance--March 31, 1994 502 88 240,522 30,375,782 (23,772,519) 6,844,375
(Carried Forward)
</TABLE>
F-5
<PAGE> 54
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
CLASS "A" CLASS "B" ADDITIONAL
PREFERRED PREFERRED COMMON PAID-IN ACCUMULATED
STOCK STOCK STOCK CAPITAL DEFICIT TOTAL
--------- --------- ------ ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance--March 31, 1994 $502 $ 88 $240,522 $30,375,782 $(23,772,519) $ 6,844,375
(Brought Forward)
Issuance of 39,375 Shares
of Common Stock Upon
Conversion of 8,750
Shares of Class "B"
Preferred Stock -- (88) 394 (306) -- --
Issuance of 40,725 Shares
of Common Stock Upon
Conversion of 9,050
Shares of Class "A"
Preferred Stock (90) -- 407 (317) -- --
Issuance of 812,018
Shares of Common Stock
Upon Exercise of Warrants -- -- 8,121 1,762,397 -- 1,770,518
Dividend on Class "A"
Preferred Stock -- -- -- (39,179) -- (39,179)
Dividend on Class "B"
Preferred Stock -- -- -- (2,425) -- (2,425)
Issuance of 1,333,333
Shares of Common Stock
in Connection With
Settlement of Class
Action Litigation -- -- 13,333 2,986,667 -- 3,000,000
Additional Paid-In
Capital Arising From
Additional Investment
in Good Ideas
Enterprises, Inc. by
Minority Interest -- -- -- 165,977 -- 165,977
Issuance of 931 Shares
of Common Stock in
Payment of Class "B"
Preferred Stock Dividend -- -- 10 2,415 -- 2,425
Issuance of 30,000 Shares
of Common Stock to
Directors for
Directors' Fees -- -- 300 54,075 -- 54,375
Issuance of 782,321 Shares
of Common Stock in
Connection With
Acquisitions -- -- 7,823 1,556,819 -- 1,564,642
Issuance of 1,050,000
Shares of Common Stock
in Connection With a
Private Placement, Net
of Related Costs -- -- 10,500 1,584,343 -- 1,594,843
Expenses of Warrant Exercise -- -- -- (25,213) -- (25,213)
Other -- -- 1 (1) -- --
Net Loss For Year Ended
March 31, 1995 -- -- -- -- (7,236,396) (7,236,396)
---- ---- -------- ----------- ------------ -----------
Balance--March 31, 1995 412 0 281,411 38,421,034 (31,008,915) 7,693,942
(Carried Forward)
</TABLE>
F-6
<PAGE> 55
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
CLASS "A" CLASS "B" ADDITIONAL
PREFERRED PREFERRED COMMON PAID-IN ACCUMULATED
STOCK STOCK STOCK CAPITAL DEFICIT TOTAL
--------- --------- ------ ---------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance - March 31, 1995 $412 $ - $281,411 $38,421,034 $(31,008,915) $7,693,942
(Brought Forward)
Dividend on Class "A" - - - (28,810) - (28,810)
Preferred Stock
Additional Paid-In Capital - - - 97,674 - 97,674
Arising From Surrender of
Capital in Good Ideas
Enterprises, Inc. by Minority
Shareholder
Issuance of 2,152,469 Shares - - 21,524 3,016,981 - 3,038,505
of Common Stock in Connection
with a Private Placement to
International Investors
Issuance of 116,500 Shares 1,165 165,440 - 166,605
of Common Stock upon Exercise
of Warrants
Issuance of 20,000 Shares of - - 200 37,300 - 37,500
Common Stock to Directors for
Director's Fees
Issuance of 2,000,000 Shares - - 20,000 3,730,000 - 3,750,000
of Common Stock in Connection
with a Private Placement
Under Regulation D
Expenses of Stock Offerings
and Warrant Exercises - - (362,500) - (362,500)
Issuance of 50,000 Shares - - 500 99,500 - 100,000
of Common Stock to Consultant
for Investor Relations and
Financial Consulting Services
Net Loss For Year Ended
March 31, - - - - (10,460,586) (10,460,586)
--- --- -------- ---------- ----------- ----------
Balance - March 31, 1996 $412 $ - $324,800 $45,176,619 ($41,469,501) $4,032,330
==== === ======== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE> 56
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash Flow From Operating Activities:
Net Loss $(10,460,586) $(7,236,396) $(10,066,035)
Adjustments to Reconcile Net Loss To Net Cash Used
By Operating Activities:
Provision For Bad Debts 131,551 50,675 59,029
Depreciation and Amortization 1,311,354 799,858 447,717
Loss on Disposal of Discontinued Operations 1,326,267 -- --
Minority Interest in Net (Loss) Income of
Subsidiary, Net of Subsidiary Preferred Stock
Dividends Paid (1,008,649) (1,096,938) (336,638)
Value of Common Stock Issued to Directors For
Services 37,500 54,375 21,250
Value of Common Stock Issued to Consultant 100,000 -- --
Value of Common Stock in Subsidiary Issued
to Officer for Services 5,000
Unrealized Loss on Marketable Securities (2,190,721) 579,991 387,746
Realized Loss on Marketable Securities 1,889,216 154,707
Amortization of Bond Discount (779) (3,116) (960)
Loss on Note Receivable -- 177,600
Loss on Disposition of Property and Equipment 22,335 40,400 2,338
Changes in Operating Assets and Liabilities:
(Increase) Decrease in Accounts Receivable 150,780 711,044 (897,187)
(Increase) Decrease in Other Receivables 67,528 (34,112) 155,143
(Increase) Decrease in Inventories 552,234 (833,681) 425,816
Increase in Prepaid Expenses (23,591) (45,742) (106,836)
Increase in Other Assets (8,703)
(Increase) Decrease in Funds in Escrow-
Restricted - 1,578,671 (1,578,671)
Increase (decrease) in Accounts Payable (848,487) 135,794 482,460
Increase in Accrued Expenses and Taxes 236,367 24,492 14,504
Increase (Decrease) in Accrued Class Action
Settlement - (1,578,671) 4,578,671
------------ ----------- ------------
Net Cash Used By Operating Activities (8,711,384) (6,698,649) (6,234,053)
------------ ----------- ------------
Cash Flow From Investing Activities:
Sale of Marketable Securities 3,609,826 13,320 -
Purchase of Marketable Securities - -- (3,908,281)
Purchase of Property and Equipment (220,483) (2,555,133) (667,536)
Purchase of Patents and Related Costs - (9,633) (12,514)
Proceeds from Sales of Fixed Assets 59,438 - -
Other (21,237) 1,456 (33,408)
Dispositions of Property and Equipment - - 10,000
Repayment of Loan to Officer - - 50,000
Cash Acquired in Business Acquisitions - 593,261 -
Costs of Business Acquisitions - (5,120) -
------------ ----------- ------------
Net Cash Provided (Used) By Investing Activities 3,427,544 (1,961,849) (4,561,739)
------------ ----------- ------------
</TABLE>
F-8
<PAGE> 57
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-----------------------------
1996 1995 1994
----------- ------------ -----------
<S> <C> <C> <C>
Cash Flow From Financing Activities:
Sales and Issuances of Common and Preferred Stock 6,788,505 1,694,063 --
Proceeds of Long-Term Debt 17,843 81,151 141,511
Payments of Long-Term Debt (74,789) (93,584) (32,941)
Payments of Notes Payable - -- (26,518)
Proceeds of Brokerage Loans Payable 1,000,000 1,674,683 --
Payments of Brokerage Loans Payable (2,569,592) (105,091) --
Proceeds From Sales of Common Stock by U.S.
Drug Testing, Inc. - -- 8,609,600
Proceeds From Sale of Common Stock by Good Ideas
Enterprises, Inc. - 326,000 6,000,000
Expenses of Stock Offerings of Subsidiaries - (44,703) (2,775,792)
Proceeds From Exercising of Placement Agent's Option in Connection With
Acquisition of 21 Units in N.V. Private Placement - -- 577,500
Expenses of Stock Offering and Exercise of Warrants (362,500) (124,433) (38,157)
Payment of Dividend on Class "A" Preferred Stock (28,810) (31,977) (26,358)
Issuance of Common Stock Upon Exercise of Warrants 166,605 1,770,518 2,348,637
----------- ------------ -----------
Net Cash Provided By Financing Activities 4,937,262 5,146,627 14,777,482
----------- ------------ -----------
Increase (Decrease) in Cash and Cash Equivalents (346,578) (3,513,871) 3,981,690
Cash and Cash Equivalents--Beginning of the Year 1,633,098 5,146,969 1,165,279
----------- ------------ -----------
Cash and Cash Equivalents--End of the Year $ 1,286,520 $ 1,633,098 $ 5,146,969
=========== ============ ===========
Supplemental Disclosure of Cash Information:
Cash Paid For Interest $ 81,450 $ 50,139 $ 7,215
=========== ============ ===========
Income Taxes Paid $ - $ - $ --
=========== ============ ===========
Non-Cash Financing Activities:
Preferred Stock Dividends Accrued $ 7,202 $ 7,202 $ -
=========== ============ ===========
Issuance of Common Stock for Businesses Acquired--
Net of Cash Received $ - $ 976,501 $ -
=========== ============ ===========
Issuance of Common Stock as Payment for Preferred
"B" Dividend $ - $ 2,465 $ 13,826
=========== ============ ===========
Issuance of Common Stock as Payment of N.V.
Preferred "A" Dividend $ - $ - $ 195,000
=========== ============ ===========
Issuance of Common Stock Upon Conversion of N.V.
Preferred "A" Shares--Net $ - $ - $ 3,676,068
=========== ============ ===========
Issuance of Common Stock Upon Conversion of N.V.
Common Shares--Net $ - $ - $ 969,156
=========== ============ ===========
Issuance of Common Stock in Connection With
Settlement of Class Action Litigation $ - $ 3,000,000 $ -
=========== ============ ===========
Issuance of Common Stock Upon Conversion Of
Class "A" Preferred Stock $ - $ 407 $ -
=========== ============ ===========
Issuance of Common Stock Upon Conversion Of
Class "B" Preferred Stock $ - $ 394 $ 5,715
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-9
<PAGE> 58
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of
U.S. Alcohol Testing of America, Inc. (the "Company") and its wholly and
majority owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.
Industry Segment and Concentration of Risk
The Company, which operates in a single industry segment,
designs, manufactures, markets and services alcohol breath testing equipment,
which is either sold or placed on a cost per test basis with laboratories or
other users, and, through its ProActive Synergies Inc. ("ProActive") subsidiary
designs and administers drug testing and background checking services as a human
resources provider. Additionally, the Company's 67.0% owned subsidiary, U.S.
Drug Testing, Inc. ("U.S. Drug") (a development stage enterprise), is developing
a saliva based, on site drug testing system and, thereafter depending on the
successful completion, completing development of a urine based, on site drug
testing system. The Company performs ongoing credit evaluations of its customers
and generally does not require collateral. The Company maintains reserves for
potential credit losses, and such losses have been within management's
expectations. No customer accounted for 10% or more of net revenues in the years
ended March 31, 1996, 1995 or 1994.
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash investments and trade
receivables. The Company currently invests excess cash in short term commercial
paper with strong credit ratings and in money market accounts with commercial
banks.
The Company's operating results each quarter are subject to
various uncertainties, including uncertainties related to revenues from major
customers, actions of competitors and the risks inherent in the new product
development currently being undertaken by the Company's 67.0%-owned subsidiary,
U.S. Drug.
One of the significant risks potentially affecting the
Company's operating results is the effect of the history of operating losses on
its ability to secure additional capital resources. Management continues to
believe that the Company will have the cash resources to meet all of its
operating requirements for the next 12 months as a result of the exercise of
warrants to purchase its Common Stock, the anticipated growth of the human
resource provider portion of its business which is expected to benefit from the
acquisition of Robert Stutman & Associates, Inc. ( See Note 16-Subsequent
Events), increased sales of breath alcohol testing machines and cost per test
revenue, the discontinuance of the operations of its subsidiaries, U.S. Rubber
Recycling, Inc. ("USRR") and Good Ideas Enterprises, Inc. ("Good Ideas"), and
significant budgeted reductions in general and administrative costs.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles required 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 and Cash Equivalents
The Company considers all highly liquid cash investments with
an original maturity of three months or less when purchased to be cash
equivalents.
Trading Securities
Trading securities at March 31, 1995 consisted of
mortgage-backed debt and corporate equity securities. The Company adopted the
provisions of Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", effective
April 1, 1994. Pursuant to SFAS No. 115, the provisions of the Statement were
not applied retroactively. The change had no material cumulative effect on the
Company's financial position or results of operations. Prior to the adoption of
SFAS No. 115, equity and debt securities were carried at the lower of aggregate
cost or market and on an amortized cost basis, respectively.
Under SFAS No. 115, the Company classified all of its debt and marketable equity
securities held at March 31, 1995 as trading securities and recorded them at
fair market value. Management determines the appropriate classification of all
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. Unrealized holding gains and losses, net of the related tax
effect, are included in earnings.
F-10
<PAGE> 59
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 1 (CONTINUED)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories
Inventories are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed by both
straight-line and accelerated methods over the estimated useful lives of the
related assets. Expenditures for maintenance and repairs are charged to expense
as incurred whereas major betterments and renewals are capitalized.
The Company's property and equipment is depreciated using the following
estimated useful lives:
Life
Furniture and Fixtures 5 - 7 Years
Equipment 5 - 7 Years
Equipment--Network/Per Test 3 - 5 Years
Test Equipment 5 Years
Leasehold Improvements Life of Lease
Vehicles 5 Years
Covenants Not to Compete
Covenants not to compete are amortized using the straight-line
method over five to eight years.
Goodwill
Goodwill represents the excess of the cost of the businesses
acquired over the fair value of net identifiable assets at the date of the
acquisition and is amortized using the straight-line method over 5 to 15 years.
The Company continually monitors events and changes in
circumstances that could indicate carrying amounts of goodwill may not be
recoverable. When events or changes in circumstances are present that indicate
the carrying amount of goodwill many not be recoverable, the Company assesses
the recoverability of goodwill by determining whether the carrying value of such
goodwill will be recovered through undiscounted expected future cash flows after
interest charges associated with the business acquired. No impairment losses
were recorded by the Company in the years ended March 31, 1995 or 1994.
Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121"), which is required to be adopted by the year ending March 31, 1997.
SFAS 121 establishes the accounting standards for the impairment of long-lived
assets, certain intangible assets and cost in excess of net assets acquired to
be held and used, and for long-lived assets and certain intangible assets to be
disposed of. The Company does not expect the adaption of SFAS 121 to have a
material impact on its financial statement.
Patents
The cost of patents are amortized over their expected useful
lives (approximately 17 years) using the straight-line method.
Revenue Recognition
Sales are recorded as products are shipped. Per test revenues
are recognized in the period that such tests are performed.
Research and Development Costs
Research and development costs are expensed as incurred.
F-11
<PAGE> 60
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 1 (CONTINUED)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Income Taxes
The Company accounts for income taxes under Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". In
accordance with SFAS No. 109, deferred tax assets and liabilities are
established for the temporary differences between the financial reporting basis
and the tax basis of the Company's assets and liabilities at enacted tax rates
expected to be in effect when such amounts are realized or settled.
Common Stock Issued for Services
The Company accounts for Common Stock issued for services
other than employment by charging income in the period of grant with the market
value of the Common Stock.
Accounting for Stock Based Compensation
The Company accounts for Common Stock and warrants issued to
employees as compensation in accordance with the provisions of the Accounting
Principles Board Opinion No. 25 (APB 25) "Accounting for Stock Issued to
Employees." In 1995, the Financial Accounting Standards Board released SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 provides an
alternative to APB 25 and is effective for fiscal years beginning after December
15, 1995. The Company expects to continue to account for its grants of Common
Stock or warrants to employees in accordance with the provisions of APB 25.
Accordingly, SFAS No. 123 is not expected to have any material impact on the
Company/s financial position or results of operations.
Net Loss Per Common Shares
Loss per common share is based upon the weighted average
number of common shares outstanding during the periods reported. Common stock
equivalents have not been included in this calculation since their inclusion
would be antidilutive.
Reclassification
The Company has reclassified certain prior year balances to
conform with the current year's presentation.
NOTE 2--CASH AND CASH EQUIVALENTS
Cash and cash equivalents are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------
1996 1995
---- ----
<S> <C> <C>
Cash in Banks $ 527,969 $ 160,939
Money Market Funds 5,683 1,472,159
Commercial Paper 752,868 -
---------- ----------
$1,286,520 $1,633,098
========== ==========
</TABLE>
NOTE 3--TRADING SECURITIES
Trading securities at March 31, 1995 are summarized below. The
Company owned no trading securities at March 31, 1996.
<TABLE>
<CAPTION>
MARCH 31,
--------
1995
----
<S> <C>
Marketable Equity Securities $1,585,906
Federal Home Loan Mortgage Corporation REMIC Bonds 3,428,998
Federal National Mortgage Association REMIC Bonds 483,360
----------
5,498,264
Less: Unrealized Losses 2,190,721
----------
Trading Securities at Aggregate Market Value $3,307,543
==========
</TABLE>
At March 31, 1995, the trading securities were collateral for
the brokerage loan payable. The REMIC Bonds were sold for proceeds of $3,285,625
during July 1995 and the brokerage loan was paid off (See Note 6). The Company
recorded a gain of $76,441, net of amortization of bond discount, over the
carrying value on the March 31, 1995 Balance Sheet. The Company realized an
overall loss of $627,512 on its investment in REMIC bonds. Management will make
no further investments in any high risk trading securities.
F-12
<PAGE> 61
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 4--INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------
1996 1995
---- ----
<S> <C> <C>
Finished Goods $ 246,261 $ 538,677
Work in Process 378,162 497,583
Raw Materials 416,838 1,176,306
---------- ----------
$1,041,261 $2,212,566
========== ==========
</TABLE>
NOTE 5--PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------
1996 1995
---- ----
<S> <C> <C>
Furniture and Fixtures $ 464,010 $ 411,965
Equipment 1,254,435 1,339,602
Equipment--Network/Per Test 2,327,553 2,030,918
Test Equipment 476,765 460,978
Leasehold Improvements 410,829 397,567
Vehicles 124,042 183,562
---------- ----------
5,057,634 4,824,592
Less: Accumulated Depreciation 2,060,568 1,081,606
---------- ----------
$3,997,066 $3,742,986
========== ==========
</TABLE>
NOTE 6--BROKERAGE LOAN PAYABLE
At March 31, 1995, the brokerage loan payable consisted of
demand loans from a major national stock brokerage firm, bearing interest at
8.5% per annum and secured by certain trading securities held by the brokerage
firm. The purpose of these loans was for working capital. These loans could not
exceed 75% of the current market value of the REMIC Bonds (see Note 3). The loan
was repaid during the second quarter of the year ended March 31, 1996 from the
proceeds of the sale of the REMIC bonds.
NOTE 7-LONG-TERM DEBT
<TABLE>
<CAPTION>
March 31,
Long-term debt is summarized as follows: ---------
1996 1995
---- ----
<S> <C> <C>
Capitalized lease obligations, secured by certain equipment, payable in
various monthly installments due from July 1995 to January 1999. $75,789 $112,735
Note payable, bearing interest at 6% per annum from January 15, 1995,
payable in semi-annual payments including principal and interest of
$1,771 from July 15, 1995 and due January 15, 2002 - 20,000
------- --------
75,789 132,735
Less: Current Portion 32,827 53,727
------- --------
$42,962 $ 79,008
======= ========
</TABLE>
F-13
<PAGE> 62
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 7 (CONTINUED)--LONG-TERM DEBT
Long-term debt matures as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------
<S> <C>
1997 $ 32,827
1998 20,567
1999 14,244
2000 4,512
2001 3,639
--------
$ 75,789
</TABLE>
NOTE 8--MINORITY INTEREST
The Company's consolidated financial statements at March 31,
1995 include 100% of the assets, liabilities and losses of U.S. Drug, a
67.0%-owned publicly traded subsidiary, and 100% of the assets, liabilities and
losses of Good Ideas, a 59%-owned publicly traded subsidiary. The percentage
ownership in Good Ideas decreased by 1% during the year ended March 31, 1995 by
virtue of an additional 65,200 shares of common shares of the subsidiary sold
pursuant to the overallotment provision of its initial public offering. The
$2,723,502 minority interest reported on the balance sheet represents the
minority stockholders' interest in the equity of these subsidiaries.
At March 31, 1996, the Company's consolidated statements
reflect an increase in the minority interest in Good Ideas as a 60.8%-owned
subsidiary as a result of the surrender of 126,520 shares of common stock of
Good Ideas in connection with the resignation of Keith Parten, formerly Chief
Operating Officer, President and a director of Good Ideas, and the issuance of
10,000 shares of common stock of Good Ideas to an officer for compensation.
See Note 16 for information regarding the Company's
registration statements under the Securities Act of 1933, as amended (the
"Securities Act"), in connection with the offer to purchase the minority shares
of U.S. Drug and Good Ideas.
NOTE 9 - STOCKHOLDERS' EQUITY
Directors' Stock
In February 1994, the Company authorized the issuance of
10,000 shares of Common Stock valued at $21,250 to its directors for annual
directors' fees. In June 1994, the Company authorized the issuance of 30,000
shares of Common Stock valued at $54,375 as directors' compensation. The values
of these shares were charged to operations in the respective periods.
In September 1995, the Company authorized the issuance of
20,000 shares of Common Stock valued at $37,500 to two of its directors for
directors' fees. The value of these shares was charges to operations in the
current period.
Preferred Stock
Each share of Class "A" Preferred Stock is convertible into
4.5 shares of Common Stock and pays dividends at the rate of 14% per annum on
the liquidation preference of $5 per share (or $.70 per share). Dividends are
payable semi-annually.
Each share of Class "B" Preferred Stock is convertible into
4.5 shares of Common Stock and pays dividends at the rate of 10% per annum on
the liquidation preference of $4 per share (or $.40 per share). Dividends are
payable semi-annually in cash or Common Stock at the Company's election. All
Class "B" Preferred Stock was converted into Common Stock prior to March 31,
1995.
Registration of Warrants
A Registration Statement of the Company filed under the
Securities Act was declared effective during May 1994. The filing registered
81,250 shares of Common Stock underlying an equal amount of warrants expiring
between May 17, 1997 and September 1, 1998 and at exercise prices ranging from
$1.06 to $4.00.
During the year ended March 31, 1994, a total of 1,210,421
shares registered under the Securities Act were issued upon the exercise of
warrants for proceeds of approximately $2,348,000 before deducting expenses of
approximately $38,000.
During the year ended March 31, 1995, a total of 812,018
shares registered under the Securities Act were issued upon the exercise of
warrants for proceeds of approximately $1,770,000.
During the year ended March 31, 1996, a total of 116,500
shares registered under the Securities Act were issued upon the exercise for
proceeds of approximately $167,000.
F-14
<PAGE> 63
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 9 (CONTINUED)--STOCKHOLDERS' EQUITY
Initial Public Offering of Good Ideas
In February 1994, the initial public offering of Good Ideas
was completed and 1,200,000 shares of the common stock of Good Ideas was sold to
the public at $5 per share for gross proceeds of $6,000,000. Net proceeds to the
subsidiary amounted to approximately $4,735,000 after deducting expenses of
approximately $1,265,000. The offering represented the sale of 30% of the
outstanding stock and the Company holds a 60% interest in the subsidiary. In
connection with the offering, the underwriter was granted, for nominal
consideration, common stock purchase warrants entitling the underwriter to
purchase up to 120,000 shares of common stock of Good Ideas at $6 per share.
In April 1994, an additional 65,200 shares of common stock of
Good Ideas were sold pursuant to its initial public offering's overallotment
provision and the subsidiary grossed $326,000 before deducting expenses of
approximately $45,000.
As a result of the initial public offering and overallotment,
approximately $2,800,000 was added to the additional paid-in-capital of the
Company. After completion of the overallotment, the Company's ownership of Good
Ideas was reduced to 59%.
Initial Public Offering of U.S. Drug Testing, Inc.
U.S. Drug completed its initial public offering of 1,500,000
shares of common stock at $5 per share on October 13, 1993 and the subsequent
overallotment of 221,900 shares in November 1993. U.S. Drug realized gross
proceeds of $8,609,500 and incurred expenses of $1,501,500, yielding net
proceeds of $7,108,000. In connection with the offering, the underwriter was
granted, for nominal consideration, common stock purchase warrants entitling the
underwriter to purchase up to 150,000 shares of common stock of U.S. Drug at $6
per share.
As a result of the initial public offering and overallotment,
approximately $4,800,000 was added to the additional paid-in-capital of the
Company. After completion of the transaction, the Company holds a 67.0% interest
in the subsidiary.
Alconet and Dakotanet Acquisitions
On March 30, 1995, the Company acquired 100% of the
outstanding capital stock of Alconet, Inc., a privately held North Dakota
corporation ("Alconet"), and 100% of the net equity of Dakotanet, LLC, a
privately held North Dakota Limited Liability company ("Dakotanet"). The
transactions provided for the issuance of 782,321 shares of the Common Stock
valued at $1,565,000. In connection with the transaction certain of the shares
issued by the Company to the selling shareholders of Alconet were used as
payment of obligations of Alconet in the approximate amount of $109,000.
Concurrent with the acquisitions, the Company contributed the net assets of
Dakotanet to Alconet. The purchase price of the acquisitions exceeded the net
book value of the assets acquired, which included cash of $593,000, by $818,000
and this has been assigned to goodwill. The acquisitions have been accounted for
as a purchase.
Private Placements
In August 1995, the Company completed a private placement to
international investors, who were not related to the Company, in accordance with
the provisions of Regulation S under the Securities Act in which it sold
2,152,469 shares of its common stock and realized gross proceeds of $3,038,505.
In February 1996, the Company completed a private placement
under Regulation D under the Securities Act in which it sold 2,000,000 shares of
its common stock and realized gross proceeds of $3,750,000.
NOTE 10--INCENTIVE COMPENSATION PLAN AND OUTSTANDING COMMON STOCK PURCHASE
WARRANTS
The Company has adopted an Employees' Incentive Compensation
Plan ("the Plan"). The Plan provides for the issuance of restricted stock to
employees under certain conditions, as well as non-qualified stock options and
Incentive Stock Options.
There are reserved 450,000 shares of Common Stock for issuance
upon the exercise of non-qualified and incentive options and the grant of
restricted stock under the plan. During August 1994, stock options to purchase
all of the 450,000 shares of Common Stock reserved for issuance under the Plan
were granted to key officers and directors of the Company in recognition for
services rendered to the Company. These options are immediately exercisable at
$2.38 per share, which represented the market value at the date of grant. The
options expire after ten years.
F-15
<PAGE> 64
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 10 (CONTINUED)--INCENTIVE COMPENSATION PLAN AND OUTSTANDING COMMON STOCK
PURCHASE WARRANTS
Common shares reserved for stock options and for outstanding stock purchase
warrants are presented in the following table:
<TABLE>
<CAPTION>
Incentive Stock Options Non Qualified Options Warrant Agreements
----------------------- --------------------- ------------------
Number Price Range Number Price Range Number Price Range
of Shares Per Share of Shares Per Share of Shares Per Share
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - April 1 1993 -0- $ -0- -0- $ -0- 5,345,875 $ .44-4.00
Granted -0- -0- -0- -0- 53,250 1.81-3.00
Exercised -0- -0- -0- -0- (1,210,442) 1.33
------- ------ ---------
Outstanding - March 31, 1994 -0- -0- -0- -0- 4,188,683 1.06-4.00
Granted 420,000 2.38 30,000 2.38 869,750 1.81-2.50
Canceled -0- -0- -0- -0- (6,000) 2.19
Exercised -0- -0- -0- -0- (812,018) 1.33-3.00
------- ------ ---------
Outstanding - March 31, 1995 420,000 -0- 30,000 -0- 4,240,415 1.06-4.00
Granted -0- -0- -0- -0- 3,951,000) 1.88-4.00
Exercised -0- -0- -0- -0- (116,500) 1.06-1.87
------ ------ ------- ------ ---------- ----------
Outstanding March 31, 1996 420,000 $ 2.38 30,000 $ 2.38 8,074,915 $1.06-4.00
======= ====== ====== ====== ========= ==========
</TABLE>
During October 1995, the Company issued five-year warrants for the purchase of
100,000 shares of common stock at $2.17 to the placement agents for a private
placement pursuant to Regulation S under the Securities Act.
During November 1995, the Board of Directors authorized the issuance of
three-year warrants for the purchase of 60,000 shares of Common Stock at $1.94
to five new directors of the Company and to a consultant to the Board of
Directors.
During November 1995, the Board of Directors authorized the issuance of three
warrants to purchase an aggregate of 700,000 shares of the Common Stock to a new
director of the Company in connection with his services in a capacity other than
as a director, including those related to the private placement pursuant to
Regulation D under the Securities Act. The warrants were issued for three to
five-year periods at exercise prices ranging from $1.94 to $4.00.
During December 1995, the Board of Directors authorized the issuance of
four-year warrants to purchase 2,000,000 shares of Common Stock at $2.00 in
connection with the private placement completed pursuant to Regulation D under
the Securities Act.
During December 1995, the Board of Directors authorized the issuance of
three-year warrants for the purchase of 400,000 shares of Common Stock at $2.00
pursuant to a consulting agreement with ProActive Synergies, Inc. Pursuant to
this agreement, a Common Stock purchase warrant for 200,000 shares was issued on
December 14, 1995 to Robert Stutman and a warrant for the remaining 200,000
shares was issued to Robert Stutman & Associates, Inc. on April 1, 1996.
During January 1996, the Company issued four-year warrants for the purchase of
150,000 shares of Common Stock at $2.25 to an individual in connection with the
settlement of litigation against the Company.
During February 1996, the Board of Directors authorized the issuance of
three-year warrants for the purchase of 700,000 shares of Common Stock at $2.44
to a consultant to the Company for financial public relations services.
During the year ended March 31, 1996, the Company granted three-year warrants to
employees to acquire 41,000 shares of Common Stock at prices ranging from $1.88
to $2.81.
F-16
<PAGE> 65
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 11--SETTLEMENT OF LITIGATION
In November 1993, the Company and Jeffrey Brooks Securities,
Inc., its former investment banker, and Jeffrey Brooks individually
(collectively "Brooks") resolved a dispute which provided, in pertinent part,
that Brooks exercise an option to purchase 21 Units of securities issued by the
Company's international subsidiary ("NV") for $577,500 and thereafter convert
those shares to Common Stock at the same conversion price of $1.17. As a result,
Brooks was issued 493,590 shares of the Common Stock.
In November 1993, the Company executed a stipulation of
settlement in the securities class action litigation which was subject to Court
approval. The Company agreed to pay $1,600,000 in cash to the class and
$3,000,000 worth of its Common Stock, or a total consideration of $4,600,000 to
completely settle both class actions then pending against the Company and all
defendants. This amount was charged to operations during the year ended March
31, 1994. The Company funded the $1,600,000 cash portion through exercised
warrants and options of certain co-defendants in the class action.
On April 4, 1994, the Court approved the stipulation of
settlement entered into by the Company in November 1993. The Court chose March
31, 1994 as the valuation date for the $3,000,000 stock portion of the
settlement. Accordingly 1,333,333 shares of Common Stock were issued based upon
the $2.25 closing price at March 31, 1994. These shares have not been included
in the computation of earnings (loss) per share for the year ended March 31,
1994 because the number of shares were not determinable until the date of the
court approval. If these shares were outstanding for the entire year ended March
31, 1994, the effect on loss per share would have been to decrease the net loss
per share by $.03.
In November 1993, as part of a dispute resolution with its
former consultant, David Brooks, the Company received all of Mr. Brooks' 25%
equity interests in both NV and Good Ideas for nominal consideration. As a
result, the Company's interests became 100% of NV and 60% percent of Good Ideas.
In September 1995, the Company settled litigation relating to
a consent solicitation filed against it by a group of stockholders. Term of the
settlement included the payment of legal costs of the stockholder group. The
costs incurred by the Company and the stockholder group totaled approximately
$1,000,000 and are included in the caption "Loss from Settlement of Litigation."
In January 1996, the Company settled litigation with a former
consultant, Jonathan J. Pallin, with the payment of $175,000 cash and the
issuance of warrants to purchase 150,000 shares of the Common Stock at a price
of $2.25 per share though January 30, 2000. Warrants to purchase 200,000 shares
of the Common Stock at $2.625 were returned to the Company and canceled as part
of the settlement. The cash payment related to this settlement is included in
Additional Paid In Capital.
In March 1996, the Company settled litigation with two former
officers of Alconet. The settlement resulted in payments by the Company of
$250,000. These costs are included in the caption "Loss from Settlement of
Litigation."
NOTE 12--COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company entered into new employment agreements with four
of its senior officers which became effective January 1, 1994 and terminate on
December 31, 1996. The agreements provide for aggregate annual minimum salaries
in the amount of $638,000, as well as for reimbursement of related business
expenses incurred.
F-17
<PAGE> 66
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 12 (CONTINUED)--COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries have entered into employment
agreements with certain of its officers and employees which will terminate at
various dates through the end of December 1997. The agreements provide for
aggregate annual minimum salaries of approximately $707,000 as well as
reimbursement of related business expenses incurred.
Royalty Agreement
As part of the acquisition of certain assets of Luckey
Laboratories, Inc., during June 1988 and a covenant not to compete provision by
Manley Luckey, principal of Luckey Laboratories, Inc. the Company was obligated
to pay royalties equal to 5% of the first $1,000,000 in sales, 3% of the second
$1,000,000 in sales and 2% of sales exceeding $2,000,000, with a maximum
guaranteed annual royalty of $120,000. Guaranteed minimum royalties of $30,000
per year were payable at the rate of $2,500 per month, through June 30, 1993, as
amended. The royalty terms extend for Manley Luckey's lifetime with no minimum
guarantee after June 1993, but were limited to $120,000 per year or 3% of gross
sales, whichever is less. In anticipation of increased revenues which would
result in the payment of the maximum royalty under the existing agreement, in
September 1994, the Company renegotiated the terms of the agreement to provide
monthly payments of $5,000 for the period from September through December, 1994
and $10,000 per month from January 1, 1995. The agreement also provides for a
CPI adjustment every six months starting June 1, 1995. Had the terms of the
revised royalty agreement been in effect for the last three years, royalty
expense would have increased by $57,500 for the year ended March 31, 1995 and
$90,000 for each of the years ended March 31, 1994 and 1993. Royalties charged
to operations under this agreement amounted to $122,700,$62,500 and $30,000 for
the fiscal years ended 1996, 1995 and 1994, respectively.
Lease Commitments
The Company has entered into a lease that commenced July 1,
1991 and terminates on January 31, 1997 as amended, for new office and factory
facilities in Rancho Cucamonga, California. The lease as amended provides for
annual rental payments commencing November 1, 1991. Two of the Company's
subsidiaries maintain facilities under leases expiring over periods through June
1999. In addition to rent, the leases provide for payment of real estate taxes
and other occupancy costs.
Approximate future minimum payments under these leases are
summarized as follows:
<TABLE>
<CAPTION>
Fiscal year ending March 31:
----------------------------
<S> <C>
1997 $167,200
1998 26,800
1999 20,300
--------
$214,300
========
</TABLE>
Rent expense was approximately $293,000, $276,000, and
$283,000 for the years ended March 31, 1996, 1995 and 1994, respectively.
Although the purchaser of the discontinued USRR business has
assumed the lease of the building the business occupied, the landlord did not
release USRR from liability on the lease if the purchaser does not perform.
Material Contracts
The Company and the Department of the Navy, on January 24,
1992, entered into a ten-year agreement granting the Company a partial exclusive
patent license to products for drug testing in the United States and certain
foreign countries. In June 1995, USAT's License Agreement with the Department of
Navy was renegotiated and amended to provide for minimum royalties of $100,000
per year commencing October 1, 1995 and terminating September 30, 2005.
Additional royalties will be paid pursuant to a schedule based upon sales of
products. U.S. Drug is a sub-licensee under this agreement from USAT and,
accordingly, has an obligation to USAT for the royalty payments required by the
License Agreement. Royalties paid under the License Agreement by the Company
amounted to $50,000 for the year ended March 31, 1996, $375,000 for the year
ended March 31, 1995 and $228,750 for the year ended March 31, 1994.
F-18
<PAGE> 67
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 12 (CONTINUED)--COMMITMENTS AND CONTINGENCIES
Network/Per Test Equipment Agreements
In December 1994, the Company entered into Equipment,
Licensing, Service and Maintenance Agreements with two national laboratories
("the Customers") for three and five- year terms, respectively. Under the terms
of these agreements, the Company delivered its Alco Analyzer 2100 Unit, together
with related software and equipment, to various testing sites of the Customers,
as outlined in the agreements. The Company granted to the Customers a
nonexclusive, nontransferable license to use the equipment as specified in the
agreements. In addition, the Company shall provide to the Customers technical
services, disposable supplies and maintenance as specified in the agreements.
The Company will be compensated under the terms of the agreements by receiving a
fee for each test performed on its equipment.
NOTE 13--INCOME TAXES
The Company and its subsidiaries file their corporation income
tax returns on an unconsolidated basis and have net operating loss carryforwards
at March 31, 1996 of approximately $35,600,000, expiring from March 31, 2004 to
March 31, 2011 if not offset against future federal taxable income.
Pursuant to Section 382 of the Internal Revenue Code, due to
changes in the ownership of the Company and its subsidiaries, the utilization of
these loss carryforwards may be subject to an annual limitation.
Income tax benefit attributable to net loss differed from the
amounts computed by applying the statutory Federal Income tax rate applicable
for each period as a result of the following:
<TABLE>
<CAPTION>
MARCH 31,
---------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Computed "Expected" Tax Benefit $ 2,550,000 $ 4,080,000 $ 1,906,000
Decrease in Tax Benefit Resulting from:
Net Operating Loss For Which no Benefit is Currently
Available ( 2,550,000) (4,080,000) (1,906,000)
----------- ----------- -----------
$ - $ - $ -
=========== ============ ===========
</TABLE>
The tax effects of temporary differences that give rise to
significant portions of the net deferred tax asset are presented below:
<TABLE>
<CAPTION>
MARCH 31,
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Net Operating Loss Carryforwards $12,800,000 $9,520,000
Allowances for Unrealized Losses on Marketable Securities - 745,000
----------- ----------
12,800,000 10,265,000
Less:
Valuation Allowance Under SFAS 109 12,800,000 10,265,000
----------- ----------
Net Deferred Tax Assets $ -- $ --
=========== ==========
</TABLE>
NOTE 14 RELATED TRANSACTIONS
In February 1996, Lee S. Rosen, a director of the Company,
received $100,000 and warrants to purchase 700,000 shares of Common Stock for
services performed in connection with the Company's offering of Common Stock
pursuant to Regulation D under the Securities Act. Subsequent to year end,
during May and June 1996, Mr. Rosen received an additional $400,000 for services
rendered to the Company in connection with the exercise of Common Stock purchase
warrants (See Note 16 to the Financial Statements). The payments to Mr. Rosen
have been charged to Additional Paid-In Capital.
F-19
<PAGE> 68
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 15 DISCONTINUED OPERATIONS
On February 26, 1996, the Board of Directors approved a
strategic decision to focus on the Company's core alcohol, drug and human
resource provider businesses and to dispose of its non core rubber recycling and
toy operations, namely USRR and Good Ideas. These business units are accounted
for as discontinued operations and, accordingly, their operations are segregated
in the accompanying income statements. Sales, operating costs and expenses,
other income and expense and applicable minority share of losses for the years
March 31, 1995 and 1994 have been reclassified for amounts associated with
discontinued units. All operations for USRR and Good Ideas have been classified
as Loss from Discontinued Operations.
Discontinued operations include management's best estimates of
the amounts expected to be realized from the sale or liquidation of its toy
operations. The amounts the Company will ultimately realize could differ in the
near term from the amounts assumed in arriving at the loss on disposal of the
discontinued operations.
Sales, related losses and minority share of losses associated
with the discontinued business units are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Sales $ 2,400,750 $ 6,741,935 $ 6,739,689
=========== =========== ===========
Loss from operations before minority interests (1,545,457) (857,575) (242,451)
Minority interest in loss $467,183 327,306 (127,445)
Loss from disposal, net of Minority interest of $143,671 (1,326,267) - -
----------- ----------- -----------
Total Loss from Discontinued Operations ($2,404,541) ($ 530,269) ($ 369,896)
=========== =========== ===========
</TABLE>
Assets and liabilities of discontinued operations included in the accompanying
balance sheet include the following:
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
Accounts receivable, net $ 209,903
Inventories 749,359
Other current assets 8,574
Fixed assets, net 366,870
Other assets 12,808
Accounts payable (162,139)
Other Current Liabilities (63,575)
Non current liabilities (24,209)
</TABLE>
The sale of certain of the net assets of USRR was completed on April 30, 1996
(See Note 16). The disposition of Good Ideas, either through the sale of assets
or liquidation, is expected to be completed during the year ending March 31,
1997.
F-20
<PAGE> 69
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 16--SUBSEQUENT EVENTS
Management Changes
On April 18, 1996, James C. Witham and Karen B. Laustsen both submitted their
resignations from their respective positions as executive officers and directors
of the Company.
On the same date the following executive appointments were announced:
Robert Stutman was elected to the Board of Directors, elected Chairman of the
Board and designated as Chief Executive Officer of the Company. Terms of
compensation for Mr. Stutman include a base salary of $225,000 plus cash bonuses
based upon attainment of business objectives. Terms of employment include a
provision that, in the event of termination without cause prior to April 17,
1999, Mr. Stutman receives severance pay in the amount of his current base pay
on the effective termination date through April 17,1999.
Linda H. Masterson was elected President and designated its Chief Operating
Officer of the Company effective May 13, 1996. Terms of employment include a
base salary of $175,000 and a grant of warrants to purchase 600,000 shares of
the Common Stock at $3.125 exercisable over a four-year period. Terms of
employment include a provision that, in the event of termination without cause,
Ms. Masterson receives severance pay in the amount of one-year's base pay in
effect on the termination date.
Discontinued Operations
On April 30, 1996, the Company's subsidiary, USSR, completed the sale of certain
of its assets, net of trade payables of $79,000, to Reclamation Resources, Inc.,
a private California corporation, for $150,000 cash and a $300,000 secured
promissory note bearing interest at the rate of 7% per annum, with annual
payments of $50,000 plus interest. The note contains a prepayment clause that
enables USRR to receive 12 1/2% of product sales in excess of $1,400,000.
Filing of S-4 Forms
During April and May, 1996, the Company filed two Registration Statements on
Form S-4 under the Securities Act in an attempt, through consent solicitations,
to acquire the common shares owned by the minority interests of U.S. Drug, its
67.0% owned public subsidiary, and Good Ideas, its 60.8% owned public
subsidiary. If the Company is successful, it will own 100% of these
subsidiaries. There is no assurance that either consent solicitation will be
successfully completed.
Acquisition of Robert Stutman & Associates, Inc.
On April 18, 1996, the Board of Directors approved, in principle, the
acquisition of Robert Stutman & Associates, Inc. ("RSA"), a provider of
corporate "Drug Free Workplace" programs. Robert Stutman served as President of
RSA and was its largest stockholder. The acquisition was completed May 21, 1996.
The purchase price was comprised of $2,100,000 in cash, $400,000 in notes,
500,000 shares of the Company's Common Stock and Common Stock purchase warrants
to acquire 900,000 shares of the Company's Common Stock at $ 3.125 per share,
which was the closing sales price of the Common Stock on April 17, 1996.
Proforma combined results of operations for the Company and
RSA have not been presented herein because, prior to its acquisition by USAT on
May 21, 1996, RSA was a Subchapter S corporation and distributed substantially
all of its income to its shareholders. As a result of these distributions,
proforma financial information would not affect reported earnings per share.
Pursuant to the acquisition of RSA, Brian Stutman, who is the
son of Robert Stutman and was a shareholder of RSA, has been employed by USAT as
its Director of Sales and Marketing. Brian Stutman's compensation agreement
provides for an annual salary is of $130,000, a bonus of upon achievement of
goals for the year ending March 31, 1997 and a one-time cash bonus of $30,000
upon ProActive satisfying certain performance standards. In the event that Brian
Stutman is terminated without cause (as defined) during the first three years
that he is employed by the Company, he shall receive severance pay in an amount
equal to the base salary that would have been paid to him after the date of
termination had he not been terminated and had he been employed by USAT for a
period of three years ending May 20, 1999.
Exercise of Warrants and Options
From April 1, 1996 through June 5, 1996, the Company has
received gross proceeds of $4,242,000 from the exercise of warrants and options
to purchase 2,353,449 shares of the Common Stock. The cash portion of the RSA
acquisition agreement was paid from the proceeds of the warrant exercises.
F-21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) ERNST &
YOUNG'S AUDITED CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF
OPERATIONS OF FISCAL YEAR ENDING 3/31/96 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH (B) U.S. ALCOHOIL TESTING OF AMERICA FORM 10-K FINANCIAL
STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 1,286,520
<SECURITIES> 0
<RECEIVABLES> 676,479
<ALLOWANCES> 187,703
<INVENTORY> 1,041,261
<CURRENT-ASSETS> 3,084,067
<PP&E> 5,057,634
<DEPRECIATION> 2,060,568
<TOTAL-ASSETS> 6,952,284
<CURRENT-LIABILITIES> 1,398,484
<BONDS> 42,962
324,800
412
<COMMON> 0
<OTHER-SE> 3,707,118
<TOTAL-LIABILITY-AND-EQUITY> 6,952,284
<SALES> 1,165,661
<TOTAL-REVENUES> 1,165,661
<CGS> 10,172,048
<TOTAL-COSTS> 10,172,048
<OTHER-EXPENSES> 1,897,920
<LOSS-PROVISION> 177,600
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 8,056,045
<INCOME-TAX> 0
<INCOME-CONTINUING> 8,056,045
<DISCONTINUED> (2,404,541)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,460,586)
<EPS-PRIMARY> .35
<EPS-DILUTED> .35
</TABLE>
